ADTRAN Holdings, Inc. (ADTN) Q1 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to ADTRAN's First Quarter 2012 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 core products, the degree of competition in the market for such products, the product and channel mix, component costs, manufacturing efficiencies and other risks detailed in our Annual Report on Form 10-K for the year ended December 31, 2011. 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, Josh. Good morning, everyone. Thank you for joining us for our first quarter 2012 conference call. With me this morning is Jim Matthews, Senior Vice President and Chief Financial Officer. I would like to begin this morning by discussing, in more detail, our Q1 results, trends for the second quarter, along with some comments on other areas of focus. This will be followed by Jim's report, and then we will open the call up for questions. As presented in last night's press release, ADTRAN achieved revenues of $134.7 million in the quarter. As we stated in our March prerelease, 2 issues impacted us in the first quarter. The first was a slower than normal start to the seasonal buying pattern at our larger carrier customers. And the second, which had a greater impact, was a delay in both the start and ramp of orders from one of these customers due to new systems implementations. This negatively impacted revenues for the Carrier Networks division in the quarter. Due to the unusual nature of this quarter, I would like to give you more specifics as to the activity we saw. Order activity for the 3 largest domestic carriers had a slow start affecting all product areas, but most notably, Broadband Access and HDSL. During the month of March, we saw an improvement in Broadband Access and more specifically, our Fiber-to-the-Node products in orders and shipments due to the finalization of the systems implementation I previously mentioned. In addition, order rates from all 3 Tier 1 carriers saw improvement. Looking forward into the current period, we expect the activity we saw in March will continue through the second quarter and we will continue with sequential improvements at all 3 Tier 1 carriers. We expect this to materialize as increased shipments in Broadband Access, HDSL and optical products to Tier 1 carriers. Moving on to Tier 2 carrier customers, the first quarter ended on track versus our original plan. Order rates and shipments continue to build throughout the quarter, matching our expectations for seasonal trends and planned project builds. For Tier 3 customers, again, as expected, we saw an increase in shipments due to Broadband Stimulus awards and earlier market share gains allowing the quarter for this customer segment to track with our original plan. For both our Tier 2 and Tier 3 customers, we expect that order rates and shipments will continue to build momentum in the second quarter as a result of earlier market share gains and increasing shipments related to Broadband Stimulus. International revenues came in stronger than expected, with order momentum in shipments building through the first quarter as well. For our International customers, we expect order activity will continue to increase in the second quarter in all International regions. From a product category perspective, our Broadband Access category came in slightly below Q1 last year as a result of the issues discussed earlier. However, during the quarter, we saw the benefit of continuing International growth, with strong order flow and revenue contributions from Fiber-to-the-Node products. During the quarter, we added over 25 new Total Access 5000 carrier customers globally, tracking the performance we have seen over the last several quarters. Also during the quarter, we saw our first shipments of Optical Network Edge products to a Tier 2 carrier. Our Internetworking category grew 25% over the prior year, as we continue to refine our expanding domestic dealer base and we benefited from market share gains with service providers. Also during the quarter, we saw awards from both Tier 1 and Tier 2 carrier customers as they roll out cloud-based hosted services, which included our IP gateways, routers, switches and IP PBX products. In addition, we were able to obtain our first Tier 1 carrier certification for our Bluesocket wireless LAN products, with several more carriers at different points in their approval process. As most of you know, we announced in December our intentions to acquire the NSN Broadband Access business. The planned acquisition of NSN Broadband Access business helps ensure our long-term success and our efforts to evolve ADTRAN into a global solutions provider. It is still our belief that in the years to come, ADTRAN's growth will be influenced by our ability to expand our geographic presence and our relevance with Tier 1 carriers around the world. The NSN Broadband Access business, with its entrenched incumbency at large carriers outside of North America, will without a doubt, substantially accelerate our initiatives and increase our odds of long-term success. Today, I can report to you that the transaction is on track, with an expected close date of May 4, 2012. For the remainder of 2012, we expect revenues from our Total Access 5000 family and our Fiber-to-the-Node platform will continue to grow meaningfully across all carrier classes, as spending patterns recover significantly from Q1 levels. This growth will be driven by fiber deployments, Ethernet migration and higher-speed broadband requirements, and as carriers seek cost-effective ways to accelerate deployments. We believe Internetworking will continue to maintain its current positive momentum with benefits from market share gains and new product offerings, such as our virtual wireless LAN offering. During 2012, we will continue to see benefits of carrier optical deployments for bandwidth upgrades, with acceleration of our Optical Networking Edge and cell site gateway products. In summary, on a macro level, increasing competition driving accelerating global broadband deployments and intensive upgrade of mobile infrastructure, channel expansion in our Enterprise segment, meaningful sales initiatives outside of the United States, government and regulatory initiatives around the world, the benefits of our planned acquisition of NSN BBA business, coupled with an innovative diverse and expanding product portfolio lead us to be optimistic about our company's future. I'd now like Jim Matthews to review our results for the first quarter 2012 and our comments on the second quarter of 2012. We will then open the conference call up for questions. Jim?

Thank you, Tom, and good morning, everyone. Revenue for the first quarter was $134.7 million compared to $165.5 million in Q1 of 2011. Broadband Access product revenues for Q1 of 2012 were $49.5 million compared to $51.8 million for Q1 of 2011. Internetworking product revenues for Q1 of 2012 were $41 million compared to $32.9 million for Q1 of 2011. Optical product revenues for Q1 of 2012 were $14.3 million compared to $20.9 million for Q1 of 2011. Carrier Systems revenues for Q1 of 2012 were $71.3 million compared to $86.8 million for Q1 of 2011. Business Networking revenues for Q1 of 2012 were $43.1 million compared to $36.4 million for Q1 of 2011. Loop Access revenues for Q1 of 2012 were $20.3 million compared with $42.4 million for Q1 of 2011. HDSL product revenues for Q1 of 2012 were $19 million compared to a $40.9 million for Q1 of 2011. As a result of the above, Carrier Networks division revenues for Q1 of 2012 were $96.7 million compared to $132.4 million for Q1 of 2011. Enterprise Networks division revenues for Q1 of 2012 were $38.1 million compared to $33.2 million for Q1 of 2011. International revenues for Q1 of 2012 were $18.3 million compared to $12.4 million dollars for Q1 of 2011. To provide the reporting of each of these categories, we have published them on our Investor Relations webpage at adtran.com. Gross margin was 55% of revenue for Q1 of 2012 compared to 56.6% for Q4 of 2011 and 59.7% for Q1 of 2011. The lower gross margin compared to Q4 of 2011 was largely attributable to lower efficiencies due to lower volumes in the quarter. This issue will resolve itself as volumes return to anticipated levels. The lower gross margin compared to Q1 of 2011 was largely attributable to customer mix, a higher mix of services-related revenue, including cabinet shipments and lower efficiencies due to lower volumes in the quarter. Total operating expenses were $57.9 million for the first quarter of 2012 compared to $58.1 million for the fourth quarter of 2011, and $53.2 million for the first quarter of 2011. The increase in operating expenses from Q1 of 2011 to Q1 of 2012 was primarily attributable to expenses related to the planned NSN Broadband Access acquisition, amortizations in connection with the Bluesocket acquisition, Bluesocket operating expenses and increased staffing costs. Acquisition-related expenses, amortizations and adjustments related to Bluesocket and the planned acquisition of Nokia Siemens Networks Broadband Access business net of tax were $1.3 million for Q1 of 2012. Stock-based compensation expense net of tax was $1.9 million for Q1 of 2012 compared to $1.6 million for Q1 of 2011. All other income, net of interest expense for Q1 of 2012 was $3.9 million compared to $3.8 million for Q1 of 2011. The company's income tax provision rate was 35.4% for the first quarter of 2012 compared to 30.7% for the first quarter of 2011. The tax provision rate for the first quarter of 2012 does not include benefits from research tax credits due to delays in legislation. The tax provision rate for the first quarter of 2011, included benefits from research credits and increased benefits from employee stock option exercises. Earnings per share assuming dilution for Q1 of 2012 were $0.20 compared to $0.52 for Q1 of 2011. Non-GAAP earnings per share for the quarter were $0.25 compared to $0.55 for the first quarter of 2011. Non-GAAP earnings per share exclude the effect of acquisition-related expenses, amortizations and adjustments related to the acquisition of Bluesocket Inc. and the planned acquisition of NSN Broadband Access business and stock compensation expense. Inventories were $95.8 million at quarter end compared to $87.8 million at the end of Q4 2011. The increase in inventory levels for the quarter was a result of a delay in both the start and ramp of orders from a large carrier customer due to new system supplementations. We expect inventory levels will decline for Q2. Net trade accounts receivable were $74.8 million at quarter end, resulting in DSOs of 51. Unrestricted cash and marketable securities net of debt totaled $504 million at quarter end, after paying $5.7 million of dividends. Due to the book and ship nature of our business and the timing of near-term revenues associated with large projects, it is our policy not to give specific guidance for the quarter or for the year. However, we would like to give color to help you formulate your views on our near-term business outlook. For the second quarter of 2012, we anticipate organic revenues will increase at a rate greater than historic seasonal trends because of the slower than normal start we saw in Q1. We expect revenues for Q2 will increase in the low- to mid-20s percentage point range on a sequential basis. We expect organic gross margins will improve for the second quarter and will be at the low end of the high-50s range percent to revenue, as we saw in the fourth quarter of 2011, based on returning to anticipated revenue levels. Consistent with the view we gave last year, we expect operating expenses for the second quarter of 2012, not including acquisition-related amortizations and expenses, to hold firm at the third quarter 2011 level. Acquisition-related amortizations and expenses for the second quarter of 2012, we expect to be in the range of $1.5 million to $1.8 million. Also, as a result of delays to extend legislation for research tax credits for the 2012 year, we anticipate our tax rate for the second quarter will be in a range of approximately 36%. We believe the larger factors impacting the organic revenue we realize for the second quarter of 2012 will be the following: the macro spending environment for carriers and enterprises; the adoption rate of our Total Access 5000 platform; professional services activity levels, both domestic and International; upgrades for mobile broadband infrastructure; and the timing of revenue related to Broadband Stimulus projects. As Tom said earlier, our planned acquisition of the NSN Broadband Access business remains on track. After the close of the transaction, we anticipate announcing a separate conference call to provide more details of this transaction and our views of the effects on the second quarter of 2012. Tom, back to you.

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

[Operator Instructions] And we will first go to the site of Rich Valera with Needham & Company. Richard Valera - Needham & Company, LLC, Research Division: With respect to the 2Q revenue levels that you've suggested you could hit, I'm wondering how much of that sort of being below where you'd be historically off of your original 1Q guidance that you'd been at 175 and typical, say 10% seasonality, would put you around 190. So the delta there, is that just a timing issue in your view in that some of these various carriers and perhaps the system issues at one of your customers are not fully resolved? And do you expect to be back sort of in line with your historical levels by the time you get to Q3, if there's any color you can give on that?

Well, let me -- I'll let Jim talk about the Q3 piece -- let me just about where we are with the customer issues. They did start -- the one customer that had the larger issue with the system implementation really started coming on in the, let's say, first week or so of March and progressively got better. And we would still expect some improvement as we go through Q2. So that probably gives you some feeling as to it's not -- it's not as if we're hitting the ground running at the beginning of Q2 at 100% because I don’t think we are. So that will get better through the quarter. They have projects and they have timing and as to exactly when and when they catch up, and to be honest with you, I really don't know because they're still doing some work on trying to get back up to 100%. Jim, do you have any other color on that?

Rich, in terms of your question in regards to the third quarter, we certainly do intend to give a view on the third quarter on the next earnings call. However, we wouldn't anticipate a sequential increase, seeing a sequential increase from Q2 levels in Q3. But again, for us to comment on that at this stage, I think would be premature.

You said we would expect to see it. We typically see that increase in Q2 to Q3, we would expect that again this year.

That's correct. That's correct. Richard Valera - Needham & Company, LLC, Research Division: Okay. That's helpful. And then on the NSN acquisition, just wondering if anything has changed relative to some of the commentary you provided on that. On the original call for that, I think you talked about or implied that gross margins initially could be perhaps in, I think, the low-30% range and then moving up as you enact cost cuts and take some other actions there. And I think you gave a preliminary revenue range. Is there any reason to change those or would you say those still apply?

We don't see any reason to change those at this point, Rich. And again, we'll give further comment on the call specifically to the acquisition after we close. But again, we don't see any sort of large enough change to talk about at this point.

We will next go to the site of Michael Genovese with MKM Partners.

So it sounds like on that one Tier 1 carrier with the systems issue, you gave specific commentary that they came back in the 1st week of March. What about at the other two Tier 1s? I mean now that spending has returned, is it returning to a normal level from your view? And then secondly, on the -- well, if we switch over to the European market, I mean, you may want to hold this off to the next call, but given that BBA is going to become such an important part of your revenue and your mix in Europe is going up, do you have any kind of view at this point on the Broadband Access market in Europe this year?

Sure. We saw progressive improvement through March, really, with all 3 carriers. As to whether or not they're actually at what we would expect their run rate to be at, my sense would be no. I mean, we really did see a slow start across all 3 carriers. One of them was more dramatic than the other. One of them does more business with us than the other 2. But we saw that slowness across the board and we could absolutely pinpoint the exact issue at one carrier. The other 2 carriers, it felt like it was more about when capital budgets got released for the particular thing that we were working on with those 2s, and it was definitely later in the quarter. And I would say that they are still all kind of recovering as we entered the second quarter. As far as the European market, there is a lot of activity. As you can imagine, we have stepped up our presence there with people on the ground and understanding the different customer basis and understanding what all is going on. We had some presence for some number of years, but our intelligence has gotten substantially better. And there are major carriers that are tackling the issues of what they're going to do with Ethernet migration and expanding broadband access. So I would say the activity there is -- every bit as, as strong as the activity that we've seen in the U.S. over the last couple of years.

Great. And just a very quick follow-up. Is there any risk in your view from a strike here at North America at one of the Tier 1s, could that possibly impact, say, HDSL revenues in the second quarter depending on how that develops?

So HDSL, I think Jim had mentioned, HDSL was very low. And getting back to the previous question on the Tier 1 carriers, 2 of those 3 carriers are strong HDSL customers. So we saw an impact -- that was some of the impact that we saw in Q1. Could it impact in the second quarter? I think that is not a worry especially from the levels that we saw in Q1 and we're not expecting a big rebound in our numbers on HDSL, specifically in Q2. So that is not a worry that we have.

Next we will go to the site of Nikos Theodosopoulos with UBS.

Just a couple of quick questions. Can you comment on 10% customers in the quarter?

Jim?

Nikos, this is Jim. We had one.

You had one, okay. And then on the international strength that you saw this quarter, how broad-based was that? How much of it was your large deployment in Central America versus a broader rollout and acceptance of your products, can you comment on that?

Yes. I would say in general, in the International market, we saw kind of normal Q1 seasonality, except for that Latin American customer, where we just saw -- just increasing demand that surpassed any seasonality that we would have expected there.

I see. Okay. Okay. And just on the Broadband Stimulus. Typically, you give some information on what kind of revenues you think it contributed and how do you see the ramp over the course of the year now that you have one quarter behind you on that?

Well, yes. I mean, we saw a ramp, just to kind of refresh everybody's memory. We saw the ramp really start in Q3 of last year. It was albeit fairly small in Q3 and we expected that to incrementally increase through this year. We saw an increase again in the fourth quarter. And again in the first quarter, we saw an increase in shipments versus any prior period, and we would expect that again through this year. Not only was that ramp in shipments but we also saw a fairly significant ramp in order rates too, which have yet to ship. So I would say it's pretty much on track with what we were expecting.

Great. And just one last question, it's probably not that material at this point, but you mentioned you signed one carrier customer for your wireless LAN solutions as a reseller. Can you comment on the momentum you think you're going to get from the carrier channel for that product consistent with the rest of the networking piece that you've had some pretty good success so far?

I'll tell you it's a really exciting piece, but I will tell you we have work to do. So there are multiple avenues that we think the Bluesocket product set can play in a carriers network. One is, is they just go out and sell hosted wireless access to business customers. And then the other is cellular offload. And then the third, which is the piece that we're talking about specifically here is reselling to enterprise customers. So all 3 of those have kind of their own trajectory and all 3 of those have different R&D requirements associated with them. Needless to say, we've got the third one done, but we have work to do on the other 2. And most of that work will happen, will occur this year. So we're really excited about the opportunity. I think it's something that in any of those 3 that you can get are very meaningful. But I would also tell you, to just caution you, that we still have work to do. But we're very excited about the carrier piece of that.

Our next question comes from the site of Barry McCarver with Stephens.

I think just one quick question for Jim. If you look at the margins in the first quarter, how much of the cost may have been a little bit more variable once you found out what the order flow was going to look like? And is there any idea -- could you give us any color on what a more normalized margin rate would have looked like without that bump in the first couple of months?

Well, yes, let's start with gross margins. If I look at the movement in gross margin percentage from the fourth quarter to the first quarter on a sequential basis, that percentage point movement was really based on lower volumes, okay. So as volumes return to anticipated levels for Q2, I would expect gross margins to be just a little bit north of 56%. So hopefully that gives you a view there. And if you look at the OpEx line, again, if you look at what we did, where we ended up in Q3 of last year, which was in the range of about $58.4 million, now albeit about $1 million of that $58.4 million related to acquisition-related activities, okay. So the baseline that we're looking at in terms of non-acquisition-related expenses, call it $57.4 million. And if you add on to that, the acquisition-related expenses that we anticipate for Q2 being in the range of, call it, $1.5 million to $1.8 million, that would be our expectation on the OpEx line, okay. So you can draw your conclusions for Q2 in that regard. Is that helpful?

That's very helpful. And I guess just one follow-up for Tom. In regards to the NSN acquisition that's about to be put to bed here, are you seeing any movement by competition in some of these international markets? Have you lost any headcount in NSN or any step-up from some of the competitors in those markets that might want to take advantage of this transition?

No. We haven't seen it from really when we got involved in a meaningful way. And I think the reason for that is, is that much of the customer base -- I think most of them view this as a positive thing. I think the fact that the BBA business has been kind of had a question mark around it for a period of time, this actually put that to bed. And so I think a lot of that kind of pushing by other customers or by other competitors had been going on for some time. And I think that the customers that we have today are fairly secure. Now we have to make the transition, we have to show them that we're going to be the kind of partner that they want going forward. But I think, I wouldn't say that it's increased in any meaningful way.

Next we will go to the side of Jim Suva with Citigroup.

This is Asiya Merchant on behalf of Jim. Can you provide any more color on Broadband Stimulus, how much that contributed, if you can, on the Q1 results? And then as well as a follow-up on market share gains, if we can have some more clarity on where that's happening in your product portfolio?

Okay. So on the Broadband Stimulus piece, I would say it's incrementally up from Q4, but it was still single-digit millions. And we would expect that to grow again in Q2. As far as market share gains, one of the numbers I think I gave in my discussion was 25-plus customers, actually over 25 customers. The majority, probably, I'm going to guess here because I don't have the actual customer breakout, but 70-plus percent were in the U.S. and then the rest were outside of the U.S. Did that answer that question for you?

And then on the product side, is that still happening on the Business Networking side and partially on the Broadband Access side or...

Okay. So what I just gave you was a Broadband Access kind of customer acquisition piece in the quarter. What we saw in the Enterprise segment was there were actually several positive things that happened during the quarter. One is we had secured some business last year in our Enterprise segment and some of that business actually came online during Q1, so that was actually good to see. And then we had actually just won some additional Enterprise customer awards, but that's pretty much an ongoing piece. I mean, the real movement up that's really noticeable is when you actually win a carrier business where they're using you in some type of hosted service or managed service. But we did see some of that come online in Q1. Does that answer your question?

Okay. Yes, that was very helpful. And then, well, I don't expect you to provide full year guidance at this point, but just looking at the numbers and putting some seasonality around the 3 and 4Q, I mean, excluding the NSN acquisition, are we still looking at any kind of growth profile for 2012 organically? Just given the sharp downtick you've had in 1Q '12?

Well, Asiya, this is Jim. I think a lot of that is going to depend on the rate that the Tier 1's come back as we go through the year. So I really think honestly the jury is still out in that regard, although we did talk about a range for Q2. We expect another sequential increase to happen in Q3. We'll talk more about that on the next earnings call. But again, I think the jury is out in terms of whether or not we expect growth this year.

And let me just break that down just maybe one level lower than that. Our Tier 2 customer base, we expect to expand this year off of last year. Our Enterprise products, of course, we expect to expand this year off of last year and international, we expect to expand, excluding BBA, we still expect to expand this year versus last year. So what Jim is saying, which is really -- it's the recovery rate of the Tier 1s is, I think, exactly the right way to frame it.

Your next question comes from the site of Simon Leopold with Raymond James. Simon M. Leopold - Raymond James & Associates, Inc., Research Division: Sorry, just learning how to work my mute button. So I wanted to ask a little bit about the regulatory environment and what you're seeing and if we could put it in context. So the first part of this question is to understand what portion of your customer base is typically Tier 2 and Tier 3 customers, basically U.S. and smaller than CenturyLink is what I'm looking for. And what you're hearing in terms of their concerns related to the changes in the USF funding to the Connect America fund? And then I've got a follow-up.

There's a broad mixed opinion on the Connect America fund and whether or not that's beneficial, I'm sure you're hearing some of the noise or some of the debate is the proper way to phrase it as well. I think several of the Tier 2 carriers are very much in favor. And in fact as you're aware, they had a very strong voice in how it was craft or how it has been crafted. I think that they've been vocal in what they thought was necessary. Some of the other carriers and specifically some of the Tier 3 carriers are less happy about what's happened there, but I would say it's a mixed opinion. It depends on how you run your business and what you think you want to do to expand going forward. Simon M. Leopold - Raymond James & Associates, Inc., Research Division: And as a portion of your overall customer base, is it fair to think of this group of carriers as about 25% of your business?

Tier 2s and Tier 3s? Simon M. Leopold - Raymond James & Associates, Inc., Research Division: Yes.

As you know, I mean, because I think we've tried to answer this 2 times, it's something we don't specifically break out. But I would say that it's -- I just don't have that breakout in front of me anyway. As we have progressed through last year and the year before and definitely this year, it has continued to grow at a fairly aggressive clip. And this year, with some of the Tier 3s that we're bringing on for the first time in some of our BBA business -- Tier 2, excuse me, I would expect it to grow again. So I would say you're probably -- without having the number in front of me -- it's a meaningful piece of business. Simon M. Leopold - Raymond James & Associates, Inc., Research Division: Okay. And then the other topic I wanted to touch on was the Nokia Siemens business, how it exited 2011. When you had announced the deal, it was prior to the close of the year for them. And if you could just give us some update of how their business fared after the announcement was made, just any quantification you could give us?

Simon, it's too early for us to do that. There is a disclosure requirement that we disclose last year's information in terms of revenue and pretax income and that will be done in the 10-Q once we close. And I'm afraid that's all we can say at this point. Simon M. Leopold - Raymond James & Associates, Inc., Research Division: And you're still I hope planning on hosting a conference call to discuss the details once the deal does close?

Absolutely.

Absolutely.

And the next question comes from the site of Blair King with Avondale Partners.

I have a question, Tom, perhaps for you. It's been sort of -- you talked a little bit about this in your prepared remarks and also it's come up a couple of times I think on the call, but maybe if you could just talk more broadly about, barring Q1, if you could talk more broadly about the growth rates that you would expect in your business through 2012 and then even to the extent that you can, the opportunity into 2013, that would be helpful, if there's any way to frame just kind of your thought process on what the opportunities look like.

Sure. So I'll start with -- first of all, the Tier 1s are the piece that I think has got some unknown, it's probably got -- we're less certain about that than the rest of the business because of where we are and the fact that, basically the Tier 1 business that affected us in Q1. If I look at the Tier 2 business, we have 2 positive things going on. One is, we have an expansion that is continuing on because of merger-related activity or acquisition-related activity. And we expect those are fairly definitive projects that have linked through and that last throughout this year and into next year. The second piece we have in the Tier 2s is, are there where a -- some of those customers actually received fairly meaningful Broadband Stimulus funds. And those projects will really start in earnest this year. And we will start to build on the shipments of those, I would say we did very little of that in Q2. For the Tier 2s we did some, but it was fairly -- I think, it was less than 10% of the total number that we did with Broadband Stimulus in Q1. And we would expect that to grow at a meaningful clip through this year, so that's a real positive in that segment. In the Tier 3 segment we have the benefit of the fact that it's a new segment to us. So when I had said that 70-some-odd percent of those Tier 3s were, I mean, of those Tier 5000 customers were Tier 3 customers. And the fact that, that has been that 25 to 30 new customers every quarter for the last, I don't know, maybe 2 years or so, that has been squarely in that Tier 3 space, all of that is incremental business to us. And then we have the added benefit of the fact that several of those customers, not all, but several of those customers have received Broadband Stimulus awards as well, and those are coming online. So we're fairly confident that, that segment, and we're very confident that, that segment should post a very strong year this year. And as you know, those builds go on into 2013. The other incremental piece to us is we're doing a fantastic job at this point, with our international business. Not only is Latin America been very strong last year, and we expect actually a stronger year this year in Latin America than we had last year. And I think most of you know, it was a very good year last year. We expect to see the same kind of trends we saw through 2011 across the globe. So every region grew last year. We fully expect every region to grow this year. And that should be a strong benefit. Enterprise business has been tracking along now for 2 years at a fairly solid growth rate. And we see no reason for that to change with the acquisition of Bluesocket and the capabilities that brings. There's just no reason why we wouldn't -- why we would lose any confidence. I won't say that, that necessarily changes the game in a short period of time, as you know these things take some time, but we see nothing -- we don’t really see any strong headwinds there. Finally, we introduced several new products on the Optical side. Our ONE product, which really helps cement us into a different space than where we were traditionally in the Tier 2 carriers and in some of the larger Tier 3s. And of course, our wireless gateway products, which we've really started shipping towards the tail-end of last year. I hoped that didn't sound like too much of a commercial, but did that answer your question?

Yes. It really did help a lot, appreciate it. Maybe one last follow-up in terms of just maybe more specific question with respect to the Tier 1 optical opportunity that you had available to you in 2012. Has that panned out or is that still in front of you?

It is still in front of us. We are in, what I expect to be the final field trial. It's actually a customer, we're actually bringing up live on customer traffic. I think it started actually at the end of last quarter, so that's still in front of us.

And next we will go to the side of Jeff Kvaal with Barclays.

Tom and Jim, I have a question for each of you, if that's okay. I think, Tom, would you mind drawing on your history and your expertise in the carrier spending. It seems to me that anecdotally, what we are doing in the first half of the year with the Tier 1s anyway is, certainly, obviously lower than last year, which was pretty evenly split first half, second half, but even lower than perhaps than we have seen in prior years when the spending wasn't as balanced across the halves of the year. What I'm getting at is, is it possible that the flattish, this modest growth budget that we've seen from the Tier 1s end up not being quite the right number. And then secondly, Jim, for you, could you talk a little bit about how much of the broadband project revenues is slipping into the second quarter? How much is in the guidance? That would be fantastic.

So as far as whether or not we're seeing this year be different in the Tier 1s than we have seen before, the answer is yes. I mean, we have not seen a delay in spending with the Tier 1s that was this far into the quarter, really, for quite some time. Like it's been many years since I've seen anything like it, probably back, and I don't want to -- let's just say it's been many, many years since I've seen that kind of slow start. Now to try to overlay that onto total carrier spending I think would -- I would not be comfortable with because we play in very specific things with the carriers. And carriers, many times, will focus on the projects that are important to them at the time. And if you're in that window, you do well. And if you're not in that window, you do less well. So I don't want to say that, that's an overall encompassing statement. But I will say from our perspective, the first quarter was definitely something we hadn't seen before, and it was different than what we saw last year or any time in the recent future. Jim, do you want to...

Jeff, in terms of your question on Broadband Stimulus for the second quarter, as Tom said before, we do expect to see a sequential increase in Q2 from Q1 levels. We did say that Q1 levels was in the single-digit million range, so hopefully that gives you enough color in that regard.

I think his question was also about -- it was more of the uptick. I think if you look at the seasonal uptick that we typically see from Q1 to Q2, then -- I mean, there's no reason for us not to believe that would have been the normal seasonal uptick. So to answer how much of it was kind of back end from Q1 pullback, I think that's fairly easy math to do.

Next we will go to the side of Ehud Gelblum with Morgan Stanley.

Couple of questions. First of all, I want to dig further into some of the Tier 1 issues and the bounce backs and the slowdown that happened in Q1. Do you get the sense that the Tier 1 budgets have remained relatively unchanged and by definition, the fact that spending was as weak as it was in Q1 just means that by definition it has to ramp hard as you go through the year or do you think that we just sort of lost revenue or lost buying opportunity in 2012? Because I'm curious as to how it would look because you notoriously have a lower Q4, but if in fact, numbers haven't really -- total spending hasn't really changed that much, then we may end up having a much more of a bunched up Q4 and probably not the same weakness in Q4 that we have in past years. Do you have, get a sense as to how that looks?

I have a sense that -- just from the conversations I I've had. So the conversations I've had is, literally, it is related to slow start to spending and that nothing fundamentally has changed in the projections. I will tell you that -- I mean, I know you know this, I have been here before where it is -- if you see a slowness in a period of time and there is talk about catch up, sometimes that catch up doesn't happen and budgets get modified. So I'm just skeptical as to whether or not we would see a substantially-improved fourth quarter because of that. I've seen that happen both ways, but I don't think it's a guaranty. But what I have been specifically told is there's a delay in start and no change in plans.

Interesting. Okay. So along the same lines, did you get a sense of this delay -- first of all, can you give us any insight, what did you learn in terms of talking to your customers about the source of the delay and why, obviously, with that one customer there was an actual reason. With the other 2 maybe less clear. Did you get a sense as to why they were delaying and was this a planned delay or were the network engineers that you sell to, were they just as frustrated by their inability to buy, as you guys were to sell, because they come up from on high and they were ready to go? Or was this planned and they knew going into January 1 that there would be delay and they could play golf for the first 6 weeks of the quarter?

Yes. I don't think it was a -- it's a fairly subjective question to be honest with you as to -- the people that are actually, that we're selling to on a daily basis, I don't think get a sense as to whether or not it was a planned or not planned thing. The general conversations I've had is it wasn't a planned thing to actually delay it, it just took that long to actually get it done.

Okay. So it may not even have been planned on higher levels, it's just there was some extra levels of complexity that just -- the intention was there to start early but...

Yes. That's a fairly -- I mean, like I said, I mean that's a fairly-nuanced differentiation there in trying to read a conversation. My sense is, it wasn't any specific planned thing, it just took that long to get done.

Sure. But that's actually interesting because it speaks to what their intention is for spending for the rest of the year as I try and look at it.

But here again, I would not -- it's a fairly-nuanced piece, so I wouldn't read too much into that.

Okay. Are your broadband -- obviously, Broadband Access was hurt a lot, again, more so from this one customer than necessarily from the other 2 but equally so. Is your Optical business, was that impacted the same as the Broadband Access business from the slowdown of the Tier 1s or is that -- were they kind of impacted differently?

They were impacted. But if you would rate them, I would say it would fall behind the 2 that we mentioned more specifically was Broadband Access, which was a substantial impact. And then secondarily, HDSL and then third in that line would be Optical Access.

Okay. If we look at Optical Access, is that going to bounce? What is the right number for that? It's come down, obviously, from low- to mid-20s of several quarters ago to now to mid-teens. Does that go back to the mid-20s or is the use case perhaps not as strong as it was?

I think the unknowns on Optical Access are going to be -- first of all, we have some new products coming out with wireless backhaul and ONE and things that will actually benefit it, but those are longer-term plays. And then we have an uptick, potential uptick with a Tier 1 that's going through an approval process right now for wireless backhaul and I think that's a very near-term thing. So I think that's really going to be the case as to what happens in the near term with our Optical Access product line.

Okay. And then finally, on the buyback or the lack of buybacks. Did you guys consider buying back stock when the stock was cheap? How do you look at your buyback strategy as the stock has kind of moved around that between the high-20s and the high-30s? Is there a spot at which you will get aggressive or is there...

Well, first of all, we have very specific blackout periods. So just whether or not we think the stock is cheap, if it's in the blackout period we cannot execute on it. But having said that, we have what 5 point...

5.8 million remaining in the current authorization, that's shares.

And we have a history of buying at specific level, which are very public and our blackout period is over, I guess on Friday.

On Friday.

Okay. Last question I actually wanted to tack on, was Frontier had a press release a couple of weeks ago that they'd finished their provisioning system conversion a couple of months earlier than they anticipated off of the Verizon systems on to their own. Have you seen any change in their order behavior because of that?

I don't want to get Frontier upset with us. Well, let me just say, Frontier is a very good customer of ours. I've seen no change in behavior because of any press release and we try to stay very much aligned with what their project plans are, and I don’t know of any deviation in project plans.

Next we will go to the side of Jonathan Kees with Capstone Investments.

I have just a couple. One is with regards to the balance sheet. Jim, you talked about inventories would be going down into Q2. How about DSOs? DSOs are kind of high for the quarter. Can you talk about one, why they were high and what's the trajectory for that?

Yes, Jonathan, good question. So they were higher Q1 this year versus Q1 last year and it was primarily related to the linearity of revenue. And as we said in our comments, the order and shipment levels picked up quite a bit in March, okay. So that's what would have contributed to the higher DSOs in the March quarter. In regards to the June quarter, typically we see better linearity so to speak. So that would provide DSOs lower, typically, than what we see in Q1, okay. So we would expect for DSOs to trend down in Q2.

Okay. So the cash cycle should be shortening in Q2, it sounds like?

We think so. And also, as we said in the comments, we expect inventories to move down as well as we correct that situation or see the correction in that situation, fairly close to the levels that we saw in Q4, on inventories.

Okay. Great. And then the other question I have is -- going back to Tier 1. You sold, I mean, this is just a broader question here. You've sold applications or at least have had interest in the applications off the TA5000 with the Tier 1s. I'm not asking you to identify the Tier 1s, so just speaking in terms of applications. But some of them have not been eyeing some of those applications, even though they've expressed interest in doing that. Is that still the same state especially with Q1? Is it putting on hold or have they just simply said we're not going to invest in those applications anymore? Or is it the reverse, are they looking at more applications off your TA5000?

So are we expecting a change in state, let me just answer that very directly. In Q2 or Q3, the answer to that is no. We have Tier 1s that have approved. Some of them are doing well and we are shipping to all the Tier 1s. Some of the applications are doing better than the others but there's no near-term change in state in those, although there are continuing discussions and I would say actually broader discussions about what they want to do and it's a matter of prioritization of where they're rolling Ethernet converged services out versus where they're rolling wireless services out. So I think all of them still are on the table. All of them are still planned in the network, but it's a matter of timing and I don't see an inflection point happening in the next 2 quarters.

Okay. All right. That's helpful. My last question if I can here. You have some products that are going through certification with the carriers, the ultra broadband. Sounds like you're gaining some traction with that one Tier 1, with the ONE product. Can you just update us in terms of where these products are in the certification process and the testing process for the carriers in general? And when do you think that'd be completed and when you can start getting revenues on those?

So in general, so the ONE product, actually, we just got approval last quarter, Q1, for a Tier 2 carrier. And we are in trial at several Tier 2s. There's some interest with one of the Tier 1s, actually with 2 of the Tier 1s for ONE. But it's a Tier 1 carrier, so it's going to take some time. Tier 2s tend to move quicker and we would expect approvals in the Tier 2 and the larger Tier 3 space through this year. UBE, we've seen a lot of -- I mean UBE is actually several different products at this point, and the majority of that interest still remains outside of the U.S. and we're just in various different trial phases, and actually customer trials in several different carriers. ONE is probably is a -- because we've already got ONE approved in one of the Tier 2s, you'll see actually a pickup in ONE quicker than you'll see a pickup in UBE.

And UBE maybe more like end of this year, it sounds like its earliest?

Yes. There's -- some of that is dependent on us. So we have some customization that one of the -- a couple or 2 of the carriers actually want us to do. And we have to decide to do that customization for those carriers. But yes, we are thinking more second half than first half.

And we will next go to the site of Eric Ghernati with Bank of America.

I just want to reconcile your comments regarding order improvements at all carriers, including Tier 1 and Tier 2 adding to Q2 against your relatively cautious view on Tier 1 and the less certainty about Tier 1 heading to Q2. Just like any comments -- shall we interpret this that excluding your largest customers, the other 2 Tier 1 customers are going to be flattish or up modestly or how should we think about it? And then second question is with respect to Broadband Access, if including Broadband Stimulus, do you think Broadband Access business has a shot at growing this year on an organic basis?

That's a good question. And the answer to your Broadband Access piece is yes. We do think it will grow organically this year. As far as the Tier 2 versus Tier 1 and Q1 versus Q2, the Tier 2s actually had a quarter that came in very much in line with what our expectations were. So the growth that we'll see from Q1 to Q2 is not pent-up growth because of a slow Q1 with the Tier 2 carriers because they came in line. So the growth, the pent-up growth to the extent that there's pent-up growth is going to really come from the Tier 1 space. And I would tell you, yes, we are being cautious there. Some of that has to do with just the nature of those carriers and they can surprise you periodically as we just learned. And the others is -- some of it, that business is HDSL-related, which is in itself a fairly volatile product set. So for us to expect or for us to plan on a large recovery in HDSL to Tier 1s, just feels like something we shouldn't be doing. So that's the cautiousness there.

And just to be clear, you're not expecting to see any rebound, material rebound in HDSL business in Q2, right?

That is correct.

And on the customers, you said one of your customer not being 100% following the system transition. Do you think that they are like 80% there or 70% of the way there or...

That is so specific. I'd say over 50% and less than 100%.

Okay. And then just my final question on the Optical side. Again, same question with Broadband Access, do you think with all the opportunities that you have, do you think that the optical business has a shot at growing this year, on an organic basis of course?

Good question. And I really -- I don't have a definitive answer on that. I think it has to do by the way with how that Tier 1 carrier actually comes on board and to what extent they're actually able to ramp up this year? Okay. With that Josh, I think we're out of time here. So I appreciate everybody for coming on the conference call and we look forward to talking to you again a quarter from now.

This does conclude today's teleconference. Thank you for your participation. You may now disconnect.