ADTRAN Holdings, Inc. (ADTN) Q1 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to ADTRAN’s First Quarter 2021 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 judgments based on factors currently known. However, these statements involve risks and uncertainties, including the continued spread and expense of the impact of COVID-19 global pandemic, the ability of component supplies to align with customer demand, the successful development and market acceptance of our products; 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 ending December 31, 2020. 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. Please go ahead.

Thank you, Christine. Good morning, everyone. We appreciate you joining us for our first quarter 2021 conference call. With me today is ADTRAN’s CFO, Mike Foliano. Following my opening remarks, Mike will review the quarterly financial performance in detail and then we will take any questions that you may have. We had a strong first quarter and we expect this to be an exciting year for ADTRAN. We grew revenue 11% year-over-year, increased non-GAAP EPS by $0.18 year-over-year and recorded the highest product bookings for any quarter in our history. This success was primarily driven by the demand for our fiber-based broadband solutions, continuing the positive momentum from the second half of last year. If we look at the market, there are several key indicators that provide a positive outlook for our business. On the consumer side, we continue to see increased demand for fiber-based broadband access paired with premium cloud-managed Wi-Fi in the home. From a funding perspective, governments are prioritizing high-speed broadband connectivity to all residents more than ever. In the U.S., President Biden has proposed $100 billion to future proof broadband as part of an eight year infrastructure plan. He referred to high speed broadband as the new electricity that’s a necessity for all Americans. The U.K. Government has also pledged $7 billion in funding for gigabit capable broadband for hard-to-reach areas. Similar multibillion dollar investments are being committed in the EU to accelerate high-speed broadband connectivity across its member countries. In addition to government spending, we continue to see increased investment from private equity, municipalities, utilities and others to fund the build out of fiber access networks for high speed broadband and future 5G connectivity. From a technology standpoint, refresh cycles around 10 gig fiber access, mesh Wi-Fi 6 and cloud-based services are driving increased investment in our growth products. Finally, supply chain diversification and vendor risk mitigation initiatives are also being -- are also accelerating vendor selection programs across our target customer base. With our strong presence in key growth markets, including the U.S. and Europe, along with our trusted vendor status and differentiated portfolio, we are well-positioned to take advantage of the major investment cycles that we see ahead of us. Taking a closer look at our key growth areas of fiber access, in-home servers, delivery platforms and software, you will see several highlights that reinforce our success in these areas. In fiber access, Dell’Oro’s Q4 2020 market share report noted ADTRAN as the fastest growing PON OLT vendor in both North America and EMEA in terms of year-over-year market share gains. For our in-home service delivery platforms, Q1 was the record revenue quarter with growth being led by cloud managed mesh Wi-Fi gateways. On the software side, our growth was led by our cloud-based SaaS offerings where we have grown our customer base by 66% in the past year. As we look at the Q1 financials, revenue for the quarter was $127.5 million with 42% gross margins. Network Solutions accounted for 89% of total revenue at $113.8 million, while Global Services contributed $13.7 million. During the quarter, we had two 10% customers, both distribution partners. These distribution partners serve hundreds of Tier 2s and regional service providers in the U.S. with a mix of broadband access, connected-home and enterprise solutions. This reinforces the success we are having with both customer and portfolio diversification. We continue to make good progress toward our customer acquisition and diversification efforts in Q1 with an addition of 26 new service provider customers. We expect continue to -- we expect to continue to grow our customer base as our 10 gig fiber access solutions, connected-home solutions and software platforms are adopted by customers that are upgrading their networks due to favorable government regulatory and technology factors. Much like the second half of 2020, the growth that we saw in Q1 was led by our success with regional broadband operators in both the U.S. and Europe. In the U.S. market, revenue from regional broadband operators was up a combined 48% year-over-year, while European regional operators were up a combined 70% year-over-year. We continue to see increasing demand for our fiber access, connected-home and cloud-based offerings. Our fiber access and aggregation business grew 51% year-over-year, in-home service delivery platforms were up 94% year-over-year and SaaS offerings increased 32% year-over-year. The growth in these areas more than offset the decline in our traditional copper access business. For the previously announced Tier 1 fiber access projects, we continue to make great progress and expect to exit the lab for each of these around the middle of the year. In addition to these previously announced awards, we are still on track with several Tier 1 projects globally and we are also experiencing growth in Tier 1 MSO customers with our 10 gig fiber access portfolio as they begin to transition to more full fiber network deployments. Inventory levels remain higher than normal due to the increased lead times from the global chip shortage and COVID-19 related logistics issues. We continue to see lead times extend and expect that this will continue for some time into the future. We are taking the necessary steps to mitigate these challenges to the best of our ability, but the supply chain constraints do present risk in the near-term or midterm. From an organizational perspective, we continue to maintain a disciplined approach to our operational expenses. The structural changes that we implemented over the past year continue to improve our operational efficiency. We have reduced our non-GAAP quarterly operating expenses by 9% year over through disciplined expense management. As we secure additional Tier 1 wins, we do expect to see a slight increase in R&D expenses. On the product side, we introduced several key advantages during the quarter. In our fiber access platforms, we announced several new products that will simplify the deployment of fiber-based gigabit services in low density areas for RDOF recipients. For in-home service delivery platforms, we have begun to ramp deployments of our cloud-managed mesh Wi-Fi 6 gateway. As mentioned previously, Q1 was a record revenue quarter for our in-home service delivery platforms, especially in mesh Wi-Fi, and we have very strong order bookings going forward for this growth area. On the software side, we have two primary areas of growth. In the SaaS category, we are seeing increased demand for our cloud-based tools that proactively optimize end-to-end performance for broadband access and in-home networks, while providing actionable insight to the operations and marketing teams. As noted earlier, we grew our customer base for SaaS offerings by 66% year-over-year. SaaS projects are typically pay-as-you-grow multiyear programs that will continue to increase over time. In addition to our SaaS solutions, we also offer leading edge access domain orchestration software that simplifies the programmability of open multi-vendor networks. We have seen an increase in customer additions, including multi-vendor integrations in this category as service providers modernize their IT and OSS processes. In our enterprise gateway portfolio, we very recently launched our low-end IoT gateways. We have a growing backlog of demand for these products that simplify the connectivity of large-scale IoT sensor networks to cloud-based IoT cores. These IoT gateways are the latest additions to our updated enterprise portfolio that consists of fiber access routers, business class Ethernet switches, business Wi-Fi, all to support the next-generation of industrial automation applications. Continued investment in our portfolio, coupled with the success we are having in our growth products has us well-positioned for additional success throughout the year. This will also enable us to continue to meet our customer and portfolio diversification objectives. On the Q1 call last year, we first spoke of COVID-19 and its impact on our company. I want to say I am extremely proud of how our employees continue to weather the storm. They have remained flexible and resilient throughout this difficult time and I want to thank them. With that background, Mike, will now provide a review of our financials, following his remarks, I will be happy to answer any questions that you may have. Mike?

Thank you, Tom, and good morning to all. I’ll review our first quarter 2021 results and provide our expectations for the second quarter. During my report, I’ll be referencing both GAAP and non-GAAP results with reconciliations presented in our press release and supplemental financial schedules on our Investor Relations webpage at www.adtran.com/investor. The supplemental financial schedules on our web page also present certain revenue information by segment and category, which I’ll be discussing today. ADTRAN’s first quarter 2021 revenue came in at $127.5 million, compared to $130.1 million in the prior quarter and $114.5 million in the first quarter of 2020. Subdividing this across our operating segments, our Network Solutions revenue for the first quarter was $113.8 million versus $114.1 million reported for Q4 of 2020 and $97.4 million in Q1 2020. Our Services and Support revenue in Q1 of this year was $13.7 million, compared to $16 million reported in the fourth quarter of 2020 and $17.2 million in the first quarter of 2020. Across our revenue categories, Access & Aggregation revenue for the first quarter of 2021 was $69.1 million, compared to $79 million in the prior quarter and $66 million in Q1 of 2020. The revenue for our Subscriber Solutions & Experience category was $54.6 million for the quarter versus $45.4 million for quarter four of 2020 and $42.2 million for quarter one of 2020. Traditional and other products revenue for the quarter was $3.9 million, compared to $5.8 million for quarter four of 2020 and $6.4 million for quarter one of 2020. Looking at our revenues geographically, domestic revenue for Q1 2021 was $86.5 million versus $95.8 million reported in quarter four of 2020 and $79 million in quarter one of 2020. Our international revenue for quarter one of 2021 was $41 million, compared to $34.3 million in Q4 of 2020 and $35.5 million in the first quarter of 2020. As Tom stated, in the first quarter, we had two 10% of revenue customers, both of these were domestic. Our GAAP gross margin for the first quarter of this year was at 42%, as compared to 41.1% in the prior quarter and 45.1% in the first quarter of 2020. Non-GAAP gross margin for the quarter was 42.1%, as compared to 41.3% in the prior quarter and 45.4% in the first quarter of 2020. The quarter-over-quarter improvement in both GAAP and non-GAAP gross margins were driven by product and customer mix in both our products and services segments. The year-over-year decreases in both GAAP and non-GAAP gross margins are attributable to both domestic and international product mix, partially offset by higher volume manufacturing efficiencies. During the quarter we experienced extended component lead times, which we expect to continue, potentially affecting component availability and also component and logistics costs. Total operating expenses on a GAAP basis were $54.9 million for the quarter, compared to $56.8 million reported in the prior quarter and $56.5 million for quarter one of 2020. The quarter-over-quarter decrease was driven by reduced restructuring expenses, market driven decreases in our deferred compensation expense and lower legal expenses, partially offset by increases in employee benefit expenses in both R&D and SG&A, and higher R&D project-related expenses. The year-over-year decrease in operating expenses was a result of lower labor expenses in both R&D and SG&A, and lower travel and marketing-related expenses, partially offset by market driven increases in our deferred compensation expense and contract services costs. On a non-GAAP basis, our first quarter operating expense was $51.4 million, compared to $49.5 million in the prior quarter and $56.7 million in quarter one of 2020. The increase in quarter-over-quarter non-GAAP operating expenses was primarily due to increases in employee benefit expenses in both R&D and SG&A, and higher R&D project related expenses, partially offset by decreases in legal expense and other planned SG&A expense reductions. The year-over-year decrease in non-GAAP operating expenses was a result of lower labor expenses in both R&D and SG&A, and lower travel and marketing related expenses, partially offset by increases in contract services costs. Operating loss on a GAAP basis for the first quarter of 2021 was $1.3 million, compared to an operating loss of $3.3 million in the prior quarter and an operating loss of $4.9 million reported in Q1 of 2020. Non-GAAP operating income for quarter one of 2021 was $2.4 million, compared to $4.3 million in the prior quarter and an operating loss of $4.6 million in quarter one of 2020. The quarter-over-quarter GAAP improvement in profitability was attributable to a more favorable gross margin mix and reduced operating expenses. The year-over-year decrease in GAAP operating expenses was driven by higher sales and reduced operating expenses. The non-GAAP quarter-over-quarter decrease in profitability was driven by higher operating expenses and reduced sales volume, which partially offset by improving gross margins. The non-GAAP year-over-year operating income improvement was related to higher sales volume and reduced operating expenses. Other income on a GAAP basis for the first quarter of 2021 was $3.3 million, compared to other income of $3 million in the prior quarter and a loss of $9.4 million for quarter one of 2020. Our non-GAAP other income for the quarter was $3.3 million, compared to non-GAAP other income of $1.7 million in Q4 of 2020 and a non-GAAP loss of $7.5 million in quarter one of 2020. The quarter-over-quarter increases in both the GAAP and non-GAAP other income were related to higher realized foreign currency exchange gains, partially offset by reduced returns in our investment portfolio. The increases in both the GAAP and non-GAAP other income on a year-over-year basis were related to increases in the market driven fair value of our investment portfolio and to a lesser extent, higher realized foreign currency exchange gains. The company’s tax provision for the first quarter of 2021 was an expense of $1 million, as compared to a $6.5 million tax benefit in the prior quarter and a $4.4 million benefit in the first quarter of 2020. The current quarter’s expense was primarily driven by tax expense from our international operations as the deferred tax benefits generated by our domestic operations continue to be offset by additional changes in the valuation allowance. The tax benefits in the first quarter and fourth quarter of 2020 were primarily due to the passage of the CARES Act in the first quarter and finalization of those calculations as part of finalizing our filing and related 2019 net operating loss carryback claims, as well as in a shift across our profitability jurisdictions. GAAP net income for quarter one of 2020 was $900,000, compared to $6.1 million in the prior quarter and a net loss of $10 million for the first quarter of 2020. Non-GAAP net income for the first quarter of 2021 was $6.3 million, as compared to $5.2 million in the prior quarter and a net loss of $2.2 million in quarter one of 2020. Earnings per share assuming dilution on a GAAP basis were $0.02 per share, as compared to $0.13 per share in the prior quarter and a loss of $0.21 per share in the first quarter of 2020. Non-GAAP EPS assuming dilution for the first quarter of 2021 was $0.13 per share, compared to $0.11 per share in the prior quarter and a loss of $0.05 per share in quarter one of 2020. On the balance sheet, unrestricted cash and marketable securities totaled $123.2 million at quarter end after paying $4.4 million in dividends for the quarter. During the quarter, we generated $10.7 million in cash from operations. Net trade accounts receivable was $103.2 million at quarter end resulting in DSOs of 73 days, compared to 70 days in the prior quarter and 69 days at the end of the first quarter of 2020. The variability in DSOs quarter-over-quarter and year-over-year is mainly attributable to the timing of shipments during the quarter, customer mix and sales volumes. Net inventories were $122.9 million at the end of the first quarter, as compared to $125.5 million at year end 2020 and $99.5 million at the end of Q1 2020. While inventories were down slightly quarter-over-quarter, we continue to carry higher inventory levels in preparation for new product ramp-ups and strategic inventory buffer purchases designed to aid and supply continuity. Looking ahead to the next quarter, the continuing effects of the COVID-19 pandemic, the ability of component supplies to align with customer demand, the book and ship nature of our business, the timing of revenue associated with large projects, the variability of ordering patterns from the customer base and to which we sell, as well as fluctuations in currency exchange rates in our international markets may cause material differences between our expectations and the actual results. Keeping that in mind, we expect that our second quarter 2021 revenue will be in the range of $136 million to $146 million. After considering the projected sales mix, we expect that our second quarter gross margin on a non-GAAP basis will be in the range of 41% to 43%. We also expect non-GAAP operating expenses for the second quarter of 2021 will be about $52 million to $53 million. And finally, we anticipate the consolidated tax rate for the second quarter of 2021 on a non-GAAP basis will be in the low to mid-20s percentage rate. We believe the significant factors impacting revenue and earnings realized in 2021 will be component availability, the macro spending environment for carriers and enterprises, the ongoing effects of the COVID-19 pandemic, the variability of mix and revenue associated with project rollouts, the proportion of international relative -- revenue relative to our total revenue, professional services activity levels, the adoption rate of our broadband access platforms, potential changes in corporate tax laws, currency exchange rate movements and inventory fluctuations in our distribution channels. Once again, additional financial information is available at ADTRAN’s Investor Relations webpage at adtran.com/investor. Now, I’ll turn it back over to Tom.

Great. Thank you, Mike. Christina, at this point, we’re ready to open up for any questions people may have.

Thank you. [Operator Instructions] Your first question comes from the line of Rod Hall from Goldman Sachs. Your line is open.

Hey, guys. Thank you for picking my question. I just wanted to dig into the Tier 1s in the U.S. a little bit on visibility. We’re hearing from some other suppliers that visibility is starting to improve a little bit as people get worried about supply chain disruptions or supply chain shortages and I am just curious whether you guys are seeing that? And what -- how you feel about Tier 1 visibility as you look into the second half of the year. Then I’ve got a follow-up to that.

I think we’re feeling pretty good about it. I do think that some of the carriers understand the supply constraints better than others. And typically, the larger ones are really coming on Board and trying to at least if not place purchase orders, at least place serious forecasts that are things that have been maybe a little more sure than they have been in the past. So I would say, visibility across the Board is better and that’s not just with Tier 1, that’s pretty much across the Board.

Okay. Thank you, Tom. And then the other thing that is coming up more and more is inflation on all sorts of different -- not just semiconductors, but steel and freight and so on. I am just curious if you guys could comment on what you’re seeing in that respect? Do you see upward pressure on underlying costs and do you think you could pass that through to customers for the most part or do you think it will pressure margin? Just kind of what’s your take on inflation here?

Well, if I take a look at the -- let’s take semiconductors out. I mean, we’re still having the ability to drive overall purchasing costs down. So [Audio Gap] were able to do that and to some respects, I consider this to be a semiconductor tariff. But my guess would be to the things -- to the extent that these things continue on or actually accelerate that we would be passing some of those costs off onto the customer base?

Okay. All right. Thanks a lot.

Okay.

Your next question comes from the line of George Notter from Jefferies. Your line is open.

Hi, guys. Thanks very much. I guess maybe to start, I think, Tom you mentioned record bookings at the start of the call, is there -- could you give us a book-to-bill number or a backlog number or give us some sense for where bookings are right now? And then also, I guess, kind of extending on a question earlier, is it simply customers just giving you more visibility or longer dated POs and do you think the rate of consumption in the end market is going up? Thanks.

Yeah. We don’t -- I don’t -- the answer about the booking, anyways, but we typically don’t give that. I was going to give you something that you can manage off of that, which is, I don’t know how to say it, Mike, but without giving a book-to-bill number. Let me just say it was a strong booking quarter. So and this is including -- we had kind of this booking uptick at the first part of last year when COVID was coming in line and it was actually stronger than that. So bookings wise we’re feeling good. Now as far as how much is in this quarter versus people buying out, I will tell you, we try to do that analysis and if we take out the things that are scheduled far into the future, which is really those customers trying to buy typically commit our shipments to them further into the year. If you remove that, it was still a very strong booking quarter. Now the only thing that I can’t explicitly tell you is, well, are they trying to put the inventory on their shelves versus keeping it in our shelf effectively and I can’t -- there’s really no way to gauge that. Although, I didn’t -- if we look at the demand increase that we’ve been seeing over the last, let’s say, three quarters, it’s not atypical. It’s really -- a lot of that growth is coming from Tier 3s and what we’re seeing in order demand out of those is very typical to what we have been seeing. I mean, we just -- that segment is growing very strong.

Got it. And I think last quarter you guys gave us percentage of sales coming from that Tier 3 customer set. Is there a percentage of sales number you could give us here for Q1?

I don’t know if we gave a percentage of sales. I think we gave -- it was over $50 million or $60 million and it grew sequentially and year-over-year. So it’s over that number now, of course.

Great. Okay. Thank you very much.

Okay. Hey. And one other thing, just -- I know you’re not on the phone anymore, but one thing, we did talk about the growth in that segment too. So you can -- you may be able to come up with a number from that perspective.

Okay.

Okay, Christine.

Thank you.

Okay.

Your next question comes from the line of Michael Genovese from West Capital Park. Your line is open.

Great. Thanks. Hi, Tom. Hi, Mike. It’s WestPark Capital. So my question -- my first question is just the nature of the business, has it completely changed, I mean, you used to always talk about being a book-and-ship business. But is there no room now for book-and-ship orders to come in and is it now a plan a year in ahead business completely? So that’s my first question.

No. I would -- no, in some ways it would be nice if it was, but no. So we still have a large amount, I mean, the majority of our orders come in and they want us to ship them within a two week period of time. But the highest runner pieces and selected parts are things where if you’re not placing orders right now for six months from now or even a year from now, you’re liable to run into a real supply constraint. So I would say it’s more of a -- it’s definitely shifted more toward longer term perspective, but we -- but it’s still -- the majority of our orders still come in and they want us to ship them within the quarter definitely and typically within the month.

Great. When you look at your Tier 1 business for the second half of the year, do you feel like you’re managing to supply and demand for those projects being in balance or is there a supply shortage or is there demand -- potential demand shortage, how are you thinking about that?

Tier 1s, I think, we’re by and large good at, if you look at it from an infrastructure perspective. So you almost have to go by product type. If you look at the Tier 1 business that’s coming on in Europe, that’s been forecast for some time. So we’ve already got the supply chain lined up for that increase that we’re expecting in the second half. In the U.S., I would say, the same is predominantly true. Where we run into issues is where there’s variability in the forecast from the customer and that’s typically with things like RGs and O&Ts. So on end user devices, we can run into problems, because the demand for those products is through the roof. I think combined it was up like 94% year-over-year. It’s just going through the roof. We did not forecast that because our customers weren’t forecasting that. We’ve been able to keep up, but, yes, it’s -- that’s the type of product that’s more problematic.

Does that include Wi-Fi 6 devices, is that a meaningful piece of your business, like, how many -- what percent of your customers buy Wi-Fi from you?

A large percentage of our customers buy Wi-Fi from us. It’s not -- Wi-Fi 6 itself is relatively new for us, so it’s just now starting up. Future course we got to drive demand. We think we’ve got a handle on the forecast for the chips required for that. But here, again, so far everything that we forecasted we’ve been out-stripping on the O&T and RG side. The real thing that hurts us is we do have some of our vendors de-committing, right? So when you’ve got orders in place and all of a sudden they’re not -- you can’t count on anymore, that causes material repercussion. So we’re continuing to fight that challenge.

Is the Wi-Fi stuff growing at a similar or faster rate than the O&T stuff?

I would say it’s -- yeah, I don’t have the actual breakout of those SKUs. But I would say, it’s probably leading the charge, okay…

And my final question is just -- I appreciate all this color. My final question is just -- is this a point of gross margin outperformance in the quarter? You guided in line but -- than the quarter you beat, so where do you attribute the better performance in 1Q too?

Mix. It was a mix.

You mean domestic mixed or mix or mix or that would be domestic mix?

No. No. It probably, well, it could be. There was definitely -- the answer to your question is yes. Because if you think of the growth that we saw, I mean, Tier 3s are going through the roof and a lot of that is infrastructure business, right? So it was just a good mix.

Thank you.

Okay.

Your next question comes from the line of Tim Savageaux from Northland Capital. Your line is open.

Hi. Good morning and congrats especially on the bookings. One question and then a follow-up, I think it’s been a while, maybe a very long while, since you’ve had a quarter without any 10% service provider customers, I think, last year you had two or three. And I wonder if you could characterize your U.S. business in terms of the growth, assuming your historic Tier 1 was over 10% last year and was under this year. I wonder if you have any comments on U.S. growth, excluding that customer. And then more broadly speaking, do you expect some of your historic Tier 1s to re-attain 10% customer status as we move on in the year?

Yeah. So that’s a good question. So let’s talk about Tier 1s in the U.S. So the Tier 1s in the U.S. -- and I could actually just say kind of North America. So let’s include what has happened in Mexico. You’re seeing two things happen. One is we are growing the PON market share in those Tier 1s and let’s say, PON shipments in those Tier 1s. But we are also seeing a decline in our copper business and I think a lot of people lose sight of that. So we have, you could call it today definitely a legacy business, but copper, that if we did not have that legacy business, our number -- our growth numbers would be through the roof, right, so you’re seeing copper decline. I think and I don’t know if I have -- that is in statement [ph]. At this point in time, fiber is over 70% of our business. If you can look back a year ago, it was less than 50% of our business. So you’re seeing that decline in copper, while you’re seeing huge growth in the fiber business and some of that is of course affecting the Tier 1s. And so I don’t know if that answers your question or not, so. And…

Yeah. That’s great. Just to follow-up, with regard to the booking strength. I don’t know if there’s any, if we could just assume that’s similar to what you saw in revenue-wise in overall broadband and what’s or whether there’s any sort of different character to what you saw from a booking standpoint? And can you comment on whether that booking strength has continued into Q2 and whether perhaps adjusting for some CAF II services we might reasonably expect a record revenue quarter at some point fairly soon after seeing a record bookings quarter?

Yeah. So, by the way, I didn’t finish the answer to your last question. So let me just kind of finish that. So as you know, we did won a Tier 1 award, which is a sole source award for XGS here in the U.S. That is one of those things that we expect to start shipping in the second half of the year. So I think you’ll see the Tier 1 business trajectory change after that point. On the bookings strength, yeah, that’s what -- our biggest problem right now is supply. Our problem is not bookings. So I think it has to do, where that record falls is largely dependent upon when we can actually, I mean, we walked out of Q1 with a significant amount of orders that the customers wanted to take in Q1. And the same thing is going to happen this quarter and the same thing will happen in the third quarter. And I don’t have line of sight to a real cure for that as to when it actually gets better. So I think it’s highly dependent on our ability to supply product.

Okay. Thanks very much.

Okay.

Your next question comes from the line of Paul Silverstein from Cowen. Your line is open.

Thanks guys. Tom, first off, and I apologize if you already said this, but did you address when you expect RDOF to have an impact and to what extent?

No. We didn’t. I would -- I think there’s a good chance we’ll start seeing some RDOF in the second half of this year. I don’t have a good line of sight to the ramp of that. But I would be surprised if we didn’t start seeing -- I am not -- by the way, not so sure we haven’t seen it already in some of the smaller customers. But the bigger customers and there’s, of course, a really large customer in the U.S. that we’re an incumbent to that we’ll hopefully start seeing some shipments in the second half of this year.

So do you think -- is it too much to say it’s a given that will have a meaningful impact next year or do you have a confidence level as to what…

Yeah. It should have a meaningful impact. Yeah. It should have a meaningful impact next year. They have a longer time to build, of course, as you know, but it should be a nice tailwind next year, yes.

All right. And then, Mike, I think, I ask you this question every quarter, so I do apologize, but I’ll ask it again, which is longer term from a margin standpoint on the gross margin line, you’ve been very candid about this. I think historically you’ve said consistently you expect model to remain in the low 40s. But as you look out to the prospective impacts of these large projects of these large Tier 1s, assuming they come in as advertised in terms of volumes? All the things being equal, will that -- should that drive margin lower given that some of those projects at least the non-U.S. ones probably have lower margin structure as has been the case historically or does it -- do you think long-term at least model one for us?

No. Paul, I think, it’s still the same as what I’ve said in the past. It’s low-to-mid 40s. So I can take the middle of that range. And if you start looking at those Tier 1s, I think, the additional volume that it’s driving through gives us a little bit of a tailwind as well. So I think there’s really no change to our plans going forward, still in that same model.

I would also add, Paul, I think -- there’s two other things that affect us. One is there was predatory, I mean, to put it lightly, predatory pricing going on in Europe, that has somewhat been mitigated. So I think the types of margins that you, I mean, I think, we have sustainable business type margins out of Europe today where that wasn’t the case historically. And then we have a positive draw that we haven’t yet tried to put numbers around. But our SaaS customer base, which is predominantly in the Tier 3s here in the U.S., that customer is basically 60% -- 66% year-over-year and that will, at some point, really start kicking up and being very positive gross margins, but we haven’t really forecasted that impact at this point.

Got it. And one last quick question, if I may. It’s only 90 days further on. But Tom, is there any incremental insight with respect to these large projects in terms of them panning out to the extent that the particular customers have projected to you? I mean…

Yeah. Yeah.

… you have 90 days more?

Right. Yeah. Yeah. There’s still no real changes there. I mean everything is still, we’re planning on getting to start shipping in the second half of this year and then seeing them ramp from there. So there’s no material change.

I appreciate it. Thanks, guys.

Okay. All right. At this point, we’re going to end the call. I appreciate everybody for joining us and I look forward to talking to you next quarter at this time.

This concludes today’s conference call. Thank you for participating. You may now disconnect.