Thomas Stanton - CEO James Matthews - SVP and CFO.

Amitabh Passi - UBS Investment Bank Michael Genovese - MKM Partners Tim Quillin - Stephens Inc. Rich Valera - Needham & Company Paul Silverstein – Cowen and Company Sanjiv Wadhwani - Stifel Nicolaus William Dezellem - Tieton Capital.

Ladies and gentlemen, thank you for standing by, and welcome to ADTRAN's First Quarter 2014 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). Please be advised today’s program may be recorded.

During the course of the conference call ADTRAN's 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, components cost, manufacturing efficiencies and other risks detailed in our Annual Report on Form 10-K for the year ended December 31, 2013.

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. You may begin, sir..

Thank you very much. Good morning everyone. Thank you for joining us for our first quarter 2014 conference call. With me this morning is Jim Matthews, Senior Vice-President and Chief Financial Officer. I'd like to begin this morning by discussing the details behind our Q1 results, and I'll end with some comments on what we see for the future.

As stated in our press release, revenues for the quarter were $147 million. Our Carrier Networks division revenues came in at $118.2 million, an increase of 8% over the same period the prior year. The Broadband Access category grew 13%, bolstered by a strong performance from our international business.

Our Enterprise division Q1 sales totaled $28.8 million, compared to $33.1 million for the same period last year. Our Internetworking revenue on a combined product basis including both Enterprise and Carrier products was $36.9 million, essentially flat year-over-year. Domestic revenues came in at $92.7 million. Carrier related sales in the U.S.

for both Enterprise and Infrastructure products started slow than is typical in the first quarter. We did see a meaningful pickup in this activity exiting the quarter. On a product basis, our core product areas which include Broadband Access, Internetworking, and Optical achieved $131.3 million in revenue, an increase of 11% over the prior year.

More specifically, Broadband Access achieved $81.5 million in revenue, an increase of 13% over the same period last year, driven by high-ex shipment followed by fiber to the note. Product drivers continue to be vectored VDSL, VDSL2 and GPON. Moving on, our Internetworking product category came in at $36.9 million, flat to Q1 of 2013.

The softness in IP gateways was also offset by growth in Carrier Ethernet followed by Ethernet switching.

Our Optical revenues saw year-over-year growth of 44% coming in at $12.8 million in revenues, helped by increasing shipments for Broadband Access and increasing shipments of our OPTI-6100 products for wireless backhaul to a domestic Tier 1 carrier.

HDSL revenue was down 22% with total legacy product revenue including HDSL down 37%, a greater decline than expected although we remind you that our legacy product revenue can be erratic when measured on a quarter-by-quarter basis.

Looking at the sales channels of our Enterprise products, a decrease in carrier distribution sales was partially offset by an increase in sales to our value-added reseller channel. Also we had another solid recruitment quarter, adding approximately 70 new partners to our dealer base.

Looking at the business on a geographic basis, as compared to the same period last year, strength in international sales overcame with slowness experienced in the U.S. In particular, we saw significant strength in EMEA and Latin America.

As expected, sales in those two regions were substantially bolstered by increased sales of our Broadband Access products. U.S. sales were negatively affected by a slow start to carrier spending as I previously mentioned which impacted products in both divisions most notably Broadband Access and IP gateways.

This slowness was more prevalent in Tier 2 and Tier 3 markets including competitive service providers. Moving on, as you can summarize from our result in Q1, our vectoring rollout in Europe continues to progress well and our Tier 1 award here in the U.S.

continues to track as well with lab exit forecasted to be in the third quarter of this year and initial revenues commencing shortly thereafter this year. As I mentioned earlier, U.S. Tier 2 and Tier 3 markets started slow in Q1, but accelerated as we exited the quarter.

We continue to believe the USF to CAF transition holds promise as carriers eventually adjust to the new rulings and we remain encouraged by the enhanced funding for CAF Phase 2 and the eventual implementation of CAF Phase 2, both of which will directly affect our customer base and provide additional incentive for Price CAF Carriers to upgrade their infrastructure.

Finally, as I have mentioned on previous calls, we believe our market share and geographic expansion is timed well with the carrier cycle associated with the rollout of ultrahigh speed access. And so far this has proven true despite the slow recovery of the U.S. wire line market.

We continue to see accelerating activities as carriers around the world embrace next generation access technologies to strengthen their competitive position and meet their customers' growing demand. I’d now like Jim Matthews to review our results for the first quarter of 2014 and our comments on the second quarter of 2014.

We will then open the conference call up for any questions. Jim..

Thank you Tom and good morning everyone. Revenue for the first quarter increased to $147 million compared to $143 million for Q1 of 2013. Broadband access product revenues for Q1 of 2014 increased to $81.5 million compared to $72.2 million for Q1 2013.

Internetworking product revenues for Q1 of 2014 were $36.9 million compared to 36.9 million for Q1 of 2013. Optical product revenues for Q1 of 2014 increased to $12.8 million compared to $8.9 million for Q1 2013. Carrier systems revenues for Q1 of 2014 increased to $99.6 million compared to $92.8 million for Q1 of 2013.

Business networking revenues for Q1 of 2014 was $37.9 million compared to $38.1 million from Q1 of 2013. Loop Access revenues for Q1 of 2014 were $9.5 million compared to $12.1 million for Q1 of 2013. HDSL product revenues for Q1 of 2014 were $8.9 million compared to $11.4 million for Q1 of 2013.

As a result of the above, Carrier Networks division revenues for Q1 of 2014 increased to $119.2 million compared to $109.9 million for Q1 of 2013. Enterprise Networks division revenues for Q1 of 2014 were $28.8 million compared to $33.1 million from Q1 of 2013.

International revenues for Q1 of 2014 increased to $54.3 million compared to $34.9 million from Q1, 2013. To provide the reporting of each of these categories, we have published them in our Investor Relations webpage at adtran.com. Gross margin was 52.9% for Q1 of 2014 compared to 48.3% from Q4 of 2013 and 48.7% for Q1 of 2013.

The sequential and year-over-year improvement in gross margin for the quarter was attributable to improved gross margins in both the acquired Broadband Access business and the organic business primarily as a result of lower product costs and a favorable product mix.

Total operating expenses were $66.5 million for Q1 of 2014 compared to $66.2 million for Q4 of 2013 and $63.1 million for Q1 of 2013. The increase in operating expenses from Q1, 2013 to Q1 of 2014 was primarily attributable to the increased sales and marketing expenses and acquisition related to amortizations totaled $0.7 million for the quarter.

Stock-based compensation expense, net of tax was $1.8 million for Q1 of 2014 compared to $2.2 million for the Q4 of 2013 and $1.9 million for Q1, 2013. Supplemental information for acquisition-related expenses, amortizations and adjustments in connection with recent acquisitions are provided in our operating results disclosure.

All other income, net of interest expense for Q1 of 2014 was $3.4 million compared to $3.7 million for Q4, 2013 and $3.2 million for Q1, 2013. The company's income tax provision rate was 34.6% for the first quarter of 2014 compared to 17.3% for the fourth quarter of 2013 and 18.9% for the first quarter of 2013.

The higher tax rate for the first quarter of 2014 compared to the fourth quarter of 2013 largely relates to the anticipated profitability of the acquired Broadband Access business for 2014 year compared to the remaining NOLs of that business.

The higher rate for the first quarter of 2014 compared to the first quarter of 2013 relates largely to retroactive research tax credits received in Q1 of 2013 for the year 2012 and for the first quarter of 2013. Legislations for extension of research credits for 2014 has not passed as of the end of Q1 2014.

Earnings per share on a GAAP basis assuming dilution for Q1, 2014 were $0.17 compared to $0.20 for Q4, 2013 and $0.13 for Q1 of 2013. Non-GAAP earnings per share for the quarter were $0.21 compared to $0.25 for Q4, 2013 and $0.17 for Q1 of 2013.

Non-GAAP earnings per share excluding the effect of acquisition-related expenses, amortizations and adjustments related to acquisitions and stock compensation expense. Reconciliation between GAAP earnings per share diluted and non-GAAP earnings per share is provided in our operating results disclosure.

Inventories were $87.4 million at quarter-end compared to $90.1 million at the end of Q4, 2013 and $95.8 million at the end of Q1 of 2013. Net trade accounts receivable were $105 million at quarter end, resulting in DSOs of 62, compared to 50 DSOs at the end of Q4, 2013 and 52 DSOs at the end of Q1 of 2013.

The higher DSOs relates largely to the linearity of revenue of the quarter. Unrestricted cash and marketable securities net of debt, totaled $404 million at quarter end after paying $5.1 million in dividends and after repurchasing 375,000 common shares for $9.4 million.

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 year. However, we would like to give color to help you formulate your views on our near-term business outlook.

As stated in our previous press release, we anticipate revenue in the second quarter of 2014 to be in a range of $170 million to $180 million. We expect GAAP gross margins would be in the range of 49% to 50% for the second quarter.

We expect GAAP operating expenses for the second quarter will be slightly higher than OpEx levels experienced in the first quarter of 2014. We expect the consolidated tax rate for Q2 to be in the mid-30ish percentage point range to pretax income.

We believe the larger factors impacting the total revenue we realized in the second quarter of 2014 will be the following.

The macro spending environment for carriers and enterprises; professional services activity levels, both domestic and international; the timing of revenue related to Broadband Stimulus and the Latin America projects; and the adoption rate of the Broadband Access platforms.

Tom?.

Thanks, Jim. Aaron at this point, we're ready to open it up for some questions..

(Operator Instructions). And we'll first go to the side of Rod Hall from JPMorgan. You line is now open..

This is Ashwin on behalf of Rod. My first question is on gross margin. I think you attributed the strength in gross margin to three factors, improving margins from the BBA lower product cost and mix.

If you were to break down the strength between these three different parts, which one contributed the most to gross margin strength?.

Well, I don't have the relative numbers before me, but we did see product cost reductions across the entire business, as well as a positive product mix here in the U.S. but in terms of breaking those numbers down specifically, I don’t have those numbers before me.

Now, as we look at the Q2 view for gross margin you can see that we're guiding down a bit, again, we expect our customer mix to be what we’ve seen in recent history in terms of our organic business. And also we expect to see an improvement in revenues, higher revenues [indiscernible] in the acquired business. So that will play on gross margins..

And on the acquired business, are we on track, are doing better than expected gross margins? I think the value was at mid-40s or somewhere around. .

We are certainly on target with that, yes..

So is it safe to say that Q1 was slightly above the target or very close to the target, on the BBA?.

On the BBAP?.

Yes, we had a bit of a positive product mix on the acquired business side in Q1, so….

I mean in Q1 itself it would be above that target,.

It would be-it would be, yes..

Okay, thanks, my last question is on the demand environment in general; you said it picked up strongly towards the end of the quarter.

I think I’m trying to understand the kind of visibility you have going into Q2, like how comfortable do you feel about the current revenue guidance really?.

Well we feel comfortable enough too, we're on the -- the announcement that we sent out early in the month that we were able to be able to give guidance earlier than we typically would. So -- and that’s not typical for us to do.

So we definitely were feeling better and so the overall activity picked up coming out and in a way that made us feel good that the trajectory was what we had initially planned. Now we still have two and a half months to go, so I wouldn’t, and we still by and large have a book-and-ship business.

But it definitely had quite a lot of where it was early in the quarter..

And we will next go to the side of Amitabh Passi, your line is open..

Hi, thank you guys, two quick ones from me.

Almost the 19% or 20% sequential growth in revenues, so I’m almost curious if you can give us a sense of -- do you anticipate both of your domestic and international business to grow at the same magnitude? Do you expect greater strength in international or greater at the U.S., just given that you had a weak start in the quarter, but you exited quite strong?.

So, Jim had mentioned, I mean the growth in our international business in Q1 was solid and the booking rate for the international business definitely exiting the quarter, was solid. Right now our view is that the international business will grow at a faster rate than the U.S. business which is the margin impact that Jim was trying to talk to you.

If you look at that downtick in margins a large portion of that has to do with just a stronger European business..

And then may be just in your domestic business you highlighted Tier 2, Tier 3 weakness early in the quarter. Curious what are you seeing with your Tier 1s and what do you think is going on with Tier 2, Tier 3s, was this simply budget assessment release later or do you think there is some other issue causing a bit of [indiscernible]..

To be honest I don’t know if there is a universal answer but I can just tell you the things, that I am hearing things that I -- that kind of make sense to me.

I do believe and I will tell you early in the quarter I was skeptical but I do believe because I’ve heard it from so many places that there was a weather related impact that the -- and the reason I was skeptical is because we have weather every year and over my period of time at ADTRAN, I’ve seen bad weather but the impact that we saw and the length of freeze that we saw truly impacted carriers’ ability to actually go out and do things like [indiscernible].

I mean there was definitely a -- and I’ve heard that from multiple places. So I think that had an impact. I do think there is still also this general uneasiness in the Tier 2 and Tier 3 market more predominantly in the Tier 3 market with cap funding and that’s one that we haven’t been forecasting a dramatic bounce back.

We have -- periodically see some upticks but we haven’t really seen a bounce back yet to where they were before and we just didn’t see that in Q1. But I would have to point it to cap so kind of a regulatory issue and then the freeze.

And the freeze of course has taken care of itself and I think that kind of explains why we start to see stronger activity exiting the quarter..

And we will next go to the side of Michael Genovese with MKM Partners. Your line is open..

Great, thanks.

First of all, just in the clarification do you have any 10% customer information in the quarter?.

Thomas Stanton :.

Yes, we do. We had two 10% customers and they’re similar to recent past in terms of the….

Okay, great.

And then in terms of this gross margin issue, and did you complete any milestones in the quarter in terms of moving production of the European broadband access business to lower cost locations, is anything like that actually finished in the quarter?.

Thomas Stanton :.

Well, we’ve been moving those over time but of course it takes time for them to work themselves through inventory and actually be able to ship. And there is no doubt that the greater shipment have an impact on a larger percentage of those being able to take place of our manufacturing activity.

We also had some cost reductions on a kind of product or let’s say material basis that really have been kicking in but really we’re able to work the way through inventory and at the beginning of the year I think we started seeing improvement there as well.

So I don’t know if it’s one major milestone, I would say a lot of things came together and we saw the improvement that we’ve been forecasting..

Okay. And just on the same issue though I mean just to understand the lower second quarter guidance sequentially on gross margins, I mean if I’m not mistaking and please correct me if I am, I thought there was a mix shift towards the European broadband access business in the first quarter and we saw pretty good gross margin upside.

You seem to be saying that there is going to be further mix shift towards that business and then that’s going to actually have a negative impact on gross margins.

Can you just help me understand that a little better?.

Thomas Stanton :.

We did have some positive product mix shifts within the acquired business in Q1 which contribute to that just a bit and that was the reason..

Okay. Final question....

Thomas Stanton :.

And I would tell you also that we’re not expecting the answer, a direct answer on this shift as far as long, we are expecting a stronger contribution from our international business in Q2 that we saw in Q1.

Now that’s basically forecasting an environment that we’re not -- we were at this point not expecting a turnaround in the Tier 2, Tier 3 market we think it will get better but we’re not expecting any type of bounce back from the performance in Q1..

Got it, okay.

Last question for me, and thanks for these answers, just on the domestic Tier 1 business that you’re going to have some lab activity in the third quarter, it sounds like you may have seen revenue recognition in the third quarter going into the fourth quarter, now you freely talked about that project being a multiyear project I think nine figures of revenue that would kind of grow from ’14 in to ’15.

And I am just trying to reconcile that with what I know about the carrier talking about their major access related both enterprise and residential projects peaking this year and then starting to decline in ’15 and ’16 and I am not exactly sure whether your deal is related to project VIP or not may be its related to something differently.

But can you help me reconcile how it will be ramping at big residential access project with you as their bigger access bucket is expected to decline into ’15 and ’16? Thank you..

Thomas Stanton :.

Yes, so I can’t talk specifically about any particular project because that would be towards a particular customer which we try to shy away from.

But there are a couple of things that factor into that, one is if you think about the cost associated with a particular build, the majority of the cost associated with any build and by majority I mean far majority of the cost associated with any of the builds is actually playing fiber and getting the environment ready to be able to put equipment is at best typically let’s say 10% to 15% of the total cost.

So there is an awful lot of activity that has to go on before you start in earnest on builds and we're just comfortable being obviously that our forecasting on that project is staying intact and we are still, we've got the momentum that we are meeting the timelines that we are hoping we are going to be able to meet and we haven’t seen any degradation on our customers’ perspective on what it is that they are trying to do with us and kind of what the opportunities that is..

And we will next go to the side of Tim Quillin with Stephens Inc. Your line is now open..

Hey good morning.

Just another question on the gross margin, could you be a little bit more specific what the positive mix was in 1Q or what the mix change you expect will be in 2Q?.

Thomas Stanton :.

We don’t have orders for everything in past but I would say we have talked before hard shipments versus chassis shipments and how that may affect gross margins, so there was definitely a positive contribution from just that type of product mix differentiator.

But not all the orders are relating for Q2 right now, and what we are going to be shipping for all of our customers.

So, I think what Jim was relating to and I'll let Jim speak for himself here but was relating to a more normalization there but I would say just as big of an impact is the fact that we're shifting from a kind of mid to high 40s region and going with a strong international content and assuming at this point no change, no dramatic change in the environment in the U.S.

We saw a pick up but it’s still not a bounce back, so we're assuming that there will be lesser revenue from that region..

And so it was I guess a heavy line card shipment with your specific international customer, but you expect it to tilt more heavily towards chassis shipments and more revenue from that big customer in 2Q is that a recap?.

Thomas Stanton :.

More things actually effective than just one customer of course, we have got multiple customers I mentioned before for instance Latin America actually had picked up. So, if you take it broader than that with that general mindset of the same product mix definitely affected on a customer-by-customer basis, you are right..

And then on your large Tier 1 opportunity in the U.S, I am just, I am trying to get a sense of whether that would be a single specific opportunity with U-verse upgrades or if there is multiple opportunities and would it all start at once or how would it perhaps phase in, it sounds like you could get going as early as 3Q but maybe if you're actually [indiscernible] maybe it’s more like 4Q, but I would be curious in terms of kind of the timing of the ramp and the pace of the ramp and whether it entails, you are looking at more of a single project or multiple projects?.

Thomas Stanton :.

Firstly you give me the perfect segway to be able to talk about the risk associated with large carriers and their timing and [indiscernible] until you are out of the lab and actually receiving POs there is always risk.

So -- and the fact that we are not out of the lab tells you that we are still testing, so although our current projection is exiting really early in Q3 things can change. Now to get more directly to your question, it is multiple projects.

And I think we've talked in the past before even on the conference call about the fact that there are kind of two big bucket is the way that we characterize it.

One is specific build that is much more finite and has a tighter timelines to it and then another that is kind of a broad approval across the entire network that includes fiber-to-the-node IPD slams, so kind of the whole family of products. And you are totally correct in saying that they don’t all have it at one time.

A large piece of that approval is scheduled for the end of -- excuse me the beginning of third quarter and then you will have ongoing approvals all through, and I don’t have the exact timeline in front me but the way I think about it is let’s say over the next two to three quarters after that, so you will see additional pieces come online.

But a large piece of what we need to get going will actually happen later in the half..

And then just one last question, I know it’s kind of dangerous to look at one specific customer and maybe a finite timeline but with Centrelink it looks like they have declined as a percent of revenue from something like 25% in 2011 to 17% in 2013 which would suggest a decline in the absolute dollar revenue from something like 180 to 110.

Can you comment on what might have driven that and your outlook within that customer side if you could? Thank you..

Thomas Stanton :.

That I hate talking about particular customer, but I will tell you, we have multiple products that we sale to that customer and some of them are fiber related products; some of them are more fiber-to-the-node products.

I can’t speak directly to what the total CapEx, equipment related CapEx was with that customer and how our percentage is actually came in line with their actual percentage, but my sense is that we weren’t far off.

So there is probably a little bit, it did have some focus on some fiber projects, some of which we participated in, there are cost associated with those fiber products outside of the equipment that still maybe capitalized and as you’re trying to do that if you look at number of homes passed versus total spend, sometimes that changes and that total spend to us sometimes changes.

But I don’t think we’re out of line from what you would expect, I don’t know if you were to follow everything, I was just trying to convey to you there, but I don’t think we were out of line there..

Next we will go to the line of Rich Valera with Needham & Company. Your line is now open..

First a question on gross margins, previously you have discussed cost reductions that you really expected to impact both the NSN business and some of the core products in the second half of ‘14.

Can you say, have some of those cost reductions one, come early and it impacted you in the first quarter? And two, do you expect further cost reductions that still should bump gross margins in the second half relative to say the Q2 level which you have guided to?.

Rich, we do expect improvements in the second half in terms of cost reductions. But again we have been talking about product mix shifts from quarter-to-quarter; we still need to bear those in mind as we think about the second half. But again we do expect cost reductions to continue to come into the second half.

So to get to your first part of question, the answer your question is yes, a lot of those did have come in. I would say, if you look at our gross margin profile one way to take a look at this is when we are talking about gross margin improvement and we did some in the U.S. I mean U.S. actually had a strong gross margin quarter as well.

What is probably the difficult piece to measure is what’s the quarter to quarter incremental revenue associated with the international business for the U.S. business.

And I think if you think about that shift that we saw in the first quarter and you think about the shift that we’re trying to talk about here in the second quarter you’ll see that there is still a stronger albeit both of them are higher, there is still a stronger shift towards a lower gross margin region, and if you could think about what a normalized shift was or would be then that gives you a sense of where our gross margins would be which I think by the way you would be comfortable in the 50s.

So that kind of gives you a sense of where we are, it’s just that we have an international business that is going gang busters right now..

So, that kind of leads to my next question now, it sounds to me from your comments that you would probably expect to be seeing revenue from the North American Tier 1 opportunity in Q3 from where you are at today, is that a fair statement?.

Revenue, say that again..

Revenue from the North American Tier 1 opportunity in Q3, do you think you’d actually recognize them?.

Thomas Stanton :.

We’ve said early after so I would expect some, I think the only thing I want to temper you on is we have no idea how much yet. We’re just going to have to do when the exit is and then when you think about first off is applications, so we exit the lab and get through the first office application piece and then we have to work through all those issues.

So I just don’t know how much, but yes we’re expecting in Q3..

But it sounds like based on your comments there is sort of a large specific order you would expect following those lab trial completions and that would, if it came late in Q3 you would expect to be more significant contribution in Q4 related to that particular point..

Yes, and I can’t sit here and tell you that there is a big order that’s sitting depending in their Q, so that that’s not really the way that this [indiscernible].

It’s execution and then depending on when we exit there are plans right now for a roll out, it’s not a single quarter roll out, they’re not going to be able to accomplish all this, be wanting to with the other things they’re doing and accomplishing in one quarter, even in the first approval that I am talking about this is a multi-quarter roll out..

Sure, and just one follow up to that. So, once that gets underway, presumably your North American mix will increase again as a percentage and presumably that would have a favorable impact on gross margin relative to say, Q2 where you’re going to have the very high international mix..

We would expect that, I can’t tell you how -- first I don't -- Q3 is getting out there for us. So I can’t tell you what the international mix profile will look like in Q3 at this point in time. There will be some contribution, our belief is also by the way that the U.S.

Tier 2 and Tier 3 market should be stronger and you should see that -- you’ll see the normal wrap up in albeit at a lower base in Q2 and Q3. So we would expect the U.S.

piece, but I can’t sit here and tell you that the international piece won’t swamp that because; I mean if you think about the objective we've seen since really third quarter of last year has been pretty phenomenal. And it’s coming at a time when the U.S. market is relatively for all segment, just kind of sitting there..

And we will next go to Simona Jankowski with Goldman Sachs. Your line is open..

Hi. Thanks. This is Doug (inaudible) Simona here.

Quick question on another segment specifically in Internetworking, didn’t see much grow year on year, just wondering if you could provide a little bit more detail on that and then similarly a little of insight into your outlook for that portion of the business, the enterprise segment?.

Yes. So Internetworking was -- the slowness we saw as very carrier centric, but if you think about the Internetworking segment of the business, there are couple of pieces that are directly affected by carriers, the largest piece being IP gateway.

And so the slowness we saw on the tier 2, tier 3 space wasn’t just the tier 2 and tier 3 Internetworking, I also mentioned [indiscernible]. You know in many cases tier 2 carriers but that bonus was there too so it was just, it was kind of a just a broadly, kind of say and that definitely impacted the business.

I mentioned also that the board business continued to grow, so that was actually a positive thing. If I look outside of the carrier space, it was actually pretty good. But the Internetworking piece have got a large component that is IP gateways and that does affect the enterprise business.

So if it wasn’t for IP gateways and I am going to look forward to Jim, I think the enterprise business would have grown if it wasn’t for the [indiscernible] IP gateway, I think that was the big piece. .

Okay, great. Thanks. And another follow-up more regarding shares at your tier 2, tier 3 carriers.

I think quarter two you had mentioned possible share gains of one particular tier 2 customer, wondering if that was still the case if you started to see the benefit of that or if there was essentially pushed out as a result of some of the lower spending in the first quarter?.

Yes, we picked up from a few and I would say, yes, I mean it is absolutely still the case, in fact, I think I am going to -- we added approximately 16 new tier 3 customer by the way this last quarter, but, so that’s -- but it's still the case in the tier 2 space too.

We did not see a lot of ordering activity in the tier 2 space and I can tell you with very -- with much certainty that that wasn’t any market share shift that was just a lot of activity. So we did see some pick up in some of those tier 2s but it wasn’t indicative of the award that we got yet..

And we will next go to side of Paul Silverstein with Cowen and Company. Your line is now open..

Thanks for taking the question. Not asking about any specific customer, but can you show a little insight in the terms of are there differences in margin structure among the customers, both if we look within your international business [indiscernible] acquired business, as well as the traditional business.

Are the significant differences from one customer to another, specially the large build outs relative to the less large build outs?.

When you say acquired and non-acquired business, the answer is yes. If you look at -- so if I look at the and you’re -- while you are very aware some of the business that we had prior to the acquisition and the gross margin profile that that business is different, the product set is different.

So for instance where we were selling our fiber-to-the-node products which are highly technically differentiated, you will see a different margin profile and if you’re selling at these plans which are less technically differentiated just harder to do as far as trying to show some enough technical differentiation to drive a different price premium.

So to answer your question directly, yes, there is a difference within the acquired business, there is some margin differential from account to account but that margin differentiation falls differently depending on the customer.

So we have talked before about chassis versus line cards, the chassis versus line card phenomena doesn’t occur across all of the acquired business customer base, at least not to the same extent.

So if you look at the blended gross margin, I would say they are probably closer I would say there is some differentiation still but it’s -- and I won’t say that’s meaningful but it’s definitely understandable it’s not the broad range, if you look at blended gross margins on a complete system, but on a lion card versus chassis, you will see differentiation from one account to another that is real..

So, the benefit that you saw this quarter was that almost entirely the [indiscernible] issue or was it also other from either from customer to customer or product to product as opposed to within broadband access?.

I want to reiterate that, then I will answer your particular fee. We saw gross -- there was gross margin improvement in a broad set of customers that were just cost reductions on our side. So if I look at my fiber-to-node products and as you know we do this and have been doing and have been forecasting this, we do this on a regular basis.

So our highest products without a doubt are cheaper to build today, than they were at some period in the past and that’s across the entire spectrum. That’s across the portfolio and we saw a meaningful reduction that will continue to build up and sometimes these coming chunks and sometimes they don't.

So that’s better and I would say that’s true for a large percentage of our U.S. products as well, but as far as the line card versus there is -- I mean we had a strong Latin American quarter which is on the international segment more positive because it is non-BBA versus BBA. And as Jim mentioned, we had a strong U.S.

quarter too, some of that was cost reduction, some of that was particular product mix..

And we will next go to side of Simon Leopold with Raymond James. Your line is open..

Hi, guys. This is Victor [Chu] in for Simon Leopold. I just wanted to follow up a little bit on what Paul was speaking about. Previously, you guys have guided gross margin kind of flattish -- presumably there was some factored in that kind of exceeded you expectation.

It seems like product cost reduction and that’s more of a factor that’s kind of within your control, so that it seems like your visibility should be relatively higher from that perspective, so what kind of change I guess or what impacted your visibility within that market?.

Thomas Stanton :.

Well product mix of course you don’t have all of the orders book, so if you happen to ship a product that may have benefited from cost reductions and were in inventory you start moving those, thanks to inventory and then you do get a pickup there that, that you may not expect. And then there is just also the customer mix piece to that as well.

So we have, at this point a much more, I’d say a broader customer base definitely than we’ve had in the past. I can remember being on calls where upwards of 50% of our revenue were from a couple of customers and maybe three, and we do have a broader set of customers now that can impact our gross margins.

So we don’t have all the lower orders locked in, so we don’t know how much will be sold to Latin America versus the U.S. versus some place in Germany or Europe. So, I would say it, albeit it was greater than we had expected. And we tend to try to be a little conservative, so we don’t know going into a quarter exactly how it’s going to exit.

So it was just a lot of things lined up properly and we were able to move some things out of inventory that allowed us to actually get benefit of some of the work we have been doing..

But in respect to your customer mix, so the international portion increased quite a bit in the mix, so that would imply an inverse kind of impact most, right?.

Thomas Stanton :.

Yes, but the U.S. margin was fairly rich too and I would say we probably didn’t do as good of job of and we look at Germany that you got to be happy about. We probably didn’t do as good of job of understanding what that U.S. gross margin impact would have been, as we would have like to have.

It was a positive piece but we probably got as much as that was something that we just didn’t have nailed down..

Certainly, the mix was a positive piece and again we saw some cost reduction..

Okay and going forward next quarter, you’re saying that it should revert back to the international portion should continue to grow at this click, but now it’s -- and that’s being gross margin negative?.

Thomas Stanton :.

Yes, negatively to this quarter, but I think if you go back it’s still even with, I mean, if you think about a year ago or six months ago and if we would have that high of an internal product mix, the impact to our gross margins would have been significantly downward.

So, I know that, but it’s easy to say, but I mean if you think what that mix would have been in the shift and the fact we’re able to absorb a substantially higher international business component and still to be gross margin kind of in the mid high 40s low 50s now and kind of moving that range up, I still think that’s actually a positive outcome..

Just the quick question on your Tier 2 and 3 customers, it seems like last quarter, even last quarter you guys noted that the business haven't seeing any extraordinary changes in this spending pattern, you’ve actually mentioned that group actually increased the bid for you.

So are your expectations to be more aligned now with Calix, I guess you've already met the group and you’re expecting fairly challenging year for that particularly for the customer service?.

Thomas Stanton :.

Yes. I don’t know what their particular forecast is, but I would hope that we have been signaling a bumpy environment because it is definitely a bumpy environment.

The thing that I don’t know to be honest with you how much is weather related and what we were picking up is if into the extent that it’s stable, the market share gains that we were picking up seems to -- would bolster the numbers, so we would see an increase in number base of the market share in a flat environment and then what we saw in Q1 was a declining environment.

So I just don’t know how that’s going to recover, but I would totally agree that this market is still and I’m sure we voiced that, that this market is still not normal, hasn’t returned back to the way they had been for years and years before that..

That’s make sense.

And just really quickly, I know, you don’t want to speak too much about the third quarter, but can you just kind of describe what the normal seasonality is for your third quarter, I guess?.

Normal seasonality, would be an uptick from second quarter to third quarter. This was the normal trend that we would see. In the U.S. business I would still think that that’s still intact and so we would expect in the European business it's still fairly early, so we'll have to wait and see how that will go..

And we will next go to the side of Sanjiv Wadhwani with Stifel, your line is open..

Thanks, just a couple of questions on my side. Just on the international side it looks like Latin America was also very positive in Q1. Just curious what you think the trajectory for that geography is going to be for the rest of the year.

And then just on the line card versus chassis situation, I just wanted to confirm that positive impact that you saw in Q1 was related to the large customer in [EMEA] (ph) and you know, what do you sort of expect that mix to be over the next 12 months with that customer on the chassis versus line card side?.

Thomas Stanton :.

The question was trajectory of the line. So you know we expect a solid year from that customer this year. Our early expectation is that we probably would see a pickup in Q2 versus Q1 with that customer.

We don’t try to forecast a customer that far out, because it’s a very fluid customer, but we would just see -- we would expect a good performance at least next quarter and, I don’t want to summarize the third quarter, it's going to follow-up, it's not, we’re just not forecasting that far out.

As far as the line card mix, and the question was whether or not that was directly –.

In terms of the large European customer and that -- you know the relationship between those two components, is more impactful with that particular customer, because they are the largest customer within the acquired business..

Got to tell you, I guess the question is, was the Q1 sort of being skewed a little bit more on the chassis side -- on the line card side was that a little bit of anomaly, do you expect sort of continued larger chassis deployments over the next 12 months?.

Well, they don’t give us a direct line card versus chassis piece because the line card piece of course is driven as much by demand as anything else. I think what Jim had signaled then here again I will let him elaborate, but would Jim has signal, basically over term; all we can do is in affect forecast going out.

Unfortunately history is the best guide that we have. So we signal a return to normalization on that. And you forecast in effect that unless we see something that’s substantially different. I don’t think that gross margin -- so the gross margins would be impacted and then that is offset by any cost reductions that we may have..

And we will next go to the side of Bill Dezellem with Tieton Capital, your line is now open. .

Thanks, a couple of questions.

First of all, would you discuss your growth in vectoring customers as you experienced in the first quarter and what you think you might be seeing coming into the second quarter, please?.

We expect vectoring shipments to be up in the second quarter. Most of the vectoring shipments that we are doing today are outside the U.S. and we had that tremendous growth as we launched tat product in that space and we expect that to continue..

And specific to number of customers are....

We have multiple customers doing it, we have one that’s launched, as we know a very large project. But we have multiple customers, which really started coming on. The first one we started shipping in the third quarter, and then we picked up some in fourth quarter.

I don't have the numbers to say whether or not we started shipping more than what we picked up in the fourth quarter and the first quarter. My sense is -- for actual shipments probably not because Q1 is typically slow on that. But my sense would be we would be shipping more this quarter as far as additional customers..

Great, that is helpful and then one specific balance sheet question. The other receivables account jumped sequentially.

Would you discuss that for us, please?.

Yes. Bill this is Jim. That’s related to the deferred revenue increase that you saw on the other side of the balance sheet both in terms of the short-term and long-term deferred revenues. And that balance should liquidate or paid, in the second quarter..

And that deferred revenue specifically came about from what actions or activities?.

It resulted in the acquired business, from the signing of the new business..

And we will now go to the side of Amitabh Passi with UBS, your line is open..

Hi Jim, I just had a quick clarification. Just on the OpEx you said to expect it to be up sequentially in Q2, again I don’t know if you can help with some sort of bond, revenues will be up 20%.

Are we talking you know OpEx up 0 to 5, maybe 5% to 10%; any help you can give us there?.

The range that you’re talking about, 0 to 5, we don’t expect 5 but certainly in the low single digits is the way we think about it..

Low single digit percentage or absolute dollars?.

Thomas Stanton :.

Call it absolute dollars. .

(Operator Instructions) We’ll pause briefly for any final questions to queue. At this time, there are no additional questions. I’d like to turn the program back over to our presenters..

Thomas Stanton :.

Well, thank you very much Aaron and thank you everyone for joining us on our call. And we look forward to talking to you again next quarter..

This does conclude today’s program. You may disconnect at any time..