ADTRAN Holdings Inc (ADTN) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to ADTRAN's fourth-quarter 2014 earnings release conference call. (Operator Instructions). During the course of the conference call, ADTRAN representatives expect to make forward-looking statements, which reflect management's best judgment based on factors currently known. However, these statements involve risks and uncertainties, including the successful development and market acceptance of 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, 2013 and Form 10-Q for the quarter ended September 30, 2014. 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. It is now my pleasure to turn the call over to Mr. Tom Stanton, Chief Executive Officer of ADTRAN. Sir, please go ahead.

Thank you, Kevin. Thank you for joining us for our fourth-quarter 2014 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. Then I'll end with some comments on what we see for the future. As stated in our press release, revenues for the quarter were $144 million coming in at the higher end of our range, seasonally down as expected from our $163 million in the third quarter.

Total Carrier Networks Division revenues, including both international and domestic, came in at $115.8 million. Total Enterprise revenues were $28.2 million with both divisions coming in within the seasonal range we expected coming into the quarter. Revenues on a geographic basis also came in much as expected with domestic revenues coming in at $93 million and international revenues at $51 million for the quarter.

On a product basis, our core product areas, which include broadband access, Internetworking and Optical, came in at $131.3 million in revenue compared to $142.9 million for the same period last year and $148.4 million for Q3 of 2014. More specifically, total Broadband Access revenues came in at $82.5 million compared to $88.6 million for the same period in 2013 and $96.1 million for Q3 of this year. The sequential decline was driven by an expected decline in our International business, which was partially offset by an increase in our domestic business whose sales outpaced our traditional season pattern hosting its third consecutive sequential quarterly increase.

Our Internetworking product category came in at $35.7 million compared to $40.3 million for Q4 of 2013. Our Optical product category came in at $13.1 million, down from $14.1 million for the same period in 2014. HDSL revenues came in at $5.8 million, down 32% from the same period in 2013. And total legacy product revenue, including HDSL, came in at $12.7 million, down 21% from the prior year.

As I previously mentioned, total international sales came in at $51 million. The sequential decrease from $64.3 million was mainly attributable to a decline in Europe, which was partially offset with the strong performance in our Latin American business. The European decline was due to an expected seasonal slowdown and we fully expect to see an upturn in this business as we start this year.

Here in the US, we continue to see improvement in broadband shipments driven by acceleration in shipments to Tier 2 carriers, which were positively impacted by CAF funding. The non-CAF affected markets remained relatively flat and we did see an increase in Tier 1 spending as well. Although the Enterprise division continued to see relatively soft demand in its carrier distribution channels, the quarter came in largely as expected with a 6% sequential decline. We had another solid recruiting quarter this quarter with 57 new partners added to our dealer base.

As we head into 2015, we see several bright spots that we believe will define the year. Of course, in 2015, we expect to begin to capitalize on our significant efforts we have placed in our Tier 1 US marketshare gains or marketshare efforts. We also expect to see continued acceleration of Tier 2 broadband spend as carriers receive CAF funding and other carriers execute on their plans to deploy gigabit fiber in a more meaningful way. We expect continued growth as we saw this year in the Tier 3 space as those carriers moved forward with their USF to CAF transitions.

On a broader geographic basis, we expect new product wins and continuing momentum of existing awards will lead to continued growth in Latin America and EMEA. I should note that both of these areas grew in excess of 35% in 2014. Another area of focus in 2014 was the Carrier Services component of our business, which grew nearly 30% last year with most of that growth coming in the second half. We fully expect this growth to continue in 2015 as we capitalize on the turf and other awards that we have received in 2014.

From a product perspective, the largest growth area will, of course, be Broadband Access with FTTP growth leading this acceleration. We expect to see strong momentum around our vectoring solutions and in general Ethernet service delivery will be a driver for our Carrier and Enterprise divisions in both domestic and international markets. New products such as our 4660 and 5660 families of high-performance routers, expansion of our 1500 series of switches and major rollouts of products such as the 1108 UBE, second-generation SLV and our new family of 10 gig Edge aggregation products are all expected to contribute meaningfully in 2015.

As all of you know, higher bandwidth and IP services have entered the mainstream of carrier and consumer concerns. The lack of investment in this area has become a competitive and sometimes political barrier to carriers around the world and they are starting to respond. It is on this premise that we have steered our R&D and have pursued our geographic expansion. We expect to see accelerating activity in 2015 as carriers embrace next-generation access technologies to strengthen their competitive positions and meet their customers' growing demands. I would now like Jim Matthews to review our results for the fourth quarter 2014 and our comments on the first quarter of 2015. We will then open the conference call up for questions. Jim?

Thank you, Tom and good morning, everyone. Revenue for the fourth quarter was $144 million compared to $159.1 million for Q4 2013. Broadband Access product revenues for Q4 2014 were $82.5 million compared to $88.6 million for Q4 2013. Internetworking product revenues for Q4 2014 were $35.7 million compared to $40.3 million for Q4 2013. Optical product revenues for Q4 2014 were $13.1 million compared to $14.1 million for Q4 2013. Carrier Systems revenues for Q4 2014 were $100.3 million compared to $108.7 million for Q4 2013. Business Networking revenues for Q4 2014 were $37.3 million compared to $41.2 million for Q4 2013. Loop Access revenues for Q4 2014 were $6.3 million compared to $9.2 million for Q4 2013. HDSL product revenues for Q4 2014 were $5.8 million compared to $8.5 million for Q4 2013.

As a result of the above, Carrier Networks Division revenues for Q4 2014 were $115.8 million compared to $126.2 million for Q4 of 2013. Enterprise Networks Division revenues for Q4 2014 were $28.2 million compared to $32.9 million for Q4 2013. International revenues for Q4 2014 were $50.9 million compared to $51.9 million for Q4 of 2013. To provide the reporting of each of these categories, we have published them on our Investor Relations webpage at ADTRAN.com.

Gross margin was 47.6% for Q4 2014 compared to 48.3% for Q4 2013 and 48% for Q3 of this year -- of 2014 rather. The decline in gross margin for the quarter compared to Q4 2013 and Q3 2014 was primarily driven by a weaker euro compared to the US dollar and a higher mix of professional services revenues in our North American Carrier business, partially offset by improved product cost margins in our North American business. As expected, our higher mix of professional services revenue was nicely accretive to our operating margins in Q4.

Total operating expenses were $64.5 million for Q4 2014 compared to $66.2 million for Q4 of 2013 and $65.8 million for Q3 of 2014. The decrease in operating expenses compared to Q4 of 2013 last year was attributable to lower selling and G&A expenses. The decrease in operating expenses compared to Q3 2014 was attributable to a decline in R&D, selling and G&A expenses. Acquisition-related amortizations totaled $0.7 million for the quarter. Stock-based compensation expense net of tax was $2 million for Q4 2014 compared to $2.2 million for Q4 2013. 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 2014 was $4.4 million compared to $3.7 million for Q4 of 2013 and $2.6 million for Q3 of 2014. Other income for Q4 2014 included a $2.4 million gain related to the settlement of working capital items for an acquisition transaction that closed in 2012. The Company's income tax provisions for Q4 2014 was a net benefit of $937,000 compared to a tax provision rate of 17.3% for Q4 2013 and 24.8% for the third quarter this year. The net tax benefit in Q4 was driven by release of the remaining deferred tax asset valuation allowance partially offset by tax return to provision adjustments related to a foreign subsidiary. And US legislation extending research tax credits for the 2014 year that passed in the fourth quarter. All of these items netted to a benefit of $3.3 million.

Earnings per share on a GAAP basis assuming dilution for Q4 2014 were $0.17 compared to $0.20 for Q4 of 2013. Non-GAAP earnings per share for Q4 2014 were $0.19 compared to $0.25 for Q4 of 2013. Non-GAAP earnings per share exclude the effect of acquisition-related expenses, amortizations and adjustments related to acquisitions and stock compensation expense. The reconciliation between GAAP earnings per share, diluted and non-GAAP earnings per share is provided in our operating results disclosure.

Inventories were $86.7 million at quarter-end compared to $90.1 million at the end of Q4 2013. Net trade accounts receivable were $86.2 million at quarter-end resulting in 55 DSOs compared to 50 DSOs at the end of Q4 2013 and 56 DSOs at the end of Q3 of 2014. Unrestricted cash and marketable securities net of debt totaled $353.2 million at quarter-end after paying $4.9 million in dividends and after repurchasing 929,000 common shares for $18.4 million.

The book and ship nature of our business, the timing of revenues associated with large projects and the variability of order patterns of the customer base we predominantly sell into may cause material differences between our expectations and actual results. However, our current expectations are that Q1 revenues will be slightly up on a sequential basis net of a negative impact on our consolidated revenues caused by an expected weaker euro currency compared to Q4 of 2014. This will, of course, affect gross margins as well. Taking into account that impact, we expect gross margins to be flat to slightly lower in Q1 of 2015. We expect GAAP operating expenses for the first quarter will be slightly up on a sequential basis and we expect a consolidated tax rate for Q1 to be in the mid-30s percentage point range for pretax income.

We believe the larger factors impacting the revenue and earnings we've realized in 2015 will be the following -- the macro spending environment for carriers and enterprises, the variability of mix in revenue associated with large project rollouts, professional services activity levels, both domestic and international, currency exchange movements, timing of revenue related to Connect America project, the adoption rate of our Broadband Access platforms and inventory fluctuations in our distribution channels. Tom?

Thanks very much, Jim. Kevin, I think we're ready to open it up for questions.

(Operator Instructions). Rod Hall, JPMorgan.

Hi, guys, good morning. Thanks for taking my question. I guess my main question for you guys is I'd be curious to get you to comment on the state of regulation and how you see that affecting the market the first half of the year here. And Tom, maybe if you could give us any specific things we out here in the investing community should be looking for in terms of the Title II regulatory decisions that would maybe swing things one way or the other. Thanks.

That's a really good question and one that I can probably only touch on just from my knowledge base because I know that there are a lot of things that go on in Washington that I totally do not understand. And this would be one of them. I know that there was a lot of noise and a lot of people in our sector were covering that noise towards the tail end of last year. My sense was that there are still things, and the way we're looking at it is, first of all, the larger players seem to be let's say more mobile in talking about Title II regulation and more active in talking about Title II regulation. So a large piece of our customer base has been relatively silent and we don't see any change in their activity.

With the larger carriers, I think the key is going to be what, at least for the near term, is what needs to be done and what has to be done and where do your programs sit from a relative priority perspective as they start looking at trying to position themselves one way or another. And if you recall, we saw something similar to this back with the unbundling fights; I think it was in the late 1990s or so. So it is nothing new. I don't expect this to be nearly that depth. I think the FCC is trying to come up with some compromise. I think, at least from my perspective, I feel that the market in general is looking for a compromise and I fully expect us to find that, but I think it's just going to be noisy for a period of time.

Tom, do you have any view on the timing on this? It looks like they'll make a decision in February, but then I guess it probably drags out quite a ways beyond that.

Right. So it drags out to the extent that, at least from my perspective again, to the extent that you have a regulatory body that may be perceived as overreaching what their authority is and then you end up getting through the courts in order to figure out what authority really is there and then you end up potentially with legislation trying to increase that authority. So I totally expect it to be a -- and this is not -- I would be very surprised to see it cleared up this year, but I do think, and I think we've already seen some of this, that you'll see a softening of stances as people look towards a middle ground.

Okay, thank you. And then, Jim, just a quick one on the gross margin. You guys are guiding for it to be flat to slightly lower. I guess I'm assuming that again is currency impact. Is there anything else going on on the gross margin line we need to be aware of?

That's it really is the currency issue.

Okay, all right. Thank you, guys.

Amitabh Passi, UBS.

Hi, thank you. Good morning, guys. I just had two questions. Jim, I guess the first one for you. Is there a way you can help quantify the impact of the euro both on the revenue and gross margin line? And then I wanted to confirm as part of the question that your first-quarter revenue guidance was slightly up. Does that already embed the impact of the weaker euro?

Yes, it definitely does on your second question. In terms of your first question, I can really talk more about the fourth quarter as actuals are in obviously. So the hit on revenue was in the range of about 1% and on gross margin, we're talking -- obviously, we saw a sequential decline and that related somewhat to the currency movement and we talked about our services revenue as well. So it was certainly in the mix and the gross margin decline.

Okay. And then just as a follow-up, I was curious, if I look at your international revenue second half 2013 to second half 2014, they were essentially flat despite the big Tier 1 ramp. It looks like LatAm was also strong in the fourth quarter. I guess I'm just trying to understand, Jim or Tom, as we look at 2015, I mean does the overall business grow substantially or do we ebb and flow based on seasonal patterns where you probably get a good 2Q, 3Q and then a moderation in 4Q? I'm just trying to get a better sense of why we didn't see an uplift in the underlying base business.

Okay, so let's start with the seasonal pattern that we expect and we don't see -- at this point in time, we don't see any reason to change our seasonal outlook. We've got a couple of years behind us on the European business and that looks very much that you'll see a strong -- you'll see us come out of the gates strong in Q1 and you'll see an uptick in Q2 and then you'll see a moderation and probably a downturn in Q3 and definitely a downturn in Q4. I don't see any reason at this point to think that that will be any different in this year.

In our US business, it's typically soft in Q1 depending on weather. It's typically flat to slightly down, so the fact that we're talking about a slightly up quarter means that we're looking for incremental things and some of that, of course, would be just the uptick in the European business. And then it starts moderating around the half. Q3 typically is still stronger and then you see it decrease fairly rapidly in Q4. I don't see any reason to change that except with the fact that we do expect incremental Tier 1 business to be coming in at some point this year, which, depending on the timing of that rampup, may slightly skew that. But I don't have good visibility to what that would be at this point.

Okay, thanks.

Tim Quillin, Stephens Inc.

Hey, good morning and I think you just alluded to it a second ago, but do you have an update on the expected timing of your large Tier 1 project here domestically?

Yes, really nothing has changed from the last time we spoke, so we still expect to see incremental revenue coming in or say kind of first revenue coming in for that at some point in the Q1. Now it's going to be right towards the end of the Q1, so -- and I will tell you customers change timing a little bit, but our sense is that we'll see it right towards the end of the quarter and then we'll start seeing it ramp up from there.

Okay. And is there any change in terms of the expected ramp? Do you expect to get to a full run rate by Q3 or Q4?

Yes. I don't see -- saying a run rate because there are -- there are -- in Q4, there's no doubt that seasonality will impact us. So if you take into effect seasonality and the fact that there are still projects that come and go, the answer to your question is yes. Do we expect to be in full production at that point in time and the project running at a normal pace? Yes, the answer to that question is yes. I don't for you to assume it's just going to be flat and just keep going though because projects like this tend to have some peaks and valleys.

Okay. And then just one last one on that. Do you have any greater level of visibility or where are you in terms of the discussions of the second phase of the opportunity? So I think the first part of this has a fairly defined geography. The second part is more as a second source across the entire geography. Where are you in relationship to that second opportunity?

As we know, we've been focused with the first. Although going through the first in effect gets you approval for the second and really what we have been focusing on for this year and the impact that we expect this year is predominantly the first. Those discussions will go on and they will continue to go on, but right now we're focused on the first. We fully expect to be able to participate on a broader scale, but all of our efforts are right now on what's the most critical piece, which is that first phase. I would expect that to really start contributing more in 2016.

Okay, thank you very much.

Doug Clark, Goldman Sachs.

Great, thanks. One follow-up to that topic related to the US Tier 1. Can you give us any sense now that we understand a little bit more of the timing how long or how much visibility do you have in terms of when the orders are placed and when you actually start shipping considering now that we're already almost a third of the way through the quarter?

The orders come -- depending on the particular equipment, they come with various leadtimes. I would say it's relatively short. What we do have is a forecast that everybody is marching to. So that's where our visibility is at this point and I won't say we haven't gotten any orders. That wouldn't be accurate, but I would say from the perspective you're talking about, it's still relatively short leadtimes from when a forecast turns into a purchase order.

Okay, that's fair and then also going back to gross margins, I understand the impact of the euro, as well as the impact of services. Looking out over the year, I think previously you had talked about achieving 50% or re-achieving 50% gross margins. Is that still in the range of possibilities considering maybe not the euro, but more so the professional services mix?

Doug, we think it is at this point.

Okay, and then I guess one quick final follow-up to that. Just in terms of 10% customers, can you give us any sense for how many there were in the year and how large they were?

Sure. We can tell you in terms of the quarter and certainly the year we will disclose in the 10-K. So for the quarter, we actually had three. We had two that were the usual and one that was a Tier 2, a large Tier 2 customer.

Great, thank you very much.

Rich Valera, Needham & Company.

Thank you. Wanted to follow up on the gross margin question. Jim, to the degree that you were able to hit the 50% within the year, just wondering how you would think that trajectory would play out. Would that be a ramping somewhat steadily through the year or should we expect that to bounce around and what would be the primary drivers of that? Would we assume continued pressure from the euro, but maybe internal cost reductions or what exactly would drive that up?

Well, we talked about the large Tier 1 opportunity in the past as being accretive to overall gross margins as we see it today. Certainly that would help us. We also have other cost reduction activities going on both internationally and domestically that would help in that effort as well.

Great. And so from an annual perspective, do you have any view after looking at sort of 2015 overall gross margin versus 2014 if we could see parity or an uplift there? Or is that too tough to call at this point?

Yes, I think that's too tough to call at this point.

Okay, fair enough. And then I don't think you've talked much about the new enterprise win you had with your large European customer. Any color on that and when you expect that to ramp? Should we see anything in the first quarter or is that more of a second-quarter ramp for you?

That's a good question. So the ramp will be relative -- let me just say in general, I believe we're going to, and this is just a belief because I literally don't have it in front of me, but I believe we will start shipping a little bit in Q1. I know we're expecting -- it will ramp up through this year and it will be a relatively slow ramp this year. The real impact that we expect actually where you start seeing really meaningful and I really mean from an Enterprise revenue perspective very meaningful revenue is in 2016, but you'll see it ramp up slowly this year and then start picking up steam towards the second half.

Got it. So how should we think about that Enterprise or the Internetworking business overall for the year and I don't know if you can baseline it off of Q4, but it sounds like you've got some inventory correction behind you. Any color at all on how we should think about that business this year maybe versus 2014?

Yes, that's a good question. I mean the Enterprise business and specifically the Enterprise piece of Internetworking really had a tough second half. And if I look at that second half, there were a lot of moving pieces, much more so than we really want to go into on a conference call, but there were a lot of pieces. One of them was inventory, of course, but if I tried to net all of it, basically we had a softer Carrier distribution business in the second half than we expected and then we had the inventory correction that hit us in the third quarter.

If we go back and actually get into detail on each of those carriers, there really is no marketshare loss. There are particular inventory issues at some of the carriers, especially if you talk about the CLECs where there were some mergers that impacted inventory, maybe some delays in rollouts because of other things that have happened. They are all kind of specific reasons. None of them feel like they have- - they're not sticky. None of them aren't irreversible or none of them are things that wouldn't cure themselves, but we had several of them hit in the second half of this year.

So my sense is, and if I look at the forecast for the Carrier piece of that business, we fully expect it to grow in 2015 and return back into a normal cadence. We also have additional products and we have the European win that you mentioned that we think will be additive to that. If I look at the VAR business, through VAR distribution, it actually id -- it wasn't a robust year, but it actually grew last year and we continue to see momentum picking up there a little bit. So we expect it to grow. Whether or not it hits its traditional 10% to 15% growth rate, which it had been on that track for a period of time and then fell off, I don't know, but we do expect it to grow.

Okay, that's it for me. Thank you.

Simon Leopold, Raymond James.

I wanted to follow-up on some of the trends in Europe. Certainly understanding the foreign exchange aspect to it, trying to get a sense of the demand. So as a baseline, just want to make sure I'm estimating the NSN or former NSN contribution in the December quarter is below $30 million. So if we could just check on a ballpark of how to think about that. Then going forward if you could talk a little bit about how you're thinking about your anchor Tier 1 customer in terms of how much they have left to do in their project versus what they have completed and then address some of the pipeline. You've talked in the past about some incremental smaller wins and a sales pipeline for other meaningful customer awards. So if we could get an update on the pipeline around those products and the European trends. Thank you.

So let me touch on a couple of those pieces. So the first one as far as we don't specifically break out the BBA business. There are multiple customers in that business, so we have the one large Tier 1 there. We have more than one Tier 1 there by the way, but we have one that is predominantly -- that is definitely the largest customer that we have in that region. But we have several other and they all contributed, but if you look at the number and then look at the fact that the BBA business is still by far the biggest piece of that business, periodically you'll see our Latin America business, especially when we have both of the carriers there clicking at the same time, kind of a pushup, but in the fourth quarter you would still think the BBA was the biggest. But I don't want to try to break that down into $30 million or $40 million or whatever it ends up being. And Latin America, as I mentioned, on the piece actually had a pretty good quarter and a pretty good year.

As far as the timing or the length of that project, we're still relatively early into that project. We had expected to be multiple years. We're probably, what, a year and a half into it or so and there's still a lot of runway. We fully expect it to last throughout this year and fully expect it to last through next year at a minimum and to be honest with you, I haven't looked at a stop dead date. I will tell you that even as we're rolling out technology and as you know, we're pushing VDSL2 vectoring, there's new technology that's coming down that gives them incremental speed from where they are today. And I talked about FTV and how that could play into this. That allows them to upgrade even things that they are putting in today, so we do think it has a very long tail and it's more of a -- you think about it -- the way I think about it is cyclical upgrades to the installed base that would allow them to continue to increase their speed for some period of time. So it's not just one fixed thing.

Then the pipeline of additional awards in Europe?

Yes, so I had mentioned we picked up -- I shouldn't say picked up -- after a long period of time, we secured a win in the Middle East. Towards the tail end of last year, we expect that to be shipping this year. That's probably -- and I don't have all of them in front of me. That's probably the largest -- I'm looking at Jim, maybe he may know -- maybe the largest incremental piece that we've picked up in that region. We have picked up several smaller carriers and we have reengaged and actually have I'd say upgrade plans with some of the smaller Middle Eastern carriers that actually will happen this year as well. But I would say those two are the biggest. We have picked up by the way several Tier 2 carriers in the German region as well during last year that will start shipping this year.

Thank you.

Paul Silverstein, Cowen and Company.

A couple of questions, if I may. First off, Tom and Jim, I'm a little bit confused in that if I remember correctly, I think historically, I don't know that you said it today, but historically you said that you expected a ramp, a meaningful ramp I think at Deutsche Telekom and you're expecting AT&T to ship this year. You just told us that you've got a Tier 1 in the Middle East that you won last year that you expect to ship this year. You've got several Tier 2s in the Middle East and Germany that you expect to ship this year and you expect Enterprise to improve this year, including Internetworking. What are the offsets that will cause you -- I'm not trying to be argumentative, I'm just trying to understand. But given all of that, why aren't you expecting and why shouldn't we expect calendar 2015 to be much stronger growth than what it appears you are talking about? What am I missing?

One of the things I think you may be missing is we're only talking about the first quarter and so we haven't given full-year guidance and as you know, and I think you've followed us for quite some time, that we typically don't give full-year guidance. What we do is try to give people the best view we can in the period of time that we can. As far as all of the pieces -- so I think some of them are bigger than others. The Tier 1 carrier in the US is by far the largest incremental piece and although they don't lay out things as specifically as you would like to see, I think that in itself moves the ball a substantial way. And if I were to guide based off of that award, we would expect strong returns from that this year.

We expect the European business -- everything else you said is totally correct. I think we're just talking about magnitude here. I don't expect the incremental piece that we're going to get from our Tier 1 European carrier or that we're going to get for that matter from our carrier in the Middle East to be the same magnitude as what we're talking about here in the US with that Tier 1 carrier. So that piece itself is bigger than the other pieces combined actually.

All right. And then on the Enterprise piece, especially your Internetworking, which has been such a strong growth driver for you historically, hit hard times this year. I appreciate your comments on the second half of 2014, the inventory correction and what went on with your service provider partners, but that softness in Internetworking started at the beginning of last year. It was actually down, albeit not as much as it was in the second half. There was an outright decline in the second quarter of last year as well. It was flat in the first quarter. Your Enterprise business was even worse from that perspective. What causes that to get back on track? What's new and different this year that's going to cause Enterprise in general, including Internetworking specifically, to see meaningful improvement?

I don't -- the Q2 number, Jim, where were we at in Q2? So we actually had -- I think if I remember we did around $32 million (multiple speakers).

Yes, Q2 was $32.7 million up from Q1.

And Q1 was?

$28.8 million.

The numbers I'm looking at, your Q2 business in June 2014 was down 6.7% year-over-year and it was 0.1% growth in March. (multiple speakers).

You're talking on a year-over-year basis.

There was no doubt that it was -- I think the difference, the disconnect we're having is we really did think that we were -- and we did see some movement coming into this year that made us believe that we were building momentum in that piece. It was -- the Enterprise business was also negatively impacted. We did do a product transition that hurt that. That was probably I want to say in general a couple of million dollars that impacted them this year where we started weaning down O&Ts that were developed in the Enterprise business and the Carrier piece started taking on responsibility for new generation O&T, so you saw a shift in O&Ts that negatively impacted their revenue because they basically got out of that business and started focusing more on business versus residential family.

I don't know what to tell you, Paul. I'm fully aware of the state of where that business is in 2014 and like I said, we've done a complete review. I think there has been softness in other companies that were selling into the same channel areas too. So some of it may have been segmental or the segmentation or the segment that is particularly selling into, but I would agree that that division needs to do better in 2015.

I'll pass it on. Thanks, guys.

Sanjiv Wadhwani, Stifel.

Thanks. Tom, I just wanted to revisit Title II regulations. I think there have been a couple of Tier 1s that have made comments about slowing down broadband upgrades, etc. depending on how these regulations pan out and understanding that your Tier 1 in the US is starting up in Q1, I just wanted to see if you could talk about the risks as you go through 2015 given all these things related to Title II that these projects might go through fits and starts as you progress through the year. Thanks.

That is without a doubt a risk that we have and I would characterize it as it's a risk in dealing with specific Tier 1s in general. Some tend to be more flexible in their operating plan than others and if you're dealing with a carrier that is flexible in the way that they implement their operating plan then there are risks that you have to be willing to take. And I would say that that's something that I have cautioned about on this call when we've talked about our Tier 1 potential probably every single time that I've mentioned the Tier 1 potential and I would say that's no different. So we have a particular risk that's highlighted in this year because of some of the things that happened last year and I think the thing that gives you solace is whether or not the particular projects that you're working on are projects that are of high priority that feel like they need to be done or projects that can actually be delayed without really hurting anything.

Our sense right now is that we are fixing a problem that is a real problem and that that problem will be funded and that that problem will move forward and it will make whatever cuts ended up being made in order for them to live up to their words on what they've said for capital. But that is absolutely a risk that could hit us at some point.

Got it. Is this risk more acute or less acute with Tier 2s and Tier 3s?

It is less acute. I hear zero about it in Tier 2s and Tier 3s. So it is -- you don't hear any of we're going to spend less because of Title II regulations. Now to be fair, it impacts them in a different way and it impacts them -- the magnitude of that impact is different. So I think in general they have less at risk. So maybe that's where some of the positioning comes from. But I have not heard that brought up in a Tier 2 account other than their particular stance on the issue, but not in any type of threatening way in regards to capital spend.

Got it. That's helpful. Thank you.

Bill Dezellem, Tieton Capital.

Thank you. You had mentioned I think in your opening remarks that you anticipated that Latin America would also show strength this year and that it did in 2014. Would you talk in a little bit more depth about what you saw in 2014 and then roll us forward to 2015 and what's going to be the driver?

Sure. I had mentioned that we had actually grown Latin America in excess -- I think I put in in excess of 30% and it was definitely in excess of 30%. And I think a couple things happened. One is we have a long-standing long relationship with a Tier 1 in Latin America. There is -- there's kind of a -- that business ebbs and flows, but there's always a constant level of activity and if you take into account that we do a lot of services there as well. So there is just ongoing revenue that comes from that customer and us continuing to work with them on rolling out either what they have purchased or what they are going to purchase.

One of the positive things that happened, there's been some talk about whether or not there would be another phase to the deployment we have. We did receive orders for the beginning of another phase of deployment with our fiber-to-the-node products, which we will be shipping this year. So that actually bolsters us even more. If you recall, we were -- the previous phase, which I think was called Phase 3 plus, was winding down and we were doing a lot of deployment and services in 2014 and now we have yet another leg that's been added to it. So that was a positive thing.

We also in 2014 added another Tier 1 carrier, albeit an MSO, in that area and they have started deploying their fiber products with us and we would expect that to pick up. So that's where that sense of strength comes from off of what was a really good year.

That is helpful. And that Tier 1 carrier was up and the driver of that increase in 2014, is that correct?

Yes, I would say that was -- my sense, I don't have their exact revenue number, but my sense was that was probably the bigger piece. But we did a lot of things with the other Tier 1 as well and like I said, those were more services related so you see maybe a negative impact on the gross margin line, but they did well as well.

Great, thank you.

Michael Genovese, MKM Partners.

Great, thanks. Just a quick one from me. Following up on Sanjiv's earlier question about the potential for delays at the Tier 1 this year, and given that you've spoken about that project in two pieces, the piece that you've been moving through the lab and into the field on and then a second more amorphous piece. I'm wondering is that second piece more at risk from some of these issues with CapEx and FCC decisions and that kind of stuff? Would you consider that second piece? Is there a difference between the first and second piece in terms of how much risk there is to CapEx delays as we move through 2015?

I don't know and I can't speak for where the mindset of any particular individual in the customer base might be. If you think about the second piece as being almost -- there are pieces that you could argue are reactive when you're going out and deploying high-speed services, whether that's fiber-based or not and then there are pieces that are more proactive and the way I think about it is the reactive pieces are where you're maybe fixing problems that you have or you are fixing particular marketshare items that are critical and then proactive pieces are where you're trying to go after an increased marketshare and kind of get in the front.

If you think about the nature of the awards that we're talking about, the first one in my view is much more fixing a problem and the second one has the potential, at least a large percentage of the second one is more proactive. So I guess my sense would be the answer to your question is yes.

Okay, that's helpful. Maybe another one, and I know this is kind of a remedial question because you have been talking about it since the beginning of the conference call, but could you just -- because I'm slow -- just help me understand the gross margins for the quarter and the guidance. The main factors you're saying are services and currency. Is there anything else in there that we should think about?

For the fourth quarter, those are the items.

And for the first quarter, it is FX currency.

Okay, so mix or pricing or any of that are not factors?

They are always factors -- no doubt, if we had higher prices, gross margins would be higher, but if you think about it from what we had been modeling and where our thought process is and what we have been voicing, those were the changes.

Got it. Okay, I appreciate it. Thanks.

Tim Quillin, Stephens Inc.

Thank you for taking my follow-up. I just had two or three quick questions. But one is on Carrier services, which you said was up 30% in 2014. Do you have a dollar amount or what percent of revenue it represented in 2014?

We do not at this point, Tim.

We can say it did not hit 10%.

Okay, okay, but maybe it hits 10% next year as you ramp up some of the turf vendor opportunities?

Yes, I think that's going to depend on the overall mix of services versus hardware shipments.

As you know, we have incremental revenue coming in. Our expectation is to have incremental coming in on the productline basis, but it could very well hit 10%. I hope it does hit 10%. I think that would be fantastic growth for that area.

Right. And then on investment income, I think that you always do a good job managing your investment portfolio. The realized investment gain in the quarter was relatively low versus historical standards. How should we think about -- and by the same token, your interest income was a little bit higher than maybe I modeled. Is there some kind of change within the cash portfolio or investment portfolio or how should we think about that as we go into 2015?

Well, the way I would think about it, Tim, going into 2015, if you look at Q3 in terms of the net other income and expense category, it came in at about $2.6 million. I would view that as a normal quarterly run rate as we go through 2015 and obviously we had the benefit of the working capital adjustment coming through Q4. So it really made sense to us to defer some of the things that we might typically do in a normal quarter if that makes sense.

Okay, and then just lastly, the other receivable has gone up over the past couple of quarters quite a bit. Can you remind us what's happening there and can that work its way down and drive some incremental cash flow in 2015? Thank you.

Well, we think it can, Tim and good question. So actually in the December balance, there is sort of three components there. First of all, part of that relates to the raw materials that we send to our EMS providers and bill them for and they pay those based on terms. So there's another piece in terms of value-added tax that we incur that we have to apply for a refund for. So that's built up as well, but we expect that that will begin to liquidate at a faster rate as we go through 2015. Also a third piece is that we mentioned the settlement on a 2012 acquisition. There was a receivable hung up there at year-end that has since resolved itself. We've been paid on it so that would reflect obviously a lower balance as we look at it today. So those are the elements that drive it, but we expect that as we go through this year that that balance will liquidate at a faster pace so to speak.

Okay, thank you very much.

David Fondrie, Heartland Funds.

Thank you. I wonder if you could just talk a little bit broadly about the deployment of gigabit networks and how you think that might influence your business going forward over the next year. Obviously, Google has made a big splash in it and I think some of the carriers have responded. Do you think all those will go forward and just your participation in that?

Sure. So I had mentioned in my notes that one of the big drivers for this year is expected to be fiber-to-the-prem and I would say the majority of those -- maybe not the majority, but a large percentage of those shipments are either gigabit fiber coming out the door or they are gigabit fiber-capable versus standard GPON, which may itself can be used to deliver different speeds and many times is deployed at less than a gigabit. It has been a -- it is in my view a catalyst for the industry and I think it's a very good thing.

We have been participating at the Tier 2 and Tier 3 level for some period of time. There has been less interest in the Tier 2 space and looking at gigabit fiber or gigabit Ethernet in general up until maybe the second half of last year where there were some carriers that were interested in it, but I would say the audience got much broader and pretty much encompasses all the Tier 2s at this point where they are looking at gigabit either for specific regions or specific cities and in many, many cases, they are looking at gigabit Ethernet to deploy to businesses and I would say almost all of them have now either plans in the works or plans that they are planning on deploying this year. So we do see that as a positive catalyst for the industry. Typically as you raise speed levels, everything below that speed level also has to increase by some level. So it's just -- it kind of lifts all tides over time.

In the Tier 1 space, that movement happened earlier. We've seen one of our Tier 1s start deploying gigabit Ethernet with us and with others that they deploy in their network last year. That actually was kind of a negative at the first part of last year and then in the second half, it got fixed because we weren't fully approved in that carrier, but that did get fixed and we expect that to be a catalyst in 2015.

And then the other large Tier 1, without a doubt that is high on their mind of deploying and we're right in the middle of those discussions and that's part of this second phase rollout that we've talked about before.

Thank you.

(Operator Instructions). George Notter, Jefferies.

Hi, guys, thanks very much. I guess my question on your large Tier 1 project in the US, I think this starts to touch on a question from earlier, but I guess I'm trying to understand the situation there. It feels like there's a lot of CapEx pressure among that particular carrier. Has anything changed with regard to that Phase 1 portion of your opportunity there? Has it been scaled down or pushed out timing-wise? Any changes there at all over the last quarter or two?

So in relation to the capital discussion, no. As you know, I think it was probably somewhere around the third-quarter call when I talked about it being pushed out, but not since that point in time.

Got it. Okay, great. That's all I had.

And I do not know of any -- needless to say, we're asking every day and probably three times a day about where they are with the program because we're working with all the direct engineers. So I haven't seen any pressure. We do believe this is high on their priority list to get done.

Got it. Okay. And is there approval then already for 2014 capital budget to be allocated to this project specifically or is that something that you're still waiting on?

Their budget approval cycle is -- the way that they typically -- well, I shouldn't say typically because I only deal with specific people in there. The budget approval cycle at this carrier is a fairly fluid thing, as you probably know and their budget cycle is fairly fluid. So what I can tell you is right now everything looks like we're moving forward. What they end up budgeting for the second half of this year or for the fourth quarter this year I don't know.

Got it. Okay. Fair enough. Thanks very much.

All right, I think that pretty much wraps us up. So thank you everybody for joining us and we look forward to talking to you next quarter at this time.

This does conclude today's teleconference. You may now disconnect. Thank you and have a great day.