ADTRAN Holdings Inc (ADTN) 2008 Q4 法說會逐字稿

Good morning. My name Tamara is and I will be your conference operator today. At this time, I would like to welcome everyone to the ADTRAN fourth quarter 2008 Earnings Release conference call. (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 marketing, 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 risk detailed in our annual report on Form 10-K of the year ended December 31st, 2007. And Form 10-Q for the quarter ended September 30th, 2008. These risks and uncertainties could cause actual results to differ materially from those in the forward-looking statements which may be made during this call. Thank you.

Mr. Stanton, you may begin your conference.

Thank you, Tamara and good morning, everyone. Thank you for joining us for our fourth quarter 2008 conference call. With me this morning is Jim Matthews, Senior Vice President and Chief Financial Officer.

I would like to start out this morning by discussing the environment we experienced in the fourth quarter, that led to revenues of $112.4 million. As you will recall, the latter part of the third quarter experienced a decrease in order flow across most customer segments and you across most product segments. Although we experienced a stabilization of order rates in early October, order rates declined further in November to a level that continued through the end of the year, as we continued to feel the effects of the economy along with typical seasonality. On a more granular level, although Optical Access was up 17% year-over-year for the quarter, this category was sequentially down, greater than which can be attributed to normal seasonality. This decrease was fairly broad-based across multiple customers. Similarly, although Internetworking was up 10% year-over-year for the quarter, this product segment saw sequential decline greater than normal seasonality along with our traditional IAD segment, both of which are targeted for the SMB market.

The sequential revenue decline we experienced in Broadband Access category was primarily the result of an expected decline in the 1100 series Fiber to the Node revenues. This decline was partially offset by an increase in TA5000 system revenues. As mentioned previously, we anticipate reacceleration of Fiber to the Node shipments beginning in early 2009. And as expected, HDSL was down sequentially. This followed a very strong third quarter. Year-over-year for the fourth quarter, HDSL actually grew 15% and for the full year, HDSL was up 4%. Our TA5000 category continued to grow through the quarter. But more importantly, we continued to move forward with our customer initiatives, securing our third [ARBAC] approval in December. The momentum in the TA5000 product remains very strong as we enter 2009.

Looking back on 2008, the environment was difficult as many of our customers and competitors adjusted to the changing circumstances created by the economic conditions. Our growth areas combined grew 23% year-over-year. Each achieving new record revenue levels and all poised for long-term growth. Broadband Access experienced 22% revenue growth for the year. Our Fiber to the Node products continued to show strong growth as carriers continued to invest to upgrade services to their subscribers. The activity around our Fiber to the Node products both from a bidding and lab perspective continued to be strong in the US and abroad.

Strategically, the TA5000 system had a phenomenal year. This system is now approved at over 60 carriers in the US including all of the top eight. The majority of which are in the very early stages of deployment. We continue to anticipate that expanded deployments and the addition of new applications will contribute meaningfully to the growth of this platform for many years to come.

For the year, our Optical Access category also showed good progress, growing 25% over the prior year as we began to see the effects of Tier One approvals. We continue to believe despite our gains to date, that we are in the early phases of Optical Access conversion and that the increasing demand for bandwidth, both wire lined and wireless, holds great promise for this product area. In our enterprise segment, for the year, Internetworking revenues grew 23% over the prior year. This growth, although muted by economic conditions, continued to reflect the broad-based support we are seeing as we continue to utilize our carrier distribution channels and aggressively grow our broad dealer base. For the year, this growth area now represents approximately 60% of our total enterprise revenue. Finally, considering the slowing effects of SMB, HDSL, our largest legacy product area, showed a strong result for the year, growing 4%. Our leading market share position in this category continues to benefit from increased demand for wireless back haul.

We believe the results of continuing share gains in our new product categories will enable us to mute the effect of the environment we are experiencing. Although the continuing economic uncertainty and the resulting volatility in order rates forced us to enter 2009 with some level of caution. Overall, the economic environment has had both positive and negative impacts on our Company. There is little doubt that growth in 2008 was slowed due to cautious spending and declining capital budgets. However, our heightened focus on improving operational efficiencies across the board will lead to a Company with greater flexibility and increased capacity. In addition, this environment is one where companies with strong operating models can aggressively pursue market share and continue to fund R&D efforts to open up future opportunities.

We believe the Company enters 2009, the 2009 year, better positioned for long-term growth than at any time in its history. Although we will continue to be impacted by macroeconomic headwinds, we are positioned well to weather this environment, and over the long-term prevail as a preeminent access supplier. I would now like Jim Matthews to review our results for the fourth quarter 2008, and our comments on 2009 first quarter and full year. We will then open the conference call up for questions. Jim?

Thank you, Tom and good morning to everyone. Revenue for the fourth quarter was $112.4 million compared to $119 million in Q4 of '07. For the total year 2008, revenues grew 5% to $500.7 million compared to $476.8 million for the year 2007. Broadband Access product revenues for Q4 2008 were $19.5 million, compared to $27.3 million in Q4 of '07. Comparing Q4 of 2008 to Q4 of 2007, the decrease in Broadband Access product revenues is primarily attributable to a decline in sales of Fiber to the Node systems partially offset by a significant increase in sales of Total Access 5000 systems. For the total year 2008, Broadband Access revenues grew 22% to $102.3 million, compared to $84 million for the year 2007.

Optical Access revenues increased 17% to $12.6 million for the fourth quarter of 2008, compared to $10.8 million in Q4 of '07. Comparing Q4 of '08 to Q4 of '07, the increase in Optical Access revenues was the result of continuing market share gains across numerous customers including Tier One carriers. For the year 2008, Optical Access revenues grew 25% to $53.8 million, compared to $43.1 million for the year 2007. Internetworking product revenues increased 10% to $15.7 million in the fourth quarter of 2008, compared to $14.2 million in Q4 of '07. For the year 2008, Internetworking product revenues grew 23% to $65.8 million, compared to $53.4 million for the year 2007. For the total year 2008, our growth products grew 23% to $222 million, from $180.4 million for the year 2007.

Carrier systems revenue was $43.5 million for Q4 of '08, compared to $49.1 million in Q4 of '07. Comparing Q4 of '08 to Q4 of '07, the decrease in carrier systems revenues was primarily attributable to a decrease in Broadband Access product revenues, partially offset by an increase in Optical Access product revenues. For the year 2008, carrier systems revenues grew 15% to $206.2 million, compared to $179.8 million for the year 2007. The growth in carrier systems revenue for the year was primarily attributable to continuing share gains in our Broadband Access and Optical Access categories. Business networking revenues for Q4 of '08 were $21.4 million, compared to $23.7 million Q4 of '07. Comparing Q4 of '08 to quarter of '07 the decrease in business networking revenues was primarily attributable to a decrease in traditional integrated access device revenues partially offset by an increase in Internetworking product revenues.

For the year 2008, business networking revenue was $89.6 million, compared to $88.3 million for the year 2007. Loop Access revenue was $47.5 million for the fourth quarter of '08, compared to $46.1 million for Q4 of '07. Comparing Q4 of '08 to Q4 of '07 the increase in Loop Access revenues was attributable an increase in HDSL revenues partially offset by a decrease in Enterprise T1 revenues. For the year 2008, Loop Access revenue was $204.9 million compared to $208.7 million for the year 2007. The decrease in Loop Access revenues for the year attributable to a decrease in Enterprise T1 revenues partially offset by an increase in HDSL revenues.

HDSL product revenues grew 15% to $41.7 million in Q4 of '08, compared to $36.3 million for Q4 of '07. For the year 2008, HDSL product revenues grew to $179.8 million, compared to $173.6 million for the year 2007. As a a result of the above, carrier networks division revenue was $86.8 million and enterprise network's division revenues were $25.7 million for Q4 of '08. For the year 2008, carrier network division revenues were $392.2 million, and enterprise network division revenues were $108.5 million. International revenue was $8.1 million for the fourth quarter of 2008, compared to $15.7 million in the fourth quarter of 2007. Comparing Q4 of '08 to Q4 of '07, the decrease in international revenues is primarily attributable to a decline in sales of Fiber to the Node systems to a large Latin American carrier. To provide the reporting of each of these categories, we have published them on our Investor Relations web page at ADTRAN.com.

Gross margin was 60.1% of revenue for the fourth quarter of 2008, compared to 58.4% for the fourth quarter of 2007. The increase in gross margin is primarily attributable to lower transportation, expediting and unit costs per sales dollar. Research and Development expenses were $20.4 million in Q4 of '08, compared to $18.7 million in Q4 of '07. And the increase in Research and Development expenses was primarily attributable to an increase in activities related to customer development specific efforts. Selling, general and administrative expenses were $25.7 million for Q4 of '08, compared to $25.4 million for Q4 of '07. And stock-based compensation expense net of tax was $1.3 million in the fourth quarter of '08, compared to $1.1 million for the fourth quarter of '07.

Interest income was $2 million for the fourth quarter of '08, compared to $2.8 million for the fourth quarter of '07. The decline in interest income was attributable to lower interest rates. During the fourth quarter of 2008, the Company recorded net realized investment losses of $2.3 million in its marketable equity securities portfolio, as a result of a significant decline in the equity markets. Tax affected this reduced diluted earnings per share by $0.02 for the quarter. The Company's income tax provision rate was 19.1% for the fourth quarter of '08 compared to 34.4% for the fourth quarter of '07. The tax provision rate for the fourth quarter of '08 was lower primarily as a result of recognition of research tax credits for the full year as legislation was enacted in the fourth quarter of 2008. The amount of reserve credits recognized in the quarter was $2.3 million.

Additionally, during the fourth quarter, the Company completed a review of its estimated tax deduction for the year 2008, relating to section 199 of the internal revenue code. This review resulted in an increase in the Company's estimated tax deductions for the year 2008, which reduced the quarter's tax provision by $900,000. The increase in tax deductions was attributable to an increase in domestic content of products we manufacture. We anticipate the Company will continue to benefit from this deduction in future years.

Earnings per share assuming dilution for Q4 of '08 were $0.27, compared to $0.27 for Q4 of '07. Inventory was $47.4 million at quarter end. Net trade accounts receivable were $52.7 million at quarter end, resulting in DSOs of 43 days for the fourth quarter. Compared to 55 days for the fourth quarter of 2007. Net cash provided by operating activities for the fourth quarter 2008 was a strong $23.5 million compared to $19.4 million for the same period the prior year. Unrestricted cash and marketable securities totaled $226 million at quarter end after paying $5.6 million in dividends during the fourth quarter and after repurchasing 399,000 shares of common stock for $5.6 million.

We would like to remind you that we typically do not give specific guidance on revenues, however, given the environment we feel compelled to assist you in developing your opinions on future revenues. We want to remind you that we are a book and ship business and timing of near term revenues associated with large products we are engaged in combined with the impact of the economic environment on carrier and SMB spending make it difficult to predict revenue levels. Assuming economic activity levels remain constant with the current environment, for the first quarter of 2009 we anticipate that revenues will be flat to slightly down from fourth quarter 2008 levels.

For the first quarter, we believe we will execute in a range consistent with our historic operating model at the achieved revenue level. For a yearly perspective, we expect total revenues for growth products will be up, HDSL to be slightly down, and other legacy products to be down. For the total year 2009, we anticipate profitability will be in a range consistent with our historic operating model. We believe the larger factors impacting the revenue we realized in the first quarter and full year 2009 will be the following. Spending levels at our Tier One and Tier Two carrier customers, the adoption rate of our Total Access 5000 and 1100 Series platforms, the adoption rate of the OPTI-6100 with Tier One carriers, continued growth of internetworking revenues, the continuing negative impact of the economy on our traditional product revenues and order trans infraction at newer international customers. Tom back to you.

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

(Operator Instructions). Your first question comes from the line of Vivek Arya with Merrill Lynch.

Thank you. Hello, Tom, hello, Jim. Couple of questions. First is Tom, can you give us a sense for the drivers of your HDSL business? That has been I think a pleasant surprise last year and I think for '09 you are guiding it to be down. Can you give us a sense for what the drivers are there, how much of it is tied to wireless, how much of it is tied to small, medium size business, any color around that would be great?

Well, I can basically just give you the color that we have because just to remind everybody, we actually ship most of our HDSL equipment to the large carriers and they don't then distinguish for us whether or not it's going for wire line capacity, wireless capacity or what the actual usage may be. Our sense, and I think just from a sense of the current conditions and what we're kind of seeing in general in the business environment, that the majority of -- or definitely the uptick or let's say the positive surprise or really the uptick for the year 2008 had to have been driven by wireless and we have continued to hear and we had heard really since the beginning or since the middle of last year about back haul increases and bandwidth upgrades and we're expecting that same type of activity to probably drive some of the numbers going forward into 2009.

And then on the Broadband Access business, the DF5000 is expected to grow in '09 but how much of that growth could be offset by declines in either the 1100 or the DA3000?

I think the real -- the potential decline is much more centered around the 3000 series platform than the 1100 or 1200 series platforms. The 1100 and 1200 we're very active in bidding these products today. We have some fairly large customers who have projected usages for these things. So we're thinking the 1100 and 1200 series to be fairly stable. And would not at all be surprised to see some good growth out of those product lines this year. The 3000 will probably decline but of our DSLAM area it is by far the smallest. So -- and that's our traditional ATM DSLAM.

And then on the Optical Access side, very sharp drop in the fourth quarter. Were there any one-time factors associated with that or it's a general weakness in carrier spending and how should we think about that business, especially when you have someone like Nortel who is finding it hard to sell that piece of its business, how should we think about the optical market in general?

Yeah, I mean, I think -- I don't know if I would use the inability to -- for Nortel to sell that piece of business as necessarily reflective on the business that we're in, but yeah, it was down in the fourth quarter and some of that was seasonality but we did see a more pronounced slowdown in that and very well could be that that's to a large extent a CapEx item and we may have some additional contraction because of that. We're very hopeful for the Optical Access product line in general in 2009 because it is also participating in this wireless upgrade cycle. So that is one where we haven't given more specific color than that. We don't expect -- I can tell you, we don't expect significant declines and if anything we would expect an increase in sales there. But the visibility on that product line is just less than was we can say on something like the 5000.

Got it. And one final question. Jim, gross margins have actually held up very well and there's been good improvement on the OpEx side also. Can you give us a sense of how the trajectory of those two items will be in '09?

Well, you know, as far as gross margins for '09 for the total year, we're still anticipating in the high 50s there and in terms of operating income or pretax income for that matter, again, in 2008 we ended up 23.6%. We would anticipate that 2009 year would end up in that same range in terms of pretax income.

Thank you, gentlemen.

Your next question comes from the line of Paul Silverstein with Credit Suisse.

Jim, can you tell us what the 10% customers?

Sure, Paul. AT&T, 22% for the quarter. Verizon, 14% for the quarter. And Embarq 10% for the quarter.

Okay. You know, I know you mentioned that it was broad-based in terms of the down-tick. In terms of the big customers, AT&T and Verizon on these roll-outs, have they given you any insight in the terms of '09 plans?

No, they have not given us any specific insight.

Okay. I'll pass it on. Thanks, Jim.

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

Hi, kind of CapEx landscape again here. Would you expect any additional slowdown in kind of the Tier Two, Tier Three customers because of lack of access to capital or do you see them wanting to try to invest in this kind of down environment as well?

I think it's a mixed bag. I think we have some that are wanting to invest and then we have some that have been slow. I don't know if I would -- I really would be somewhat surprised to see additional slowdown in the Tier Two space because the ones that have been slow, I would expect to continue to be slow and the ones that have been slow have been contracting for some time. It could happen, though. But I would say there are some out there that are actively planning to grow their network and some of them that have started that.

An then kind of on the new presidential administration here, clearly looking at broadband and IT as ways to jump start our economy here. International marketplaces had similar things. What is your take on all these new political changes and what they want to do with infrastructure?

Needless to say, we're all for it. We have not factored those type of impacts into our thinking at this point. One, because of course we're dealing with carriers, which have a life cycle of their own on purchases and then when you throw government on top of that, I don't know anybody that can forecast that. So those are all positive things. The customer base that I think the government is currently looking at targeting is one that I think we're well-positioned in and I think we have very good products for that space so it would be a nice surprise but it's something we wouldn't bet on.

With the guidance being about flat for this quarter here, how would you kind of expect that to roll out through the year, then, typical seasonality, increases a little bit through the year but do you see it just being more of a flat from the kind of Q1 level?

Well, you know, seasonality in the first quarter is always a mixed bag. But what we tried to guide for is something that was flat to slightly down. We would expect that our seasonal ramps, our first quarter is low, then second quarter goes up, third quarter is typically the highest and we would definitely expect that to be the case this year also. I don't know if I answered your question or not.

Yep, that's great. I'll pass it along. Thank you very much.

Okay.

Your next question comes from the line of Ehud Gelblum with JP Morgan.

Hi, thank you very much. Couple questions. First of all, on your comment, Jim, that the operating model for Q1 would be as normal for that revenue line of the flat to down from 112, does that mean that the pretax EBIT margin goes back into the mid-20s or do you mean it kind of replicates the 20% number that you had in Q4?

I think it would indicates roughly the 20% number we had in Q4. Obviously, we were impacted by the impairments, right, but if we look at it on an operating level, operating income level in Q4 we were at about 19% and we come in at that revenue level in the first quarter, we would expect operating income around that same level.

Okay. So it's the matching up the margin with the revenue level, by the operating margin model target?

Yeah, I think that's correct.

Okay.

I think the other thing too, our target, which is kind of mid-20s is typically for the full year so we do see a swing towards the positive as revenue increases through the year.

Right.

And then it swings back.

Right. So it's associated with the revenue level. Okay. I appreciate that. Linearity for the quarter, sounded like October was stable and fairly good, at least through your conference call in October and then November fell off. Did December get worse than November?

No, actually it didn't. And that's -- we usually do see an additional slowdown in December but November and December were fairly flat.

And when you make those comments, is that primarily an HDSL comment or is that a comment on the growth product as well.

That was a comment on everything.

On everything. Okay. And now can you give us a sense for now for the first weeks in January, that you gave us last time in October, has that continued at that time same?

We have to break it out a cycle because it's always a scary thing to do but when one of the reasons is you'll recall that we did that, these are difficult times and we're trying to give as much information as we can. I will tell you at this point in time in January, it's a -- we've got a fairly strong order rate right now. So I cannot tell you it's going to hang through the rest of the quarter. I can't tell you it will hang through the rest of January because we are pretty much a book and ship business and things are volatile but at this point in time in January we're feeling pretty good.

Okay. So it sounds like it actually has picked up from December?

I would say it's picked up from December.

Okay. Interesting. Now, the Fiber to the Node 1100 that fell off in the US from your Tier One customer over there. You mentioned again like you did in the last conference call that you expect it to pick up early in 2009. Have they indicated to you what their timing is, what their timing is contingent upon, are they waiting to see when they -- when their own margins come back a little bit? Are they just reticent to spend early in the year but they said sometime over the summer is when they're planning on spending? And how recently did they reassure you that they'll continue with the Fiber to the Node rollout.

I would rather not talk specifically about that customer because it's really up to that customer to speak for themselves and fortunately or unfortunately, there are a lot of ties to who that customer is. I don't want to speak for them. Let me speak about the 1100 platform. We expected the 1100 order rate to pick up early this year, early this year meaning definitely in the first quarter and we continue to believe that to be the case.

But that's not part of the pickup you saw in January, yet, so that could be an incremental pickup from this point?

I think I mentioned that the January pickup was across the board.

So that could already subassume some of that and therefore you confidence level in that 1100. Okay. I'll take that as a yes. (LAUGHTER). Appreciate it. One last thing, as you look at the Optical Access business at the end of the quarter and probably tailed off with some of the other things, what level of -- are there certain projects you're waiting for, certain level of confidence you get for that to pick back up again in 2009 after the end of 2008, were there certain customers that either promised to pick back up in spending of that or certain projects you're expecting to see come through? How do you gauge the success of the Optical Access in particular?

The 6100 product is the one that's the most prominent there.

Right.

And those really aren't at this point in time with the customer base that's doing the majority of the spending, aren't project oriented, they're just ongoing as they go and upgrade this particular area or go and deploy this new customer. So there is no trigger like that. I think we just look at the -- just the order activity.

Okay. Appreciate it. Thank you.

Your next question comes from the line of Scott Coleman with Morgan Stanley.

Good morning.

Good morning.

Good morning and thanks, guys. I'm hear a lot of feedback. I'm not sure if you can hear me okay.

Yeah, we can hear you fine.

Okay. Tom, in your opening remarks you talked about how the Company was using the downturn and would lead to increased capacity and greater flexibility. I'm wondering if you could expand on that, particularly on the capacity side, and how you think you'll be able to maybe flex your muscles a little bit through a soft 2009?

Well, you know, any time that -- this is one of those things that I think as the Company, our employees do a very, very good job of, which is trying to continually improve the particular functions that they may be involved in. But any time that you enter some type of rough patch in the economy, which is definitely what I would characterize where we have been over the last couple of quarters or so, I mean, there's an additional focus on where you spend money, how can you actually improve efficiency in a particular area, and as we have seen in the past, when we exit those areas, there's just a general increase in the level of productivity for the dollars spent and that's really what I was kind of alluding to in my comment.

Are you actively working to cut costs? Now, I think, Jim, correct me if I'm wrong, but your guidance for the full year 2009 is that you think revenue will be down a little bit, if I heard correctly.

We actually did not say that.

Okay. I'm sorry, that's what I put in my notes. Are you working to take costs out of the system right now? And is that necessary to get back to those mid-20 pretax margins by the middle of the year?

You know, I think the mid-20, the answer to your question on mid-20 by the middle of the year, we of course haven't guided that far out but I don't think we would need to take costs out in order to do that. The thing that we do need to be consistently and constantly mindful of is the fact that we're in a recession and although you may have great plans for the next six months, those plans may change materially and not because of your own doing. So we're -- at this point in time, no, the answer is no. We have a very strong model that we think would carry us through this year and give us the same type of performance we've seen historically but that doesn't mean that we shouldn't be looking and planning for things, if they turn out differently.

Okay. And maybe one last question from me. If my math is right, growth products dropped about 9% year-over-year in Q4 versus the fourth quarter of last year. I'm just curious how that compares to what your expectations were coming into the quarter, you know, you clearly were very cautious coming into the quarter, given the guidance you provided. But it seems like the growth products fell off even a little more than certainly I would have thought. And I guess to me, the big question is how does that carry through into the beginning part of the year? Was it just some push-outs in terms of orders or -- there's obviously good demand out there but the confidence comes back, I guess stays at this level, slightly better in Q1, I'm just curious where that comes from.

There's a little mixed bag when you're talking about the year-over-year comparison. Let me just try to step you through it. One is, on the Broadband Access piece which in the fourth quarter of last year was predominantly 1100 series, Fiber to the Node products. That was Telmex. So we had a fairly large component there that was Telmex and that did not repeat itself this year. So we expected a decline in Fiber to the Node because of just current customer situations and as I mentioned before we expected it to come back early in 2009. As far as the rest of the growth product areas, I would say optical was a little bit slower than we had hoped. I don't think it was dramatically slower but it was slower and Internetworking was a little slower in the fourth quarter than we would have expected and that's kind of in my notes, although it probably wasn't as apparent as we had hoped. I pointed those two products out initially because those were areas where they were a little softer than we would have expected. Fiber to the Node I think is pretty much where we would have expected it to be.

Thanks for the color, guys.

Our next question comes from the line of George Notter with Jeffries.

Hi, thanks very much, guys. I wanted to ask about the HDSL business and, I guess I'm mentally trying to reconcile sort of where that business goes longer term. I mean, obviously you've got operators trying to pull fiber out to base stations, hearing more and more about specific projects to do that and certainly your Company plays in areas there. But, you know, as we see that transition occur more fiber fed base stations versus copper fed, can you sort of think about -- how does that net out for ADTRAN, HDSL versus other areas where you play with the on OPTI-6100 so on.

You're specifically talking about the fiber transition. We also think over time that there will be a copper transition to ethernet technology versus GDM technology. And our opinion really hasn't changed there. I think most forecasts, if you look at the fiber to copper transition, it's a fairly long-term process and although we see it impact our HDSL business, it has been impacting our HDSL business probably for the last five to 10 years and we just don't see that dramatic of an impact in the near term, let's say the near term being one to two years and I think the numbers have kind of shown that. So over time, it will convert and over time the reason for us being in the Optical Access business was we think of that conversion can be very lucrative to a vendor and we want to make sure that we're in there and positioned properly fairly early in that cycle. So that's a transition that we're trying to cover both sides. We have the legacy business there and it seems to be doing well and holding its own. Over time, that will convert to both ethernet over copper or fiber and we hope to be positioned well and I think we've come along way towards that.

I guess one of the obvious pieces here though is that the HDSL business, you have gigantic market share whereas in optical transport certainly that market share is improving but you've got more competitors there. How do you sort of reconcile that when you think about the net effect of this transition happening?

Absolutely, that's true. There are a different set of competitors in the optical business. I think one mitigating factor towards that though is that the ASPs are substantially different. So I wouldn't trade a handful of HDSL circuits for one OPTI-6100 any day. So we think we'll do well in that transition but it's not that it isn't without risk.

Thanks.

Okay.

Your next question comes from the line of Blair King with Avondale Partners.

Hey, guys, thanks for taking my question. Just couple quick ones. One follow-up on the last question, with regard to ethernet over copper. Is that a market that you believe is going to remain strategic initiative from your customer base over 2009? Or do you see -- do you see them actually milking more of their legacy network as spending tightens in 2009?

That's a good question. First of all, ethernet over copper hasn't really been adopted widespread in the US yet, definitely not outside of the US, so it's -- there are a few kind of leading companies that are pushing that technology forward. One of them happens to be a very, very large carrier in North America. I think that there's definitely a willingness and a continued push driving ethernet over copper out. I think that there's several things that have to happen in the overall infrastructure that they're working on and I think also that the end user, you know, whether that's a wireless customer or a wire line customer or let's say a business customer, will have to pull that product. So, if the wireless companies aren't pulling ethernet native services yet, then that won't happen until that transition does happen. I do think it's a strategic push for them. I do think that they want that to happen in an expeditious manner but I do think that at this point in time, they're reliant on adding capacity to their TDM network.

Okay. Interesting. Maybe just a couple quick subjects on sort of spread out. On the CenturyTel Embarq merger, have you gotten any clarity out of CenturyTel whether they would plan to pursue a video-based strategy in the Embarq footprint upon that deal?

That's one where I would definitely be speaking for the customer and I don't want to do that. I think there has been some things that have been made public about their plans. We're very glad to have CenturyTel as a customer for our product line as well as Embarq so we'll do whatever they need us to do.

One last question. If there's any possibility where you could give some update on some of the international trial activity you've been involved in, that would be very helpful.

Sure. Of course our biggest opportunity continues to be the Telmex piece because they've adopted the Fiber to the Node products and I would say that we -- there's some regulatory issues that have been very slow to clear up and I would say they're still slow to clear up. So that continuing to be one that we work with the customer and continue to position ourselves well, but there's some timing issues that they have to work through. There will be some additional -- I believe there will be additional capacity additions this year into their network and we just need to make sure we're positioned well for that.

Okay.

I will also say, just one other point, that the 1100 isn't playing in other areas. We really haven't specifically outlined those. I would like to get some of those under our belt before we talk about those.

There is substantial international activity outside of Telmex going on, is that correct.

Yes both on the 1100 the 5000.

Thank you very much.

Okay.

Your next question is from the line of Nikos Theodosopoulos with UBS.

Can you hear me.

Yes, Nikos.

Okay. I just had a couple of quick questions. First of all, on the tax rate for 2009, the tax rate was quite volatile quarter-to-quarter in say 08. Can you give us a sense of what you're thinking about for the full year '09 for the first quarter?

Sure, Nikos. For the full year '09, we think something consistent with the full year '08 rate would be probably appropriate for planning purposes, so '08 the tax rate was 33.6%. So again, we think that that would be a fair estimate for the '09 year.

Okay. And the second question was on the impairment charge. What investment incurred the impairment and do you feel that there's some additional risk or was this kind of a one-time impairment?

Well, we have about $12 million of marketable equity securities as of the end of December. And it consists of a portfolio of about 350 marketable equity securities and due to the market declines, we thought it appropriate to take the impairments. Now, did we have additional impairments in Q1? We believe that they'll be substantially less than what we saw in Q4. However, if the market goes down significantly again, you know, that's another issue. Does that answer your question?

Yeah, perfect. And then just one last question. On the TA5000, you gave a lot of metrics around what happened with the 1100 year over year, sequentially. Can you give me a feel what the sequential growth rate and year-over-year growth rates were for the TA5000 in the quarter?

Well, the sequential growth rate would be phenomenal but it was off of a very low base in Q4 of '07. Excuse me, the year-over-year growth rate would have been phenomenal. The sequential growth rate was definitely double-digit. I would like to kind of leave it at that.

Double-digit. Okay. And you mentioned that you got additional Tier One carrier for that business. If you look at -- is that the product you have the most confidence in '09 in terms of growth, is that fair to say?

Without a doubt.

Without a doubt. Okay. I'm sorry, just one last question. Your comments earlier about quarters being a little bit better in January than December, is that across enterprise and carrier or was that specific to carrier?

It was -- I'm going to throw this caution out but I know a lot of people's ears will turn off. It is very early in the quarter so we don't forecast the quarter based off of two or two and-a-half weeks into it. But it was across carrier and enterprise, pretty much the entire product segment.

Great. Thanks a lot.

Your next question comes from the line of Simon Leopold with Morgan Keegan.

Great. Thanks a lot. First, I wanted to follow up on the TA5000 line of questioning, since that seems to be where a lot of the opportunity lies. What kind of time frame and pattern do you expect for the year in terms of maybe getting to, let's say, 10% of sales? And let me be explicit, what I'm imagining is that there's probably a step function kind of pattern but I want to see how you're thinking about the roll-out.

Well, you know, the three different [RBots] and a multitude of smaller carriers and the reality is that some of these smaller carriers can in and of themselves drop a significant amount of volume when they turn on but they're very lumpy in the way that they do that. You know, I would expect it to just ramp really from Q1 through the end of the year. There may be a step function in there, you know, as one of the bigger carriers starts a project or whatever. But we're not really trying to forecast to that level. Probably some time mid-year, but I can't tell you exactly, that would be a second quarter or third quarter event and lot of these smaller carriers can actually impact that prior to that or after that.

And am I correct in imagining that the product is currently still less than 10% of overall sales today?

Yeah, I think that would be correct, yes.

Okay. And if you could give us an update on the competitive landscape, one of the things we're trying to get a sense of is how much emphasis your customers may be putting on your balance sheet and your position and how that's affecting the competitive environment for you and whether you're gaining, losing share, if you could give us more color on that?

You know, I think -- I don't think we've lost any share, definitely, because of our balance sheet. I think that we have had, as we've given -- gotten into some competitive situations, more so in 2008 than probably in the previous years, people ask questions about Company's current financial stability. I don't think it's really ours. I think that other companies have driven those questions and then we end up having to check the same boxes. We have not lost any share of course because of that metric and I think in fact it's helped us. Where we've seen the more direct impact, though, is where companies have exited businesses or have said that they're going to stop investing in businesses and that has led to fairly direct business to us.

Right. Okay. Thank you very much. That was all I had.

Okay.

Your next question comes from the line of Ari Bensinger with Standard and Poor's.

Yes, thank you. Do you expect R&D and SG&A expenses in absolute dollars to be down in '09 year-over-year and related to this, what was employee headcount in Q4 versus Q3, your hiring policy going forward?

You know, as far as the OpEx trend, Ari, you know, we really haven't given any color on that, other than, again, we are targeting a pretax operating model consistent to what we saw in 2008. Okay? In terms of the employee count, we're around 1650 employees, okay. We'll have specific numbers obviously in the 10-K.

And was that up from Q3?

No.

No. Okay. And then last question. Can you give a sense of the growth prospects you see in '09 split between the carrier and enterprise segment?

Well, you know, the color that we've given basically is that for '09 is that our growth areas will grow and that HDSL will be slightly down. Now, HDSL does have a component of SMB as well, but again, we think that any pressure there might be offset with wireless spending. And our other traditional products, again, outside of HDSL, we would expect to continue to decline, probably at a rate around what we saw over the last couple of years, I would imagine, okay, but that portion of our traditional products has grown to a much smaller level than it was, say, two or three years ago. Okay? Now, again, I think that's about all the color that we can give at this point.

Thank you.

Your next question comes from the line of Manny [Recari]with Kaufman Brothers.

Good morning. Thanks for taking my questions. I have two. One, you just mentioned the growth products, you expect them to be up year-over-year. Is that across all three of them? Are there any like large deals that there were in the December '07 quarter that kind of make it a difficult comp in any of the quarters?

There is nothing that stands out I think on a quarterly basis, like we saw in '07 fourth quarter of '07. So I mean, I think we have some customers that kind of ramped through the year in '08 on some of these products and we would expect the same type of thing. So there's nothing that really stands out there.

Okay. And then the second question is with Nortel filing for bankruptcy, do you see any opportunity there to target some of their distribution channel on the Internetworking side for you?

I think there are actually several opportunities that have opened up where we can target distribution channels and customers directly. I think Nortel is just one of those. It's probably not the one that will have the biggest near term impact but it's definitely one that we would look at.

Okay. Thanks.

Your next question comes from the line of Larry Harris with CL King.

Yes. Thank you. Was Qwest a 10% customer in the quarter? I missed that.

They were not, Larry.

They were not. Okay. Thank you. And within the Internetworking category, did you make any comments regarding the 7100 series IPPBX and where that stands right now?

We didn't specifically point out the 7100. The 7100, we relaunched the 7100 last year with additional features that we felt would continue to push that product forward so it's not something that I would expect to get 10% of revenue or anything like that in the near term.

Your next question comes from the line Bill (inaudible) with Triton Capital

Relative to your R&D, the percentage increase as a percentage of sales is that largely of solely due to the sales drop or do you have some important projects that you are just not willing to pull the spending back on even in a choppier economic environment?

It is a function of -- of course of revenue which can swing from quarter-to-quarter in our business. Having said that, we have over the last year and-a-half or so increased the R&D line and that was a conscious decision on our part to meet some of the customer commitments that we have and some of these commitments are contract to deliver as late at 2010 so we made a conscious effort to do that. At the same time, we're cognizant of the environment that we're in. So I think that the rate of increase is definitely slowed down and I would not expect to see that type of rate, if any, increase going into 2009.

Would you please repeat that last part again? I wasn't able to hear it.

I wouldn't expect to see the same type of increase and in fact if there is an increase it would be very small in 2009. I think we're at this point in time fairly right-sized with our engineering, our R&D expense, versus the opportunities that we with have and the things that we have committed to.

And that would be at the roughly $20 million per quarter?

Yeah, that's where we were in the fourth quarter.

Right. Great. Thank you.

Okay.

(Operator Instructions). Your next question comes from the line of Todd Koffman with Raymond James.

Just a follow-up on the TA5000 performance in the December quarter. I just wanted sort of get a gauge. You've been given a little bit of historically qualitative sense of where that business is. It is north of 5% of revenue or not quite?

It is north of 5% of revenue.

Okay. And then I don't know who said it but I thought I heard you say you thought the TA5000 would sort of ramp consistently. Historically in telecom, there's not been a lot of consistency. Are you getting better visibility about the TA5000 ramp over the next two or three quarters or was that really just sort of more of a guess?

That was more of a guess. I will say the difference here is that this has had a broader based acceptance than any other product I can recall that we've actually come to market with. So there are a lot more inputs into it than just one customer that can substantially change the order flow and that's probably one of the differences also.

But it wouldn't be unexpected, if in one of these quarters over the next two or three quarters, you had an outsized performance or undersized performance in TA5000, right.

It wouldn't surprise us, yes, that's true.

Thank you very much.

Okay. Tamara, I think at this point we're pretty much at the end so I want to thank everybody for joining us on our conference call and we look forward to talking to you next quarter. Thanks very much.

This concludes today's ADTRAN fourth quarter 2008 Earnings Release conference call.