Thomas Stanton - Chief Executive Officer Roger Shannon - Chief Financial Officer

Ashwin Kesireddy - Goldman Sachs Paul Silverstein - Cowen and Company Richard Valera - Needham & Company George Snyder - Jefferies Michael Genovese - MKM Partners William Dezellem - Tieton Capital Fahad Najam - Cowen and Company

Good day ladies and gentlemen and thank you for standing by and welcome to ADTRAN’s Fourth Quarter 2018 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] During the course of the conference call, ADTRAN representatives 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 markets 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 31st, 2017. 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 Tom Stanton, Chief Executive Officer of ADTRAN. Sir, you may begin.

Thank you, Eric. Good morning everyone. We appreciate you joining us for our fourth quarter 2018 conference call. I’m joined by ADTRAN CFO Roger Shannon. Following my remarks on the quarter and what we expect to see going forward, Roger will review the quarterly financial performance in greater detail and then we will take your questions. Overall the 2018 fiscal year was difficult on several fronts, as we work to broaden our customer base and mitigate the impact of a direction change from one of our largest customers. However, we continue to make progress in terms of customer engagement, product development and expansion of our market opportunity, both domestically and around the world. From a top-line perspective, we had a solid fourth quarter with revenues of the $140.1 million aligning with our expectations. Q4 revenues were up 10% over the same period last year and flat compared to Q3 as an increase in our domestic Tier-1 revenues and strong international sales negated typical seasonal decline. Network solutions accounted for the majority of our $116.9 million, while global services and support contributed $23.2 million or 17% of total revenues for the quarter and a 20% increase over the prior quarter. Revenues for domestic markets came in at $74.8 million or 53.4% of the total while international revenues were $65.3 million or 46.6% of the total. International revenue was up 15% over the previous quarter and up 101% on a year-over-year basis. Strong growth in our international business was driven by material contributions in your some Tier-1 operators in our AMEA Pacific Rim and LATAM regions. Breaking revenues down a little further our access and aggregation business came in at $100.5 million up 9% from the previous quarter and at 27% on a year-over-year basis. The build out of broadband access infrastructure…

Thank you, Tom and good morning. I will speak about our fourth quarter results and discuss what we see for the next quarter. During my report, I will be referencing both GAAP and non GAAP results. The differences between reported GAAP and non GAAP include stock-based compensation, acquisition related expenses and amortization, restructuring expenses and tax reform expenses. As Tom stated, ADTRAN's fourth quarter revenues came in at $140.1 million compared to $140.3 million last quarter and $126.8 million for quarter fourth last year. Our Q4 2018 results include approximately $3 million in revenues resulting from our November 30th acquisition Smart RG, which Tom discussed in his comments. Our network solutions revenues for the fourth quarter were $116.9 million versus $121 million reported for Q3 of 2018 and $95.8 million in Q4 of last year. Our global services and support revenues in Q4 of this year were $23.2 million, compared to $19.3 million reported for the third quarter and $31 million in the fourth quarter of last year. Across our revenue categories, access and aggregation revenues for quarter four of 2018 were $100.5 million compared and $91.9 million last quarter and $79.2 million in quarter four 2017. Revenues for our Subscriber Solutions and Experience category formally customer devices were $31.2 million for the quarter versus $38.6 million for quarter three of 2018 and $32.8 million for quarter four last year. Traditional and other products revenues for the quarter were $8.3 million compared to $9.9 million for quarter three of 2018 and $14.9 million for quarter four of 2017. Looking at revenues geographically, domestic revenues for Q4 2018 were $74.8 million versus $83.7 million reported in quarter three of 2018 and $94.3 in quarter four of last year. Our international revenues for quarter four 2018 were $65.3 million compared to $56.6…

Thanks, Roger. I think it was unclear that revenue guidance was 141 or 142. Okay, with that Aeron, we are willing to open it up for any questions.

[Operator Instructions] We can take our first question from Rod Hall with Goldman Sachs. Your line is open.

Thank you for taking my questions, this is Ashwin on behalf of Rod. Tom I wanted to ask about the situation and the impact from government shutdown and how are you thinking about that in the guidance and I have a follow-up.

Well the government shutdown is something that I think to the extent that it goes on, we will have ramifications that ultimately can be end-user driven if we don’t start doing something, but having said that in relations to [CAF] (Ph) the largest portion that were connected with is actually not under the shutdown piece. So the payment schedule and things associated with the work that’s being done right now is not materially affected by the shutdown. For some of the newer dollars like some of the Tier-3 stuff that is relatively new where they are putting in architecture plans and future design. So let’s say for a year out, I think that work has been effective, but for the work that we are expecting this year, we don't see any big impact.

Thank you and regarding your comments about the U.S. Tier-1 sales increase in Q4, is it the same carrier that cause the weakness in rest of 2018. Did you see some spending come back there or are you talking about...

We did see a pick up there.

Okay. Finally on the international business, it looks like portfolio 2018 international rose about 45% to 46% of total revenue. Just curious how you are thinking about that going forward, and is there a level of budget could settle as percentage of your overall revenue?

I don't envision it settling, I mean I think it's always going to be dependent upon which projects are going on in the U.S. versus outside of the U.S., we have a pretty good projects flow right now outside of the U.S., I mention one of the carriers in Europe, we have actually picked-up by several carriers over the second half of last year and mostly those are Tier-2 carriers. But there are I might have mentioned this in the last or quite a few RFPs that are out right now with Tier-1 carriers are looking for 10-Gig service and that's actually - I mentioned some activity here in the U.S., I would tell you that the carriers in Europe are typically larger carriers, they are Tier-1 carriers that are looking what they are going to - how they are going to deploy 10 gig so I can't - that's just going to be dependent on a year-by-year and some of this quarter-by-quarter quarterly basis on how the revenue flows and projects come in.

Okay. Thank you.

Alright.

And we will take our next question from Paul Silverstein with Cowen and Company. Your line is now open.

First-off, Roger can you just repeat what the Smart RG contribution was?

For the one month that we had consolidated in Q4 is approximately $3 million of revenue.

Thank you. With respect to gross margin any change in pricing, is somewhat the softness is that just reflective of the geographic mix and what are your expectations go throughout the year?

If you look at U.S. gross margin versus international gross margins there is really no material change there. So some of that is going to be mix driven. We do this year expect geographies out of the U.S. to shift a little bit, so I think we are going to feel a little more strength out of Latin America than what we have seen probably about couple of years as you know, they have been through kind of the regulatory holds which seems to have unlocked. So I think you will see some shifts there, those gross margins are being negotiated as we speak. So right now, I would just say it's going to follow the trend, we would expect the U.S. to pick-up some as it typically does seasonally through the year and then internationally theirs is just a lot of activity. Our thought of the trends are being in the kind of low to mid-40s, which is kind of where we have been really hasn't materially changed and our projections for the year.

Got it and Tom, just to be clear you haven't seen a change in pricing versus the historical trends?

No, have not.

Alright. The Latin American strength you saw was that your historical customer in Mexico that waxes and wanes over the past many years or is there a plenty of business you picked up?

The material piece for this year will probably be that same customer.

Alright. If I may one last one question. In terms of those big projects Tom, the incremental above and beyond the NB and AT&T et cetera. Can you give a little bit more insight, how many large Tier-1 RFPs are out there right now, are these a function of last 90 days, but have they been out there for the past six to four months, how does we compare it to six to 12 months ago and do you have any sense for the timing of rewards putting aside [Indiscernible]?

Yes, let me answer this in a way that's clear. So as far as they are in the last 90 days, not all of them are in, all of them are expected to stay within the next 90 days, if you look at that six months window that's a broad way to look at them, they many times tell you what date the RFP is going to come out. I think its somewhere between five and ten.

Given that they are Tier-1s, are these typically a $100 million plus type opportunities?

Not necessarily in one year. But in aggregate for a particular carrier yes.

I appreciate. I will back off, thanks.

And Paul let me just tell you, we haven’t necessarily won those yet. So just and I know you mentioned that I’m not at all saying that we are going to win every one of them.

Understood. Good luck.

Okay.

And we will take our next question from Rich Valera with Needham & Company. Your line is now open.

Thank you. Just a follow-up on the Smart RG, understand you got three million for the month, you had in the fourth. Do we just sort of linearize that for the first quarter or you want to give us a more specific contribution you are expecting for Smart RG in the first quarter.

I don’t think you will see it liner in the first quarter, I think still we are trying to understand their seasonal pattern. So it would be you if you just linearize it that would be nine, we don’t expect nine out of it and we have given it a fairly broad window. But on a going forward basis, let's say and I’m just going to pick a quarter of saying second quarter we expect the run rate to be - shouldn’t be an atypical run rate. About something less than nine Q1 and then it wrapping up to 9ish and I think that’s the way to think about it.

Got it, that’s helpful. And can you say what their historical gross margins have been.

I don’t think we have really dissected that enough because I know you have take that as the number going forward. We also do think that there is some improvement in adding our supply chain to it so we are not really at a point here to be kind of speaking about that yet.

Fair enough. So the Latin American development sounds pretty significant, if I recall its been about two years. I believe since you had any revenue since that big Tier-1 down there. What are your thoughts on the potential for that this year. Is this something where you think they are kind of ramp back up and there is going to be a significant contributor for the balance of this year and beyond, how can we think about them relative to historical run rates.

So you followed us for a while. They typically bind in chunk that are fairly large and they deliver over a period of time and then there is typically work on the services side associated with that and I would say the pattern seems similar to that, yet we would expect them to be material this year at this point in time, that is not the easiest customer to forecast and they are very demanding, when they do actually decided they want to do something so it typically accelerates supply chain and things, but the direct answer to your question is we expect them to be a meaningful contributor this year.

Got it that’s helpful. And then you provided some growth statistic from your MSO customers, pretty impressive year-over-year growth for the MSO group in 4Q and it sounds like you have some pretty good momentum into 2019 with that group, I guess presumably but mostly with the ePON products, any you can say about expectations for that business in 2019 relative to 2018?

We expect it to grow; I don’t think we are going to see the same growth rate. Some of that was acquired businesses, when we acquired it initially we acquired the CommScope piece and then we acquired Sumitomo piece and there is just - it happens to coincide with the growth and what their ePON - they happen is because we expected it to coincide with growth and their ePON business. We have projects, with the two major MSOs here in the U.S. where we are in the lab, I’m getting some new products approved that we think will meaningfully open-up the ePON business those are coming, those will get through the pipeline this year in the meantime and the largest one of those were the sole source supplier which is a good place to be as they continue to try to enhance their ePON deployments. And we would expect that business to grow this year.

Got it, and one final one from me. Can you give us an update on the Verizon on opportunity I think last time we talked to you, you were fairly optimistic that you would get qualify for at least one of their use cases, I believe the low cost Internet within perhaps earlier this year. Anything you can provide us by the way of update on update on that opportunity?

We are still in the lab and still working with them, that's probably all I want to say, we target on the specific use case as the first piece to get out of the lab and we are still working through that. So really no change there.

Got it. I will leave the floor. Thank you.

Okay.

Thank you. And we will take our next question from George Snyder with Jefferies. Your line is now open.

Hi guys, thanks very much. I guess I wanted to go back to the Smart RG acquisition, so I guess mostly it looks like it would be analyzing at $35 million in the top-line, I think you paid from the cash flow around $15 million in change for that. I guess I'm wondering, if that business is profitable, is it accretive, can you talk about the profitability or lack of profitability that would come with Smart RG just what does that look like? And then I also wanted to ask about - go ahead sorry.

To answer that question, we expect it to be profitable this year yes. I think it was profitable when we bought it.

Okay, great. And then I'm just curious about the use case on Smart RG, I mean I heard what you said in terms of trying to create new service offerings in homes. Can you just talk about the specific examples of what you might offer to broadband users in that case and how you would sell it in conjunction with the existing portfolio? Thanks.

No it's actually a good fit with our existing portfolio and it's probably the piece that were the most excited about it is the potential for virtualization of the software itself, which we have been working on here, they are a big add to that, so first of all they have a whole suite of residential required services, including LAN management kind of LAN and WAN management with inside the home customer portal access, additional service capability being on as an application widget. So they have a lot of these things that are already in the cloud and they have been in the midst of converting their customer base towards those. They have Tier-1 customers not just here in the U.S. but around the world actually, including some of our customers to the synergy on the CPE side of that and the virtualization side is probably the biggest thing. It's a nice, it is a suite of services that we have been working on to add into our Mosaic cloud for some time. This not only accelerates that, but in areas where somebody does not want to buy Mosaic cloud allows us to have a standalone virtualized cloud based offering that we just don't have today. And the demand as you know, probably as it is much as anybody - not just in the Tier-1, but in the Tier-3s as well, where they are looking to kind of compete on a service-level basis with the larger carriers and it materially helps on their maintenance and troubleshooting and everything else when somebody says their Wi-Fi doesn't work.

Great. Thank you very much.

Okay.

And we will take our next question from Michael Genovese with MKM Partners. Your line is now open.

Yes, thanks very much. First of all the guide for the quarter seems much more narrow and much more specific than what you guys have given in the past, so is this just sort of a change in the way you plan to give guidance or is there is ability somehow actually different this quarter?

Yes. Our guide tends to really like it was fairly wide last quarter and that is literally visibility. So if we feel that the number has a wide range to it and we tend to give ourselves latitude to that, and when we don’t, we don’t. So that’s almost directly dependent upon the visibility you have within the quarter.

Okay, great. So for the GM guidance from the commentary, I mean as we think about the move from 4Q to 1Q and major regions and major customers. Can you just sort of highlight for me any big changes that you are expecting, because it sounds like it’s fairly consistent, I’m not really seeing big regional or customer changes in your outlook. So am I missing anything there?

I haven’t exactly put it in my head what are you thinking about, so it’s a very logical question. Let me just give you regions, we expect LATAM to be pretty strong. We would expect Europe to be moderately strong. They tend to grow from Q1 to Q2, U.S. typically starts out a little slow because their budgets that has to get approved and those budgets over prints since last year was a very slow budget cycle so we would expect the U.S. to be a little bit slower coming out so if anything, you may expect a little bit more shift towards Europe - not Europe certainly international. Although you know NBN had a pretty strong Q4. So I think the way you are thinking, which is not big shifts, although there are customers shifts, but on a regional basis not material shift that’s probably not a bad way to think about it.

Great and very helpful, thanks. And a couple more here, just in terms, can you give us a - gross margins, when we are going to have a better sort of U.S. mix. Would you expect that in 2Q and Q3 of this year, or is it too early to tell and how many points in gross margin, I know you are not giving 2Q, 3Q guidance yet, but how should we think about the gross margin for the next two quarters after this one.

I can give you trends and trends are exactly right. Q2, Q3 are up from a mix perspective in the U.S. depending on what happens in Europe. Sometimes Europe overcomes that. In the case today, we would expect to Q2 and Q3 U.S. revenue to be up, but we have also now at Latin America components that will figure in. And as you know I just mentioned we are kind of working through those numbers with that customer as we speak. So you know the mix that we are dealing with, so it really depends on how that comes out to the extent that international is a higher component in Q2 and Q3 then typically you would expect that actually to follow revenue trend that would be positive.

Okay, great. And then one final one for me. Just in terms - can you give us an update on the NG-PON2 and 5G could that be revenues in 2019 or is that going to be more of a 2020, how does that look?

I don’t know about 5G specifically, that one puts a little question mark, but as far as NG-PON2 revenue and this year and answer to that is yes.

Okay thanks so much Tom. I appreciate all the questions.

Okay.

And we will take our next question from Bill Dezellem with Tieton Capital. Your line is now open.

Thank you. I would actually to follow-up on a Smart RG question. I mean essentially you are saying that one plus one is greater than two, and the question I have is what is the timing before that becomes apparent to or to those that they are something outside?

Well we just talked about a target number for revenue, which was kind of this $9 million. I think there are things that we had to [Technical Difficult] scale and manufacturing and probably more importantly scale in customer base and access to customers. So we know that, we are actively involved in deals today that the standalone company would not have been involved in, some material number of deals actually. But the company alone were not been able to come in to. So to the extent that we are able to increase that $9 million run rate to something materially above the $9 million, I would say that’s where you see it. And just at this point I know you are wanting to hear, but at this point, I would like to be a little conservative on how we actually do this until we have, it's a very new acquisition right it’s a month and the half ago. I think we are just now getting into customer discussions of meaningful depth on the technology side to make sure that there are earnings gaps and so already we are pretty confident with the $9 million run rate number, but it's little early to talk about upside on that number.

Great. Thank you. And then let me switch if I may to Latin America, it has been some time since that region has had the strength that you are experiencing this quarter. What has driven that shift, what is your sense there?

I think it has been on regulatory fees for over two years and I think it's just a matter of - that's being overwhelmed and a strong desire to increase the broadband asset capabilities within that country which is not a bad thing.

Got it. And then lastly there has been lots of conversation since your last conference call about [Huawei] (Ph). Talk to us if you would please about the implications of this additional commentary, and if you are seeing any benefit and if so what part of the globe is that benefit appearing to be most prominent or the greatest potential?

Europe and the Americas we are more specifically North America and yes, it has been beneficial. I mentioned that there were a string of RFPs that have been coming out and it is a from a requirement for new technology in the network, timing wise and the visibility that is being shared on, that has been happening in the market. I think the timing is perfect and probably - and we are actually seeing a change in mindset because of that. So I think it’s a positive thing for us.

Great. Thank you and we look forward to you - go ahead.

Yes. I was about to put to an end to it, but go ahead please.

I was just going to say we look forward to you winning two or three additional deals that they would have otherwise won.

Okay. Thank you.

We will take our next question from Fahad Najam with Cowen. Your line is now open.

Thank you for squeezing me in. I wanted to ask you a big picture question. We are at the start of the year, what are most excited about for 2019 and what are you most concern about, what are the things that are [indiscernible].

Honestly what I'm excited about, so what I’m excited about is - the problem is that doesn't necessarily affect 2019, it’s a longer term outlook. What I’m most excited about is the number of customers that are actively pursuing upgrading their network, it has never been bigger than what we have seen. Now there is some in the U.S. and some of those carriers they working out their capital budgets and their capital constraints and it’s kind of less deterministic as to when those things will actually break free, but in Europe it’s a very strong level of engagement and if I think about what that means for our longer term future and us being able to kind of break out of a customer base that is small enough to where it leads to material volatility from time-to-time, I get very excited about that. Well like that, I like where we are in the MSO space a lot and this all has to do again with customer diversification and we have never had material revenues coming out of the MSO space in over the last year and half, although it’s been clouded by the downturn we had of our customer in U.S, we have done a fantastic job of aggregating technologies and building relationships within the MSO space and that is going to pay meaningful returns over the years in the future. So that’s really the thing I’m most excited about. If you look at it from just the 2019 specific thing then it is the fact that we have landed some customers in Europe that will in aggregate materially bring us revenue in 2019, as well as the fact that you know the Latin America market has been frozen for some period of time and it seems to be in a quick defrost. So those are things that kind of affect this year more than other things, but the thing that I’m most excited about is really the longer term prospects. What I worry about is I always worry about, which is we still have a very - a relatively definitive set of customers that can materially move the needle and that leads to pain and it's very hard to forecast when that happen. So that's the thing that keeps me up. When we fall into a whole like that we do the best we can picking ourselves up and making sure that we are ready to continue on and continue to execute our plan, but that is a diversion when that happens it's more than a diversion and it's very difficult for our shareholders as well. So we are doing what we can do, but that takes time as far as diversification.

Thank you.

Okay.

Alright. With that said that, that concludes our call. I appreciate everybody for joining us today and we look forward to talking to you next quarter.

Thank you for your participation. This does conclude today's program. You may disconnect at any time.