ADTRAN Holdings Inc (ADTN) 2008 Q1 法說會逐字稿

Good morning. I will be your conference operator today. At this time, I would like to welcome everyone to the ADTRAN first quarter 2008 earnings release conference call. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). During the course of the conference call, ADTRAN representatives expect to make forward-looking statements, which reflect management's best judgment, based on factors currently known. However, these statements involve risks and uncertainties, including the successful development and market acceptance of new products; the degree of competition in the market for such products; the product and channel mix; component costs; manufacturing efficiencies and other risks detailed in our annual report on Form 10-K for the year ended December 31, 2007. These risks and uncertainties can cause actual results to differ materially from those in the forward-looking statements, which may be made during this call. Thank you. I will now turn the conference over to Mr. Tom Stanton, Chairman and CEO. Mr. Stanton, you may begin.

Thank you and good morning everyone. Thank you for joining us on our first quarter 2008 conference call. With me this morning is Jim Matthews, Senior Vice President and Chief Financial Officer. During the first quarter, momentum in our growth businesses, including Broadband Access, optical access and internetworking allowed us to overcome the seasonal decline in revenues we typically see at this time of year. Combined, our businesses were able to achieve a 44% year-over-year revenue increase, reaching a new record level for the Company. As we enter the second quarter, our growth businesses now represent 46% of our total Company revenue, again, a new record. This level compares to just 34% for the same period last year.

Our traditional product areas saw mixed results. HDSL, the largest component of our traditional product area, had a strong quarter after a relatively weak fourth quarter. Our legacy enterprise products reflected the impact of seasonality, compounded by the effect of a soft enterprise spending environment. This product area represented less than 10% of our total revenue in the first quarter.

Now, moving on to some specific categories. As a result of continuing share gains in all our key market areas, our Broadband Access business produced another record revenue quarter, as shipments of our 1100 Series, fiber-to-the-node products and our Total Access 5000 multi-service platform expanded. Our 1100 series products continued to grow in fiber-to-the-node applications, addressing the move to upgrade bandwidth for delivery of new services and to meet expanding competitive demands. On the development front, we began carrier trials with our new 1124P broadband media Gateway, and our new 1124V, VDSL2 high speed platform. We believe the 1100 series products continue to show significant growth potential, both domestically and internationally.

Moving on to the Total Access 5000 family. The quarter saw increasing shipments of our TA5000 platform across a broad range of carrier accounts and we continue to see strong trial activity, both domestically and internationally. Also during the quarter, we increased our market potential as we began shipping new feature sets, including ATM to ethernet aggregation and fiber to the premise products. Our progress continued across all account segment including tier one accounts where we believe multiple application solutions will begin shipping this year. Although we are very pleased with the number of awards to date in our Broadband Access product family, we should remind you that carriers require significant time to operate complex products like the Total Access 5000 and 1100 series platform and the timing of these opportunities can vary significantly from anticipated dates.

Moving on to our internetworking business. We saw another record revenue quarter with 34% year-over-year increases in sales for the first quarter. This growth continues to be the result of traction in our NetVanta service access routers, switches, IP telephony products and our IP Business Gateways, all targeted toward small and medium sized businesses. This strong revenue growth while in a soft enterprise spending environment continues to reflect a broad base support we are seeing as we work to leverage our carrier distribution channels and our growing bar dealer base. The support we are seeing confirms that our SMB solutions are meeting the needs of businesses that require integrated solutions for voice, data and Internet connectivity. An optical access to quarter saw continuing results of expanding product roll-outs in our tier one accounts. All of our tier one carriers achieved new record levels during the quarter, despite the normal seasonality we saw across all accounts. This continued expansion allowed us to achieve both sequential and year-over-year growth.

We continued to achieve broader acceptance of our higher speed configurations, including our OC48 and Ethernet products. Moving forward, we will continue to operationalize new applications and are optimistic about the growth potential of this category. We are clearly making good progress transforming our Company to a global systems level provider of IP-centric solutions for both copper and fiber. This achievement makes us very excited about our global growth potential. We believe our growth businesses will continue to see strength based on market share gains related to both current and future product introductions and customer spending trends.

Our traditional businesses will continue to track on a macro level with enterprise demand, wireless network expansion, wireline capacity upgrades and general economic conditions. I would like Jim Matthews to review our results for the first quarter of 2008 and our comments on the second quarter of 2008. We will then open the conference call up for questions. Jim?

Thank you, Tom and good morning everyone. Revenue for the first quarter increased 9% to $119.9 million, compared to $110.3 million in Q1 of '07 and increased sequentially from $119 million in Q4 of '07.

Broadband Access product revenues for Q1 of '08 increased 57% to a record $28.6 million, compared to $18.3 million in Q1 of '07, and increased sequentially from $27.3 million in Q4 of '07. Comparing Q1 of '08 to Q1 of '07, the significant increase in Broadband Access product revenues is primarily attributable to 1100 series fiber-to-the-node upgrades, rollout of Ethernet-over-copper services and broadband digital loop carrier applications. Comparing Q1 of '08 to Q4 of '07, the increase in Broadband Access product revenues is primarily attributable to effect of 1100 series fiber to the node upgrades, rollout of Ethernet-over-copper services and broadband digital loop carrier applications. Partially offset by a decline in international Broadband Access revenues due to sporadic timing of orders from a tier one international carrier for 1100 series fiber-to-the-node products.

Optical Access revenues increased 30% to $11.2 million for the first quarter of '08, compared to $8.6 million in Q1 of '07, an increase sequentially from $10.8 million in Q4 of '07. Comparing Q1 of '08 to Q1 of '07 the increase in Optical Access revenues was the result of market share gains across numerous customers including tier one carriers. Comparing Q1 '08 to Q4 of '07, the increase in Optical Access revenues was primarily attributable to record revenue levels at tier one carriers, partially offset by seasonality at tier two and tier three customers. Internetworking product revenues increased 34% to a record $14.9 million in the first quarter of '08, compared to $11.1 million in Q1 of '07, and increased sequentially from the fourth quarter of '07. Internetworking products continued to experience increasing momentum as a result of continuing efforts to improve traditional enterprise channel focus and leveraged carrier distribution.

In total, our growth products grew 44% in the first quarter of '08, compared to the same period the prior year. For the quarter, our growth products represented 46% of total revenue, compared to 34% for the same period the prior year. Carrier systems revenues were $51.2 million in Q1 of '08, compared to $39.6 million in Q1 of '07, and $49.1 million in Q4 of '07. Comparing Q1 '08 to Q1 of '07, the increase in carrier systems revenues was primarily attributable to the revenue increases in Broadband Access, Optical Access product categories. Comparing Q1 '08 to Q4 '07, the increase in carrier systems revenue was primarily attributable to an increase in domestic Broadband Access and Optical Access revenues, partially offset by a decline in international Broadband Access revenues.

Business networking revenues for Q1 of '08 were $21 million, compared to $19.5 million in Q1 of '07 and $23.7 million in Q4 of '07. Comparing Q1 of '08 to Q1 of '07, the increase in business networking revenues was primarily attributable to a significant increase in internetworking product revenues, partially offset by a decline in traditional IAD product revenues. Comparing Q1 of '08 to Q4 of '07, the decrease in business networking revenues was primarily attributable to a decrease in traditional IAD product revenues, partially offset by an increase in internetworking product revenues. Loop access revenues were $47.7 million for the first quarter of '08, compared to $51.2 million in Q1 of '07 and $46.1 million in Q4 of '07. Comparing Q1 of '08 to Q1 of '07 the decline in loop access revenues was attributable to a decrease in enterprise T1 and HDSL revenues. Comparing Q1 of '08 to Q4 of '07, the increase in loop access revenues was attributable to an increase in HDSL revenues, partially offset by a decrease in enterprise T1 revenues.

HDSL product revenue was $42 million in Q1 of '08 compared to $43.8 million in Q1 of '07. HDSL revenues for the first quarter of '08 were sequentially up from the fourth quarter revenues of $36.3 million. As a result of the above, carrier network's division revenues were $94.5 million, and enterprise network division's revenues were $25.4 million in Q1 of '08. International revenue was $6.4 million for the first quarter of '08, compared to $7.8 million in Q1 of '07 and $15.7 million in Q4 of '07. The sequential decline in international revenue was primarily attributable to sporadic timing of orders from a tier one international carrier. To provide the reporting of each of these categories, we have published them on our Investor Relations Webpage at www.adtran.com.

Gross margin was 58.6% of revenue for the first quarter of '08, compared to 59.6% for the first quarter of '07 and 58.4% for the fourth quarter of '07. Comparing Q1 of '08 to Q1 of '07, the decrease in gross margin percentage was primarily attributable to start-up costs associated with initial deployments of Total Access 5000 and secondarily, to a less favorable product mix. Research and development expenses were $19.6 million in Q1 of '08, compared to $18.4 million in Q1 of '07 and $18.7 million in Q4 of '07. The increase in research and development expenses was primarily attributable to an increase in activities related to customer specific development efforts and to costs related to tier one carrier product approvals.

Selling, general and administrative expenses were $25.5 million for Q1 of '08, compared to $26.5 million in Q1 of '07, and $25.4 million in Q4 of '07. Stock based compensation expense, net of tax, was $1.8 million in the first quarter of '08, compared to $2.1 million for the first quarter of '07 and $1.1 million in the fourth quarter of '07. The lower stock-based compensation expense in the fourth quarter of '07 reflects the impact of actual forfeitures experienced on stock option grants whose vesting period matured during the fourth quarter of '07. Other income, net of interest expense, was $1.7 million in Q1 of '08, compared to $3.7 million in Q1 of '07 and $2.2 million in Q4 of '07. Other income, net of interest expense for Q1 of '07 included proceeds from a term life policy of $1 million. The decrease in other income, net of interest expense for Q1 of '08, is primarily attributable to lower investment balances as a result of our share repurchase program and to lower interest rates.

The Company's income tax provision rate for the quarter was 36.5%, compared to 31.3% for the first quarter of '07 and 34.4% for the fourth quarter of '07. The tax provision rate for the first quarter of '08 was unusually high, primarily as a result of delays in federal legislation required to extend research tax credits for the 2008 year. The lower tax provision rate in the first quarter of '07 was primarily attributable to a benefit recorded in that quarter relating to the closure of tax audits from prior years. Earnings per share, assuming dilution for Q1 of '08, were $0.26; compared to $0.24 for Q1 of '07 and $0.27 for Q4 of '07. Inventories decreased to $47.4 million at quarter end.

Net trade accounts receivable were $70.8 million at quarter end, resulting in DSO's of 54 days for the first quarter of '08, compared to 47 days for the first quarter of '07 and 55 days for the fourth quarter of '07. Net cash provided by operating activities for the first quarter of '08 was a strong $34.1 million, compared to $23.3 million for the same period the prior year. Unrestricted cash and marketable securities totaled $225 million at quarter end, after paying $5.8 million in dividends during the first quarter and after repurchasing 771,000 shares of common stock for $14.9 million for the quarter.

As you are aware, ADTRAN has traditionally seen sequential revenue increases from the first quarter to the second quarter. For the second quarter of '08, we believe that revenue will grow sequentially and year-over-year. Although our first quarter results reflect a good momentum, exiting the fourth quarter, allowing us to overcome typical seasonality; we want to remind you that timing of near term revenue associated with large projects we are engaged in, combined with the possible impact of a slow enterprise spending environment make it difficult to predict the amount of sequential and year-over-year growth we should see in the second quarter.

The amount of sequential and year-over-year revenue growth we realized in the second quarter will be dependent on the following. Continued stability of our traditional product revenues, spending levels at our tier one and tier two carrier customers, order trends and traction and newer international customers, the adoption rate of our Total Access 5000 and 1100 series platforms, the adoption rate of our OPTI-6100 with tier one carriers, continued growth in internetworking revenues and general economic conditions. We believe we will continue to our historic operating model at the achieved revenue level in the second quarter. Tom?

Thanks, Jim. Okay, at this point we're ready to open it up for some questions.

Thank you, Mr. Stanton. (OPERATOR INSTRUCTIONS). Your first question comes from the line of Paul Silverstein with Credit Suisse.

Tom, can you hear me?

Yes I, I can hear you, Paul.

Great. Thanks. Tom, can you give us a little bit more insight on -- it sure seems like your next generation of products through your growth drivers are finally starting to catch some real traction. Can you give us some more incremental insight in terms of what you're seeing, what you would anticipate over the balance of the year from a timing standpoint with the 5000 in particular in the Optical Access platforms?

Sure. Well, the 5000, actually had a pretty good first quarter. We, at this point in time, are shipping to one tier one carrier with the 5000, multiple tier twos and multiple tier threes. And let me just try to hit those by segments. In the tier ones, we're expecting to ship to all three of the tier ones by the end of this year. One of those tier ones is farther along in their let's say OS integration and field trial activity. And we would expect that to come at this point in time around the half, but I'll just kind of remind you that carriers tend to move dates around like that. The other tier one is progressing with multiple applications and the first set of those applications we're expecting -- let me just say sometime in the second half. And then with --.

Tom, can I interrupt you for one second? I'm sorry. The second tier one you said you expect shipments to begin around the midpoint of the year.

That's correct.

And that was for one application or multiple?

That one is for one application.

And would you characterize that as a prominent deployment?

As a what type of deployment?

As a large deployment.

It has the potential to be a large deployment. That deployment -- that application is actually ATM-to-Ethernet aggregation.

Okay. I'm sorry.

And the other tier one will with shipping towards the tail end of the year, multiple applications are targeted for that customer that we've been awarded through the RFP processes. Tier twos, I would say that we would just continue to add on to the fuel that we've got. I think we're shipping to probably all the tier twos at this point in time in some configuration, very early in the rollout in these configurations. In most cases we have other configurations. They may be buying us today for Broadband DLC. Most of them are looking at us either for IP DSLAM, Fiber-to-the-node or for ATM-to-Ethernet aggregations. So, I would say you would just see those continuing to kind of add to that momentum through the year. And tier threes, we already have been rolling out.

Let me cover Optical Access real quickly. Optical Access, we are at this point in time standardized in two of the three RBOCs and I would just characterize those as just kind of building steam. I think we're out there in the field right now, actively selling and I think we've seen a good momentum over the last, let's say, six months or so and I would expect that to continue on. I would still say we're very early. With that last carrier we are -- last tier one, we have partial approval but not into their whole telecom network. So, two of the three we've got complete approvals. One of the three we're still working on.

Are you generating revenue from all three?

We are generating revenue. And in fact, I mentioned it. You may have missed it. I mentioned that all three of those actually generated new records for themselves in the first quarter, which is not typical.

Tom, just going back to the 5000, on the third tier one that's doing multiple applications where you expect revenue around the end of the year, does that have the potential to be larger than the second one or around the same level?

I would say it has larger -- at this point in time, to be larger than the second one.

Larger. And larger than the first or -- ?

Probably near term, yes, just because the first one that we're out there actively selling, which is Ethernet-over-copper is one that there's initial deployments and then it's kind of market-based revenue growth. So as they sell more services, we will sell more. But the third carrier is one where there's some existing need right now. We're replacing some incumbent equipment that will already have immediate demand. So I think in the near term, we're liable to see more out of that third carrier.

And Tom, you don't think that there's any cannibalization or much cannibalization of the traditional loop access products at this point?

Not at this point. The one where we would see the most would be -- that people talk about the most, I would guess, would be HDSL. And we're kind of in a good position to be able to see that incremental creep because that will be -- probably the biggest technical potential to impact that would be Ethernet-over-copper. And I would say we're not seeing a big impact on that yet.

All right. And finally, can you tell us or give us a rough idea of just how much revenue you're generating off 5000 at this point?

That's getting awful granular. I think people have mentioned before that 5% level. I would tell you we're at that 5% level.

Great. Thanks a lot, guys.

Okay.

Your next question comes from the line of Vivek Arya with Merrill Lynch.

Thank you. Tom, you sort of had your second quarter outlook -- when I look at the last two years you have grown roughly 12%, 13% sequentially. Can you please share some thoughts on how you expect the second quarter to shape up? And what I'm really interested in is that -- is your hedging based on just the normal lumpiness in your business or are you seeing any other push-out or CapEx today or anything that gives you extra concern this year?

Well, our intent was not to hedge it. What we're trying to do is, being as we have large projects that can actually swing the revenue, and we are a book and ship business, our visibility just isn't that great. Right now -- we exited the last year and we exited this quarter with some pretty strong momentum. But there are just timing issues associated with projects that kind of keep us from the being able to tell you exactly where we're going to end up. So to the extent you felt hedging, it wasn't because we're not enthusiastic about what we see in front of us, it's just trying to nail that down in three month increments that's been difficult for us.

But you're not seeing -- are you seeing any concerns due to the macro weakness? I understand there is lumpiness.

Yes, if you break away those projects and say, "Okay, what about the underlying pieces of the business?" HDSL, I would characterize as a pretty strong quarter, definitely for a first quarter. But I would just kind of remind you we had a little bit of a weaker -- we definitely had a weaker fourth quarter than we historically have seen. I would also say that our traditional enterprise business, kind of the non-NetVanta piece was definitely not as strong as we would hope. And I'm not going to sit here and tell you that that's going to rebound, because I do think a large part of that has to do with just the overall economy at this point. Now, the good thing and the bad thing is that at this point in time, that represents something less than 10% of our revenue. But it's still an area that we would look at with some concern.

And when you look at gross margins, there was a slight hit because of, I think you mentioned, the start-up costs in your new products. Now, you will have a number of new product launches throughout this year. So should we look at that pressure on gross margins to stay this year? Would gross margins be in this 58% to 59% or do you think they can actually go back to the 59% plus levels that you've seen in the last one or two years?

What our target has been to shoot for the high 50's and kind of model the business around the high 50s' and give ourselves a little bit of latitude on a quarter by quarter basis. You're right that there are multiple projects that we are delivering now and we will be delivering for some period of time in the future. And over the last maybe two or three quarters we've been in that 58%, 59% range. I can't tell you specifically, will we pick up a point next quarter or not, because it depends on timing on certain things. And to some extent, on product mix. But -- so our stated goal has been high 50's and we'd kind of like to leave it at that.

I see. And just the last question is; I believe, Jim, you mentioned that you will get back to your historical operating model in Q2. Can you please just elaborate on that in terms of what it means for gross margins and operating margins?

Well, Vivek, what I actually said I believe was that we expect to be at the normal operating model at the second quarter revenue level that we achieve. Okay. So, I think you can relate that to where we've been historically, from an operating model standpoint.

So just a quick follow-up. I think, though, historically your peak margins have been, I believe, 25% plus. Is it reasonable to see you get there this year? And if not, like what would stand in the way, other than just product mix?

This year, as we progress through the year, on a sequential basis, we do anticipate revenue to increase potentially. With a possible exception of Q4 where we typically see seasonality. Okay? We do not expect OpEx to increase at the same levels as revenues do going through the year. So with that in mind, we do expect for the year to be at the model. And again, obviously as we progress through the quarters remaining, as revenues increase, we should see higher operating margins as a result of higher revenues.

Great. Thank you.

Okay.

Your next question comes from the line of Brian Coyne with FBR Capital Markets.

Hi, guys. Good morning.

Good morning.

You recently announced your GPON product about the same time that Tellabs announced its exit of this area. I was hoping maybe you could talk a little bit more specifically about what you're seeing in your opportunity there? Help us do a little compare and contrast.

Sure. I can assure you we didn't coordinate Press Releases. What -- we have been in the works for a GPON product for some time. And actually, I think in that press release, we not only announced the product but we announced a customer with that product, which is a tier three customer. The timing in our press releases, we typically don't do a lot of press releases. We just shy away from that and really felt that they didn't help us a whole lot and can let out competitive information that really doesn't help us over the long-term. Where we do do customer announcements, it's typically because we have other customers looking for us to make those announcements in order to help them make decisions they're making. And that's really what's behind most of the announcements that you see from us.

Great. And so just in terms of the opportunity then, with the announcement, you would expect some additional follow-on business beyond the initial tier three customer that you mentioned on the press release, sort of in the near term?

We fully expect to be able to grow that business throughout this year. And I would say you would see us follow the same model that we have typically where we get into some tier threes and tier twos initially and then try to move ourselves into the right position if tier one opportunities open up.

Great. Okay. On -- getting back to the Total Access 5000 and clearly last quarter you had a big shipment to a tier one in Latin America. Does this continue to be sort of your best opportunity, from a product standpoint, to increase your international exposure? And maybe if you could just spend a moment talking about your own efforts and partnerships to expand your product reach overseas.

Sure. Now, the Latin American opportunity or the Latin American customer for the fourth quarter was actually with our 1100 series fiber-to-the-node product.

Right, right.

And that is -- we fully expect a good quarter, strong quarter with that -- excuse me, a strong year with that customer. And that customer's ordering habits have tended to be and we kind of -- I think we alluded to this in the fourth quarter, somewhat sporadic in that they buy a significant amount of equipment, they install that equipment, which takes some period of time and then they come back and do it again. And so far, that's proven to be true and we expect that to continue on this year. We have other areas in South America where we are actually selling some 1100 products with some good potential. I would say from where our international expansion will come from, will probably come from both the 1100 series products, where we've already seen some good results, and from the 5000 series products where we are in trials or at the tail end of some fairly good RFP potentials in different parts of the world. So, I think both of those will have potential to move it. In most cases, we are going out direct sales or through local country representation. There are a couple of cases where we have teamed with some other companies but I would say the majority of the revenue is coming from more on a direct basis.

All right, sounds good. One other quick one on gross margins. You spoke a little bit earlier about whether or not you might be able to pick up 1 point of margin if timing comes through on big deals. What do you think is sort of your comfort range on the 58%, 59% outlook? If you get all sorts of things falling in place, could that be more than a percentage point of margin in the upcoming quarter or so?

That's getting awful granular. It has over the last two years sometimes floated up in the very high 59's. There's nothing that's endemic to the way that we're -- that our pricing is going on or anything that would keep that from happening again. But we just really need to kind of keep that latitude. And it's very -- actually, at this point in time, it's impossible to forecast without knowing the product mix that we end up in the quarter with. So the answer to your question is, yes, we could get back up there again. But we would rather as people look at how ADTRAN's models flows in, to really listen to the high 50's and that's -- we will absolutely fluctuate from quarter-to-quarter.

Got it. And then one last one, just in terms of -- I may have missed it, but top customers and anything that surprised you?

Sure, Brian. The top customers -- this is Jim Matthews. AT&T came in at 26% for the quarter. Verizon came in at 11%. Embark came in at 12%. And Qwest came in at a record 19% of revenue.

Great. That's all I had had. Thank you so much.

Thank you.

Your next question comes from the line of Ken Muth with Robert Baird.

Back on the business segment here where you talked about kind of the traditional business networking slowing down. How do you look at that through the year in the way of the NetVanta line? Are you going to be able to continue to kind of offset with stronger, better VAR relationships with Verizon and AT&T? Because there is quite a bit of healthy growth in the kind of the estimates at this point within this segment.

Yes.

And I just want to see your comfort level there. Can these new relationships, the new VAR's and obviously they're very large and substantial but the concern would be in that enterprise segment capacity, maybe slow things down a little bit.

We were able to set a new record on NetVanta again in the first quarter, which was probably one of the tougher -- typically the tougher quarter for us to set any type of record. So, we're not unhappy with the NetVanta performance in Q1 and I don't get the sense that that's slowing down. I think that we still have more potential in the tier ones where we've secured some business and secured some awards and approvals, that we would fully expect to accelerate through the rest of this year and our VAR channel recruitment has not slowed down. We picked up quite a few VAR's in the first quarter and are continuing a very aggressive bait -- aggressive program on VAR recruitment through the rest of this year. So, I have no reasons to think that NetVanta will slow down. Now, could NetVanta be higher if the enterprise business was robust? Maybe. But our game right now is to actually go out there and pick up market share and there's a lot of market share for us to pick up.

Okay. And as you talked about in your kind of opening remarks there, the international market clearly was down, seasonality in Q1 here. How do you see more potential opportunities, with all these new products you have out there in your portfolio broadening, what does that international market look like for you in 2008?

The international market has an awful lot of potential for us and a lot of that in 2008. We have secured some awards that are meaningful and meaningful to, not just the international segment, but to the Company. I think our cautiousness there is just going to be more on timing where we have secured business. We know there's business out there but trying to get through the buying cycles of a customer may be difficult to forecast. But we fully expect that segment to grow on a substantial basis this year. Some of the RFP's that we are involved in right now have the potential of shipping towards the tail end of the year. Although, I would say probably those are more 2009 events. So we're expecting it to grow and we're seeing good momentum in the products that we've introduced.

And are these obviously kind of of more tier one like opportunities and more fiber-to-the-node or better build-outs? Isn't that what this is?

We have -- yes, we have several tier ones and they're fiber-to-the-node in some of them. In other ones, there are -- there's a big focus on Ethernet-over-copper or Ethernet-over-TDM as they're trying to move Ethernet out to business customers. It's very similar to the same of type of activity that we're seeing in North America, with the exception of the Broadband DLC. We haven't seen a lot of Broadband DLC excitement in our international markets. But other than that, the things that we're selling in north America seem to be able to be sold internationally also.

And then, what are you seeing in kind of the traditional DSLAM products right now? Are those kind of being upgraded or substituted, if you will, with your 1100 series and the TA5000 and so that kind of revenue segment would be slowing down continuously here? How do you look at that opportunity?

The area I wouldn't expect strong growth in would be the -- specifically the Total Access 3000 piece of our business, which is Central Office, ADSL, DSLAM, ATM deployment. That has not been -- that was not a growth driver last year. I don't expect to it be a growth driver this year. I think the growth is going to be coming from our 1100 series and our 5000 products.

Thank you very much.

Your next question comes from the line of Steven O'Brien, JP Morgan.

Hi, thanks for taking my question. Tom, I was wondering if you could comment on linearity of HDSL in the quarter? Month to month, was there any notable change in demand and how do you look at Q2 guidance coming out of Q1, overall, with respect to the HDSL business? Should we expect a normal kind of seasonal improvement there?

Let me talk about linearity in the first quarter and then I'll get Jim to give you some specifics he has on HDSL. Linearity in the first quarter is typically, very much, orders start off slow in January, pick up some in February and then really kind of accelerate towards the tail end of February through March. And I think in general that's exactly the -- what we saw this quarter, as far as the HDSL being -- having a stronger quarter in the second quarter than the first, I would fully expect that. Jim, do you want to add anything to that?

Yes, Steven, I think if you go back a few years you'll see that we've seen HDSL increase sequentially in the second quarter. And I think we will continue to expect that.

So is there really an enterprise economic impact on the HDSL business or is it -- should we think of it more related to carriers? But I'm thinking the end customer here is largely enterprise.

Well, there are kind of two major segments and then one that I'll speak about a little bit. One is -- you're right, enterprise is the biggest piece. Wireless back haul is a significant piece of that business and then there is the interconnectivity of the carrier's network itself. So as they need to add more bandwidth to DSLAM's, for example, they will deploy more T1's in order to feed those DSLAM's if they're copper fed. And there are still an awful lot of copper fed DSLAM's out there. So, there are kind of purchasers or there are markets for HDSL that may not be so economic environment focused. And we can't tell you whether or not it was those pieces that actually drove it to the revenues level it was in the first quarter or not. If you look at the overall kind of noise out there in the industry, I would say that it probably was not enterprise spending that drove that. And if you reflect that back to our enterprise business, I would say that kind of gives you more conviction that it wasn't enterprise spending that drove that number up.

And if I could, one more. Regarding Qwest and the strength from that customer this quarter, can you comment at all about which products were particularly strong there? Qwest has been a little slower than the other two tier ones regarding fiber-to-the-node, fiber-to-the-X build-outs. Is -- should we be looking at other categories beyond broadband to explain that strength?

Well, there are two areas of growth for us in Qwest. Qwest is an HDSL customer also. But the two areas of growth on the carrier side is -- our Broadband Access, which is predominantly our 1100 series, fiber-to-the-node products today. And Optical Access, which they did also achieve a new level of revenue that they had not achieved before. So, I think those are the two areas where we're seeing strength. On the enterprise side, though, they are also -- they've embraced a lot of our NetVanta products and are doing well there also.

Great. And actually one more for Jim. Can you refresh us in terms of your buyback authorization strategy? You decreased the amount of shares you repurchased this quarter on a quarter-over-quarter basis but clearly the authorization increased. So how should we be looking at buybacks through the remainder of the year and is there anything to read into quarter-over-quarter changes in the amount of shares you repurchased?

Well, I don't think there's anything to read into it. We will continue to be opportunistic in terms of our buyback. If we look back over the last five quarters, we've repurchased a significant number of shares. I think it's to the tune of about 6.5 million shares. So we've made sizable repurchases over recent quarters and we believe that that continues to be the best use of our excess cash. So we will continue on an opportunistic basis to participate in buyback activity.

Thanks a lot.

Your next question comes from the line of [Jack Murphy with Lehman Brothers.]

Hi, thanks for taking my question. I just wanted to dig into the granularity on the TA5000. Basically if the first tier one customer for the TA5000 is down quarter-over-quarter in Q2, would it be because of absorbing 1Q capacity, or would it be because of waiting for more success-based sales out there with the product? Thanks.

That is getting pretty granular. It's a hypothetical as to whether or not they'll be down. I can't tell you today that they'll be down. If they were down it would have to do with the roll-out of the service and it would be the opportunistic kind of market share gains there that you're talking about. Okay. Thank you.

All right.

Your next question comes from the line of George Notter with Jefferies.

Hi. I just wanted to ask about, you had a big jump in business with AT&T sequentially. It looks like that actually kind of of bounced back to maybe run rates that were more in line with historical norms at AT&T. Am I just looking at kind of the bounceback from a weak Q4 with them associated with the slowdown in capital spending there and we're just rebounding here in Q1? Is that the big driver there?

I think there are two drivers. One is, yes, they were slow at the tail end and definitely in the fourth quarter of last year. So, there probably was some bounceback, probably more specifically in HDSL than in other areas. And then we did have incremental increases in revenue in both the 5000 and in the Optical Access business.

Got it. Okay. And then just shifting gears a little bit, if you look at the HDSL business and you look into the crystal ball a little bit, Tom and think about how over time we see that business evolving. Can you kind of give us your road map for that? Is that something that slows down a year out, two years out, three years out and you do your best to substitute it with Ethernet-over-copper and fiber-based solutions? How do you think the net of that would work for ADTRAN over time?

I think over time that business will decline. Whether or not it's going to decline this year or next year or three years from now, we don't have a crystal ball that that's granular. So, what we're doing is trying to add new products and new growth areas, just as quickly as we can, and we would do that, by the way, even if HDSL was growing. We don't expect HDSL to grow this year. I think there is the potential for growth if we see an acceleration in any of those three market dynamics. But mainly the two, being enterprise, which we don't expect, or wireless back haul which we don't know. And those are the things that are in the near term will be the drivers. As to whether or not it declines three years from now, I don't know. I would not be surprised if it did decline at some point in time in that kind of time frame. And when they do decline, there's typically an awful lot of discussion about that and it's very visible. So, we haven't seen a mass move away from HDSL technology at this point in time. Thanks very much.

Okay.

Your next question comes from the line of Andy Schopick with Nutmeg Securities.

Thank you and good morning. Guys, I'd really like to ask you a bigger picture question and some these issues have already been touched upon but let me rephrase this. In terms of financial management of the business and the relative conservatism of your accounting for financial reporting purposes, I am one of your biggest fans. However, I would like to ask about the ongoing strategy of the aggressive buyback program. We're really now approaching close to $350 million of share buybacks over recent years. While I have no doubt that the management believes its stock is a good investment, the top line annual growth over the past five years has barely averaged 7% per annum. I really believe that investors would rather see the Company engage in a more aggressive investment or reinvestment in its business for accelerated growth, which certainly could have included some acquisitions. Could you kind of talk to us a little bit about what you think needs to be done to better position the Company for growth going forward and whether or not these types of aggressive buybacks to the extent to which you've already engaged in them really make good sense?

Well, our opinion is and the Board's opinion has been that they have made better sense than the alternatives presented at the time. And could we go and do what some other companies have done and make large acquisitions in order to further enhance our growth potential? First of all, we do think we have good growth potential. We think we're starting to see the fruit of that. Having said that, we absolutely remain open to looking at alternatives to our share buyback as uses of cash. So, we do actively look at the marketplace and see what companies are out there and see what the potential is for those companies, if they were combined with ours, in order to add to shareholder value. And at this point in time, we haven't seen it.

Now, the valuation on a lot of these companies have suffered as has ours. And the potential or say the number of companies out there that economically might make sense has grown but at this point in time we still haven't seen that. So we stay open to that. There is no ban against us doing something like that. And we are as active today and probably more active today in kind of scouring the market and trying to understand how we can add fuel to the momentum that we have, by looking at different technologies and different companies. We just -- nothing has passed that bar yet, though.

I'm sure you can appreciate and understand the point I'm trying to drive home on this. But one follow-up question is on the auction rate securities area. It appears that you've kind of avoided any exposures to this. Am I correct that you really have no cash that could be tied up or subject to any of those problems?

Andy, this is Jim Matthews. You are correct. We do not have any auction rate security investments at this point.

Wonderful, A+. Thanks.

Your next question comes from the line of Cobb Sadler with Deutsche Bank.

Thanks a lot. I had a question on the TA5000 and Ethernet-over-copper. Do you think that application could become kind of the primary or the dominant application for the TA5000? What -- RFP's, particularly in Europe, where you haven't done much business historically, how is the competitive landscape? Who is showing up? Is it hatteras, Alcatel-Lucent? And could you talk about roughly how many deals you're pursuing with tier two and above in Europe and what do you think the ultimate win rate could be? Thanks a lot.

I don't want to give you the specific number in Europe but there's more than one and they are tier two and above. The competitors you basically named them, it's Alcatel-Lucent, Hatteras, some of the start-ups like Actelis, some of those have teamed up with larger companies in order to try to present their applications. Right now, in the Ethernet over copper space, we believe we have a good head start from a technology perspective and from a price perspective and pretty much any way you measure it. And we think that's going to bode well for us in being able to secure some of those opportunities. As to whether or not Ethernet-over-copper ends up being the largest potential or the largest revenue producer in the 5000 family, I don't know the answer to that. I think a lot of that that has to do with our success rate in all the different areas and end up winning 20% in one space and 80% in another, that would drive that. I will say Ethernet-over-copper, though, is an area where a lot of the tier two and above have a significant emerging focus. So, some of these people like AT&T have kind of stepped up. They're kind of early. We're seeing some of the other European carriers and mainly in Europe, step out there and really do some things and I think some of the other carriers are taking notice of that.

So if you're able to get the TA5000, let's say, into three or four European carriers, do you think that that -- you could sell additional products into these carriers? Because at the end of the day, you've been basically locked out of some of these carriers historically.

There's no reason to believe we can't. Once we get it approved in their OS's and with the 5000's multiple application kind of flexibility, there's no reason to think we can't. And you could imagine that's exactly what we would try to do.

Okay and last question. I know you don't pay a lot of attention to the Street's estimates. The Street's got about 7% growth for you in '08 and you talked about roughly almost 50% of your business being growth products and some pretty high growth rates on those products. How should we be looking at the long-term growth of your business with half your business being relatively high growth products? Thanks a lot.

Well, Cobb, I'll take a shot at that. We're in what we believe to be three significant markets where we're basically at the beginning of gaining significant market share. We have a long way to go on that way, in that direction. We believe that as these three categories together exceed 50% of total revenue and go beyond that, that our growth should accelerate. We haven't given guidance in that regard but we certainly believe that over time that our business growth will be in excess of the 7% or 8% that's on the Street for this year.

Great. Thanks a lot.

Your next question comes from the line of Jason Ader with Thomas Weisel.

Thank you. So, Tom and Jim, if I would think about the carrier spending environment right now, would you say that there -- you are seeing any impact, clearly not in the tier ones, but in the tier twos and threes, are you seeing any impact from the macro environment on tier two and three spending trends?

Well, I can't say specifically the macro environment. I would say because some of these tier twos have been more in a lockdown mode for some period of time. And I would say the environment in those accounts really, to, me hasn't changed. And let's say at least over the last nine months or so, I think that they have been very frugal with the way that they're spending capital and I haven't seen that change. The only thing that's changed for us, which makes us believe we're going to actually have growth out of these accounts, actually in '08, is that we are now approved in areas where we were not approved before, so we're getting a bigger piece of the pie that they're spending, even though the overall pie may still be somewhat constrained.

Okay. So you may be able to do better than the average supplier because you have some product cycles here, essentially?

That's exactly right. We've got brand new products that are just introduced in these and we're now into grabbing market share from areas that we didn't have before.

Okay. All right. Thanks. And then the international business for Q2, I know you talked about feeling good about it for the year. Do you expect to see a rebound in Q2 off of the fairly low level in Q1?

I would say we would see sequentially, up, is what we would expect. As to how much it's up, it's dependent upon some of these timing issues which I don't know. But we would expect it to be up.

But you don't have visibility on the one large customer that you had in Q4 making a significant purchase this quarter?

We don't have visibility that we're willing at this point in time to say is definitely going to happen.

Okay. And then lastly, Jim, did you -- I may have missed it. Did you talk about tax rate guidance for Q2?

Jason, I think it's probably going to be something consistent or in the area of what we recorded in Q1 in terms of the tax rate.

Okay, so basically until we get the R&D tax credit approved, we're going to be at this sort of 36.5% rate?

I think that's fair.

Okay. All right. Thank you, guys.

Your next question comes from the line of Nikos Theodosopoulos, UBS.

I had a couple of questions on the access business. Just to make sure I heard what -- heard it properly, when you made the comments on the 5000, you were talking about 5% of total sales, not the Broadband Access division; correct?

Yes, that's total sales.

Okay. So if you look at your DSLAM business today, historically it started as a Central Office based business and over the last few years it's migrated to Outside Plant. What would you say a rough split of that business is today Outside Plant versus Central Office?

Well, I would say right now the -- I don't have the exact split, but I would say the majority has -- over the last few quarters has been our fiber-to-the-node products, which are the 1100 products.

Okay. Okay. And if you look at Tellabs' commentary, well, their decision to exit the GPON market, one has to question their investment and viability in the access market overall. And it seems like you've been gaining share in the outside plant, DSLAM market and obviously in the 5000. What's the competitive landscape there and is it really an area that is ripe for significant share gains, given -- they were probably one of the top U.S. suppliers post Alcatel and it seems like they're de-emphasizing the market. Is that part of the reason of your confidence in this business this year?

I think it's been open to share gains for quite some time. I don't know if the Tellabs announcement really affects that because in the -- it depends on the customer base you're talking about. Outside of BPON and Verizon, I would say that their biggest strength in North America was in tier two and tier three accounts. And I think that that market potential has been opened to several players for some period of time. Now, I have not read them into thinking that they were getting completely out of the PON market. I kind of of more viewed that as a Verizon phenomenon, not an overall market. So, I can't tell you that they won't be more aggressive than they've been in the past. But we're confident with the players, on the way that they're situated today, that we can pick up market share. And so far we've been pretty successful picking up market share in those spaces. So, I don't know if it's wide open. You always have start-ups and other companies that are trying to do their best to unseat you or get you off track but at this point in time, we're feeling pretty good about it.

Okay. Well let me -- I'm sorry, let me ask the question a different way. In last three months and going forward, who do you think your top two competitors will be in the 11,000 -- in the 1100 and the 5000 product line as you try to win new business?

It depends on the tier of the account. In the tier ones it is, without a doubt, Alcatel-Lucent. With Ericsson coming in periodically, trying to win some share. In the tier two accounts and in the tier three accounts, I would say it's more people like Kalex and some of these smaller companies. With Tellabs' periodically having a strong position. but I would say it's a broad list of players in the tier twos and tier threes.

Okay. And my last question is; in the next two quarters, if the TA5000 becomes a greater percentage of your business, which it sounds like it will, based on the addition of two tier ones over the course of the year, do you think that we've seen the bottom of gross margin for the Company, assuming there's no big massive CapEx slowdown and your revenue stream overall gets impacted? But as this mix becomes bigger and you grow your overall sales sequentially in the next couple quarters, have we seen the biggest impact in gross margin or is it possible that gross margin could go down sequentially with the -- as the TA5000 ramps in 2Q and 3Q?

I think you're attributing the gross margin impacts to be specifically 5000-based, and that's not always true. If we go in there and win a large tier one for 1100 series products, you may see some impact of that win as we initially roll that product out. The 5000, if we -- if the 5000 -- let me try to answer it this way. If the 5000 were out there and deployed today and we didn't have these kind of start-up impacts, would gross margins suffer from where they are today or let's say the 58%, 59% range? The answer would be no. The gross margins on the 5000 product itself are very healthy. I don't know if that answers your question or not.

Okay. I think it does. But just to clarify, so these start-up costs are total volume based, not customer specific based. Where I was coming from, in the next couple quarters if you get big chassis orders with not a lot of line cards in two new customers, you're going to still have these start-up costs and it could still impact gross margin? That's what I was trying to get at. Or is it more a volume situation as the business ramps, the start-up costs go away as you spread it across multiple tier ones?

I'll give you an example which may help you understand this a little bit better. In some times, historically, what we have done is we have gone in there and incentivized broad footprint deployments in order to secure that footprint for ADTRAN's market share going forward. Now, those deployments are typically or those type of incentives are typically one-time things, where it's for X number of pieces of equipment in this footprint. And once we hit that spot, they go away. So going forward, as they expand capacity, even if it's chassis or expand footprints, even if it's chassis, you won't see that hidden margin.

Okay. So it sounds like barring something unusual, you don't see the gross margin going down as the TA5000 ramps in the next couple quarters. The 5000 itself will not cause that decline in margin.

What we want to make sure we have the flexibility to do though, is as we go out and grab large chunks of market share and we work out arrangement with customers, that may impact the gross margin over the short term. We want to maintain that flexibility and we think we can do those type of deals within the high 50's still guidance. So we just want to maintain that.

Okay. All right. Great. Thanks a lot.

I think that was our last question. I think we're out of time. So I'd like to thank everybody for joining us on our conference call and we look forward to talking to you next quarter.

Thank you. This concludes ADTRAN's first quarter 2008 earnings release conference call. You may now disconnect.