ADTRAN Holdings Inc (ADTN) 2010 Q2 法說會逐字稿

Good morning. My name is Bonnie, and I will be your conference operator today. At this time, I would like to welcome everyone to the ADTRAN second-quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

During the course of the conference call, ADTRAN representatives expect to make forward-looking statements which reflect management's best judgment based on factors currently known. However, these statements involve risks and uncertainties, including the successful development and market acceptance of new products; the degree of competition in the market for such products; the product and channel mix; component costs; manufacturing efficiencies; and other risks detailed in our annual report on Form 10-K for the year ended December 31, 2009, and Form 10-Q for the quarter ended March 31, 2010. 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.

Thank you. Mr. Stanton, you may begin your conference.

Thank you, Bonnie. Welcome to ADTRAN's second-quarter 2010 conference call. Joining me on the call is Senior Vice President and Chief Financial Officer, Jim Matthews.

I'd like to begin by providing some insight into the Company's performance for the quarter and comment on our outlook for the third quarter. Jim will then provide the financial results for the second quarter. We will then open the floor to answer questions.

As stated in our press release, ADTRAN had record revenues of $150.4 million for the quarter, driven by accelerating demand for higher-speed services from residential and business customers in both fixed and wireless applications. As you can see from our disclosure, both Carrier and Enterprise divisions benefited from these trends.

The Carrier Networks Division reported a strong 28% increase in revenue over the same period last year due to a number of factors, including increased deployments of infrastructure for higher-speed broadband connectivity; increasing demand for wireless backhaul as carriers continue to deploy infrastructure to alleviate network congestion; increased deployments for business ethernet connectivity, driven by network convergence, the need for higher speeds, and the growing demand for native ethernet services; an increased need for network aggregation as carriers strengthen their infrastructure investment in a cost-effective and scalable manner; and a generally improved telecom spending environment.

Likewise, our Enterprise Division benefited from another strong performance in its Internetworking category, which grew 37% over the same period last year. This category's performance was driven by continued growth in our expanding dealer base, market share gains and market growth from competitive carriers and market share gains at Tier 1 and Tier 2 carriers.

During the quarter, our combined growth areas, Broadband Access, Internetworking and Optical Access, delivered yet again, growing an impressive 36% year-over-year. For the first half of 2010, these areas achieved revenues of $159 million, an increase of $45 million over the same period last year.

Taking a closer look at these areas, Broadband Access led the revenue increase for the quarter and was driven by the continued acceptance of our Total Access 5000 platform. This platform benefited from an increase in shipments to all of our Tier 1 and Tier 2 carrier accounts and our Tier 3 carrier segment.

Moving on to Internetworking, which during the second quarter reached a record revenue level, growth in this product segment occurred across all our component product areas, including IP business gateways, routers, switches and IP PBX products. This growth also occurred across all of our distribution channels, including Tier 1 and Tier 2 carriers, competitive carriers and our growing VAR dealer channel.

Finally, as expected, Optical Access benefited from an increase in wireless backhaul spending, and as a result, reported a 19% increase over the same period last year. HDSL also benefited from this increased demand, growing 23% over the same period of the prior year.

Moving on to a discussion about the third quarter. We expect the momentum from our growth categories to continue. In Broadband Access, we anticipate our Total Access 5000 platform will see increasing revenues resulting from recent market share wins in Tier 2 and Tier 3 accounts, and accelerating deployments within our Tier 1 customers.

We expect to see positive effects of continuing market share gains with our 1100 and 1200 series products, as we begin introductions of new product offerings which will significantly increase service capabilities for carriers in both urban and rural environments.

In Internetworking, we expect growth will be driven by continued expansion of our VAR dealer channel, new application awards, continued market share gains in our Tier 1, Tier 2 and competitive service provider base, and a growing demand for IP convergence products by all of our carrier segments.

We expect the third quarter will be a solid quarter for wireless backhaul related products, including optical access and HDSL.

For the year, we now expect HDSL revenues to be flat to slightly down versus our previous estimate of down high single to low teens percentage points.

Looking forward at our industry and what we expect for the future, we anticipate an accelerating shift from TDM to ethernet architectures, fueled by the growing need for bandwidth that are resulting from the rapid adoption of applications such as voice over IP, IP TV and Internet-enabled mobile devices.

In addition, carriers will increasingly deploy fiber deep into their access network 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 the industry's broadest portfolio of access solutions that meet both carrier and industries customers' needs.

We believe ADTRAN is uniquely positioned, providing the full suite of fiber and copper products, targeting broad-scale urban and rural deployments for both residential and business applications.

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 to questions. Jim?

Thank you, Tom, and good morning to everyone. Revenue for the second quarter increased 24% to a record level of $150.4 million compared to $121.5 million in Q2 of 2009. Broadband Access product revenues for Q2 of 2010 increased 43% to a record level of $45 million compared to $31.4 million for Q2 of 2009.

Internetworking product revenues for Q2 of 2010 increased 37% to a record level of $27.9 million compared to $20.4 million for Q2 of 2009. Optical Access product revenues for Q2 of 2010 increased 19% to $16.1 million compared to $13.5 million for Q2 of 2009.

Carrier systems revenue for Q2 of 2010 increased 30% to a record level of $73.1 million compared to $56.2 million for the second quarter of 2009. Business Networking revenues for the second quarter of 2010 increased 22% to a record level $32.2 million compared to $26.4 million for the second quarter of 2009.

Loop Access revenues for Q2 of 2010 increased 16% to $45 million compared to $38.9 million for Q2 of 2009. HDSL product revenues increased 23% to $42.2 million for Q2 of 2010 compared to $34.3 million for Q2 of 2009.

As a result of the above, Carrier Networks Division revenues for Q2 of 2010 increased 28% to $117.6 million compared to $91.8 million for the second quarter of 2009. Enterprise Networks Division revenues for the second quarter of 2010 were $32.8 million compared to $29.8 million for the second quarter of 2009.

International revenue was $8.3 million for the second quarter of 2010 compared to $6.4 million for the second quarter of 2009.

To provide the reporting of each of these categories, we have published them on our Investor Relations webpage at ADTRAN.com.

Gross margin was 59.4% of revenue for Q2 of 2010 compared to 59% for Q2 of 2009. Research and development expenses were $22.3 million for Q2 of 2010 compared to $20.7 million for the second quarter of 2009. This increase in expense was primarily related to an increase in customer-specific projects.

Selling, general and administrative expenses were $28.5 million for the second quarter of 2010 compared to $24.9 million for the second quarter of 2009. 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 $1.6 million for the second quarter of 2010 compared to $1.4 million for the second quarter of 2009.

All other income net of interest expense for the second quarter of 2010 was $3.3 million compared to $2.3 million for the second quarter of 2009. The increase is primarily related to an increase in realized investment gains.

The Company's income tax provision rate was 33.9% for the second quarter of 2010 compared to 33.8% for the second quarter of 2009. The tax provision rate for the second quarter of 2010 included a benefit of $643,000 related to closure of IRS audits for years 2006 and 2007. The tax provision rate for the second quarter of 2010 did not include a benefit from research tax credits due to delays in legislation to extend the benefit for research tax credits for the year 2010.

In the second quarter of 2009, the Company recognized their usual benefit from research tax credits.

Earnings per share, assuming dilution, for the second quarter of 2010 increased 47% to $0.44 compared to $0.30 for the second quarter of 2009. Inventories were $63.9 million at quarter-end. Net trade accounts receivable were $71.6 million at quarter-end, resulting in DSOs of 43 days for the second quarter of 2010 compared to 48 days for the second quarter of 2009.

Unrestricted cash and marketable securities totaled $336 million at quarter-end, after paying $5.6 million in dividends during the second quarter.

Due to the book-and-ship nature of our business and the 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 anticipate seasonality in the third quarter will follow a trend similar to trends experienced over the last three years. Therefore, we expect third-quarter revenues to be flat to slightly up on a sequential basis. At this revenue level, we expect third-quarter operating expenses to be slightly up on a sequential basis.

We believe the larger factors impacting the revenue we recognize for the year will be the following. Spending levels at our Tier 1 and Tier 2 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?

Thanks very much, Jim. Bonnie, at this time we would like to go ahead and open it up to any questions people may have.

(Operator Instructions) Todd Koffman, Raymond James.

Thank you very much and congratulations on a good quarter. What contribution in the quarter did you benefit from as it relates to the economic stimulus and the -- for broadband, and how do you see that playing out? If we could get an update on that.

We had some customers that we had won either in the first quarter or the second quarter that, of course, have since then actually been awarded broadband stimulus funds. But it's unclear to us as to whether or not those funds were actively used to purchase equipment versus equipment they may have purchased for other reasons.

So the net of that is -- my sense is if we received some stimulus funds in the second quarter, they were minimal. They really didn't move the needle much. And we would expect them just to kind of ramp up at some rate through the third quarter and beyond. Although it is going to be difficult for us to tell you exactly what's what, and we are not expecting a very quick acceleration in the third quarter, and it is not in the numbers that we are talking about in Jim's view of the third quarter.

Do you still expect, looking out over the next four, five, six quarters, for that to be a nice incremental kicker, or has the whole program sort of started to fragment?

I don't think it's fragmented. There are pressures on the program that pop up periodically, but I don't think anything has stopped the program.

And yes, the answer is we do expect it to have some contribution as we go forward from this point in time, and definitely into 2011. Although we have been reluctant to put an exact time frame around that or an exact dollar amount around that because of the obvious piece, which is that it's government-funded and governments sometimes don't behave in the way that you would expect them to behave.

So that is the reason for our reluctance. It is nothing to do with whether or not we think we are going to be successful in that market or whether or not we think at this point in time the market has real potential. It is just a matter of the fact that there are always unknowns when you are dealing with government funding like that.

Thank you very much. Good luck.

Jim Suva, Citi.

Congratulations, everyone. My first question is when we look at the balance sheet, I think it's pretty fair to say that inventory increased pretty significantly. And I typically think of inventory you would build today for your sales tomorrow, and I'm having trouble matching the inventory build with your sales outlook of flat to slightly up. Can you kind of help me bridge that?

Inventory did uptick, obviously, in the second quarter, and it really happened for two reasons -- to fund increasing revenues, and also to mitigate component supply constraints that we've been seeing and that we've commented on over the last few conference calls.

As we look at inventory, say, at year-end or in the December quarter, we expect that our inventory turns will return to a normal turns level, which is just above 4 times. So we do expect the issue to moderate as we go through the year.

Thank you. And my quick follow-up is when we look at the tax rate, understanding that you got a benefit from prior year resolution of audits, and my understanding is the R&D tax credit has kind of stalled out in Congress and the Senate, and maybe it comes back or maybe it doesn't, but let's just, I guess, assume it doesn't. Is it more accurate to build in going forward like a 35% to 36% tax rate, or can you talk to us a little bit about tax rate expectations?

Fair question. As far as our tax rate expectation, excluding any benefit from the research credits, we are looking at somewhere in the range of about 35.5% tax rate. And actually, if you add back the benefit that we saw in the second quarter, you would come up to something very close to that rate on a GAAP basis.

We are being told in terms of the research credit that the expectation is that it would be in the fourth quarter, and we are hearing this from people that apparently know what's going on in Washington. In that event, that benefit would actually happen in the fourth quarter of this year.

Thank you, and congratulations to you and your Company.

Nikos Theodosopoulos.

Thank you. Can you give us an update, I guess, first of all, on the 10% customers this quarter?

AT&T came in at 17% of total Company revenue, Verizon at 12% and Qwest at 20%.

Okay. Got it. And I guess the exposure -- or I guess the spending of AT&T and Verizon doesn't seem to be as robust as the rest of the business. Do you see concern among the bigger carriers in terms of their spending outlook throughout the rest of the year, or would you characterize it as more of a slow start to the year? What is your impression of that?

I think your question applies more generally as opposed to specific to ADTRAN. Is that correct?

Yes. I guess if I just look at the trend of your -- the Tier 1 customers in general, they don't seem to be spending as robustly versus your results. And just get your perspective on is there a concern? I mean, you seem pretty confident for the second half. Just want to get your sense of how do you connect those dots, if you will?

Well, I think the confidence we have in the second half is driven probably as much by the particular product segments that we're expecting growth from as much as the specific customer that we may or may not be expecting growth from. So in general, I think we are happy with the way that our large customers have adopted our product so far this year. We expect positive improvements on a pretty wide scale or pretty wide base of customers going into the second half.

And if you look at the pieces that we play in, which in a lot of cases is infrastructure upgrade, it's wireless bandwidth upgrade, it's higher-speed initiatives, where there are competitive pressures that are forcing carriers to do something, or it's cost savings where they are doing aggregation instead of, for instance, putting additional router blades in or expensive switchblades in, I think we feel -- I think that is probably what has got us at least to the point that we are right now.

Okay. And just on international, it is still a small number, but it was a nice sequential uptick. I think it is the highest quarterly revenue you've seen in several quarters. Was there anything unique this quarter there that is sustainable, or can you talk a little bit about that?

As far as sustainability, I would say yes, we feel confident at the level we are and we feel that we are where -- as you know, it takes quite a while and you know we've been at it for quite a while. And I would say it is a fairly broad-based increase, although it is albeit small. And we think it is just a matter of us continuing to go at it and get traction in a broader base.

So we have a lot of things going on, although a lot of them are still -- we still have quite a bit of runway before we actually see something. But I think it is a broader base just of us continuing to push forward with the same product set.

Okay. And just last question. Can you give some color on the TA 5000? You mentioned it several times during the call -- what kind of sequential improvement you saw there, just to give us a feel of what kind of momentum the business has.

That would get pretty specific. I will tell you we were very, very pleased. And I'm sure you want more color than that, but we were very pleased with the way the 5000 came in in the quarter.

The reason we highlight it as much -- I highlighted it in my comments, and the reason we did that is because we try to, during my comments, actually highlight the items that contributed the most. And so that was the reason for that. So I would say we are very happy with where we are right now with it, and we expect more going into the second half.

All right. Great. Thank you.

Steve Ferranti, Stephens, Inc.

Thanks for taking the call and great results, guys. When you look at the second-quarter results, Tom, can you give us a sense for where the upside might have come from relative to your original guidance for the second quarter?

Yes, that's a good question. One is, I think we entered the quarter feeling good about broadband and feeling good about the uptick in the 5000. And one of the things that happened in the second quarter, which you don't always see, which is we've had every single carrier segment grow. So a lot of times, you will see -- and by the way, in the Tier 1's and in the Tier 2's, we had every single customer grow from an adoption of the 5000. So I think that is something that you typically don't see, and I think that was a real positive to us.

The other piece that -- I think Internetworking, we expected growth. It was probably a little bit more than we expected, but we were expecting solid performance there. And then the piece that we were kind of unsure about is kind of the -- well, the HDSL, backhaul and the OPTI backhaul, and then trying to see to what extent that would play itself out. And it came in fairly strong.

Okay. That's helpful. I know this is obviously (technical difficulty) a book-and-ship business, but it sounds like from your commentary and maybe your tone that perhaps visibility is maybe a little bit better than what it normally would be historically. Is that accurate, and I guess if so, what do you think is behind that?

Our systems have -- the type of products that we have have shifted over the years, but I would still say that our visibility isn't substantially different than what we have seen in the past.

So a lot of what we look at when we are drilling into what we think third quarter will be is absolutely looking at the mirror and trying to get a sense for the recent order flow that we see in any particular area, and then trying to extrapolate it from there. So I wouldn't say it is an undue increase in visibility.

Okay. Fair enough. Last one for me, I guess for Jim, talked a little bit about the component availability issue earlier. Has that improved since you last updated us on it? Do you see it getting better, or are we still pretty tight on the supply chain?

We don't see it getting any worse. I think that is how we would best characterize it at this point. We are hopeful that as we approach the latter part of the third quarter and the fourth quarter, we might see some indications of things returning to some level of normalcy -- to the point of our expectation that we expect that the inventory turns will increase back to their more normal levels of just over 4 times.

Okay, great. That's it for me. Thanks, guys.

Sanjiv Wadhwani, Stifel Nicolaus.

Thanks so much. Two questions on me. Tom, on HDSL, clearly the momentum was very strong in 2Q. Is it fair to say you were a little bit surprised by that? And can you talk in sort of broad strokes about how decisions are being made, particularly by AT&T, for example, to use HDSL versus OPTI? Any color on that would be helpful.

A couple of things. First of all, I really am going to be reluctant to talk about any specific customer, and in this case, I don't think it is really required, because what we saw with HDSL was a very broad-based increase. It wasn't any specific customer that actually drove that increase.

And is it higher than we thought? Well, if we had to put a number on it, which we try to do when we go into a quarter, I would say it was probably a little higher than the number we put on it. But we did kind of get the sense -- and I think we tried to relay the sense on the last conference call -- that there was strength there that was not what we initially thought three months prior to that.

So a little bit higher, but we knew that there was the possibility of that, based off of kind of what the momentum was going into the quarter.

It was very broad-based, and I would say that there are a couple of things that drove it. I think wireless, of course, always has the biggest potential to drive that number one way or another.

I do think that we saw a broader-based usage in other areas. For instance, if you look at the Internetworking piece, one of the things that drives the Internetworking piece, which I commented on, is the competitive carrier base. And we saw a fairly strong increase in competitive carrier utilization of IP gateways, which at the end of the day, is fed with T-1 circuits and predominately HDSL circuits. So I think you saw business customers actually picking up on T-1 lines, too, which probably helped fuel that.

Got it. Okay, that's helpful. And then any updates, Tom, on the Qwest-CenturyLink merger, or any plans that might have been communicated to you? And in general, can you talk about how CenturyLink did during the quarter?

Well, we talked about, in some of the different comments, that all of our Tier 2's were up, and I think that is probably as much as I would want to say about that.

As far as what's going on with the merger, to be honest with you, you will know as much as we do on exactly how fast it is progressing. We are -- our stance has and the way we view it and the way things have been communicated to us is things are moving forward at kind of a normal process through the end of the year. We feel comfortable with where we are market-position wise, actually, in both of those accounts. Not that we don't have to continue to earn our ability to sell to them at the levels that we are selling to them and at the levels that we hope to grow. But there is really no new news from our side.

Got it. All right. Thanks so much, guys.

Amir Rozwadowski, Barclays Capital.

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

Tom, I was wondering if you could comment a bit more about the strength in the Tier 2 and Tier 3 space. Was that generally broad-based, or do you see particular strength from carriers such as Frontier, which you had highlighted as a recent win for you folks, for some of their access lines from Verizon?

I would characterize it as generally broad-based. We did have a press release with Frontier -- or that mentioned Frontier in it, and my sense is that most of that is yet to come. But I would still say every Tier 2 was up, and it was fairly broad-based.

Great. And then I was wondering if you could give us an update on the Ericsson partnership in terms of how things are progressing there. I know historically you had expected those revenues to flow through sort of the first quarter of next year. I wanted to see if that is sort of on track or how we should think about things there.

I think things are still on track and progressing well, albeit that is a fairly complicated project with -- dealing with two very large companies. But there is nothing right now that tells me anything is any different than what we have felt from a timing perspective over the last six months.

Great. And then lastly, if I may, on the operating margin side, if we think about your guidance, flattish to slightly up sales and sort of OpEx increasing as well, it seems as though you've come above sort of that 25% marker on the operating margin side. Do you expect with this type of revenue outperformance to increase ongoing investments in R&D and your OpEx, or should we think about that as sort of in line with sort of sales growth?

I would think about it as in line with sort of sales growth. I think we've been actually increasing -- if you take a -- there are a couple of things that have gone on. Some is we have kind of changed the mix of our operating expense lines. We've continued to grow R&D. I mean, you've seen it increase, but you've seen it increase at a rate that is kind of more on line with what the revenue growth has been.

And as we have said before, there were certain quarters where we will kind of -- the revenue line will outrun that. And that was the case here. But there is no change in the methodology or in the -- in my opinion, in kind of the ramp of that growth. There is no big stairstep function that we are planning.

Great. That's very helpful. Thank you very much.

Rich Valera, Needham & Company.

Thank you. Good afternoon. I just wanted to go back to the Qwest-CenturyLink deal. I understand you're comfortable with your competitive position in both accounts, but what do you think about the potential for delays in orders around the closure of the deal, just as there could be, I guess, with any large transaction?

To us that is -- that could happen. We have in our history dealt with several mergers, and sometimes that happens and sometimes it doesn't.

To the extent it does, we kind of view that as kind of a singular event that tends to work itself out in short order. And whether or not it falls on any particular boundaries, we don't know, because we don't know, number one, if that will happen or when.

I think that there is an awful lot of -- my hope is -- I don't want to say for the customer what's going on -- but my hope is there is an awful lot of communications going on. I think my sense is that both customers are very motivated in upgrading their network and offering new services to their separate and then combined customer bases. So my hope would be that we wouldn't see that, but I can't tell you that wouldn't happen.

Okay, thank you. And just wanted to revisit your revenue guidance for the third quarter. You referenced the prior three-year seasonality, which looks to have been pretty consistently sort of mid-single-digit sequential increases in the third quarter.

Just trying to reconcile that with your flat to slightly up guidance. Is there something that would make you think maybe you would see less than really what has been the pretty consistent sort of mid-single-digit growth in the third quarter?

As we go back, last year, we saw a 5% -- the prior year, we saw a 5%, and the year before that was flattish -- or very flat. And that is how we are coming up with that sort of guidance. So we don't see it particularly out of the norm.

Okay. That's helpful color. Thank you.

Erin Riley, Goldman Sachs.

Hi, this is Erin Riley on behalf of Simona Jankowski. Just wondering if you can provide some color on your expectations for gross margins next quarter.

And second question, wondering if you're seeing an acceleration in optical from wireless backhaul, and if you could speak to the dynamics you are seeing of legacy copper and fiber within your backhaul business.

I'll take the gross margin question. We continue to expect gross margins in the third quarter to be in the range of the high 50s.

And in relation to the optical and versus copper backhaul, we actually saw positive movements in both. There was no doubt that our HDSL number was affected by copper backhaul. We continue to believe, I think as most people believe, that there is -- there are so many cell sites that either economically cannot be moved over to fiber or else -- or timing-wise can't be moved over to fiber in a realistic time frame that HDSL will continue to benefit and copper technology will continue to benefit because of that. And I think we absolutely saw that.

There was also no doubt that the 6100 or our OPTI products or our Optical products saw a very good increase because of wireless backhaul.

Thank you.

Ari Bensinger, Standard & Poor's.

Thanks. Most of my questions have been answered, but just back to the broadband stimulus package. Assuming the roughly $7 [million] is doled out, absent any timeframe, talking about a year or two years, what type of share do you expect to be competitive or get from that pie?

Being as I don't know who's going to win all that, it would be very difficult to tell you that. I think we will -- I think there is the potential, because of the amount of money that is going into that, for it to be significant. We think we will get a meaningful piece of the market share. I think it is not so much the meaningful piece of the market share that we are worried about or that we are unsure as far as timing. It is really just the size of actually what actually flows through. But I can't -- I'm not going to try to peg a particular market share.

Fair enough. Thanks.

Ehud Gelblum, Morgan Stanley.

Thank you very much. Appreciate it. A couple questions. First of all, on HDSL, clearly it is doing a lot better from wireless backhaul. Going to do better this year, now that it is going to be roughly flat to slightly down.

The long-term trends of that, though, given that it appears that optical -- I'm sorry, that a lot of wireless backhaul is trending more towards ethernet over time, how do you see HDSL trending the year over the next couple of years? Do you think this is -- from what you are seeing, are you seeing a lot of sort of last-minute, just-in-time buys for HDSL to fill immediate needs for wireless backhaul, or do you think this is possibly the beginning of another just more sustainable trend for HDSL, that we could see it continue for another couple of years? Just trying to figure out the sustainability of this HDSL business as we are seeing it do much better now over the last couple quarters.

That's a very good question. First of all, I would say as far as last-minute buys versus non-last-minute buys, HDSL has always been more last minute buy-ish. Our typical leadtime on HDSL -- and I'm going to just kind of guess here -- but is probably less than 10 days from when we receive the order, and they don't order 10 at a time. They tend to order thousands -- at least 1000, if not thousands at a time. So it is very much -- that is the way that they think about the availability of that product and that is the way they buy it. So I don't think we would be able to draw much from a decrease in visibility in that product area.

As far as how we think of it going forward, when we came into this quarter, a little -- or this year feeling that wireless backhaul had actually hurt us last year in the HDSL product line because we thought we were at kind of a low rate for HDSL from a general usage and -- in wireless and in business. And because of that, we had thought kind of high single digits would be a realistic number, even though we had decreased more than that last year.

That is going to turn out not to be the case. And the usage is not just in wireless, which I do think is going to continue on for some period of time. The usage, though, as I mentioned, is kind of broader-based than that, where we are actually seeing business customer usage. And in a lot of those cases, it is business customer usage to deliver ethernet service.

So how that plays in and whether or not, for instance, competitive carriers will have easy access to native ethernet copper services, I think is yet to be figured out. So we will give guidance for next year based off of our best information on the fourth-quarter call. But there is no doubt it is going to do better this year than we've had, and we will try to gauge at that point in time what we think the slope of HDSL will be.

That's actually really interesting. Can you comment on the linearity of that HDSL business, to give a little more hints in terms of there? And then as well, the mobile backhaul uptick that you saw in both HDSL and OPTI, given that it doesn't look as though the Tier 1 guys, your three 10-percenters, picked up a whole lot sequentially, is it right to assume that a lot of this wireless backhaul activity is more to the Tier 2's and Tier 3's?

I would say it is very broad-based, but your Tier 1's are always going to very significantly outweigh the capabilities of the Tier 2's and the Tier 3's in deploying the product.

And as far as linearity, I would say it was fairly linear. I mean, it was -- one of the reasons we had talked about HDSL potentially being stronger at the end of the first quarter was we were kind of seeing that increase in demand in HDSL going back towards the end of the first quarter. And I think it has been just a very steady, strong product since that point in time.

You don't expect it necessarily to go up sequentially into Q3? It sounds like it's hit sort of a run rate-ish type of basis in the last couple of months.

Because of the linearity that we see, if you kind of infer the guidance and kind of take apart the products that we said were up, I think HDSL, like I said, has got a short lead time. But we are kind of -- I would think about it as we are thinking second quarter was a good quarter. It was a linear quarter and we're not expecting strong growth from this point in time into the third quarter.

Okay. I actually had one other thing that I had mentioned before as well. If you do calculate out your 10% customers, there was a little bit of growth but not a lot, yet HDSL grew quite substantially and so did OPTI. If they --

And 5000 broadband did, too, by the way.

And 5000 did as well on a sequential basis, but that was a little bit more expected than the wireless backhaul boost.

Right.

What I'm trying to get at is if the Tier 1s grew in HDSL and in OPTI just as much as the Tier 2s and Tier 3s then did something fall off? Because they actually stayed on a revenue basis relatively steady. They were over a little bit but nowhere near as much as your total top line.

You know, the 5000 was up in all of the Tier 1s. I guess I am -- we are probably trying to break this apart that I would almost need a spreadsheet to do so I'm not sure.

I can take it off-line if you like.

Yes. Yes, I'm not sure how to answer that. But there was nothing that in the larger customer base that was a big -- there was no negative surprises there that I am aware of.

Okay. All right, I appreciate the analysis on that. Thanks, guys.

Simon Leopold, Morgan Keegan.

Thank you very much. Just wanted to see if we could talk a little bit maybe big picture trending. I understood you had some trouble trying to quantify the contribution from government stimulus. I'm wondering if maybe we could go at kind of the drivers another way.

If you could quantify how much of the business -- and really order of magnitude would be sufficient -- but how much of the business is coming from backhaul versus the enablement of enterprise services versus consumer broadband? Could we kind of get a rough cut of that?

Simon, at this point I have difficulty in doing that.

Let me see if I can add one piece. Broadband is -- broadband -- residential broadband was the biggest growth piece of those three that you mentioned.

That was the biggest driver. I guess what I'm trying to get a sense of is the contribution as a percent of revenue.

I don't think we even have that here, because that gets into our -- one of the issues that we have is the 5000 can be used for so many things. And what ends up turning it into an ethernet over copper or an ethernet aggregation or a broadband device ends up being the particular personality parts that are deployed in it. So it is not something that is sitting right in front of us right now.

And that's exactly why I asked is because it seems like a hard number to get to. I figured you had a better shot of understanding it than I do.

Really, the way that we would -- I will tell you when we try to look at that and try to characterize that, one is we can do that in-depth analysis. We do that periodically, just to make sure that when we say we are growing in one area that we are growing the other area.

The other way we can look at it, of course, is by customer. I mean, there are customers -- we have customers that have deployed it for all three of those particular applications. But we have some customers that have -- [well] predominately one versus the other. By the way, we forgot about broadband DLC, which I guess you could map into the residential broadband piece.

But I would say I don't have any doubt residential broadband is the biggest piece. But breaking it apart as to percentages would be difficult.

Well, maybe just cutting it, then, from a qualitative perspective, how do you see these areas as drivers trending through the next, say, four quarters?

I'm sorry, because I didn't write it down. Your three areas were (multiple speakers).

So I'm looking at, I guess, residential broadband, mobile backhaul and enterprise ethernet.

Enterprise ethernet will be trending up. We are fairly confident about that. Broadband, without a doubt, will be trending up. Wireless backhaul has been choppy, if you look over the last couple of years, and we've talked a lot about that. So I think in general, wireless backhaul will be up if you give some time to that. But if you look on any particular quarter, I think it tends to be more choppy.

And is the choppiness reflective of sort of your view of trends or specific sense of customer need, or the last part of that is just maturity of the mobile backhaul upgrade?

Absolutely trends. I mean, customers, especially larger customers, tend to focus on one area than another area. When they focus on one area, products that are in that particular product set do well. And then they move that kind of focus to another area, and then other products do well.

So it is -- first of all, I think we are very -- still, of course, very early in the mobile backhaul upgrade cycle. And so I am not worried about the longevity of the market at this point. It is more of a -- from quarter to quarter, they tend to focus on different things.

Thanks. And just one last question, please. An update on how you view the competitive landscape. I think you commented in the prepared remarks that you expect to gain share. I wasn't sure if you were highlighting specific applications or your overall business.

There are a few specific applications that I think that we are -- I have no doubt we've gained share in. And we feel very confident about where we are at this point in time. Broadband Access is one of those. And if you look at the different market segments, we compete against different customers in different market segments. You are aware of that.

And in -- I would say in all of the market segments, we feel that we are in a good position to gain some share. IP business gateways, routers and switches, I think there is no doubt we've gained some share there, as well as we've seen, especially in IP gateways, we've gained market share. We know that. We know the customers. We know some of those customers haven't yet started deploying.

But we can also take a look at our kind of same-store sales type approach, which is customers that we've had for a long time, how are those customers doing. And there's no doubt that that market has grown some over the last year also.

So those are just two areas that I can absolutely say. And ethernet over copper, you know, we're in very good position there. A lot of these other pieces, I think we are well-positioned for.

And by the way, when I say Broadband Access, of course, that is fiber to the node as well as the 5000 application, things like that.

Great. Thank you very much.

Cobb Sadler, Catamount Advisors.

Thanks for taking the call. I had a follow-up on the Frontier Verizon access deal. Did that deal -- do you guys know if the deal closed July 1 as expected?

And then also, to what extent have you baked in in the guidance the [fast] 180 initiative for initial deployments into the Verizon properties?

Everything, as far as I am aware of, is going on as planned. So I don't know of any change, and I think everything is happening according to what they had been planning for some period of time.

As far as do we have it baked into our numbers, we look at broadband in general, and Frontier has been a customer of ours. We have -- there is no doubt that this particular award has the potential to move us forward on a market-share basis substantially from where we were in the past.

Yes, you would expect us to be able to look at that, but we tend to look at it from a customer basis and then an overall basis, and we say, does this make sense, even if some things don't happen. And that is how we came up with a number.

But we do expect to have a stronger second half than the first half. And here again, I'm going to try to not talk about specific customers, though, and I think I probably did a little bit too much there.

Understood. And just a follow-up on Optical Access. Tier 1's -- I may have missed it -- Tier 1's versus Tier 2 split, do you have a rough split there? I guess the major carriers, what percent were they of the Optical business, if you can break that out. Or if you can't, no problem.

I don't think we break that out, and I don't think we have. I would -- obviously, Optical Access is very similar to HDSL. I think in general when we see an uptick like this, we see a fairly broad-based uptick. And I would venture to guess that that is exactly what happened (inaudible).

Okay, great. Thanks very much.

Michael Genovese, Soleil Securities.

All right. Great. Thanks a lot. Two questions. First, can you put some quantitative numbers around the guidance, if you would do that? I mean, flat obviously is 0%, but when you say slight growth, do you think of the upper bound of that or would you think of 2%, 3%, or what are your thoughts there?

I'm afraid what we're trying to do is give color, and we are very reluctant to get more specific than that. So flat to slightly up refers to, again, if we look back to the last three years, the sequential upticks, if there were sequential upticks, were in the range of 5%. And if you look back to 2007, it was actually flat. Okay? So you might draw conclusions somewhere between those numbers, okay?

Great. That's very helpful. Number two, just when we think about your international expansion opportunities, you talked a little bit about Ericsson. But I'm wondering, the main thrust of your international opportunities, is that organic ADTRAN activity? Is that the Ericsson partnership? And are there any other significant international distribution channels that we should be aware of?

The main thrust of our international push at this point is organic. It is -- there are opportunities. We've won some business in Asia. Nothing that has gotten to the point to where we have made noise about it. We have won, of course, business in Western Europe. We have some business in Latin America that we think still has potential.

But all of that stuff is direct or with in-country partners, and I think that is the way to think about where our distribution channel is at this point in time going forward. And if something significantly changes, we would talk about it.

Great. Thanks a lot, and congratulations.

Paul Silverstein, Credit Suisse.

First off, with respect to the revenue mix from a customer perspective, your IOC customers, Tier 1 and below, everybody below the RBOCs. You were up 23% year-over-year off of 38% growth last quarter year-over-year.

Tom, Jim, can you give us some insight -- and I know you made some commentary about additional wins, deeper penetration -- but could you give us some more incremental insight in terms of what is driving that growth? Is it mostly deeper penetration? You are already in most of those guys; you've been in most of those guys. But any insight you can give us on what is driving the bulk of that growth. And then I've got a couple other questions.

Let me make sure I got the question right. So if you take a look at the Tier 2, Tier 3 space, what is driving the growth there? Is that what the question is?

Correct. I mean, that is where the bulk of the growth has been over the last couple of quarters. What is driving it?

The number one thing I would have to say would be the Total Access 5000. That is a product that if you look past a year, and in many cases even if you look shorter than that, that is all incremental to us. Because we were fairly new into -- although they have been customers for a long time, we were fairly new to getting that approved in definitely some of the bigger ones, as we rolled out the feature set, and in all of the smaller ones. So that growth predominately is from the Total Access 5000.

And Tom, does that go hand in hand with -- if we take a look at your growth from the perspective of how much of this is organic growth and in markets, versus taking share from current competitors, is the bulk of that growth in IOCs, as well as RBOCs, for that matter, is that you taking share from the existing players?

You know, I -- let me lay out -- it depends on how you say taking share, so let me lay out what I mean by that. There are customers where we were not. In fact, there were quite a few customers where we were not selling the Total Access 5000 a year ago, and we are selling it today. And in many cases during that same period of time, the customers' appetite for that type of product went up. So there has been some inherent market share gain, but there has been market growth. And you could argue whether or not that market growth which I wasn't going to participate in is actually market share gain or not. But I think the pie has gotten bigger in many of these customers, and our slice of the pie went from zero to whatever it is. Does that make sense to you?

It does. But Tom, if I could push it one step further. If I go back to Simon's question, can you give some quantitative, or at least qualitative, discussion of you go into an IOC with TA 5000, is it a new application more often than not? Is it more bandwidth in a consumer broadband context, where instead of using whoever's platform they were using -- Alcatel-Lucent, Tellabs, whoever -- they are now bringing you in to do an upgrade in the context of delivering more bandwidth to the end-user? How much is one versus the other?

Sure. So, in that -- in that context -- first of all, I am going to step back and just say, I think the market -- the broadband market right now is a healthy market and I think that a lot of people can participate in a positive way in a healthy market like this. So I wouldn't discount the fact that the market has grown.

But in the specific question you're asking, there is no doubt that in the broadband sense they could use us or somebody else. So from that sense, they are using us where if we had not have come in, somebody else would be getting that business -- from a broadband sense. There are other applications that are not so clear-cut -- ethernet over copper, ethernet services in general, are things where you can almost call those brand-new markets. But from a broadband and the way we are talking about it here, residential broadband, it is a piece that other companies can do.

Right. And I know this was asked earlier and you all don't want to get into specifics with respect to the 5000 contribution. Can you give us some sense for -- if I look at 5000 plus your fiber-to-the-X business -- I guess it is -- what -- the 1100 and the 1200 -- is that almost all of the Broadband Access revenue? Can you give some quantification of that?

That is almost all.

All. All right. And then between the 5000 and the fiber-to-the-X, can you give us some sense -- I trust the 5000 is over 10% still?

Yes, yes, that is a -- we don't expect to see that 10% mark again.

All right. Are they growing at an equal clip, Tom? Can you give us some sense of that in terms of (multiple speakers)?

The 5000 absolutely grew at a faster clip, and I think that has to do with -- I don't say we will always do that, because I think, as I mentioned, we have some new products coming out. We also have a lot of interest in the whole fiber-to-the-node architecture and those tend to be larger customers. I will tell you without a doubt in the second quarter the 5000 grew at a faster clip.

All right. Tom, how much of the growth overseas was Telmex? Historically, that was a pretty prominent international customer for you -- they were doing a Fiber-to-the-X buildout.

None of the growth overseas in the second quarter was because of Telmex.

None of it, all right. Two other quick ones, if I may. Optical internet backhaul, I know you've got products. Can you give us some sense for where you're at in revenues?

I would say that -- well, we tackle that from a couple of different ways. We have a 5000 variant of that, and we have an OPTI variant of that. I would say that is -- that was not a meaningful portion of, let's say, the upside pieces that we saw in the second quarter.

Okay. Finally, we are only two weeks into the third quarter, but if you look at the trends in the first two weeks, relative to historical seasonality, what are you seeing?

Usually, at this point in time what we see is -- you typically don't see huge inflection points during this period of time. I am going to hesitate to talk too much about the following quarter until the next conference call. But I think our color on the quarter ought to give you a sense of what we think we are seeing.

Understood. Appreciate it. Thank you.

Bonnie, at this time, I think we are past our cutoff time, so I would like to thank everybody for joining us on our call, and we appreciate you taking the time. And we look forward to talking to you next quarter.

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