ADTRAN Holdings Inc (ADTN) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to ADTRAN's fourth-quarter 2013 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 period. (Operator Instructions).

During the course of the conference call, ADTRAN representatives may make forward-looking statements, which reflect management's best judgment based on factors currently known. However, these statements involve risks and uncertainties, including successful development and market acceptance of core products; the degree of competition in the market for such products, the product and channel mix, component cost, manufacturing efficiencies, and other risks detailed in our Annual Report on Form 10-K for the year ended December 31, 2012; and on Form 10-Q for the quarter ended September 30, 2013. These risks and uncertainties could cause actual results to differ materially from those forward-looking statements which may be made during the call.

It is now my pleasure to turn the conference over to Mr. Tom Stanton, Chief Executive Officer of ADTRAN. Sir, please go ahead.

Thank you, Steve. Good morning, everyone. Thank you for joining us for our fourth-quarter 2013 conference call. With me this morning is Jim Matthews, Senior Vice President and Chief Financial Officer.

I'd like to begin this morning by discussing the details behind our Q4 results, and I'll end with some comments on what we see for the future. As stated in our press release, revenues for the quarter were $159.1 million. Our Carrier Networks Division revenues came in at $126.2 million, an increase of 14% over the same period the prior year. The Broadband Access category led this increase, growing 26%, bolstered by a strong performance from our international business.

Our Enterprise Division Q4 sales totaled $32.9 million, up 13% over the same period last year. This growth in Enterprise was driven by our Internetworking category, which, on a combined product basis, including both Enterprise and Carrier products, grew 27% year-over-year. The total -- the Company domestic revenue -- total Company domestic revenue came in at $107.2 million, with international revenues coming in at $51.9 million.

On a product basis, our core product areas -- which include Broadband Access, Internetworking and Optical -- achieved $142.9 million in revenue, an increase of 25% over the prior-year, and representing a record 90% of total Company revenues. More specifically, broadband access achieved $88.6 million in revenue, an increase of 26% over the same period last year, supported by international strength in EMEA and Latin America, and a solid performance here in the US.

The US shipments of our Broadband Access products overcame their normal seasonal trend with the help of a sequential increase in shipments to several Tier 2 customers, as we continue to see the benefit of market share gains within the market. Also, during the quarter, we saw a substantial increase in GPON shipments to carrier customers in the US, including increases to Tier 1, Tier 2, and Tier 3 carriers. This increase benefited both our Broadband Access and Internetworking categories. Our EMEA performance was helped not only by continuing shipments of vectoring technology under existing awards, but the adoption of our vectoring technology by additional carriers in the region.

Moving on, our Internetworking product category came in at $40.3 million, growing 27% over the prior year, helped by increasing GPON ONT shipments, as previously mentioned, and by growth in our business ethernet access, ethernet switching, and IP gateway products.

From a channel perspective, we yet again had another solid recruitment quarter, adding a net of approximately 60 new partners to our dealer base. Speaking of the VAR channel, we did see a year-over-year revenue decline through VAR channel distribution for the quarter, which was more than offset by a year-over-year increase in both NSP and CSP channels.

Our Optical revenue saw year-over-year growth of 14% coming in at $14.1 million in revenues, helped by increasing broadband-related shipments and increasing market acceptance for our Optical Network Edge products, where we added seven new carrier customers for the quarter.

Looking at the business on a geographic basis, as I previously mentioned, we saw strong activity in EMEA and Latin America. This activity was not only with our traditionally strong customers but with emerging customers as well. Looking forward into this year, we expect activity in this region will continue to grow as carriers, both in the telco and MSO space, move forward on implementation plans revolving around ultra-broadband, utilizing vectoring, GPON, and active ethernet technologies.

In the US, sales to carriers for the quarter remained essentially flat to last year, with a decrease in legacy products being offset by increases in our core product areas. As a side note, HDSL sales for the quarter were $8.5 million, representing a record low 5.3% of total Company revenue. Moving forward into this year, we continue to progress with our major Tier 1 award here in the US. And although exact timing of these type of awards often change, we expect revenues to begin early in the second half of this year.

In the US Tier 2 and 3 markets, we believe USF to CAF transition continues to hold promise. We are encouraged by the CAF rule changes that occurred at the end of 2013, which helped ease the uncertainty around funding of multiyear projects, and we look forward to the implementation of CAF Phase II, which will provide additional motivation for prize CAF carriers to upgrade their infrastructure. Finally, as I've mentioned on previous calls, we believe our market share and geographic expansion is timed well with carrier cycle associated with the rollout of high-speed access. We continue to see accelerating activity as carriers around the world embrace next-generation access technologies, to strengthen their competitive positions and meet their customers' growing demands.

I'd now like to turn to Jim Matthews to review our results for the fourth quarter of 2013, and our comments for the first quarter of 2014. We'll then open up the call for questions. Jim?

Thank you, Tom, and good morning, everyone. Revenue for the fourth quarter increased to $159.1 million compared to $139.8 million for Q4 2012. Broadband Access product revenues for Q4 2013 increased to $88.6 million compared to $70.1 million for Q4 2012. Internetworking product revenues for Q4 2013 increased to $40.3 million compared to $31.6 million for Q4 2012. Optical product revenues for Q4 2013 increased to $14.1 million compared to $12.3 million for Q4 2012.

Carrier systems revenues for Q4 2013 increased to $108.7 million compared to $90.1 million for Q4 2012. Business Networking revenues for Q4 2013 increased to $41.2 million compared to $33 million for Q4 2012. Loop Access revenues for Q4 2013 were $9.2 million compared to $16.7 million for Q4 2012. HDSL product revenues from Q4 2013 were $8.5 million compared to $15.6 million for Q4 2012. As a result of the above, Carrier Networks Division revenues for Q4 2013 increased to $126.2 million compared to $110.8 million for Q4 2012.

Enterprise Networks Division revenues for Q4 2013 increased to $32.9 million compared to $29 million for Q4 2012. International revenues for Q4 2013 increased to $51.9 million compared to $29.2 million for Q4 of 2012. To provide the reporting of each of these categories, we have published them on our Investor Relations webpage at ADTRAN.com.

Gross margin was 48.3% of revenue for Q4 2013 compared to 46.5% for Q3 of 2013 and 48.2% for Q4 2012. The sequential improvement in gross margin for the quarter was primarily attributable to improved gross margins in the acquired Broadband Access business. Total operating expenses were $66.2 million for Q4 of 2013 compared to $65.3 million for Q3 of 2013 and $64.5 million for Q4 of 2012. The increase in operating expenses from Q3 of 2013 and Q4 of 2013 was primarily attributable to increased R&D expenses and increased sales and marketing expenses.

The increase in operating expenses from Q4 2012 to Q4 2013 was primarily attributable to increased sales and marketing expenses. Acquisition-related amortizations totaled $700,000 for the quarter. Stock-based compensation expense, net of tax, was $2.2 million for Q4 2013 compared to $1.9 million for Q3 2013 and [$2.2 million] for Q4 2012. Supplemental information for acquisition-related expenses, amortizations and adjustments in connection with the recent acquisitions are provided in our Operating Results Disclosure. All other income, net of interest expense, for Q4 2013 was $3.7 million compared to $2.8 million in Q3 of 2013 and $3.5 million for Q4 2012.

The Company's income tax provision rate was 17.3% for the fourth quarter of 2013 compared to 18.9% for the third quarter of 2013 and 38.2% for the fourth quarter of 2012. The lower tax rate for the fourth quarter of 2013 compared to the fourth quarter of 2012 largely relates to significantly improved profitability of the acquired Broadband Access business.

Earnings per share on a GAAP basis, assuming dilution for Q4 2013, were $0.20 compared to $0.28 for Q3 of 2013 and $0.06 for Q4 of 2012. Non-GAAP earnings per share for the quarter were $0.25 compared with $0.32 for Q3 2013 and $0.11 for Q4 2012. Non-GAAP earnings per share exclude the effect of acquisition-related expenses, amortizations, and investments related to acquisitions and stock compensation expense. The reconciliation in GAAP earnings per share are diluted, and non-GAAP earnings per share is provided in our Operating Results Disclosure.

Inventories were $90.1 million at year-end compared to $93 million at the end of Q3 of 2013, and $102.6 million at the end of 2012. Net trade Accounts Receivable were $85.8 million at quarter-end, resulting in DSOs of 50 compared to 56 DSOs at the end of Q3 of 2013 and 53 DSOs at the end of Q4 2012.

Unrestricted cash and marketable securities net of debt totaled $408 million at quarter-end, after paying $5.2 million in dividends and after repurchasing 850,000 common shares for $20.1 million. For the year, we repurchased a total of 5.6 million shares for $124.3 million.

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 first quarter of 2014, we expect total Company revenues will be in the range of flat to down mid-single digit percentage point range on a sequential basis. We expect GAAP gross margins will be in range with gross margins experienced in Q4 of 2013. We expect GAAP operating expenses for the first quarter will be in range with OpEx levels experienced in the fourth quarter of 2013.

We anticipate a higher tax rate for the first quarter due to a less favorable customer mix, and slightly lower revenues in the acquired business and the delay in legislation to extend the research tax credit for 2014. We expect the consolidated tax rate for Q1 to be in the mid-30s percentage point range to pretax income. We believe the larger factors impacting the total revenue we realized for the fourth quarter of 2013 to be the following -- the macro spending environment for carriers and enterprises; professional services activity levels, both domestic and international; the timing of revenue related to broadband stimulus and Connect America projects; and the adoption rate of our Broadband Access platforms.

Tom?

Thanks, Jim. Steve, we're ready to open it up for questions now.

(Operator Instructions) Rod Hall, JPMorgan.

Thanks for taking my question. I just wanted to check a couple of things. I guess, first of all, maybe if you could talk a little bit more about the -- what do you mean by gross margins in range in Q1? I mean, what sort of a range would you put around the Q4 gross margins? Just so we can get some idea for what the variability there might be?

And also, I'd be curious to know if you could talk a little bit about your Tier 1 commentary, which is similar to, I think, what you said last quarter on an H2 start for those revenues? But can you just give us a little bit more on -- you know, now that we sit at the beginning of 2014, what is gating the start of that? You know, what are the particular factors that drive timing? And what might make it start sooner? And what might make it start later? So, that would be helpful.

And then also, if you could just update us on what's going on in Europe with large carriers over there. Just give us a little bit of color on how things are progressing and what you would expect here in the first part of the year. Thanks.

Rod, this is Jim. I'll address your first question. So, in terms of the gross margin in Q1, we think about it as flattish. Let's call it that. Obviously, there will be some level of variation, but it should be in a fairly sort of small range, so to speak or a fairly tight range. So I think flattish would characterize our view on that. Does that help?

Yes, that's great. Thank you, Jim.

Yes. This is Tom. As far as the carrier -- our progress with the carrier here in the US, I guess what I was really trying to say is there's really been no significant change in timing from where we were a quarter ago. If you look at the different things associated with a project like this, there is typically lab testing and things, which have all gone well.

The long pole in the tent tends to be OS integration, and that is integrating all the management capabilities that are inherent with any particular application or system into the legacy OS's that the different carrier may have. And that's always the long pole, and that is absolutely the gating item here. So it's just a matter of work that has to be done on the customer side predominantly in order to be able to manage these systems in a large-scale rollout.

And then, Tom, can you comment on --- you said it's the main gating item. I mean, what --- is there -- are there any particular road marking points that would -- that you could talk to us about that will either accelerate or slow down the process of integration?

Well, yes, and -- I guess I can, but I don't know if it will really help you there. I mean, the big things that we tend to look at is at lab entry of equipment, which -- what we're talking about with this particular carrier is several -- many different applications, actually. And all that is on track. We delivered a significant amount of equipment definitely what is initially going to be deployed. And that will -- that set of equipment will grow over time. So all that's on track.

The real key here is for the carrier to be able to maintain their schedule on integration. And there's really not a good way for us to have significant insight to that, other than if it gets off a track, we will typically find out. But right now, I know of nothing that would say that it's off-track. And I think we're right on track from where we were hoping to be at this point.

Okay. So, can you comment on Europe a little bit?

Sure. I mentioned that the vectoring technology -- so, Europe, actually, we had a fairly good quarter. And that quarter was actually driven by several things. One, we do have a large carrier there that started rolling out in second-half of last year. We had a strong third quarter and a strong fourth quarter with that carrier. And we expect that to continue on, and we should see some ramp of that as we get kind of -- hit our stride there this year.

But we also picked up a couple of other customers in Europe that have now adopted our vectoring technology. And I want to say here -- if you let me say EMEA, that's probably more inclusive of what I'm talking about. So, they're still -- there's definitely a strong demand. We have trials going on with several other customers in that region right now for our vectoring technology. So we expect this to be a good year from a customer acquisition perspective. Of course, it takes time to get these to roll out. But I'm encouraged by the fact that we've already got a couple of more that we started shipping to in the fourth quarter.

And how do those new customers compare in terms of size to the first big -- the initial big customer at the start of last year over in Europe?

They're smaller. I mean -- and a lot of times, it's because the geography is smaller. I would say our footprint or our market share with at least one of those customers is just as large, but the region itself is just smaller. So, I don't expect the same magnitude of ramp.

There are a couple of very large ones that we are engaged with. In fact, we have lab trials going on with one of them, but they're farther out. But the one that we're dealing with, I think, is, at least from my current perspective, the largest one that's happening right now (multiple speakers) --.

Okay. That's great. Thank you very much.

Okay.

Sanjiv Wadhwani, Stifel.

Jim, on gross margins, obviously, a nice improvement compared to September. You had an uptick in December, expecting flat in March. Can you just sort of talk about how we should model progression of gross margins through the course of the year? Are we still on track to sort of see that uptick in the back half of this year?

And then quick question on competition. You mentioned that you had a good Tier 2 quarter, Tom. It looks like there were some share gains in that quarter. I was wondering if you could give any more specifics around that? And then also, recently, there were some articles about maybe Huawei starting to get a little more interested in targeting Tier 3's in the US market. Just wondering if you could give some thoughts around that too? Thanks.

Sanjiv -- Jim. In terms of your gross margin question, we do see gross margins as we go through 2014 improving particularly in the second half, so we certainly do continue to believe that second-half gross margins will be improved over first-half, as we continue that progression.

Got it.

As far as the Tier 2's, we actually -- we did have good quarter in the Tier 2's. If I look at the Tier 2 marketplace and look at the makeup of that marketplace, I think the majority of our Tier 2 customers -- like I know the majority of our Tier 2 customers actually saw a sequential increase, which is not typical. I mean, we usually see a decrease from third to fourth quarter. So it was just fairly solid.

Some of it was broadband stimulus-related and then others were just market share gains. Some of these market share gains are things that are just coming to fruition. I talked earlier in 2013 about us winning some additional accounts, and picking up additional applications in markets or footprint within some of these accounts. And some of that is just really now starting to come online. So, I think that's one of the reasons that we saw the increase.

Got it. Any thoughts on Huawei?

Yes, we -- you know, I read what you read. I have talked to our sales force about that. We haven't seen a big impact, at least in the field, yet. Really, I know that they're hiring people, but we haven't really seen a strong push that's really affected us in any way. I don't see them in any bids and winning any bids that we're involved in. I'll tell you it's fairly early in that, at least in the announcement cycle for them. And I'm slightly confused to -- as to from week to week whether or not they're in or outside of the US market. But we haven't seen an impact yet.

Got it. That's helpful. Thanks.

Okay.

Amitabh Passi, UBS.

Tom, I just wanted to clarify a comment you made. I thought you said you had a good fourth quarter with your large international Tier 1 customer. But I think, overall, international sales were down almost 20% sequentially. So, just wanted to clarify that comment. I know -- I think in 3Q, you talked about some seasonality. So, just wanted to revisit the trends with your Tier 1 in 4Q and then expectations throughout the year.

Yes. So, you're right. It is down sequentially. But it was really -- that is what we had expected. And I would say if you look at that entire market, it was probably a little bit stronger than we would have expected. But when I say a good quarter, I didn't mean to mean that it was sequentially up. It is sequentially down, but it's actually better than what we had initially planned going into the quarter. And that's really what my comment is based off of.

I would expect them -- I think they're going to be like any -- like most carriers. I mean, we talked about seeing seasonality in that market the same way that we typically see seasonality here in the US. So I would expect them to start off a little slow in Q1; budgets and things tend to happen towards February, kind of middle of February, and then start ramping from there. And I would expect the same thing here. And then we would see it progress through the year and probably downtick in the fourth quarter.

Got it. And then just, Tom, maybe a broader question in terms of any other key geographies where you are seeing an uptick? And just sort of Broadband Access deployments? And maybe you can give us some sense, copper versus fiber-based architectures across the globe?

Sure. So, in -- I'd like us to think about our business in Europe -- it's really EMEA. And we saw additional customer traction in vectoring, which was good. There is interest in active E technology. And, in fact, we have -- we're towards the tail end of trials with some carriers with active E in the EMEA region. And we'll see that pick up next year.

But predominately, what we're shipping to that region right now is either VDSL 2 or vectored VDSL 2. And we see that shifting more and more towards vectored VDSL 2. The other real strong area for us was Latin America. We have a traditional customer down there that I think most people are aware of in Mexico that has -- we had a solid quarter with them this quarter. We expect that to actually pick up and be stronger this year than it was last year. And then we had -- and that is, by the way, VDSL 2 rollout.

And then we saw pickup in both Latin America and here in the US in fiber-based technology. (technical difficulty) Gigabit ethernet, whether or not that's over active E or GPON. And that was fairly -- in the US, fairly broad-based. We saw that pick up in Tier 1's, Tier 2's, and Tier 3's.

Excellent. And then just one final one for you, Jim. OpEx, the last three quarters, you've held it in a very tight range. Just curious, assuming you have a pretty strong ramp in the back half, how should we be thinking about OpEx, absolute dollars, percent of sales? If you can give us some guidance there.

Well, you know, in terms of absolute dollars, in a similar range to what we've seen in Q4, what we expect in Q1, we don't expect any sort of significant increase in OpEx going through the year. So, a fairly tight range.

Okay. Thanks, everyone. Thank you.

Paul Silverstein, Cowen and Company.

Two questions, if I may. First off, Jim, I take it, by virtue of your gross margin commentary, that these new Tier 1 wins in the EMEA region or Latin America that they're not coming in at meaningfully different pricing that would adversely impact gross margin. Or is that not the case? And I've got a second question.

I think I would agree with that.

Yes. I mean, I'm familiar with the pricing. And they won't affect the gross margin profile.

All right. Tom and Jim, have -- the way you've been thinking about gross margin going forward, has that changed at all from what you communicated to us 90 days ago or 90 days before that? And when you talk about continued expected improvement in the second half, the magnitude hasn't changed?

Not -- no. There's really no reason for the change. So, no -- for any change.

All right. And finally, on the Enterprise side, I know with the global recession back in the 2010 period, it might have skewed whatever seasonality, if any there was. But in various years, it's been up quarter after quarter after quarter while it was growing. And other years, it was down in the fourth quarter. Any thoughts about, as we look at Enterprise and its growing presence, any thoughts about seasonality going forward?

I mean, that's a good question. So let me kind of recalibrate where I believe Enterprise has been. So enterprise was -- actually made it through the first part of the recession fairly well and was continuing to grow. And then, really, it was 2012 where we really started seeing the impact of kind of the environment really hit Enterprise.

This year, they've done really well. They continue to grow through the year. We saw some softness in the fourth quarter, but that softness was very channel-specific. I mentioned that our VAR channel was down. And to be honest with you, I can't tell you exactly why. Because we talk to the VARs, nothing inherently different. No really competitive environment difference. There is -- we do have stocking distributors, there may have been a little bit of inventory, something going on. But the environment felt the same.

So, I would expect -- to be on the safe side, I would expect we typically see kind of flattish going into Q1, and that's what I would expect. And I would expect it to ramp up from there. We do traditionally see a softer Q4, even for Enterprise, than Q3. And I don't have the numbers right in front of me -- Paul, you may, but -- we typically see that, unless there's some market share gain that happened with the carrier or something.

Yes, Tom, if I may, it's actually -- there hasn't been a consistent pattern. In some years, it's been up and some years, it's been down to your standard. But one last question, if I might. Looking at DTs, the major carrier in Europe, I know it's still early in that deployment, but when you look at your Q3 and Q4 revenue from that carrier, and you look forward, given your seasonality comment that you expect typical seasonality, I trust you still expect overall growth when you smooth out that seasonality from here, given how early it is in deployment. Or has it already reached full run rate?

No, we definitely expect growth year-over-year.

Great. I'll pass it on. Thanks, guys.

Okay.

Simona Jankowski, Goldman Sachs.

I just wanted to ask you a question about your international business since it's starting to expand more meaningfully here. Can you just go into a little more detail on the competitive landscape there? Are you typically seeing Alcatel as the main competitor? Do you ever see Calyx? You mentioned you didn't see much of Huawei, but I wasn't sure if that was a US comment versus internationally.

So just would love to understand that a little bit better. And then also, from a margin structure perspective, how -- what is the delta right now in the deals that you are signing, internationally versus in the US?

So -- well, let me cover the first piece, and then we'll see if we can't cover the second piece. The first -- as far as Huawei and Alcatel and Calyx. So, my comment on Huawei was specifically here in the US. I just haven't seen a lot of activity. They have -- initially, they were really pushing in Tier 1 carriers, and then I think they rebooted -- tried to push maybe some into Tier 2's. And then they -- they're rebooting again and now focusing on the Tier 3 carriers. And my comment there was I've just -- I've seen the press around that, but I haven't seen any real activity around that. So we just don't see them much.

I would say I probably saw them more five years ago in the US in competitive bids than I see them today. So, we'll just wait and see how that plays out. Outside of the US, without a doubt, it's Huawei and Alcatel Lucent. In almost every large -- in fact, every large RFP that we see or a project that we see, those two are in there, trying to earn their piece of that particular project. So those are the two. We don't see Calyx that often; maybe a little in the Caribbean, but we don't really see them much outside of the US.

Any comments on the margins on the relative margin structure?

Well, I'll take you back, and hopefully, Jim won't be too upset with me. So I'll take you back a little bit to what our guidance was kind of early in when we did the BBA piece. And I will tell you it's not substantially changed from there. We were initially in the 30s. Our target had been to give it kind of in the mid to upper-40s. Arguing if you look at it, I would say we're on track with that target. So, if you think about that, our traditional business in here in the US is typically, let's say, given some of the broadband stimulus and stuff, in the low to mid-50s, I think that's the right way to think about it.

Thank you. And then just a separate quick question. I think a couple of the pushouts that you had embedded in your guidance, when you first guided for the fourth quarter, related to a delayed revenue recognition for some BBS projects, and also a delay in the ramp of the share gains. You had one at one of the Tier 2 customers. So, it sounded like both were at least partially recognized in the fourth quarter, which drove some of the better-than-expected trends in the carrier networks business. I just wanted to make sure I understood that correctly.

I think you're exactly right. We did see a pickup. I mentioned that the Tier 2 carriers specifically were -- kind of had overcome that seasonal trend. And I think you pointed out the reasons for that.

Okay, thanks very much.

Tim Quillin, Stephens Inc.

With the Tier 2 share gains, as I look at the revenue by geography, the US was down 3% year-over-year in aggregate. I'm guessing Enterprise in the US grew pretty well. So, US carrier probably down fairly significantly. So, where are you not doing as well? Or where are you seeing the weakness in the US service provider market?

(multiple speakers) Yes, on a sequential basis, if you look at HDSL, we were down.

Yes, I mean, if you look at our legacy product line, we saw -- I mean, HDSL saw a fairly big drop, which is why I specifically mentioned the revenue now associated with HDSL.

And also on the Optical side, although we were up year-to-year, we were done sequentially there too. And that's US-based carriers.

Okay. So if we just kind of saw for the core non-legacy service provider business in the US, you'd be growing that?

Core, non or --? (multiple speakers)

Well, with the exception of Optical, right? Because that was done. So I guess we're really talking about Broadband, and also the Enterprise gear that carriers sell as well.

Okay. Maybe I'll ask off-line. Do we have to wait for the 10-K, or would you be able to give us the percent of revenue from your largest customer for the year?

Well, I can tell you this. We typically do talk about the number of 10% customers on the quarterly call, and we disclose the annual percent in the 10-K. So we'll have to wait for that. But we had two 10% customers in the quarter and similar to what we saw in the third.

Okay, thanks. And then, Jim, on the tax rate, I know it's pretty difficult to forecast just because of the level of profitability at NSN. But what should we -- how should we be thinking about that over the course of the year? Thank you.

Yes. As we go through 2014, quite frankly, there will continue to be some variability based on the profitability of that business. But the way I think about it is mid-30s as we go through the year. Now, that would not include the benefit of the research tax credit legislation, which has not yet been passed. Okay? So, once that happens, it should lower the rate to that point, call it, low-30s, is the way we think about it -- or I think about it.

Yes. Great. Thank you.

And we'd appreciate everybody writing to their Congressmen to get that passed.

Rich Valera, Needham and Company.

I'm wondering if you can talk about the major pieces of your business into 1Q? And which of those you think might be down, since overall, you're expecting that flat to down?

The major piece of -- when you say major, you mean -- so (multiple speakers) --?

Broadband Access, Internetworking -- I think Internetworking you said flat. Do you expect Broadband Access sort of flat to down? And I guess the other big piece would be Optical Access and then legacy, just any color on the trajectory of those (multiple speakers) segments into one?

To be real honest with you, it is hard for us to predict that. I mean, we still are very much a book-and-ship company. So, we have significantly less than a month of backlog, typically, at any one point in time for coming into a quarter. So, really, what we look at is seasonal trends.

And I would -- the way we think about it is almost every product will be flat. But there may be some -- it won't turn out that way. One of them is going to surprise us on the upside and one of them, hopefully, will surprise us on the downside, and everything will even out. But there's not any particular item. Because we -- you have to look at it from a product basis and also from a carrier basis. And carriers will start up at different periods of time within the first quarter. And sometimes those change and they really don't telegraph that they're going to start a week or 10 days late from where they did last year.

Great. That's helpful. And then, I know you don't want to give too much color beyond Q1, but is there any qualitative commentary you could give on your expectations for the Broadband Access business? Obviously, there's the big NSN BBA piece. Not sure how much color you have. It sounds like you have some things that may be ramping as we move into 2Q and beyond, and then perhaps an increased activity domestically on maybe the Tier 2 side. So, any sense you could give us of the business beyond 1Q, other than sort of historical typical seasonality?

If you will, let me give you the variables that we're dealing with, and then kind of let you come up with your own insight as to how that will play out. The international piece, we feel -- I mean, the year ought to be a good year. I mean, we were -- not only have positive momentum at the large carrier that we've all talked about, but we have new awards that are coming in, and people are adopting more vectoring technologies. So we see an upward profile for that business that -- really, I think we're measuring kind of how much of the upward profile, and how quickly carriers adopt things.

In the US, there are a couple of big things. One is a big Tier 1 US carrier. Do they continue to stay on track from a date-wise? And then what is the launch profile in the second half? And, there's variability to that. I mean, Tier 1 carriers are incredibly difficult to forecast lab exit times, integration exit times. And really, the thing that gives us comfort is, if I could make the quarters go away and just say, is it going to happen? Is it going to happen in a reasonable time period? The answer is yes. But whether or not that falls on a particular quarter boundary for one order or two orders to come in, really does change the profile of things from your perspective. So that's the biggest variable.

And then the second variable is really around the Tier 3 market. I mean, we would still consider them to be not as robust as they were three years ago or probably even two years ago. You know, we started seeing some signs of life again. They kind of started at least spending again last year. But I would say they're still not up to a healthy level. And whether or not that turns on this year is probably the second biggest variable here in the US.

There are a lot of positive rule changes that have happened. The most recent one -- I mentioned in our notes -- happened, I think, in December, which should relieve a lot of the angst that they have around long-term, larger project commitments; but it has yet to be seen as to whether or not that's really gotten any traction. So, those are probably the two biggest things that give us some question mark as to exactly what that growth profile will be here in the US.

That's very helpful color. Thank you. And just one more, if I could, on the legacy business. Could you give us your expectations for that business in 2014, maybe relative to the fourth-quarter run rate, which I think was a new low for you guys? Do you think it's sort of stable at those levels in absolute dollars? Or do you think we see further declines in absolute dollars as we move through 2014? Thank you.

Well, the size (multiple speakers) -- go ahead.

All right, I was just going to say -- yes, Jim, I'm going to let you have this, but I think, let's restate the size of kind of where we are and --.

Yes, the size is definitely declined from prior quarters. I mean, if we look at legacy in total, we're about 10% of total revenues. And we would expect that will continue to decline over time as the growth in our core products continues, and also, as the dollar amounts of these legacy areas continue to decline quarter-to-quarter. Obviously, the big drop-off from a dollar standpoint is behind us; but again, over the long-term, we expect that they will (technical difficulty).

Okay. That's it for me. Thank you.

Simon Leopold, Raymond James.

I wanted to see if we could just do a quick clarification, first of all. The fourth-quarter tax rate, I think in the prepared remarks, you mentioned the international mix as a key factor for that lower rate. And if you could just discuss other factors that may be playing in that?

The other thing I wanted to ask about -- two topics. One is, we talked a lot about a competition on this call. The one thing I wanted to check on was whether or not you're seeing Alcatel Lucent increasing as a competitor in the Tier 2/Tier 3 space in the US, noting that you did talk about share gains. I was just wondering if you're seeing them as a more presence there.

And then the other thing was -- I was hoping we could get some sizing around the contribution of the NSN business in the quarter, because there are a lot of moving parts here. It sounds like it was better than you expected but down sequentially. I'm just trying to get a good baseline of, is that closer to 25% of overall revenue? Or closer to 30% of overall revenue, and if I'm in the right ballpark on sizing that contribution in the fourth quarter? Thank you.

Simon -- Jim. I'll start. So, in terms of the tax rate question on Q4, we did see a sequential decline in overall revenue for the acquired business. However, within that sequential decline, we had a positive mix shift in terms of customer mix, which certainly contributed towards the profitability in the lower tax rate at lower overall volumes. Okay. Hopefully, that's helpful for you.

But I (multiple speakers) --

(multiple speakers) Yes, I just wanted to make sure there was no other kind of one-time tax issues besides that customer issue that you did raise?

Well, revenues, although they were sequentially down, did come in a little bit higher than we expected as well for the acquired business, Simon. So, that was somewhat helpful.

And then on ALU and the NSN contributions?

So, let me cover the ALU piece and then I'll let Jim cover the NSN contribution. (laughter) The quick answer to your question is, no change, really. Tier 3 is definitely not a change. Tier 2's, there's a constant kind of push or pressure that comes from ALU and the Tier 2 space, but I would say there's really been no change there. It feels very similar to what it felt like a year ago.

And Simon, in terms of your question on the contribution of the overall acquired business to international, you know that's not a number that we disclose, but it's certainly a -- I would say a majority. And that's about all I can say at this point. Of the $52 million in revenue that we experienced in Q4, we did see some level of sequential increase on the organic international, but again, the larger piece of international would be the acquired business.

And just to clarify, you've talked about a Latin American customer. And that customer has been buying organic products, not the acquired products, correct?

Yes, the organic.

Correct. Right.

Great. Thank you.

George Notter, Jefferies.

I understand that a big piece of the gross margin benefit obviously came from the BBA piece, the acquisition. Can you talk about what you guys are doing there right now? It sounds like some of that was mix shift, from what you said. Is there still more to do in terms of organic cost reductions? Anything on manufacturing? And then also can you kind of give us a sense for where the margins in that business are, relative to corporate average? Thanks a lot.

Sure. Let me cover the first piece. So, yes, there are some additional cost reductions that we have planned. In fact, we have additional cost reductions planned through this year. And you are correct, that the cost reductions that we have seen so far did help us in Q4.

As far as manufacturing, we are continuing to migrate additional products from current manufacturing facilities to some of them more Asian-based manufacturing facilities. And that's a continual migration process that's been going on for -- really, since we acquired the business. I would say a lot of the -- from that perspective, a lot of the big pieces have been moved. So I would see the incremental piece on that being less than what we had seen so far to date.

But we have some major cost reductions that are on the design side that will be kicking in throughout this year. Some of them are focused specifically on Q2. Whether or not we actually see those -- hopefully, we'll see those in Q2; I think you'll see an improvement in that business. But whether or not we see the full benefit from a shipping perspective is yet to be seen. But you'll see those cost reductions still happen throughout this year.

And I think, really, as we exit this year, George, you'll see us kind of, in our normal cost reduction cycle, the same thing that we do in the US, where you'll see just periodically coming out with a new generation of products. Here in the US, we're introducing a fourth-gen OSP product that will be positive, for instance, to gross margins. And that's just the normal course of business that we do.

Got it. And then, the margin in that NSN BBA piece relative to corporate average, any sense for that? Thanks.

Sure, George. And we addressed it in -- with an earlier question. The acquired business gross margins in the 40s and the organic being in low to mid-50s.

Great. Thank you.

Eric Ghernati, Bank of America.

Thanks for taking my questions. One clarification for you, if you were to look at your large European carrier customer that you start ramping, if you look forward, let's say exit in 2014, like what do you think the percentage of the wins that you have with them would be complete? Would this be -- would you be like 50% of the way done? 60%? 70%? Any color would be very helpful.

Yes. That's a good question. It's a multiyear project. And some of it we don't know the answer to, because some of it has to do with the success on the sales side -- their sales side, on being able to grow out the service and actually generate the kind of uptick from the customer base that they're looking for. But the current project, as we see it defined, I believe was a -- roughly -- I'm going to say, roughly, a four to five-year type piece that's upgrading the existing network of our existing installed base as kind of the tail end of that network.

So right now, we're deploying new chassis and doing some upgrades in our existing base. That will continue on. It's kind of the way I think about it is, footprint expansion. And then you'll see them go back where we already have an installed base, and upgrade that installed base with vectoring technology as well.

So, I mean, is it fair to assume like I mean, let's hypothetically say this is a $200 million contract. It is not one that you will see a big chunk of that revenue in 2014? It's more likely spread out between 2014 through 2016. Is that a roughly fair assumption?

That's the right thing. And I don't have the right exact dates, but that's definitely the right way to think about it. There is a defined project schedule which says we're going to do these regions in this period of time; we're going to upgrade these regions in this period of time. And I don't see anything that would say 2014 would be the endpoint to that. It definitely goes through 2015. And I believe it goes through 2016, but I'm not sure -- I just don't have the actual dates in front of me.

Okay. Thanks for this clarification. Then just a couple more questions. So it's nice to hear that you're actually working on expanding customer base of vectoring EMEA. But from my understanding -- this is kind of public disclosed from Alcatel Lucent -- they do generate very, very low margins on this business, somewhere like in the mid-20s. Just curious, like when you go head-to-head against them in RFPs, and you're faced with these kind of margins, how do you win against them? Is it product? Is it still pricing? Just any color would be very helpful. Thank you.

Sure. So we are absolutely competing with them, and I will tell you we're not seeing low-20s. So -- and I think we just went after and secured one of the largest ones in Europe, and they are, by the way, also in that account. And we're just -- we're not seeing that profile. So, I think maybe the starting point is that you think that the architecture does lead to a good cost profile when we're competing. And I will also say that we have an approach to where, if it's not going to generate profit, then we won't go after that piece of business. So it may be a little bit of a different mindset there.

As far as what we win, there are multiple things that factor into that. We have, we believe, to be the broadest product line in the Broadband space. If you cover all the way from our UBE products, like the smaller line count side to the curb type products, all the way up to large in the hundreds and thousands of ports of GPON or gigabit GPON or active E, we have a very, very broad product set. I think there are times where our competitors have to OEM a product or bring another product in, in order to compete. And sometimes that works and sometimes that doesn't.

And we pride ourselves on having very strong engineering. And so we think on a feature-for-feature basis, or definitely a platform-for-platform basis, we do very well. Not all carriers care about all those features, and so we don't win them all; but I think if you were just to line the products up and start checking boxes, I think we would come out very well in that comparison. And sometimes that's actually what wins the game.

Of course, the third piece is relationships within the carriers, and making sure that the carriers have confidence in what you can do. And that was a large piece of the whole BBA acquisition, and being able to get some of that incumbency in those relationships to help us move our products forward.

Thanks and good luck.

Okay. Thank you.

Bill Dezellem, Tieton Capital.

I hope you didn't address this already, but -- inventories. Your revenues were down sequentially, and yet inventories weren't -- were not down much at all. And so, I guess we're curious -- is that a frustration on your part, not seeing that inventory fall off a little further? Or is that a real strong indication to us on the outside just how big a revenue ramp you're planning for after the first quarter?

Bill, this is Jim. So, yes, revenues were -- or I'm sorry, inventories were down sequentially, but not to the extent of revenue, as you mentioned. Our turns did decline a little. But the way we think about inventory turns as we go through this year is closer to the range of 4.5 turns, if I may leave it at that. Obviously, per our comments, we do expect year-over-year revenue growth as we go through the year as well. Okay? So, we want to be properly stocked, so to speak, for that.

I think that's also the right -- this is Tom -- I think that's the right target. We have had turns higher and we have run into supply problems. And although we don't foresee any supply problems, for many of our vendors today, third quarter is a completely different period of time. And we do think it's a good use of our cash to have an inventory level that keeps us out of issues, because those issues can be very painful when they occur.

So, I think 4.5 turns is really kind of where we have historically found our sweet spot, where we can meet customer requirements and we're not caring so much that it becomes an obsolescence problem or just kind of a wasteful use of cash. So that's the term we have.

There's another impact to that turns. If I look at 4.5 today versus 4.5, let's say, five years ago, because of the amount of project-related inventory that we actually have in the field, that's actually a tighter inventory situation than we have had historically, because we have a lot that's already shipped that we may not have recognized yet, because the project may not be done. And although that counts on their inventory turns, it really doesn't allow us to ship that to another customer. So we've had to become more efficient just to keep that 4.5 turns consistent or constant.

That's helpful additional information. And then just to make sure that we are fully understanding conceptually how the year unfolds, seasonally, the second quarter will be directionally up. And then the third quarter should be up further by maybe a wide margin, not only because of seasonality, but because you have your Tier 1 US customer that will be ramping. Is that the right way to be thinking about the business?

We're right with you. (laughter) I think it's that variable with that large customer that has us kind of smiling, because you don't ever know. But that is the right -- that is the way we're thinking about it.

And then I'm going to stretch this out one more quarter -- seasonally, it's off (multiple speakers) --.

(multiple speakers) No, no.

How are you thinking about that, given the -- given that ramp with the domestic customer?

I don't know the answer to that. I think there is the potential to overcome that. And I don't want to put too much emphasis on that. It really depends on the ramp profile of that customer and where the exit point is from the operational development that they're doing today, the OS development. Without a doubt, there's that potential. But if you were to ask me today what to bet on, I'd had to fall back to history, and I'd have to say, seasonally, we're down in the fourth quarter and we would expect no different this year.

Fair enough. Certainly appreciate the color.

Okay. Steve, I think at this point, we're out of time. So, I do appreciate everybody calling in. And we look forward to talking to you next quarter.

And this does conclude today's program. You may now disconnect at any time and please have a wonderful day.