Ladies and gentlemen, thank you for standing by, and welcome to ADTRAN's Third Quarter 2017 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 cost, manufacturing efficiencies and other risks detailed in our annual report on Form 10-K for the year ended December 31, 2016. These risks and uncertainties could cause actual results to differ materially from those in forward-looking statements which may be made during the call. In addition, ADTRAN will webcast this conference call live through the Q4 Inc. webcasting service. It is now my pleasure to turn the call over to Tom Stanton, Chief Executive Officer of ADTRAN. Sir, please go ahead.

Thank you, Erica. Good morning, everyone. Thank you for joining us for our third quarter 2017 conference call. With me this morning is Roger Shannon, Senior Vice President and Chief Financial Officer. I'd like to begin this morning by discussing the details behind our third quarter results, and I will end with some comments on what we see on the future. Roger will then discuss our quarter 3 performance in more detail, and we will then open the call up for any questions that you may have. As we stated in our earlier press release, revenues for the quarter were $185.1 million, up 10% over the third quarter of last year. Our Networking Solutions revenue, including both international and domestic markets, came in at $145.5 million, up 7% over the same period last year. Total Services & Support revenues were a record $39.6 million in the third quarter, an increase of 22% over last year and up 36% sequentially. Revenue for our domestic markets came in at $147.9 million or 80% of the total, while our international revenues were $37.2 million for the quarter or 20% of the total. On a year-over-year basis, our domestic revenues increased 16%, led by growth in our domestic Tier 1 products and services businesses, while our international business decreased 10% over the same period last year. Moving down a little deeper, our Access & Aggregation category had a strong performance, up 13% over the same period last year, driven by growth in our domestic Ultra Broadband products and services. Customer Devices revenue had growth both domestically and internationally, up 8% over the same quarter last year, led by strength in our enterprise products. Lastly, our Traditional Products & Other categories were down 11% versus the same quarter last year mainly due to the expected…

Thank you, Tom, and good morning. I'll speak about our third quarter results and discuss what we see for the next quarter. During my report, I'll be referencing both GAAP and non-GAAP results. As Tom stated, ADTRAN's third quarter revenue came in as expected at $185.1 million, which is up 10% compared to $168.9 million for quarter 3 of 2016 and just ahead of the $184.7 million that we reported last quarter. Our Network Solutions revenues for the third quarter were $145.5 million, up 7% from the $136.3 million for quarter 3 of last year and down 6% from $155.5 million reported for quarter two of 2017. Our Services & Support segment continues to show strong year-over-year and quarter-over-quarter growth, led by stream [ph] and ultra broadband implementations. Quarter 3 2017 revenue was $39.6 million, up 22% compared to the $32.6 million earned in quarter 3 of 2016 and up 36% versus the $29.1 million reported for the second quarter of 2017. Across our revenue categories, Access & Aggregation revenues for quarter 3 were $136 million, up 13% compared to $120.6 million for quarter 3 of 2016 but down 2% compared to $138.6 million last quarter. Customer Devices revenues for the quarter were $35.6 million, up 8% compared to $33 million for quarter 3 of 2016 and up 5% compared to $33.8 million for quarter 2 of 2017. Traditional & Other Products revenues for quarter 3 2017 were $13.6 million, down 11% compared to $15.3 million for quarter 3 of 2016 and up 11% compared to $12.2 million for quarter 2 of 2017. Looking at revenues geographically, domestic revenues for quarter 3 2017 were $147.9 million, up $20.2 million or 16% from the $127.7 million that we reported in quarter 3 of last year and up $1.2 million or 1%…

Thank you, Roger. Erica, at this point, we're ready to open up for any questions people may have.

[Operator Instructions]. And we'll go first to the line of Michael Genovese with MKM Partners.

So to start with the revenue guide for 4Q, it seems like it's a little bit worse than normal seasonality. It seems like the high end of the range is really where we'd see normal seasonality. So are there other factors in the short term impacting the fourth quarter guide besides just seasonality?

Yes. I mean, I think you're right. I think if you look at our normal seasonal trend, that would probably leach to the upper end. And Roger did mention it in his comments. I think the thing that we're being cautious about is capacity on the services portion of our business and just finalizing a lot of jobs that are scheduled to be done this year and also taking into account what the weather may actually -- how that weather may impact us. So that's really what's driving the variability.

It seems like, all along, you've seen no impact from M&A at your biggest U.S. customer. Has that really -- I mean, from your perspective, has that been the case? And are you not expecting to see any impact in the quarter where they're actually closing the deal?

You never know until things close, so I'll always be cautious about that. But at this point, we've got -- we're teed up for the fourth quarter and -- or moving forward with that. I think the biggest thing we're worried about at this point is just being able to complete all the engineering that we have to get done in the installations.

Okay. And then finally for me, on the other two U.S. Tier 1 carriers, the two bigger ones. First of all, with the GPON -- I'm sorry, G.fast customer, I just want to get a sense of their revenue contribution in the quarter and how it compared to the prior quarter. And then with the other one, which, it seems like, more of an NG-PON opportunity, did you confirm during your prepared remarks that you've been awarded that deal and have won that deal? And should we expect to see that ramp in 2018?

I wouldn't. I'm not sure what award is going to look like. What we have is agreements in hand that allow us to continue to participate in trials as they continue to roll things out. But I still think it's -- as you know, there's 2 of us in that RFP, and I think we're still going through the lab processes.

Okay. And then on the other one?

As far as the -- yes, so that one's actually up. We expected it to be up, and we -- it was actually up sequentially. We expect it to do better yet this quarter. I think the -- and we'll expect that to ramp. It's still a very early thing. They're just not getting up there and starting to really try to move it, and so we kind of get everybody centered. This particular award had two facets to it, an out-of-region network, which was -- which is now being deployed. And they're actively selling that product, and we would expect that to ramp. And then an in-region build, which we are still in the lab at, and our expectation is that we would get out of the lab in the first half of next year, hopefully, towards the fronter end of the first half, but in the first half of next year.

We'll go next to the line of Rich Valera with Needham & Company.

I had a follow-up on the services capacity issue. You obviously had a very strong quarter this quarter, and presumably, you have the same capacity quarter-over-quarter. So was it just the timing of rev rec related to these projects? And did you clarify that you expected service revenue to be kind of down materially quarter-over-quarter? Or how should we think of that quarter-over-quarter?

I don't think we actually broke it down on a quarter-over-quarter basis. Honestly, I don't expect it. We have a typical slowdown in our product business, which will impact us, not just the normal seasonal trend. I think the big -- maybe the variability that we're trying to plan for here is particularly on the services side. And depending on where we end up in that range is going to be whether or not our services number is up or down sequentially.

Okay. And just on the product side, assuming services came in sort of in line with expectations, is there anything going on on the product side that's causing you to guide maybe a little bit below typical seasonality in the fourth quarter?

No, no. No, it's definitely centered around -- you'll see the swings in our European business. We would expect that to be down in the fourth quarter, as it typically is. You just see a general kind of slowness in the fourth quarter, but there's nothing abnormal going on on the product side. I think our variability very much centers around the services piece.

Got it. Then with the GPON program you're talking about with the Tier 1, where you -- I think you've characterized it as sort of still being in the lab. Just wondering what you think the timing of that is, particularly as it relates to your elevated OpEx levels related to that program. I thought before that maybe we thought, post 4Q of this year, we might kind of be beyond that and would be into some kind of production mode. Do we now think we're more kind of pushing into next year, still heavily engaged and, perhaps, have higher OpEx, at least for that program, before potentially see a production ramp?

Yes. Here you go. Let me just kind of frame that. So when we say higher OpEx, we have been running at a higher R&D expense rate than is typical. And we've been carrying that for some period of time. We do expect OpEx to go down a little bit in the fourth quarter, as Roger mentioned in his note, actually, fairly materially on a sequential basis. But the total R&D level is still remaining relatively constant on what our headcount is and what our spend is. And I really would expect that to continue on, at least into the first quarter. I think the thing that -- the real tell sign is when we get into really full production. You don't know what changes you're going to have to make in order to ease their integration until you're complete with those changes. So we do have some of that that's still left ahead of us, which is unknown. And there are some feature changes that are continuing to happen, which is really kind of par for the course. So until those things stabilize, I think it's going to be -- I don't think I can be much granular other than tell you I would expect that R&D level to be the same -- relatively the same through the first quarter. Although I can't -- we're not here yet to be able to tell you what the total expense line will be. Typically, expenses are typically down in Q1 on a total basis.

I don't think you provided kind of an update on the timing and potential ramp of your NBN program. Could you give us a sense of where that stands and how we should think about heading into it?

Yes. That's going very well. So we are full bore into integration at this point. We had initially talked about seeing revenue in the first half of next year. There's nothing that leads me to believe that's not the case. That's one of those -- I think there's probably more upward bias than downward bias on both the timing and the trajectory of the revenue. So hopefully, that will come in stronger than we expect. But right now, our expectation hasn't changed, and we're expecting that to shift in the first half of 2018.

We'll go next to the line of Simon Leopold from Raymond James.

This is Mauricio in for Simon. Did you guys quantify the impacts from FX on the quarter?

It was very minimal. The euro, as you know, has been stronger over the course of the year, but the quarter-over-quarter impact is fairly minimal. And looking at year-over-year, the timing of the revenues and the rate in the same period last year, there's not a significant amount of impact.

Okay. And then it seems like EPS benefited from a lower-than-anticipated tax rate in the quarter. Can you talk about the sources of that decline? And then how should we think about the tax rate going forward?

Sure. So as we've discussed in prior quarters, we've continued our work looking to reset our R&D tax credit base. We've done lots of work internally to look at prior periods, which we completed in the current quarter and will allow us to benefit in quarter 3 of looking at prior periods. Going forward, we're guiding to the low 30% range for quarter 4. Again, I'll also mention, that takes into account the international versus domestic mix and, again, what we see as far as returning to normal from an R&D level.

Okay. And then one last one, something we wanted to ask you. What is your sense on the appetite from operators to adopt white box equipment under broadband networks? What do you think will be the financial impact as, basically, ONTs become commoditized on branded competition based on operator specifications? What are you guys doing to mitigate this headwind -- potential headwind?

Okay. So there's a multitude ways to tackle it. First of all, ONTs are relatively commoditized, so I think you're talking about OLTs, which are really network infrastructure side. The products that we're bidding today are very much targeted with an open architecture in mind. So there -- I think the dream is to have white box solutions. I think there were questions where those white boxes are going to be coming from and how complicated are those white boxes and are they really generic commodities. And I think it's a very long period of time before that happens. If you take a look at the current quasi-white box solution that we're shipping today and that we have in trials for NG-PON2, they're some of the most complicated products that we've ever developed. So although they give you the capabilities of having a true SDN open network architecture, the elements themselves are still very complicated. So I think that, that transition will happen over time. It will happen in different pieces of the network. And certain pieces like remote terminals, outside plant equipment, I think, is going to be much more difficult and may not prove to be cost-effective. So that's point one. Point two, our whole push has been, over the last 3.5 to 4 years, a drive towards adding software content to our portfolio and becoming more and more a leader not only in the space but in how we actually go to market. So our Mosaic Cloud Platform and our Mosaic OS are both key elements on us being able to transition more of the value-add that we bring to market, not just on having the lowest-cost product, commodity product or non-commodity product, but also on having the highest value-add software content. And I think so far, I think we're doing a fantastic job with that.

And we'll go next to the line of Greg Mesniaeff from Drexel Hamilton.

Tom, actually, on the question on Mosaic, that was my question. Have you guys explored marketing Mosaic as a stand-alone package [indiscernible]? And if so, how is that resonating with your customers?

Yes. In fact, we do. And I just -- the question leads me to believe we could probably do better. But Mosaic is actually marketed as a stand-alone SD-Access software platform. And today, in the networks that we're deploying in today, for instance, in what we're doing with our Australian carrier is actually managing elements that will not just add to an element. So we're actually in there as a -- in a stand-alone fashion, managing other people's elements, and it's our software that's leading the day. There was a separate requirement list for that software, and we were successful winning that software. Separately, there is the equipment business, which we also were successful in. But that's not just true there. It's also true with our U.S. carriers who were looking at managing multiple elements. We did a release -- I believe it was at the middle of the year last year, where we announced our CORD implementation and what we call our CORD pods, which allow people to actually buy, in effect, racks of equipment that can be stood up and used as singular elements, or they can just buy the software itself. And that's been on the market now. The problem, I think, as far as -- I guess acceptance, maybe just revenue coming directly on that line, is the mature -- you have the carriers' networks themselves, number one. Are they really ready for it? I think a lot of them see where they want to get to, but I think it's a very long path to migrate their existing OSes in order to be able to take advantage of the system. So that's -- certain carriers are ahead of others. And in general, they're all moving that way but I still think at some period of time. Secondly, because of -- fundamentally, the legacy OS is better within these networks. There's a lot of custom development that has to be done on a carrier-by-carrier basis. So it's not as clean as you would like it to be, but we are absolutely trying to sell it. It is a software element, a software product anybody can buy as a stand-alone element today. All right. I think with that, I think we're at the end of the question. So I appreciate everybody joining us for our call today, and we look forward to talking to you next quarter.

We'd like to thank everybody for their participation. Please feel free to disconnect your line at any time.