ADTRAN Holdings Inc (ADTN) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to ADTRAN's first-quarter 2011 earnings release.

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, 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.

I'll now turn the call over to Tom Stanton, Chairman and Chief Executive Officer of ADTRAN. Please go ahead sir.

Good morning everyone. Thank you for joining us for our first-quarter 2011 conference call. With me this morning is Jim Matthews, Senior Vice President and Chief Financial Officer.

I would like to begin this morning by discussing our first-quarter performance, and I'll end with some comments on what we expect for the second quarter. As stated in our press release, ADTRAN set a new revenue record of $165.5 million in the quarter. Our performance was driven by revenue acceleration in our growth areas which grew 51% over the same period last year, more than offsetting seasonal declines in our traditional product areas.

Our growth areas continue to benefit from increasing demand for higher speed services from both residential and business customers, broad-based strength for mobile infrastructure upgrades, and the continued migration towards IP services. Combined, our growth areas achieved a record $105.6 million in revenue, representing 64% of the Company total.

The Carrier Networks division as a whole reported an impressive 33% increase in revenue over the same period last year as a result of the market share gains and service upgrade deployments in Tier 2 and Tier 3 carriers with our Total Access 5000 platform, market share gains and an increase in market demand for our optical products used for mobile backhaul, acceleration of fiber to the node shipments outside of the US, and an increase in demand for products enabling Ethernet service delivery.

Our Enterprise divisions grew 21% over the same period last year as a result of market share gains driven by competitive carriers, including traditional CLECs and MSOs, strong demand through our VAR dealer base and an overall increase in demand across Tier 1 carriers.

Looking at our business on a product line basis, Broadband Access set a new record of $51.8 million, achieving 42% growth over the same period last year. As expected, the Total Access 5000 platform led this growth driven by market share gains and service upgrades across a broad set of customers.

Our Internetworking category achieved another record revenue level, growing 48% over the first quarter of the prior year. Again, we saw growth from competitive service providers in all our channels, including carrier resellers. Our growth year-over-year occurred across all product sectors, including access routers, Ethernet switches, IP business gateways, IP PBXs, and EFM products.

Our mobility products performed as expected with Optical Access growing an impressive 86% over the prior year, achieving a new record level as a result of increasing investment in network upgrades. Growth in this category, although widely distributed, occurred predominantly in Tier 1 and Tier 2 carriers. HDSL was slightly up over the prior year, achieving $40.9 million in revenues.

Now, moving on to a discussion about the second quarter, we expect our Broadband Access category to yet again set a new record driven by our Total Access 5000 family and fiber-to-the-node platforms as carriers continue to deliver higher speed services, migrate their networks to Ethernet. These product lines benefit from increasing activities with international carriers.

We expect Professional Services revenues will grow sequentially as ongoing projects progress and new awards come online. We believe Internetworking will continue to maintain its current positive momentum, benefiting from market share gains, market growth, and new customer momentum. Lastly, we expect our mobility products to continue their strong performance, driven by increasing demand for our Optical Access platforms.

As I said on our January conference call, accelerating broadband deployments driven by increasing competition and an intensive upgrade of mobile infrastructure, channel expansion in our Enterprise segments, meaningful sales initiatives outside of the United States, government and regulatory initiatives, coupled with an innovative, diverse and expanding product portfolio, lead us to be optimistic about the year ahead.

I would now like Jim Matthews to review our results for the first quarter of 2011 and our comments on the second quarter of 2011. We will then open the conference call up for questions. Jim?

Good morning everyone.

Revenue for the first quarter increased 30% to a record level of $165.5 million, compared to $127 million in Q1 of 2010. Broadband Access product revenues for Q1 of 2011 increased 42% to a record level of $51.8 million, compared to $36.4 million for Q1 of 2010. This increase was primarily related to continued growth in deployments of our TA 5000 platform.

Internetworking product revenues for Q1 of 2011 increased 48% to a record level of $32.9 million, compared to $22.2 million for Q1 of 2010. Optical Access product revenues for Q1 of 2011 increased 86% to a record level of $20.9 million, compared to $11.3 million for Q1 of 2010. Carrier Systems revenues for Q1 of 2011 increased 49% to a record level of $86.8 million compared to $58.1 million for Q1 of 2010. Business Networking revenues for Q1 of 2011 increased 37% to a record level of $36.4 million, compared to $26.5 million for Q1 of 2010. Loop Access revenues for Q1 of 2011 were $42.4 million, compared to $42.5 million for Q1 of 2010. HDSL product revenues increased to $40.9 million for Q1 of 2011, compared to $39.9 million for Q1 of 2010.

As a result of the above, Carrier Networks division revenues for Q1 2011 increased 33% to $132.4 million, compared to $99.5 million for Q1 of 2010. Enterprise Networks division revenues for Q1 of 2011 increased 21% to $33.2 million compared to $27.5 million for Q1 of 2010. International revenue for Q1 of 2011 increased 85% to $12.4 million compared to $6.7 million for Q1 of 2010. To provide the reporting of each of these categories, we have published them on our Investor Relations web page at ADTRAN.com.

Gross margin was 59.7% of revenue for Q1 of 2011 compared to 59.3% for Q1 of 2010. Research and development expenses were $23.6 million for Q1 of 2011 compared to $22.8 million for Q1 of 2010. This increase in expense was primarily related to an increase in staffing costs and customer specific projects.

Selling, general and administrative expenses were $29.6 million for Q1 of 2011 compared to $27.2 million for Q1 of 2010. This increase in expense was primarily related to an increase in staffing costs and selling activities in the US and abroad.

Stock-based compensation expense net of tax was $1.6 million for Q1 of 2011 compared to $1.5 million for Q1 of 2010. All other income net of interest expense for Q1 of 2011 was $3.8 million compared to $2.9 million in Q1 of 2010. The increase is related to an increase in realized investment gains and an increase in interest income due to higher investment balances.

The Company's income tax provision rate was 30.7% for the first quarter of 2011, compared to 35.7% for the first quarter of 2010. The tax provision rate for the first quarter of 2011 included the normal benefit from research tax credits and a benefit of $1.9 million resulting from the exercise of employee incentive stock options in the quarter. In the first quarter of 2010, the Company did not recognize benefits from research tax credits due to delays in legislation.

Earnings per share, assuming dilution for Q1 of 2011, increased 79% to $0.52 compared to $0.29 for Q1 of 2010.

Inventories were $79 million at quarter end, up $4.8 million from Q4 of 2010. The increase was driven by an increase in anticipated sales volumes and higher-than-anticipated deferred revenues related to new installation services contracts.

Net trade Accounts Receivable were $84.5 million at quarter end, resulting in DSOs of 46. Unrestricted cash and marketable securities, net of debt, totaled $460 million at quarter end after paying $5.8 million in dividends during the 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. However, we would like to give color to help you formulate your views on our near-term business outlook.

For the second quarter of 2011, we anticipate revenues will increase in the range of high single-digit percentages points on a sequential basis. We expect second-quarter operating expenses will be slightly up on a sequential basis. We believe the larger factors impacting the revenue we realize for the second quarter and 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; Professional Services activity levels, both domestic and international; upgrades for mobile broadband infrastructure; and improving enterprise spending in (technical difficulty) environment; and the timing of revenue related to broadband stimulus projects.

Tom, back to you.

Thank you Jim. At this time, would like to go ahead and open it up for questions.

(Operator Instructions). Amir Rozwadowski, Barclays.

Thank you very much and good morning Tom and Jim. Tom and Jim, I was wondering if we could dig in a bit more in terms of your outlook for the business. The Company once again reporting record revenues on the top line, various factors on the different business lines. But if I think about your outlook for high single-digit growth in the second quarter, it seems to reflect normal seasonal trends. I'm just trying to understand sort of what the puts and takes are there and how you're gauging that. Thanks.

We are a book and ship business. We continue to be a book and ship business, so our visibility is rather limited. In combination of looking at history, as you suggest, and the business volumes that we see now, that's the range that we are anticipating at this point. It is, in large part, based on historic trends.

Okay. So if we consider it based on historic trends, if we think about the current spending environment, are there any factors that are taking place right now that would lead you to believe that the current spending environment or the strength that you're seeing would diminish as we progress through the year, or are there, on the flipside, any factors such as ramping international business or perhaps broadband stimulus that would suggest a strengthening in trends through the course of the year?

This is Tom. There are things that we do have a more difficult time, and I think a lot of people would have a difficult time forecasting, things like broadband stimulus where the timing of broadband stimulus is one that has been -- we've tried not to really put very definitive timelines around that because we don't -- because there are too many things that are out of our control. So in our planning process, we really don't factor those in. Those sometimes come in as surprises, and most are from what our historical rates would be. But that's the way we tend to look at it. So we tend to try to give you the best guess we have without assuming that everything in the world is going to turn out positive.

That's very hopeful. If I may, just one other question in terms of the Broadband Access portion of the business. We are seeing continued strength there. In the past, you discussed sort of ramping opportunities with Tier 1 operators for the TA 5000. I was wondering if you could give us an update in terms of where those stand. Are those, currently you're seeing those as strong levels at the moment, or is that still in very initial phases? Thanks.

I would say it depends on the carrier. So in one carrier, we actually started seeing some movement actually last year, and they started picking up and we would expect that to continue on. I don't think they are at any type of peak rate, even in that carrier, so that's kind of an ongoing business. They will have projects that they will do from time to time which will drive that number higher. But for the most part, the majority of the applications have been approved.

In yet another carrier, I would say the applications are approved, and it's a matter of really at what point in time they decide to accelerate what their plans are there from what they had been over the last let's say couple of quarters. So I would kind of view that as a run rate piece. There is always talk about additional projects and actually acceleration areas outside of their current operating model. Then in one of the large carriers, I would say we are still very much in early phases.

So just on balance, it seems as though, with some carriers, you have received a fair amount of business there, but on balance with the Tier 1s, you're still at relatively early stages when it comes to those opportunities.

Yes, I think we are at relatively early stages. As you know, forecasting when projects actually get kicked off and when OS development gets finalized has been difficult. I think, in totality, yes we are at early stages but I think it's still -- that is something that here again, if you talk about upside potential from what we would normally forecast, that's one of those things.

Thank you very much for the incremental color.

Michael Genovese, MKM Partners.

Thank you very much. With the comment about the higher Professional Services revenues expected in the second quarter, should we think about the sequential tick-down in gross margins around that?

This is Jim. I think we should. You might notice that our gross margins were lower in the fourth quarter, and they were higher in the first quarter in part because of lower services revenue, but we do anticipate that those types of, installation services revenues will increase for Q2. Therefore, we would expect gross margins in Q2 to be closer to what we saw in Q4.

Was this entire tick-up -- it looks like a $7 million tick-up in unearned revenues. That was entirely around the professional installation services?

It related to contracts that do relate to Professional Services; that's correct.

So there's equipment in there, but those are all have to do with professional services, the majority of it by far. It's not every (inaudible) of the increase, yes.

Great, and then final question. Just any kind of -- with Qwest and CenturyLink now that deal is closed, does it appear to you like things are moving forward there without a hitch, or is there any kind of delayed planning period now that the merger closed this month? How would you think about those issues?

I would say that our activity with them, our conversations with them are continuing to move forward at basically the pace and kind of temperament that they had been before that. So I would say we are not expecting big changes in the activities in that maybe selling activity, shipping, and communications with them in the near term, or for that matter in the long term.

Congratulations on the solid quarter and strong outlook.

Sanjiv Wadhwani, Stifel Nicolaus.

Thanks so much. Jim, could you talk about the 10% customers for the quarter?

As you know, in the past, historically we have given 10% breakout customers on the quarterly calls. We have recently received letters from certain customers requesting that we not do that any longer. Therefore, that's the practice that we are going to take going forward. However, we did see three 10% customers in the quarter. That's the extent that we can talk about at this point because of customer requests.

Fair enough. That's totally understandable. A couple other questions. The services revenue piece, can you talk about how big it was this quarter in terms of revenues?

That's not a number that we specifically disclose. We did talk about it directionally from a prior question. It was down from Q4. We do expect it to go up in Q2. It did benefit gross margins to some extent because of the downward direction in Q1. But again, we expect it to go up in Q2 and grow as we go through the year.

Does it -- do you expect it to hit 10%-ish of revenues at some point during the year, or that might be too large a number?

I think at this point that might be too large a number.

Got it. Last question, Tom, on OPTI, [OPC], nice increase year-over-year. I'm curious whether you think it's reaching that inflection point in mobile backhaul deployments. And then just the outlook for that application, given that obviously eventually I think a lot of carriers would like to move to native Ethernet.

Yes, I would say, just from an activity perspective, we actually saw some pickup in activity and questions and maybe planning around that product line exiting last year. I would say it's continued to accelerate, and the product and project plans that people are talking about with that product line are kind of longer-lasting multi-quarter type projects. So, I would say we are actually feeling better about it now than we have. As to whether or not it's hit that inflection point depends on what you mean by that. I would say our outlook right now is as positive as it's ever been on the OPTI product line there.

So fair to say that it should probably see some healthy growth in the next couple of quarters?

Yes, we're feeling -- I think I mentioned in my comments that we would expect OPTI to actually kind of drive the growth in the mobility piece. That was talking specifically about Q2, but like I said these are projects that are many, many sites and cover a fairly long-spanned time frame.

Got it. Sorry, one last question, HDSL, any updated outlook on HDSL versus where you were at the start of the year?

It's just too early to tell. Q1 was pretty much in line with what we did in Q1 last year. We had a very -- we had a surprisingly strong year last year in HDSL. We are still not at a point. That is very much a book and ship business, probably as tight of order times versus delivery times as any product we have. We are not willing to step out there and say not going to be [decrease] this year. So, our guidance would still be that we would expect it to decrease somewhere in that high single digits range.

Got it, sounds good. Thanks so much.

Ehud Gelblum, Morgan Stanley.

A couple questions. First of all, I'm going to try and work through some math and hopefully I want to make sure I got this right. If we're looking for gross margin to go down next quarter, as you said Jim, back to the Q4 levels on the higher services content, then there's a little bit of drag on margin from that. But then we are growing the top line in the high single-digit range, call it 7%, 8%, 9%. So -- and you also said that OpEx is going up a little bit. So if I take lower gross margin but high single-digit revenue, then your operating margin is going to expand if you're OpEx doesn't grow faster than call it mid-single digits, because it's the high single digits minus the gross margin decline. When you said "up slightly", how should we be interpreting that? Is that going to be up mid-single digits in the OpEx, and so therefore your operating margin stays flat, or is it lower than -- slightly translate into lower than mid single digits and therefore your operating margin expands?

We are not that specific on the OpEx rather than saying "slightly up". Perhaps you can look at history based on guidance that we've given in the past draw some conclusions.

I think that's the good way to look at them. I don't think we have any -- there have been times in the past where you've seen kind of a significant change quarter-to-quarter, and that's usually been to (inaudible) expense related or something like that. I don't think there's anything like that we're looking at in Q2.

But what we continue to do, Ehud, is hire people. That certainly will add to OpEx, both in terms of sales and marketing and engineering.

Now your sales and marketing actually was flat this quarter; your R&D was up. Is that kind of what you expected or did that come in a little bit higher than you thought it was going to turn out to be?

In my view, it was in range.

That's cool. Now, when you look at some big customers, and I know certainly after you got these letters you don't want to talk about customers all that closely, but again we have CenturyLink and Qwest, and we have a slightly different merger going on with AT&T/T-Mobile which sort of really has nothing to do with you. But there's been some thought out there that possibly AT&T may be slowing down expenses or slowing down spending and deployment space on that. Are you seeing any -- at either of those two mergers, are you seeing any difference in spending patterns? If you feel like generalizing to a more general comment, that's fine as well.

I will tell you that the tone from customers around talking about their business is probably as loud as it's ever been. So, we really don't want to talk too much. If (technical difficulty) the market in general and if I talk about it from a product line basis, maybe that's a better way to look at it. Our broadband piece did very well. That included performances pretty much across the customer base that we would expect to see at this point in time, and so really no surprises there. I'm not sure much more I can tell you.

So it doesn't sound like you are seeing any change in buying behavior from your customers.

Well, I've heard the same thing you were talking about for about the largest carriers. I'm not sure if we really commented about that in Q4, but I know there was a lot of talk about kind of delayed purchases and things like that. We did not disagree with those comments. (inaudible) we kind of understood what they were doing and how they were doing things, and fully expected them to -- those things happen from time to time, when you see a slowdown and then a pickup.

Have you seen slowdowns?

Here again, (technical difficulty) (inaudible) too much into a specific customer. I would say that the comments that are out there, we haven't commented as being necessarily incorrect.

Interesting. Helpful. Our broadband stimulus quickly -- are there any -- was there any revenue this quarter, or do you expect next quarter from broadband stimulus? How should we look at that?

(multiple speakers) did see some revenue this quarter. We expected -- it's one of those that will just continue to pick up over a longer ticket time, and when you're done, you will add all those pieces up and see where it was at and feel good about it. But I would say it's still a very -- it's kind of a slow pickup or (inaudible) a little more than we saw in Q4. At some point in time, whether or not that's Q2 or Q3 or where that falls into, we would expect to see the kind of slope of that curve go up, just based off of the projects we are bidding and what the timing is on those projects. But I would say we're still pretty (inaudible) into it.

At some point, you think you should kind of veer off your historical seasonality as those are sort of additive or incremental, but not necessarily next quarter but --

Those will definitely be. To be honest with you, I think we've steered off of our seasonality already. It had nothing to do with broadband stimulus. So I mean those are all always pluses when that happens, but I think we have enough things going on that it is not what we use to try to gauge the success of our total effort here, because there are many, many things going on.

Thanks, I appreciate it.

Ari Bensinger, Standard & Poor's.

Thank you very much. I was wondering about your Internetworking or your enterprise business. You talked a little bit about the carrier activity being loud, but how are your enterprise customers' tone in terms of your aspects for 2011?

I think positive, actually. Last year was not a bad year at all for an enterprise. We saw definitely a change in the environment there from 2009 and [where] the enterprise division here again still did very well, or did relatively well. But I would say that the general tone is actually more positive now than it has been in those last two years, so I would say it's good.

In terms of overall targets, longer-term targets, I know you have your growth businesses which are growing at 20%-plus annually, and you have some traditional businesses that might see a 10% or so decline. But overall, is there any target that the Company is looking at for revenue growth for 2011?

Really haven't tried to nail that. Because of the nature of our business and the fact that we have done fairly large projects from time to time that come in and help us, we just really haven't tried to nail that. I would say that the 20% growth on the growth products is probably underplaying that just a little.

Thank you. Congratulations.

Nikos Theodosopoulos, UBS.

Thank you. Some quick ones -- Jim, tax rate for the rest of the year, should we use the first quarter as a baseline?

I would say no. I think it's going to be something closer to 34%. Again, in the first quarter, we did see quite a large tax benefit from the exercise of stock options. So that's at a much higher benefit than we would anticipate for Q2. So I would say a rate of 34% would be a better estimate.

Great. Then on international, the big sequential uptick, I think there was expectations of a large customer in the Americas that would drive that. Is that what happened? How do you see the international business flowing over the rest of the year? Is this a number you can grow off, or is it going to stay lumpy you think?

It's liable to be a little lumpy, but it's definitely I would say something that we're pretty confident we can grow off of the base that we set here in [Q1].

Any other developments in terms of other potential material new customers you might be able to capture across your product portfolio this year?

Capture -- we have one business this year, both in the US and outside of the US. I talked about if you think back about the comments and I try to highlight areas where we are actually picking up new customers versus maybe just gaining marketshare in existing customers. So from a product area, I think we try to define that a little bit better. But the answer to your question is yes.

Okay, but I was thinking more internationally. I guess maybe to rephrase that, what are the prospects of additional Tier 1s being added this year?

I think that there won't be additional Tier 1s that will be added, that we will be receiving revenue from this year that I can see at this point.

Okay. On the unearned revenue, it went up $7 million. Do you see that going down again next quarter as you recognize this Professional Services or are there other things that can move that up again next quarter?

It could move up or down. It's really based on timing of revenue recognition really in those contracts. So we have multiple customers that we are performing installation services on, so there are moving parts that could move it up or down in total. So hopefully that answers your question.

Just one last point --.

I would think the aggregate business that we are doing with the customers that are driving those numbers is going up though through the year.

Okay. Just one last one on OPTI. The sequential increase, how diversified -- the increase over the last couple of quarters, how diversified is that performance? Is it driven by multiple customers or is it a couple of larger ones that are driving the business now?

It is truly across the board. What we're seeing is, as you may expect, when wireless carriers are saying that they want to increase their bandwidth, it's in footprint and out of footprint. So when they do announcements like that, it pretty much hits every carrier in the US that is doing any type of sell-side backhaul, which there are a lot. So it's pretty much across the board.

Great, thank you.

Simona Jankowski, Goldman Sachs.

Just a follow-up first on the broadband stimulus comments. I know you have a couple of relatively larger wins. Can you just clarify those would be recognized under 397 or 398? Then also, I think you mentioned that the slope of the ramps may accelerate in either Q2 or Q3. Would you just clarify what your Q2 guidance assumes as far as that timing?

I'm going to answer the second one first, which -- if I said it was specifically going to accelerate in Q2 or Q3, I did not mean to say that. I said that we would expect it to accelerate at some point in time, but whether or not it is towards the tail end of this year or for that matter even earlier next year very well could be. The amount of broadband stimulus that we have in Q2 is assuming kind of the same type of kind of muted acceleration that we saw from Q4 to Q1. Perhaps you want to [give that]?

Also Simona, on the first part of your question, there -- we do our business -- we will be doing our broadband stimulus business on an indirect and direct basis. The indirect will be primarily based on shipment in terms of revenue recognition. The direct, we're not in a position to be specific in that regard yet, but obviously we will follow the proper policy when those contracts are concluded and we begin shipping.

Part of the reason I ask is earlier there was a comment from Calix pertaining to their acquisition of Occam where they had a relatively large deal for Occam recognized much faster than expected in the December quarter. So I just wanted to get a sense if that is something that would be possible or likely to see in ADTRAN's case, or would we not expect such a big lumpy recognition at some point this year, given what you know now about how you're recognizing these?

I don't anticipate a big lump.

(inaudible)

Now, I would say a definition of a big lump may be different depending on the Company you're talking about, so -- but we are not expecting something that just comes in like that.

Then a couple of quick other questions, one is on the HDSL side again. It sounds like you think the full year might still be down in the same range as you thought earlier, but just looking at the first quarter down double digits sequentially, the last couple of years it tended to be up sequentially in the first quarter. So I just wasn't sure if there's anything to read into that as far as the pace of decline there. I recognize you have limited visibility but as far as that decline that you just saw in the reported quarter, is that all tied into your customers' comments vis-a-vis their Internet rollout plans or what would you read into that sequential decline?

I'm not sure I am capturing your question. You talked about a sequential decrease in Q1 in regards to what?

Oh, sorry, HDSL.

HDSL typically is very seasonal, so we would expect a decrease. We were actually flat year-over-year. We didn't talk about a double-digit decline. Our expectation at this point it's high single digits decline. We will figure out exactly where it is as we get through the year because it's a very book and ship business. So there is no doubt that we are selling more optical gear. We're very bullish on what our optical products will be and that in some of those cases historically they've made a (inaudible) and that will play into that. But to the extent they are adding an increasing number of lines to areas that aren't optically fit, that's a positive and it's a matter of time to gauge to what extent that will be able to overcome any softness due to the optical shift.

Just the last question is if you can just update us on what you're seeing in terms of the competitive environment on the Broadband Access side, and in particular any new commentary around margin pressure. I know that's been an area of discussion in the past and just wanted to see if you see that as intensifying or as benign at this point?

I would say it's what it has always been. There's no real shift in margin pressure. I think our gross margins have kind of played that out. Our new products typically end up being, at the end of the day, the same -- in the same range as what our historical range has been, and we don't see any change in that.

Terrific, thank you very much.

Rich Valera, Needham & Co.

I'd like to follow-up on a prior question with respect to I guess speculation out there of a potential slowdown with a pending merger of one of your largest customers. I just wanted to clarify sort of your take on that with respect to this potential slowdown and reconcile that with your guidance, which seems to call for sort of historical seasonality, so it sounds like maybe there are other things going on, ramps with other customers that could offset any potential slowdown with this large customer. Thank you.

First of all, I don't think that the slowdown that we were talking about before was necessarily merger-related. I think they were just -- there was some commentary that was out there about whether or not they had delayed some shipments. We didn't disagree that they very well may have done that. So I don't think it's directly merger-related at all.

I would say that our current projections and with the communications that we have, we expect increases in that business through the year. But I would also tell you that the level of other business that we have with other carriers in our enterprise business gives us some level of comfort that whatever way that particular situation plays itself out, that we are still comfortable with where we are going forward.

That's helpful color. Then on past calls, there's been some discussion around a partnership you have with Ericsson for I think your IP DSLAMs to deploy into one of your large customers. Is there any color you can give on where that particular opportunity may stand and if it's expected to ramp this year?

It's still moving forward, both from a partnership perspective and from a customer perspective. So we are still on track, but I would expect that not to be probably meaningful this year. We would rather do something (inaudible) next year (multiple speakers) the tail end and I don't think there would be a large amount.

One final one, I know there's a lot of talk about seasonality, or sort of guidance with respect to historical seasonality. Any reason we wouldn't expect to see what has been a traditional sequential increase in your third quarter over the past few years in this year?

That is -- you know, we are not giving third-quarter guidance at this point. That has been a historical trend. [We saw] that for a long time, so at this point in time, I wouldn't see any reason to say anything different than that.

That's helpful. Thanks very much.

Todd Koffman, Raymond James.

Thank you very much. With regards to this customer letter that you received that indicated they don't want you to share your quarterly revenue dependence [from] them, is it likely resulting from the sheer size of that customer dependence, or has there been a change in relationship as it relates to ADTRAN and that customer?

There has been no change in the relationship with that customer. I don't think it's really sheer size with that customer in relation to our revenue. I think it's a matter of trying to make sure that they are in control in the timing of announcing their -- my guess would be from the timing of announcing their kind of capital plans and projections for the year or for the quarter for that matter.

Just to follow up, unrelated question, ADTRAN for many, many years has always highlighted the book and ship nature of the business, particularly your HDSL business, but last week Calix gave incredibly granular quarterly kind of revenue point guidance for the next few quarters in kind of a full-year number. I was wondering is there anything about the nature of your business outside of HDSL that maybe have more visibility than you've talked about in the past, given how Calix gave such an incredibly granular forecasted expectation going forward? Thank you.

Well, I think our businesses are probably different. First of all, we have multiple facets if you look at not just HDSL, but optical versus -- and our entire enterprise business. I would say our customer base is substantially different when you look at the fact that we are dealing with all of the Tier 1s as well as Tier 2s, and then Tier 3s which is kind of where I think they're getting their revenue from, and maybe so also the concentration of the business where it may be one customer that's able to give them a very specific number. That drives enough of their revenue to where they have confidence in their longer-term projections. So I think there are probably multiple things that factor into that, but that just -- I think they're just different.

Thank you, very helpful. Good luck.

Jim Suva, Citigroup.

Congratulations, gentlemen. This is [Ostia] on behalf of Jim. Most of the questions have been asked, but just a couple of very quick follow-ups, one on the inventory. I know there's been some increases there. Particularly on a year-on-year basis, it looks pretty significant. Part of it is service contract related. But when can we expect or should we expect to see some of that inventory not ticking up but rather staying flat or trending down? Is that something we should even expect for the year, given your Professional Services ramp?

I think you hit it -- the nail on the head, so to speak. Our Professional Services business is rather inventory intensive, so to speak, so it does put upward pressure on that number. The inventory level is, in large part, is really going to be dependent on that volume of business as we go through the year and the timing of when we recognize revenue. I'm afraid that's the best we can do at this point in terms of trying to pin that number down.

Okay, but there haven't been any delays in terms of when certain milestone -- service-related milestones on these projects need to be completed?

Not particularly, no.

Then just more on a macro-level picture, as 1Q budgets have been finalized by carriers, not specifically any one carrier but just broadly speaking, sort of what's your outlook for 2011 carrier spending environment?

I would say in the areas that we're playing in, which is broadband and fiber, mobile backhaul, those kind of areas, I think it is very positive (multiple speakers). We had a (multiple speakers)

Is it -- sorry, is it more surprising --?

(multiple speakers) we right now feel it's going to be stronger this year.

Is there any surprises relative to when you were going into the first quarter now that budgets have been finalized?

No. I think it's pretty much -- you always have very customer specific granularity where things may shift one way or the other. Sometimes they come in, sometimes they move out. I would tell you, at this point in time, we have both of those type of things going on. But I would say, in the aggregate, no.

Simon Leopold, Morgan Keegan.

This is Victor Chiu in for Simon Leopold. I had a question about gross margins. The Internetworking and Optical products were particular strong this quarter. Can you give a little color around the sequential increase in gross margin this quarter, maybe kind of the mix of impact from lower services and the impact maybe from higher networking product and [public] products?

Victor, we haven't historically gotten very granular on a product-by-product basis other than saying gross margins of our actual harbor products, so to speak, are in a similar range. However, our services business margins are lower, but certainly accretive to operating margins. So they weigh on gross margins. We did have a lower level of services revenue for -- or Professional Services revenue in Q1 than what we saw in Q4, so that benefited gross margins.

I'll go ahead and reiterate what was said about Q2. We are anticipating Professional Services revenues being up in Q2. Therefore, we are expecting gross margins closer to what we saw in Q4 because of the increase in services revenue.

Okay, but if you saw -- if you maybe envision particularly better growth than you expected in your optical or (inaudible), is it possible you could see gross margins do a little better than you are kind of thinking, or is that not really --?

That's not what we are anticipating at this point.

The TA 5000 was the driver for most of the growth in Broadband Access last year. Could you give a little color on your expectations for the mix [net] going forward in terms of TA 5000 and 1100 fiber-to-the-node products?

We entered this year with good momentum, customer momentum, on both of those. We have actually a growing list of customers on both of those product lines, and we have meaningful kind of large-scale deployments on both of those product lines. So it's kind of hard to pick one or the other. I would say both of them we expect to grow this year and both of them to meaningfully contribute in the overall Company growth.

Just one last macro question also. Do you think the events in Japan might impact your business at all maybe in terms of the supply chain disruption? I think I read an initial report citing like a 25% decrease of silicon wafer production. Are there any risks for you in terms of that?

We've done a fairly in-depth analysis on where we may be impacted. We believe, at this point in time, we have all of our bases covered, but that's still kind of an evolving situation. So I wouldn't say that we are 100% confident that, in some particular area, we may not see still a hiccup or two, but at this point in time, we are comfortable with where we are and we think that it won't meaningfully impact anything we are doing.

Thanks very much.

Blair King, Avondale Partners.

Thanks for taking the question. I have a few. First, Jim, I have a clarification question. Is it fair to assume that the majority of the international revenue is rolled up into the Carrier revenue segment?

Yes.

Then secondly, just again on the gross margin question, the gross margins were up nicely in the quarter. Obviously historically that typically would imply relatively linear order flow through the quarter I think. Conversely, the DSOs extended with an AR build, which would imply perhaps a back-end loaded quarter. So can you just give us some color on the order flow this quarter?

Yes, I would say you're correct in how you're interpreting the numbers. Typically, the first quarter is less linear, if you will, than the second or third in that regard. So we are shipping -- you know, shipments that actually picked up in the latter part of the quarter in the first quarter, which is not unusual.

Okay. That happened despite this potential slowdown with one of your larger customers I guess.

Yes.

Then the last question is for you, Tom. Just was -- I guess a few months ago where you guys announced the ultra broadband Ethernet product. I'm wondering if you could just give us an update on what the trial activity there looks like outside of the US and inside the US.

I'm going to speak from memory here. I didn't really get briefed on where we were at this exact point in time. We have, let's say, a handful of customers in the US that are wanting to do lab trials and we are kind of moving into that phase though, so we are not doing field trials yet. I would say, in Europe, it's actually farther along. We've got probably twice the number in Europe that are either in the midst of lab trials and looking at kind of limited field trials, or are showing significant interest and we're trying to get the lab trials scheduled.

In Europe, is it Western Europe or Eastern Europe?

Predominately Western Europe.

Okay. Are any of those Tier 1 carriers?

Yes.

Thanks Tom.

Larry Harris, CL King.

Yes, thank you. A couple of questions. One, within the Broadband Access, I didn't hear many comments about the TA 1200 or fiber-to-the-node product. Any additional updates you can provide there?

Right, now so the TA 1200 and -- we tend to use fiber-to-the-node as an encompassing piece which includes cabinet-based 1200 [serieses] that are fiber-fed, so when we talk about fiber-to-the-node, we are typically talking about both. In the 1200/1100 series, we have -- we're expecting positive things this year. We would expect it to continue to accelerate next year, or next quarter. We think that's part of the broadband growth that we are talking about for next quarter and it's going well.

In terms of Internetworking, obviously the small to mid-size business category, you've been gaining share versus Cisco. Have you seen any changes in the last few days in terms of their competitive thrust or what they are doing or is it too early to tell?

From our perspective, it's definitely too early to tell. We'll kind of see. I don't think the -- from what we've been able to see which is what you've been probably able to see, it's -- I think some of those plans haven't been laid out yet and they definitely haven't impacted anything in the field.

Okay, thank you.

Bill Dezellem, Tieton Capital.

I had two questions. First of all, relative to the ultra broadband Ethernet product, are you seeing anything with any of the trials that is reducing your enthusiasm for the product?

I would say that each carrier has got kind of different expectations on what they want their particular version to look like. That's exactly what we would've expected at this point in time.

Thank you. The second question is relative to the Verizon network and the introduction of the iPhone in the first quarter. Are you seeing any indication that network may be coming more strained than would have been anticipated?

If I knew the answer to that, I would be very hesitant to give that answer anyway. But I will just tell you that we play in Verizon's network as a backhaul vendor, and they were part of our growth last year, and we would expect -- we are very hopeful of what we can do with them this year, so --.

Thank you.

Ted Moreau, WJB Capital.

Thanks. I know you don't want to talk about specific revenue from individual Tier 1s, but can you provide an aggregate percentage of revenue from Tier 1s in the quarter?

No Ted, we are not looking at doing that at this point.

Then on the European opportunities, are these opportunities and potential wins largely because of the strength of your technology, or is it -- are you using pricing to gain some footprint at all?

It's a brand-new product with a brand-new particular application set, which [let's say is] the carrier a significant amount in operational and deployment costs because of the way that it goes about doing what it does. So the answer to that question -- there's no real price pressure on that product. It kind of stands alone as being unique and being able to save the carrier a lot of money. So the answer to that question is no.

So then margins would be in line with normal margins of all the other products?

When we start deploying it, that's what we would expect.

Okay, thank you.

Cory Armand, Rice Voelker.

Thank you. Yes, my questions were asked. Thank you.

Ehud Gelblum, Morgan Stanley.

I will be quick. One, Jim, you said I think HDSL you're expecting to be down in the high single digits. Did you mention mid-single digits last time? I seem to remember that. So is that a change of thought, or -- (multiple speakers) (technical difficulty)

(technical difficulty) for last quarter, Ehud, I think we did say mid to high single digits.

Now you're high or are you still mid to high? I just want to see if there was a change.

There's not a change. We are still at mid to high. The first quarter was in line with what (technical difficulty) we'll kind of see what the ramp is this year.

Okay, so there's no change in your outlook there. Then I want to put this concept of a slowdown to bed. At various times, companies will slow down, and I thoroughly understand that these letters that you may have gotten from carriers create a certain sensitivity that doesn't allow you to be as robust in explaining things as before. But generally when you have slowdowns, they are for one of two reasons. Either a slowdown is beginning a trend, or a slowdown as a blip that happens for any a number of reasons and there is a pickup on the other side. Given that your guidance was relatively strong in the high single digits, should we assume therefore that this slowdown that may or may not have happened is somewhat for the most part in the past and what we have to look forward to is the recovery and the pickup from there -- again, no particular customer in particular -- or is it the beginning of a trend?

Our (technical difficulty) it's a blip, and it will pick up.

We've seen the blip already. So given what guidance is, the pickup is starting next quarter of the quarter after. Is that a good way of looking at?

Yes, I mean (technical difficulty) moving forward. Does that cover your answer -- or your question?

Yes it did. Thank you very much.

This is our last question. Go ahead. We'll take one more and then wrap it up.

Amir Rozwadowski, Barclays.

Just one quick follow-up, and it's related to the prior question on the slowdown. It seems as though your focus really is if we are looking at the buckets of potential growth opportunities this year, Tom, you folks feel very comfortable around either other Tier 1 customers or Tier 2 and Tier 3 opportunities but still expect business to grow with several of your larger Tier 1 opportunities. Is that a proper way to characterize the growth opportunities for this year?

I think that's exactly right. I think we have multiple opportunities, both in Tier 1s, Tier 2s, Tier 3s, and our international piece, and we are confident with the way the year is shaping up right now. I think Q1 was indicative of just the kind of broad-based performance that we are looking for, for the rest of the year.

Thank you very much for the incremental color.

Thank you very much for joining us on the conference call. We look forward to talking to you next quarter.

Thank you for participating in ADTRAN's first-quarter 2011 earnings release conference call. You may now disconnect.