ADTRAN Holdings Inc (ADTN) 2010 Q1 法說會逐字稿

Good morning. My name is Suzette and I will be your conference operator today. At this time, I would like to welcome everyone to the ADTRAN Fourth Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's prepared remarks, there will be a question and answer period. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded today, Wednesday, April 14, 2010.

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 products, and channel mix, component cost, manufacturing efficiencies and channel mix, component cost, manufacturing efficiencies and other risks detailed in our annual report on Form 10-K for the year-ended December 31, 2009. These risks and uncertainties could cause actual results to differ materially from those in the forward-looking statements which may be made during the call.

At this time I would like to turn the call over to Mr. Tom Stanton, CEO. Mr. Stanton, you may begin your conference.

Thank you, Suzette.

It is my pleasure to welcome you to ADTRAN's first quarter 2010 conference call. Joining me on the call is Senior Vice President and Chief Financial Officer, Jim Matthews. I will start today's call by providing some insight into the company's first quarter performance as well as our outlook for the second quarter. Following this, Jim will provide the financial results for the first quarter. We will then open the floor up to answer any questions that you may have.

Let me begin by saying I am pleased to report that we had a solid first quarter for 2010 with strong performances by both our carrier and enterprise divisions. The Carrier Networks division reported a 14% increase in revenue over the same period last year due to a number of factors, including increased deployments of products for broadband connectivity, increased deployments for products for business ethernet connectivity driven by network convergence and the accelerating need for higher bandwidth, an increased demand for network aggregation products as carriers scale their infrastructure to increase network capacity and a general improvement of the telecom spending environment. Our Enterprise Networks Division reported a strong performance in its Internetworking category. This was aided by growth in both its carrier and bar channels, and as a result, we reported an 18% increase in revenues for the division over the same period last year.

During the first quarter, our combined growth areas, Broadband Access, Internetworking and Optical Access delivered yet again, growing an impressive 45% year-over-year. Taking a closer look at these areas, Broadband Access revenue grew 64% over the prior year, lead by the Total Access 5000. The Company benefited from continued share gains from tier two and tier three customers, as well as an increase in shipments to our tier one accounts. Also of note during the quarter, were strong contributions by our Total Access 1100 and 1200 series, Fiber To the Node products. We are pleased both the Total Access 5000 and our Fiber To the Node products continued to gain momentum across all carrier classes and application sets.

As previously mentioned, Internetworking lead the growth in the Enterprise segment, with a 45% increase in revenue over the same quarter in 2009. This increase was a result of good product strength throughout the Internetworking portfolio and meaningful market share gains within the competitive carrier space as well as a benefit of the recovery in the IT sector. During the quarter, we achieved carrier certification for new applications and continued to add new resellers to our VAR channel base. Overall, the demand of our Internetworking products was driven by continued conversion towards ethernet services and gains in market share from incumbent suppliers. Optical Access reported a 6% increase over the same period last year, as results were impacted by typical seasonality in the baseline business; however, customer activity around wireless backhaul increased through the quarter. As expected, HDSL declined 7% when compared to the first quarter of 2009.

Now, moving on to a broader discussion of the second quarter. In general, we expect the momentum of the first quarter to continue, marked by strong performances from all of our growth categories. In Broadband Access, we anticipate our Total Access 5000 platform will make meaningful progress when new deployments, in addition to market share gains in existing customers. We anticipate increased shipments of Total Access 5000 and our Fiber To the Node products accelerated by market share wins and tier two and tier three accounts and new application deployments within tier one markets. In Internetworking, momentum will be driven by incremental application wins in both tier one and competitive carrier accounts as well as a continual increase in our VAR presence with the addition of new channel partners. In Optical Access, as previously mentioned, an increase in customer activity leads us to expect an increase in revenues for this category in the second quarter.

Moving on to our traditional product lines. Although we expect HDSL to decline for the year in the high single to low teens percentage range, activity around wireless backhaul suggests the first half of the year will not see that level of decline. We will continue to review our outlook on this product line as the year unfolds. As mentioned on our previous conference call, the Broadband stimulus package holds the potential of having a material impact on the company's revenue, although the timing and magnitude of this impact remains uncertain. During the quarter we were awarded several projects aligned with this program and we believe orders will be forthcoming as stimulus funding is released.

Looking forward in our industry and what we expect for the future, we anticipate an accelerated shift from TDM to ethernet architectures, fueled by the growing need for bandwidth that is resulting from the rapid adoption of applications such as VoIP, IPTV, and internet enabled mobile devices. In addition, carriers will increasingly deploy fiber deeper into their access networks and deploy newer technologies to leverage their current infrastructure in order to accelerate broad based deployment and alleviate access bottlenecks. We feel that ADTRAN is well-positioned to address this transition with a broad portfolio of solutions that meet both Carrier and Enterprise customer needs. We believe we are uniquely positioned with a full portfolio of fiber and copper technologies with longstanding channels to market for these barrier customer classes.

At this time I would like to turn things over to Jim Matthews to provide you with the financial details for the quarter. Following Jim's comments, we will open the floor for questions. Jim?

Thank you, Tom. Good morning to everyone.

Revenue for the first quarter increased 15% for $127 million compared to $110.4 million in Q1 of 2009. Broadband Access product revenues for Q1 of 2010 increased 64% to a record level of $36.4 million, compared to $22.2 million for Q1 of 2009. Internetworking product revenues for Q1 of 2010 increased 45% to $22.2 million, compared to $15.3 million for Q1 of 2009. Optical Access product revenues for Q1 of 2010 increased to $11.3 million, compared to $10.7 million of Q1 of 2009. Carrier Systems revenues for Q1 of 2010 increased 36% to $58.1 million compared to $42.7 million for Q1 of 2009. Business Networking revenues for Q1 of 2010 increased 32% to $26.5 million, compared to $20 million for Q1 of 2009. Loop Access revenues were $42.5 million for Q1 of 2010, compared to $47.6 million for Q1 of 2009. HDSL product revenues were $39.9 million for Q1 of 2010, compared to $42.9 million for Q1 of 2009.

As a result of the above, Carrier Networks division revenues for Q1 of 2010 increased 14% to $99.5 million, compared to $87.1 million for Q1 of 2009. Enterprise Networks division revenues for Q1 of 2010 increased 18% to $27.5 million, compared to $23.3 million for Q1 of 2009. International revenue was $6.7 million in Q1 of 2010, compared to $6.9 million in Q1 of 2009. To provide the reporting of each of these categories, we have published them in our Investor Relations web page at ADTRAN.com.

Gross margin was 59.3 percent of revenue for Q1 of 2010, compared to 61.1% for Q1 of 2009. Research and Development expenses were $22.8 million for Q1 of 2010, compared to $20.9 million for Q1 of 2009. This increase in expense was primarily related to an increase in customer specific projects. Selling, General and Administrative expenses were $27.2 million for Q1 of 2010, compared to $23.7 million for Q1 of 2009, and this increase in expense was primarily related to an increase in selling activities in the US and abroad. Stock-based Compensation expense net of tax was $1.5 million for Q1 of 2010, compared to $1.6 million for Q1 of 2009. All other income net of interest expense for Q1 of 2010 was $2.9 million, compared to a loss of $2.3 million in Q1 of 2009.

As you will recall, during the first quarter of 2009, the Company recorded net realized investment losses of $3.2 million and this investment portfolio primarily relating to other than temporary impairments of marketable securities as a result of significant declines in the equity securities markets in that quarter. The Company's income tax provision rate was 35.7% for the first quarter of 2010, compared to 26.3% for the first quarter of 2009. The tax provision rate for the first quarter of 2010 was higher due to delays in legislation to extend the benefit for research tax credits for the year 2010. In the first quarter of 2009, the Company recognized our usual benefit from research tax credits. Also during the first quarter of 2009, the Company completed a review of its estimated tax deductions for the years 2005, 2006, and 2007 related to Section 199 of the internal revenue code. This review resulted in a $1.7 million benefit being reported in the first quarter of 2009, reducing the Company's income tax provision for that quarter. The increase in tax deductions was attributable to an increase in the calculated dollar value of domestic content of products we manufactured for those years.

Earnings per share assuming dilution of Q1 of 2010 were $0.29 compared to $0.24 for Q1 of 2009. Inventories were $47.8 million at quarter end and net trade accounts receivables were at $74.1 million at quarter end resulting in DSOs of 53 days for the first quarter of 2010, compared to 46 days for the first quarter of 2009. Unrestricted cash and marketable securities totaled $325 million cash at quarter end after paying $5.6 million in dividends during the first quarter and after re-purchasing 478,000 shares of common stock for $10.3 million.

Due to the bookings and nature of our business and timing of near term revenues associated with large projects, it is our policy not to give specific guidance for the quarter or for the year. We would like to give color to help you formulate your views on our near term business outlook. We expect second quarter revenues to be up, high single digit percent on a sequential basis. At this revenue level, we expect second quarter operating expenses to be approximately flat on a sequential basis. We believe the larger factors impacting the revenues we realize for the year will be the following, spending levels at our tier one and tier two carrier customers, the adoption rate of our Total Access 5000 platform, upgrades for wireless infrastructure, and the award and timing of broadband stimulus funding to program participants. For the year, we believe we will execute in a range consistent with our historic operating model at the achieved revenue level.

Tom?

Thank you, Jim. Okay, Suzette, I think at this point, we're ready to open it up for any questions.

(Operator Instructions). Your first question comes from Ehud Gelblum.

A couple questions. On the Internetworking, clearly, we've seen that grow as you penetrate the carrier VAR channel more and more. Can you give us a sense as to where we are on that scale? Are we half way through and there's still more businesses and segments to get through and so from sheer penetration of further VARs, especially for carriers, that we can continue to see that grow or at what point are we going to start see the level of VARs level out and then it's pure share gains from perspective of same-store sales as opposed to just further penetration?

And then some follow-ups, as well, is if you can just give us the 10% customers.

Sure, so I think you mentioned both carrier customers and VARs, which to us are two distinctly different channels. From a carrier perspective, we have approvals that are relatively broad-based and two of the carriers -- two of the big "R" box and then one of them, we are know where near as far along, so we think there's a whole lot of potential in that one carrier and really in the other carriers, we're by no means the dominant supplier, and we continue to get approval.

As I mentioned in my notes, we got approvals last quarter. We expect conditional approvals for applications this quarter. Some of those approvals are things like for the first time actually being able to sell our IPT products and some of the communication products, so we think we're fairly early on in that phase.

As far as VARs, we are definitely at the beginning stages. We have a couple of thousand or so right now; that number will grow over the next two to three years and at the same time we're also continuing to look at the type of VARs we have and make sure the players that are in the program are the ones that are able to produce.

Do you have a number as to -- can you go year-over-year as to how the VARs have grown?

I don't have it right off the top of my head. I can give you kind of a sense. Let's say three years ago, we were looking at a very strong push, in excess of 50%, and I would say it's probably at this point moderated to a probably 30%, mid-30% range, but that's just my sense. I don't have the number in front of me.

Jim, do you want to cover the 10%?

Okay, there was a question on 10% customers?

Yes.

Okay, 10% customers were AT&T at 18%, Verizon was 11% for the quarter, and Qwest was 23% for the quarter.

Okay, so there's where a lot of your 1100s went into.

When you look at the -- you mentioned share gains in tier two and tier three. Is that primarily with the 1100s or the TA5000? Can you go into details of some of the customers you're seeing share gains at and is that for order activity or for actual revenue placement? How do you gauge that and what types of metrics do you use to measure the share gains?

Well, for one, we can take a look at the 5000 in the tier twos for some spaces is very new, so we know, for instance, one of the larger tier twos, we weren't selling into the 5000 into an IPT slam or IPT application a year ago where we are now, and there was an incumbent supplier, so in those cases we're definitely picking up share on things we weren't even playing in before. As far as -- I really hate to get into names, but I will tell you we made significant head way -- there's a finite number of what we call tier twos -- I think our number is up to about five right now; and we made significant gains at least half of those as far as real incremental movement there and that has been centered around the 5000. We fully expect this year to see different movement or an additional movement in the Fiber To the Node space in some of those carriers as we go through the year.

And last question, do you know of you were brought in as a second carrier to that incumbent in each case or were you given a geography that was yours where you are the primary carrier and can, therefore, go into the incumbent's positioning in the rest of the tier two's?

I'm not aware of a geographic break down, in general I'm not aware of a geographic break down, so I think our attitude is if we can go and provide value to the entire footprint that's what we're trying to do; and I haven't heard that we're going to be relegated to a particular state or region.

Great. I'll leave it there. Appreciate it guys.

All right.

Thank you. Your next question comes from Blair King with Avondale Partners.

Yes, hi guys. Thanks for taking the call. Just a couple of quick questions here.

Jim, I think you'd mentioned in your prepared remarks that OpEx is at least expected to stay flat for the balance of this year, but we have seen the R&D line trend up a little higher over the past couple of quarters and in fact I guess over the past several quarters; and if there's any way you could provide a little color around what that entails and particularly is that focused on international opportunities or how should we think about your R&D budget?

Okay, first of all, my comments in regards to OpEx were only in regards to the second quarter. Now, in terms of engineering costs, yes, they have increased and they have related in large part to domestic opportunities, but we are seeing growing activity for international opportunities as well.

And as far as R&D going through the rest of the year, the way I'd like to talk about that is probably on the level of total OpEx. We do expect OpEx to increase year-over-year this year, but again we do not expect it to increase as much as revenue, so that's how we're managing OpEx overall. We're probably going to see some level of increase in R&D in latter quarters, but again, it's with the focus to maintain that model that I just mentioned.

And then one last question if it's okay.

Obviously with stimulus now becoming a little bit clearer, at least in terms of when funds may be released, could you give us any back drop in terms of what needs to happen at ADTRAN logistically to support or fulfill incremental demand and what the supply chain might look like there? Also from a CapEx perspective, if there's test equipment that needs to be added to turn up lines or what the plan is to fulfill the demand?

Sure, let me try to cover that. In general you're not going to see a big shift. We have the test equipment in place and although we continue to add to that base of test equipment, there's not a particular application set that would drive a significant amount of new test equipment and in fact, I think some of our incumbent customers are probably some of the most difficult testers in the world, so I think what we're set up there.

From a supply chain perspective, we have a lot of flexibility. We have been able to handle some very big jumps in near term increases in the past and we think that we're well set up for that. If you see an increase in anything, it may be in field level support, but at this point in time, we're not envisioning that to be a requirement.

Okay, thank you very much. Congratulations on a great quarter.

Thank you.

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

Yes, thank you. Looking at the HDSL line, it's certainly benefiting from backhaul activity, and I'm just interested the comment you made about at least for the first half you shouldn't see the type of decline that you'd expect for the year for the high single digits and low teens. What makes you think this trend would decelerate to see that type of decline at the end of the year given the strong start for the beginning of the year and the trends of wireless backhaul seem to be strengthening if not-- ?

That's a very legitimate point, and I think the reason you're seeing us cautious about talking about the second half has to be is centered for us around the history that we've had where we have seen carriers come in very strong in one quarter and then come in very light in the next quarter, so it's more centered around the lumpiness that HDL has exhibited in the past is driving us to really not look too far beyond our headlights.

So we feel very good about the second quarter, but we have really not a whole lot of inkling about the third quarter and probably won't until we get closer to the second; and if you look at our HDSL numbers in the past and definitely our HDSL numbers on a customer-by-customer basis, you can see fairly wide variations in ordering patterns.

And then in the Optical Access segment, there was a drop off quarter-to-quarter, you mentioned seasonality. What type of rebound are you expecting going forward and what's the outlook for that division? Maybe if you could give a little color for the full year?

Well, it is to some extent in a similar dynamic as HDSL, which as wireless, backhaul spend for us has been choppy, and we've seen that, so it's another case where we feel good about the second quarter; we feel good about the momentum at this point in time, but we're going to here again try to stay within our headlights and not project too much into the third and fourth quarter until we get closer to those periods of time.

We do expect Optical to be up, of course, sequentially. We expect Optical to be up year-over-year and in the second quarter, but that's about as far out as we want to look at this point.

Thank you.

Okay.

Thank you. Your next question comes from Michael Genovese with Soleil Securities.

Great, thanks. Can you tell us, did you recognize stimulus -- what you would characterize as stimulus revenues in the first quarter?

Michael, this is Jim. We did not.

Okay, and would you expect any at this point before say the fourth quarter this year and would you think that the fourth quarter might be an inflection point there?

Well, I think a lot of that depends on the timing of funding being released, and our latest information is that funding on round one will begin to be released within the next several weeks. Now, that's what we're hearing and there, as you know, there's been delays in the past, so I think it's really dependent on the flow of funding.

Okay, so in terms of round two, would you expect round two funding still in the fourth quarter? Is that the right way to think about it?

Well what we're talking about now is round one funding, which has taken longer than many people have forecasted, and I'm not sure that we will have gained any efficiency in the way that we're running the program in round two, so I wouldn't expect a quick turnaround of that.

Thanks a lot.

Thank you. Your next question comes from Sanjiv Wadhwani from Stifel Nicolaus.

Just to confirm, the Q2 guidance does not include any broadband stimulus, right?

That is correct.

Okay, and then just general question on Qwest. Obviously very strong and looks like they are using you guys for multiple applications. I'm just curious if you could talk about, for the rest of the year, do you expect that strength to continue of the year do you expect that strength to continue any sort of color that would be helpful? Thank you so much.

I really can't give you customer specific outlook on Qwest. I would rather talk more about the entire products; with the 5000 we're expecting momentum through this year. Now, we have pretty much every large carrier in the US is using it for something or another and what we're seeing and I think the momentum that makes us bullish on the 5000 is we're seeing applications really start to come on line and not just in the tier threes, not just in the tier twos, but we're picking up good market share but also in the tier ones where we've been working for a couple of years now on getting these applications brought to market.

I think you'll see it in more than one carrier where you'll actually see more than one tier one carrier in Q2 where you are actually going to see realistic momentum in the 5000, and then the 5000 will typically see seasonality, I would guess. It's fairly early for us at the end of the year, but with all of the other things going on in this area, we may surpass that and I think we actually did that in the fourth quarter of last year.

In Fiber To the Node products, which is is our 1100 and 1200 series, we absolutely see seasonality in that product and it tends to tail off at some point in the third quarter and then have a lower fourth quarter profile. Here again though, I'd mentioned earlier, that we have some tier two accounts that are very serious about deploying that series of product or variance of the series of products that will hopefully start up so that may skew that some, but typical profile is that decline in the fourth quarter.

Got it. That's helpful. Thanks so much.

Okay.

Your next question comes from Todd Koffman with Raymond James.

Thanks very much.

Just on the Total Access 5000, last quarter in December, you said it broke through 10% of revenue. Can you give us some sense of the contribution in the March quarter, was it up sequentially?

Well, I'd mentioned that it had broke through the 10% level, and I think I also mentioned, I didn't want to talk about that anymore, because it was, we had kind of achieved that level. To be honest with you from a competitive perspective, I'd rather not talk specifically about that other than to say we had good momentum. I will say and I'd rather like that to be what our final pieces on this is that we were of course above the 10% level in Q1 and we expect to remain that for quite a long period of time.

Just as a follow-up then on that, Tom, particularly coming off the Calex offering, the disparity in profitability, is the tightening environment today about what it's been for that product and product line the last few quarters or have you seen any change in the pricing environment?

We haven't seen really a change in the overall environment. The 5000 is one because of, truly, the underlying design of it, I think that we've got a good cost competitive product that gives us a lot of flexibility, so for the most part, where we're seeing changes, we believe we're driving those changes in order to grab market share, but I would say fundamentally, the pricing environment is the same.

Thank you very much. Good luck.

Thank you.

Thank you. Your next question comes from Rich Valera with Needham & Company.

Thank you, good morning. I was wondering if you could clarify where you expect HDSL to go on a sequential basis.

Sequentially, it's a question I guess we really didn't cover that. And I'm not going to cover it here. I think we want to leave it at what we said, which is it was down year-over-year 7%, we had implied and in fact I think had stated on previous calls we expect it for the year, nine, we said high single, low double digits.

You would expect on a year-over-year comparison, then, in the second quarter that it would be less than 7% down, and I think that's a very safe bet. I think I wouldn't be a bit surprised at this point in time to see it actually do better than that 7% range.

That's helpful, thank you.

Okay.

I was wondering if you would be willing to comment on your position at Century Link. They used to be a 10% customer, I guess, when they were, before Embark merged with Century Tell; and just wondering if you can say how close to a 10% customer Century Link is and how you feel about your competitive position there?

Well we feel very good and I think there's probably some confusion as to what happened with Century Link and Embark. We have not lost any momentum at Century Link over some period of time and I'll step you back to Embark.

When we were doing business with Embark and they were buying some of our Broadband products and really they were a very good customer and bought just about everything that we sold, we had two pieces of business with them. We had the Telco business and then we had the distribution business. Coincidence, around the same time as the Century Link merger happened, they sold the distribution business to another partner, so that business is no longer in our Century Link total number and actually, if you look at Century Link as the Telco business, non-distribution has actually been doing very well and our new entry point with the 5000 which is something that we weren't selling in any numbers to them a year ago. So our ability to actually open this up has actually done very well for us on pretty much any metric. We had a very good quarter with them in the first quarter and we expect continued growth going forward.

But I have heard the perception that there was this big downfall and that somehow we had lost market share. That's absolutely not the case. What had happened is they had sold a distribution base and that was no longer factored into our Embark number.

So is it fair to say that you think you're at a relatively early stage with the TA5000 in terms of penetration of that Telco side of the business?

Absolutely fair to say that.

Thanks very much.

Okay.

Thank you. Your next question comes from Nikos Theodosopoulos with UBS.

Thank you, just a couple of questions. On the Qwest revenue, the disclosure that you gave last quarter and this quarter, that customer was up about $7 million sequentially, how broad based was that sequential increase? Should we look at it as vastly the Fiber To the Node products or are there other drivers in that sequential increase?

Here again, customer specific things are very difficult but let me see if we can give some color.

We sell a broad base of equipment to Qwest so we sell Fiber To the Node products and we have just recently, towards the tail end of last year started selling 5000s to them. We of course sell HDSL to them and we sell optical to them.

I think in general, I'm trying to see how I can give you more color on that, but I would say that the bigger players, the ones that have been driving the revenues over the past are what's driving the revenue from Q4 to Q1, which is fairly pretty much what we expected actually. The big incremental piece to us and the one that we're expecting going forward to continue to drive things, we're very hopeful on the Fiber To the Node getting into new applications, but really the 5000 has an awful lot of potential with them. Right, okay. That is early still.

That's still an early stage there?

Yes.

Okay, and one other question. I realize that it's tough answering questions on customers so whatever insight you can give, but AT&T was down meaningfully sequentially for you and obviously, the Optic product was down meaningfully for you and yet there's a lot of, well public disclosure by AT&T how they're ramping up significantly, their wireless spend, and their wireless backhaul spend, so can you comment on why you're not seeing as much of that? Is there opportunities for you to get a better share in what they're doing there in wireless backhaul? Thank you.

Yes, I think there are near term opportunities and then there are longer term opportunities. The near term opportunities would be centered around our Optical product line and what's going on with HDSL, and if I had to try to characterize Q1 and how we rationalize what's going on. We have seen them be very targeted on either geographic or demographic or some other rationale that moves one technology versus another for a period of time, and we talked about that throughout last year as we were seeing HDSL do what HDSL did and seeing Optical do what Optical did and that's really the only color that I can put around this that makes sense to us.

We're very engaged in trying to help them alleviate whatever problems they may have and we're very hopeful that we'll see good momentum this year, but for us it's sporadic; and yet we do think we'll play in the near term position. We have a longer term thing that we're trying to get done that hopefully we'll be successful with but that won't have an impact this year. The longer term stuff is farther than that.

Okay, great. Thank you.

Okay.

And your text question comes from Steve Ferranti with Stephens Incorporated.

Hi, guys. Great job on the quarter.

I want to zoom out a little bit in terms of the TA5,000 penetration within tier ones. Could you give us your sense for where this product is in terms of penetration to that particular customer base? I know thus far, tier twos and tier threes, you've seen fairly significant adoption. It feels like we're in early stages of tier ones starting to pick it up. Any sort of color you could give around that dynamic would be helpful. And then are these retrofits or are these greenfield applications where you're seeing this adoption?

Where we are is different upon with the different carrier, but I would say in every case, we would be early on. With Verizon we're very early, and we're hoping that we're going to see some really good things coming out of them this year. With Qwest, we're early, but they adopted it and one of the things that I have to step back and remind you is that we have in each of these multiple applications and they all have their own timeline, but even having said that, Verizon, I would say, we're still very early and we're hoping to see momentum this year. Quest, we're farther along on let's say half of the applications and we've already seen some good things happen and we expect that to continue on, and AT&T, I would say we're still very early.

We came out of the gate with ethernet over copper. It is still slow going as they continue to work on how they're operationalizing it and how they are actually going to deploy it. I think we saw some good things in general, everybody saw good news from them in regards to what their SMB push is. There are two other applications that are yet out of the gate that we are hopeful will be out of the gate some time in the near future which will add to that momentum, but I would say they aren't as far along as Qwest and I would say even to some extent they may not be as far along in a meaningful momentum push from where they are today as Verizon.

Does that help you?

Yes, that's very helpful.

One quick follow-up. Can you give us any sense given the level of discussions you've had with customers this year, do you have any thoughts on what your seasonal pattern might look like this year, just because we're coming off of what would be an abnormal year in '09, do you think that changes the shape factor or the seasonality that you might see in 2010?

Again another good question.

I think our sense right now is "no. We had a good Q1, and everything at this point in time points to us that Q2 will follow the kind of traditional path. Nothing from what we're seeing right now would say Q3 would be any different than that, so my initial answer at this point in time would be "no", that we would expect it to follow our historical trend.

Very helpful. Thanks guys. Good luck going forward.

Sure, thank you.

Thank you. Your next question comes from Vivek Arya with BofA Merrill Lynch.

I'd like to go back to this tier one carrier question. If my math is right, the sales to AT&T and Verizon were down sequentially and year-on-year. I also see the same trend if I add up sales for the last four quarters and compare them to the prior four quarters, so most of the tier one sales growth in the US seems to be coming from just Qwest, so the question is why have sales to AT&T and Verizon been weak and how sustainable is the growth at Qwest?

Okay, I didn't understand the first part of your math, so I'll try to answer what I did understand. I think, actually, first of all, all of our customer bases saw a decline maybe other than Qwest, although I didn't look back at that explicitly as we entered a recession, so we did see a decline and I would say it probably wasn't just Verizon and AT&T specific. I think as we came out of last year, we saw momentum in both AT&T and Qwest, less so at Verizon because our predominant sales to Verizon are still HDSL and our forward going plan for Verizon included other products, predominantly the 5000, which I had just spoke about, so that's the profile that we see. I don't know if that's different than what you had said.

Okay, Tom, if I look at the second half and I realize that second half is some ways away, but if let's say the Fiber To the Node applications you mentioned there could be some seasonality there and AT&T and Verizon, at least in the last four quarters have not picked up, and I think you gave the reasons why and then I think even HDSL, you were saying could go down single digits to maybe even low double digits, then is it fair to say that most of the second half growth is predicated on maybe Broadband stimulus or additional TA5000 pick up?

Yes, one broadband stimulus although we haven't really talked about what the second half pick up would be, but our plans in Q2 and right now when we look at Q3 and I talked about it having the profile of following the typical seasonal pattern that did not include any input of the 5000.

What will drive the growth though, if we look at Q2 and Q3, will be broadband access in general which is the 5000 as well as our Fiber To the Node products which we fully expect to be up and not just up at a particular customer. As I also mentioned, we have additional customers that are buying that and are actually coming online. We expect Internetworking to be up and we expect Optical to be up.

Got it, and just last one. OpEx was a little higher than expected and Jim, I believe you gave some of the reasons. Were there any run-offs the during the quarter or if there's a new base and OpEx could be flat to up this year, from these levels on a quarterly basis? Thank you.

Well, as I said, we think Q2 will be approximately flat. Q3 and Q4 I think is going to be dependent a bit on the revenue levels, but overall, OpEx, if we look at OpEx overall, we expect it to increase year-over-year for the total year, but at a lesser rate than revenue. Hopefully, that answered your question.

Yes. Thanks and good luck.

Thank you.

Thank you. Your next question comes from Simon Leopold with Morgan Keegan.

Thank you very much. I wanted to ask two questions. One on gross margin and one on the TA5000.

First, talking about the TA5000, in the past, you've talked a little bit about applications for it and understanding that there is a diverse set. Could you tell us what the mix was in the March quarter in terms of what applications were driving the strengthen the product and maybe back up a little bit and talk about how you see the applications trending?

Yeah, I haven't really thought about what the trending profile would be because we tend to look at the future quarters on an aggregate basis, but if I look at the March quarter, all of the major applications -- and I characterize the major applications as being ethernet aggregation, just Broadband deployment and broadband deployment being IP-DSLAM type deployment and carrier ethernet -- all three of those segments were up, so it was fairly broad based.

I guess one of the things I'm wondering is I think there's been a lot more focus on the role of the product as a mobile backhaul platform; and I think on the last earnings call you mentioned seeing applications for providing enterprise ethernet services. I'm really trying to get a sense of the mix between those two types of deployment where they are really ethernet platforms, but different application in my mind.

I would say, my sense would be, at this point in time that mobile backhaul is not driving the 5000, that it is more carrier ethernet, IPTV delivery, and just increasing for instance backhaul bandwidth and aggregation you can almost think of it as a middle mile type product, so it's more centered around that than mobile. So it's more centered around that than mobile. I would think that's driving it more than mobile backhaul at this point.

Great. That's what I was thinking and glad to know I wasn't too far off.

The other topic was around gross margin. I don't think Jim commented on expectations for gross margin for the June quarter, and I just wanted to revisit this topic from a bigger picture perspective in that I think in the past, you've suggested that your gross margins among your products are all pretty tight with maybe the exception of the NetVanta product line being a little bit better than the group. Could you just delve into that a little bit in terms of talking about how much of a mix shift might affect gross margin?

Simon, this is Jim. As far as gross margins go, we continue to anticipate that they will be in the range of the high 50s for the foreseeable future. The gross margin between the products are fairly close and are certainly not large enough to drive it meaningful it one way or the other; so the larger thing that drives gross margin really is expediting cost. That's what we're trying to manage most as we go through the quarter and as you looked at last year first quarter, gross margins were at the record level that you might recall last year, the first quarter was very linear in terms of shipments. They were not as linear first quarter this year and really are they as linear as what we saw last year? So that's why we ten use to anticipate high 50s on gross margin.

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

Thank you. Your next question comes from Amir Rozwadowski with with Barclays Capital.

Thank you very much and good morning, Tom and Jim.

Good morning.

Tom, wondered if we could shift gears towards the enterprise spending environment. Certainly it seems as though last year some of the growth that you saw in the enterprise spending environment was particularly notable given the fact that we hadn't seen Enterprises picking up spending and in fact, cutting off spending. As we look to this year, it seems as though you are seeing bits and pieces of recovery in IT spending, and I was wondering if you could comment on your outlook for the spending environment and whether or not you'll be able to leverage some of the share gains that you had in the prior year?

I'll tell you it's difficult for us to extrapolate what our numbers are on the overall environment so what we can talk most about is our numbers, although is our sense is we've seen an improvement in the IT environment in general. And I'll also say it's difficult for us to be able to segment market share gains from an overall increase in the pie, but we think we'll benefit and why we're optimistic is because we do think we'll benefit this year from both of those items.

In the enterprise segment, internetworking is driven both by carrier direct sales as well as value-added reseller sales, and if you look at our channel mix between the carriers and the VARs, we actually saw a good pick up in both of those segments in Q1, which as we entered the downturn last year was not the case. We saw a decrease actually in both and we saw the carrier kind of pick up a little bit and the VAR stayed flat to down. That actually has shifted coming into this year. We're actually seeing some strength on both sides of that equation.

The other piece is the market share gains where I mentioned in my notes and I think it's easy to miss, but we are not only picking up new applications within the tier one accounts, but we think we're making some meaningful market share gains within the competitive carrier base, so there are some carriers out there that can move some numbers in that division because they sell an awful lot of equipment to small and medium business and end up being the entry point for us and we're seeing some good momentum there.

So then is the fair to say, Tom looking out, with some of the share gains and recovery in spending could you find yourself in a position where your enterprise growth in fact accelerates this year versus 2009?

Yes, absolutely.

Great. Thank you very much for the incremental color.

Okay.

Thank you. Your next question comes from Jim Suva with Citigroup.

Thanks very much and congratulations on a great quarter.

You gave a lot of commentary around you expect normal seasonality to benefit the Company and in your sales outlook of the high single digits that clearly manifest; however, when I look back historically, factually, of the past five years, four of those five years have been up double digit percent and the average of the past five years have been up 11.5% so I would almost consider and impose to you, why isn't normal seasonality up 11.5%, if that's what it was the past five years?

First of all there are variations in those numbers and they have to do with any particular quarter and it can be from a particular customer, so the numbers that we post are small enough and we can be influenced by a large order one way or another. So when we look at what it is we're guiding for in the next quarter we tend not necessarily to fall back just on what we have done historically on a percentage basis, but really trying to understand from products upwards as to what we think are going to do; and then for the traditional products that we don't have the same level of visibility, then we fall back on to what is seasonality.

We had a good quarter in Q1 and you may argue that's tempering our look at Q2 a little. I guess we'll find out in three months, but I understand your point. Great and second on a different topic.

When the broadband stimulus money starts to be deployed and you start to get orders from that, do you think you'll be able to receive and ship and produce those orders under normal shipping terms or do you think you'll have to incur additional expediting of shipping and what I'm trying to get at is do you expect those monetary funds and orders to be similar to the Company's high 59% gross margins or do you think it would be a little bit lower because of expediting? My sense and I'll ask Jim to chime in is they would be in the high 50s range. It's not that we haven't been doing some expediting over the last three quarters, so first of all we're getting better at that and I don't see this being substantially different than that, so I would expect it to fall in the same framework.

I would agree.

Great. Thank you very much gentlemen. Congratulations again.

Thank you.

Thank you. Your next question comes from Larry Harris with CL King & Associates.

Yes, thank you, and I'd like to add my congratulations relative to the results for the quarter.

Looking at the historical performance over the last few years and the Optical segment, it looks like historically, the third quarter has been the best performance for the segment, and I was thinking is there a specific reason for that, perhaps related to outdoor construction in the summer months providing connections at the cell sites and if so could we see that happen this year?

That is true for the 6100 or our optical products in general, but also if you look at pretty much any other segment we have that's also the case, and I do think there are a lot of environmental factors that play into that. I think it's easier for them to actually do that.

There are times it will be slightly different from one big initiative or another, but at this point in time we would expect the 6100 or optical product line and all of our products, we don't have any reason to say that wouldn't be the profile going forward, with the exception that we are still cautious on HDSL, because we do expect a stronger first half than we initially thought so we're going to wait and see and revise that view as we get in towards the tail end of next quarter.

So, stronger first half and then you'll have a wait and see attitude, I guess, in terms of the second half on HDSL and then take another look at the guidance at that point. Is that a fair assessment?

I think we will try to be more explicit as we can on the HDSL product segment this time next quarter. The reality is we don't know what third quarter is going to be and the thing that has got us conservative on the way we're looking at it is we have seen fairly wild swings that would not necessarily line up with normal seasonal patterns in the past and that's because customers can do a lot with product in the short period of time.

They can deploy very quickly, the turn time on that product is very quick, so it's just a real easy hammer to swing, and if they decide to swing it one point in time and not another then that would wipe out the typical seasonal pattern, but what you say about seasonality is absolutely true for most of our businesses.

Great. Okay, thank you very much.

Thank you. Your next question comes from Hasan Imam with Thomas Weisel Partners.

Yeah, hi. This is Shubo Ghosh for Hasan Imam.

Just curious about the tier two and tier three customer spending, did see an uptick this quarter, but how do you explain that in terms of actual broadband stimulus? Do you see tier two and tier three customers holding back a piece of that spending, waiting for broadband stimulus to come in and spend part of that? How do you really define that uptake in spending?

Good question and I think the way we view it is there's more clarity in that market as to whose going to apply for money and whose not going to apply for money; so the people that have decided not to apply have decided to go ahead and move on, and I think we're seeing benefit of going ahead with the plans that may have been on hold for some period of time as they've made that internal decision that it's something they don't want to participate in.

I would say there's still some demand out there that is waiting on stimulus funding, and we know that for a fact because we have customers that as I mentioned have selected us and have not started spending yet, but I would kind of characterize the increase we saw based off of more predominantly the ones we decided not to move forward with. They know that, they are definitive about that and they are starting to place purchase orders because of that.

Great, and I have just one more question on market share gains. You did mention you saw some of this happen this quarter, as well. How do you break out what percentage, if you will, of the revenue increment you've seen this quarter has been from that versus just the overall pie expanding?

It's difficult for us to do. It's easy to look at market share gains if we look at a customer that we were not in and now we are in. So, that's without a doubt, a piece of a business that we would not have gotten before, trying to figure out that what that pie was last year versus this year except for very few instances is impossible for us.

So, we feel better about the overall environment and some of that has to do with a previous question where we think customers kind of have gotten off the fence and decided what they are doing so they are starting to spend money and that's why we think there's been an internal change and the mind set of those customers to start spending, so the market itself is bigger than it was last year, but for the most case it's impossible for us to quantify what that market was last year because we weren't playing in that market last year.

Great. Thank you so much and just one confirmation. Are you still confirming on the 25% growth, I mean 25% (inaudible) levels for the year?

All we've said is that, again, we do expect revenue to increase, we expect opex to increase, but OpEx is not as high of increase as revenue, so--

But we have a pre-tax income range is what you're talking about.

Yes, I think all we've said is we expect to be above last year in terms of our margin.

Thank you.

Suzette, I think we've exceeded our time a little bit. I'd like to thank everybody for joining us on the conference call and we look forward to talking to you next quarter.

Thank you. This concludes today's conference call. You may now disconnect.