Thomas Stanton - CEO James Matthews - SVP and CFO.

Amitabh Passi – UBS Ashwin Kesireddy – JPMorgan Doug Clark – Goldman Sachs Rich Valera – Needham & Co. Tim Quillin – Stephens Inc. Sanjiv Wadhwani – Stifel Nicolaus Simon Leopold – Raymond James Bill Dezellem – Tieton Capital Management George Notter – Jefferies & Co. .

Good day ladies and gentlemen. Thank you for standing by, and welcome to ADTRAN's Second 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 note this call 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 and Form 10-Q for the quarter ended March 31, 2014.

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’s now my pleasure to turn the call over to Mr. Tom Stanton, Chief Executive Officer of ADTRAN. Please go ahead, sir..

Thank you, Keith. Good morning everyone. Thank you for joining us for our second 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 Q2 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 $176.1 million. Our carrier networks division revenues came in $143.5 million, an increase of 16% over the same period the prior year. Growth in this division was driven by our broadband access category which grew 33% over last year.

Our Enterprise Division’s Q2 sales totaled $32.7 million, and although down from $38.9 million in the prior year, we did see an expected sequential increase in this business with revenues growing 13.3%.

Also as expected, the sequential growth was driven by our Internetworking revenue which on a combined product basis, including both Enterprise and Carrier Products, was $41 million compared to $43.9 million for the same period last year and $36.9 million for the first quarter, growing 11% sequentially. Domestic revenue came in at $97 million.

International sales came in $79.1 million and as I mentioned in our release last night, this represents a new record level for our company. On a product basis, our core product areas which include Broadband Access, Internetworking and Optical, also achieved a new record coming in at $165.1 million in revenue, an increase of 17% over the prior year.

More specifically, Broadband Access achieved a record $108.3 million in revenue, an increase of 33% over the same period last year, driven by vectored VDSL, VDSL2 and GPON. Moving on, our Internetworking product category came in at $41 million.

On a year over year basis, softness in access routers and IP gateways was offset by growth in Carrier Ethernet followed by Ethernet switching. Our Optical product category came at $15.8 million, basically flat to Q2 of 2013 and up 24% sequentially.

HDSL revenue came at $4.8 million, down 53% from last year’s period and total Legacy product revenue including HDSL came in at $11 million, down 47% from the prior year.

Looking at the sales channels for our Enterprise products, a decrease in sales through carrier distribution drove the decline in Enterprise revenue compared to the same period last year. Sales through the value added reseller channel were flat compared to the same period last year.

And we had another solid recruitment quarter adding approximately 80 new partners to our dealer base. Looking at our business on a geographic basis, the U.S carrier business was essentially flat to the first quarter with a strong increase in tier 2 and tier 3 spending overcoming a decrease in tier 1 spending on HDSL and SONET Optical.

Although the tier 2 and tier 3 spending was still below last year’s levels, we’re glad to see that that market moved meaningfully forward in a positive direction. Our international business was driven by solid performances in Europe, the Middle East and Latin America.

Europe led this positive movement as our next generation Broadband roll out with several carriers in the region continued to progress well. During the quarter we did see several advancements and a setback.

On a positive front we moved forward with several international customers, including an OANE award adding major Latin American MSO and a next generation Broadband award at a tier one carrier in the Middle East.

Here in the U.S, we were able to extend multiyear commitments on Broadband market share in the tier 2 space, including significant commitments surrounding CAF funding from several tier 2 carriers.

Additionally we saw other awards from tier 2 carriers for deployment of new Gig-E services, 100% market award for deployment of all IPTV markets to include our Access Optical and services solutions and we were awarded the routing business for Business Hosted Voice solutions with one of the nation’s largest MSOs.

On the negative front, we did experience a delay in our project with a tier 1 award here in the US and now expect meaningful revenue to commence in the first quarter of 2015. This delay was not due to any development slips on our R&D. However the impact is still the same.

Notwithstanding my previous comments about this possibility when dealing with a project of this type, we are nonetheless disappointed. However, all parties remain committed and focused and we are moving forward. We continue to be convinced in both the short and long term benefit to our company.

However, we are revising our 2014 guidance to reflect this change. 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 that has proven true despite the slow recovery in the U.S. wire line market.

We continue to see accelerating activity as carriers around the world embrace next generation access technologies to strengthen their competitive position and meet their customers' growing demand. I would 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 up the call for questions.

Jim?.

Thank you, Tom and good morning everyone. Revenue for the second quarter increased to $176.1 million compared to $162.2 million for Q2 of 2013. Broadband Access product revenues for Q2 of 2014 increased to $108.3 million compared to $81.6 million for Q2 of 2013.

Internetworking product revenues for Q2 of 2014 were $41 million compared to $43.9 million for Q2 of 2013. Optical product revenues for Q2 of 2014 were $15.8 million compared to $16 million for Q2 of 2013. Carrier systems revenues for Q2 of 2014 increased to $128.8 million compared to $105.5 million for Q2 of 2013.

Business networking revenues for Q2 of 2014 were $42 million compared to $45.4 million for Q2 of 2013. Loop Access revenues for Q2 of 2014 were $5.3 million compared to $11.3 million for Q2 of 2013. HDSL product revenues for Q2 of 2014 were $4.8 million compared to $10.3 million for Q2 of 2013.

As a result of the above, Carrier Networks division revenues for Q2 of 2014 increased to $143.5 million compared to $123.3 million for Q2 of 2013. Enterprise Networks division revenues for Q2 of 2014 were $32.7 million compared to $38.9 million for Q2 of 2013.

International revenues for Q2 of 2014 increased to $79.1 million compared to $34.8 million for Q2 of 2013. To provide the reporting of each of these categories, we have published them on our Investor Relations webpage at adtran.com. Gross margin was 49.3% for Q2 of 2014 compared to 49.2% for Q2 of 2013.

Total operating expenses were $67.5 million for Q2 of 2014 compared to $65.7 million for Q2 of 2013. The increase in operating expenses was primarily attributable to increased sales and marketing expenses and R&D expenses. Acquisition related amortizations totaled $800,000 for the quarter.

Stock based compensation expense, net of tax was $1.8 million for Q2 of 2014 compared to $1.8 million for Q2 of 2013. Supplemental information for acquisition-related expenses, amortizations and adjustments in connection with the recent acquisitions are provided in our operating results disclosure.

All other income, net of interest expense for Q2 of 2014 was $2.5 million compared to $2.8 million for Q2 of 2013. The company’s income tax provision rate was 34% for the second quarter of 2014 compared to 41.4% for the second quarter of 2013.

The lower tax rate for the second quarter of 2014 compared to the second quarter of 2013 largely relates to losses incurred in the acquired business in Q2 of 2013, compared to anticipated profitability of the acquired Broadband Access business for the year 2014, partially offset by research credits not received in 2014.

Legislation for extension of research credits for 2014 has not passed as of the end of Q2 of 2014. Earnings per share on a GAAP basis, assuming dilution for Q2 of 2014 were $0.26 compared to $0.17 for Q2 of 2013. Non-GAAP earnings per share for the quarter were $.30 compared to $0.21 for Q2 of 2013.

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

Inventories were $89.2 million at quarter-end, compared to $87.8 million at the end of Q2 of 2013. Net trade accounts receivable were $115.5 million at quarter-end resulting in DSOs of 60, compared to 58 DSOs at the end of Q2 of 2013. The higher DSOs relates largely to the linearity of revenue during the quarter and higher international revenues.

Unrestricted cash and marketable securities net of debt, totaled $369 million at quarter-end after paying $5 million in dividends, and after repurchasing 1.96 million common shares for $43.7 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 quarter or for the year. However, we would like to give color to help you formulate your views on our near-term business outlook.

Based on the timing delay Tom mentioned, and the anticipated increase in U.S carrier and enterprise spending and projected-related decrease in international revenues, I'm sorry -- and project-related decrease in international revenues, we expect Q3 revenues to be flat or slightly up on a sequential basis.

We expect GAAP gross margins would be in the range of 49% to 50% for the third quarter. We expect GAAP operating expenses for the third quarter will be flat to slightly up on a sequential basis. We expect the consolidated tax rate for Q3 to be in the mid to low 30s percentage point range for pretax income.

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

The macro spinning environment for carriers and Enterprises, professional services activity levels both domestic and international, the timing of revenue related to Connect America projects, the adoption rate around Broadband Access platforms.

Tom?.

All right. Thank you, Jim. Keith, we are ready to open it up for questions at this point. .

(Operator Instructions). And we’ll take our first question from Amitabh Passi with UBS. Please go ahead. Your line is open. .

Thank you. Good morning guys. Just a quick one from me on the Tier 1 delays, I was wondering if you had any sense whether you think it's project specific. Is it just sort of a macro slowdown in the spending at the carrier? Any incremental insights you can give? And then Jim, you mentioned about project delays I think internationally.

I was wondering if you could expand on that. What’s driving that? And then I have a follow-up..

Yeah. As far as the tier 1 project delay, really what the net cause of what we are talking about is centered around just lab exit and first office application. So it’s a matter of just timing when things get out of the lab and then the amount of time that they actually sit in the field prior to a mass rollout.

And if I look at the current schedule and where things seem to be laying out, my sense is that we are talking about being in general at least in Q1, hopefully early in Q1 but in Q1. Let me speak a little bit to that and then on the other thing.

The project that we are talking about, we have -- as you know we have several and I mentioned in the comments we have several carriers in Europe that are deploying next generation Broadband, one that is significantly larger than the rest. That carrier does do a fairly good job of forecasting some period time out.

And the flow of that carrier which actually is somewhat consistent with what happened last year is you’ll see them actually ramp up in the first half of the year, peak around this period of time and then gradually slow down in the third quarter, fourth quarter and then come back again in the first quarter of next year.

And that’s just really how they deploy and that’s something that of course we’ve had to learn as we’ve gotten into this project with them and really no change. I wouldn’t really call that a delay, I would just say that’s the way that they purchase.

Jim, anything to add?.

I would agree with that, yes..

Okay. And then Tom, maybe just on Tier 2, Tier 3, I think you touched on them in your opening commentary.

I was wondering if you'd just elaborate what trends are you seeing there? What's your expectations for the rest of the year with your tier 2, tier 3 customer base in the US?.

That actually -- the numbers were up sequentially fairly strong. We had a very,strong year over year comp to overcome. So they didn’t meet that, but we’re actually expecting a stronger quarter this quarter.

So we expect them to continue to grow and the way things are looking right now with CAF funding rolling in, I wouldn’t be a bit surprised if we wouldn’t see them up in the fourth quarter yet again, which is not of course typical for this business. So the tier 2s and tier 3 seem to be coming back in a meaningful way for us.

So we are feeling good about that. .

And we’ll take our next question from Rod Hall with JP Morgan. Please go ahead. .

Thanks for taking my question. This is Ashwin on behalf of Rod. I was hoping you could help us think about gross margins beyond Q3. Based on your commentary on the delayed Tier 1, it looks like domestic revenue is going to increase as a percentage of total from the Q2 levels.

So in that context, how should we think about gross margins beyond Q3 and possibly into 2015?.

This is Jim. I certainly don’t want to guide margins for Q4 at this point, but longer term we talk about improving our gross margins over the longer term in order to get back perhaps the low 50s. And that includes product cost reductions coming into to play.

So we see that beginning to materialize more meaningfully next year in terms of the product cost reductions coming into effect. So hopefully that helps with your question in regards to timing. Thomas Stanton Let me add a little comment to that.

As you know, international revenues were a more substantial portion of our revenue this quarter than I think probably any time in our history. And international revenues actually come in as you know, international revenues are typically at a lower gross margin than what we see here in the domestic market.

I think if you look at our gross margins for this quarter, I think it's indicative of the cost reductions that we’ve been able to get out of our European business. I'm very -- I think I'm very happy with where our European gross margin profile is at this point and I think we will continue to improve it. .

Okay. Going back to the Tier 1 point again, I know you said that you are planning to complete the testing on IP conversion project by the end of Q3 and start demanding revenue in Q4. Is that delayed now, or is that still on track? Thomas Stanton So we initially, we were looking for a lab exit in Q3 and potentially some revenue in Q3.

And I don’t know if we ever publicly stated that. We have said I know we’re expecting lab exits somewhere around the middle of the year. And that has slipped. So I’m right now, without getting into detail that would get me in trouble with my customer, our senses is we’ll see lab exit somewhere towards the end of this quarter or early next quarter.

And you’ll see then there’s a normal period of first office application. That typically takes; let’s say 30 days or so. So if you think about that timing and kind of where that puts us, that tells you why we’re thinking Q1 of next year. Let me add one other piece. The further we get into this, the more certainty there is.

The more you get through, the less you have to get through and therefore it tends to solidify. So right now, things are looking very positive. I can’t tell you it couldn’t slip again. I will tell you the closer we get to the exit date the better off we are. .

Okay. One last question from me.

I don't think I heard this, but can you update us on the buyback consolidation lift and what percentage of your cash and equivalents are in the US now?.

Well, yeah. Still the large majority of our excess cash or cash period that remains in the U.S and during the quarter gosh, we did $1.96 million. We recently re-up and quite honestly, I do not have the remaining authorization, but that should be easily calculated from public information that we published, okay? So I apologize for that. .

And we’ll take our next question from Simona Jankowski with Goldman Sachs. Please go ahead..

Great, thanks. It's Doug Clark on behalf of Simona Jankowski actually. I want to go back to an earlier point on the improvement in kind of tier 2 carrier spending environment being related to cash spending.

I'm just wondering if you can give a little bit more details on exactly the timing of fund deployments on behalf of CAF-1 of the first phase of CAF-1, and then similarly kind of timing expectations around CAF Phase II spending. Thomas Stanton Okay.

So the way I look at it and Jim will correct me if I’m wrong, I look at it as kind of CAF-1 and there’s two parts of CAF-1. There’s the first year, and then the second year where they aggregated what wasn’t spent in the first year. And I’ll tell you the spending associated with that first level of CAF is happening now. So we have some customers.

The bullishness that I'm seeing on the Tier 2 space, a lot of that has surrounded these CAF fundings. So it’s actually happening now. The phase 2, Jim, do you have a comment on that? I just don’t have that …..

The phase 2 of CAF is my understanding will begin to materialize next year in 2015 in terms of beginning to see revenue on that. Thomas Stanton Now, in both of these phases, I believe they have a three-year spending cycle, but I will tell you, we’re not just seeing activity. We’re actually seeing purchase orders associated with that spending. .

Okay, great. Thanks. That’s helpful color. And then a related question to that as well, the gross margin guidance, which is essentially flattish sequentially, just wondering if you can kind of help reconcile that, if it's a product mix thing. But typically we would expect gross margins to improve if the domestic revenue base is growing.

So, just kind of reconciling flattish gross margins versus the growth in the U.S business as a percentage of revenues..

Sure. We do continue to have movements in product mix and customer mix within the organic business and the acquired business that would continue to play on that. So mix does continue to be an issue that we have to consider, Doug..

And we’ll pick the next question from Rich Valera with Needham & Company please go ahead..

Thanks. I just wanted to follow up on the gross margin question.

So Jim, relative to your earlier expectations of seeing gross margins north of 50% in the back half, you're saying the main issue there is with respect to sort of an unexpected mix change that's keeping you a little bit below that in the third quarter?.

I think – yeah, mix is playing on it and we’ve always talked about the potential of mix playing on gross margins. But in terms of our longer term outlook on where gross margins will end up, we’re still seeing the low 50s, Rich..

And so what is it that gives you confidence that you see the low 50s next year? I know you had a number of product cost reductions which you expected to hit a significant way in the second half, and now you are saying that impact should hit next year.

Did you have delays in executing those product cost reductions, or is it just you expect a different mix next year?.

Let me chime in a little bit on kind of at least my take on where the current forecast is for gross margins. So a lot of the cost reductions that we have talked about, that we’ve been getting a lot of questions about, are with the acquired business and that is right on track, I think we actually showed that.

I mentioned that some of the pickup that we’re seeing in the Tier 2 space which is really kind of a positive impact for the second half of this year is in CAF related projects. The majority of the CAF related projects that we have, have installation associated with it.

In fact I think the two big awards with Tier 2s that we got around CAF have us actually doing 100% of the install.

There is going to be a service level increase and I hate to bring that up because I know that that kind of confuses the mix, but there is a meaningful service level increase in our CAF related purchases for most of the carriers that we’re actually going to be doing CAF builds with. And I think that has some influence.

I’m not going to be able to sit here and tell you the exact percentage, but that has an influence on it..

Great. Just to paraphrase, it sounds like you're on track with the cost reductions you had talked about, but it's this mix, particularly the CAF-related service revenue you're going to see which is going to put a little pressure on the second half margins, but you would expect that to abate somewhat as you move into next year and see better margins.

Is that fair?.

We do expect that to abate, I’ll tell you the one other little thing just to confuse the situation a little more, we have -- during Q2, we also won turf status and I’m not sure if you’re familiar with that. But in the U.S larger carriers tend to break their services business up in what they call turfs.

We were awarded two turfs from two different customers which cover 50% of the country with each of them.

So that business could grow, will grow next year and we will have to do a better job and I will work with Jim on making sure we delineate any margin degradation which is still accretive, but any margin degradation associated with the services business versus where we are tracking with our products.

But that margin – I mean that business, the services business is not only a good strategic thing for us to be doing with our customer base, but it is accretive to earnings and we just need to be able to break that up better..

Great. And just one final one for me. Jim, in aggregate the legacy products were down quite a bit both sequentially and year-over-year.

How should we think about them going forward with respect to the 2Q levels? Should we think of them sort of flattish at these levels for at least a few quarters, or do you think there's more potential downside or upside from here?.

That total was 10 million, 9.7 million or something?.

Yeah, total including other traditional is $11 million. It was certainly a drop off sequentially..

Mix itself continues to surprise us. I mean for it to drop to $4.8 million I think where it is right now. And if you look at our year over year comparison, it is significant, even though we got a low level last year, it was a significant piece to that. But at $4.8 million you’re basically doing replacements of cards.

You are not really talking about any growth in that business. So it could drop, but it’s .-- we are pretty close to a floor..

And we’ll take the next question from Tim Quillin with Stephens. Please go ahead..

Hi, good morning. I just want to understand your expectations for lab exits over the next few quarters. And my understanding is that there was one single project where there was a fiber to the curb initiative, and somewhat of a technical challenge to get it to work with what the legacy vendor had provided.

Is that the specific project you're looking for lab exits later this year?.

Yes. No. In that project, that project because it includes fiber to the curb technology as well as fiber to [Prem] technology, t enables more than just that project. but the answer to your question is yes. .

Tim Quillin – Stephens Inc.:.

:.

We know of no additional hurdles. It feels like a process but -- and there are times when you find bugs and you have to fix bugs and we have time allocated for that. There could crop up a technical hurdle, but I don’t think anybody believes that to be the case. And let me add one other thing. That is not what caused the delay to begin with.

There was not big technical hurdle that necessarily that caused the significant delay. .

Okay.

And then in terms of other projects and second source opportunities that you might have with that customer, when would you expect lab exits there or potential opportunities to present themselves? And with AT&T’s at least stated plans to reduce CapEx and start winding down project VIP, is there any risk that those are pushed out even further kind of beyond 2015?.

I won’t tell you that there isn’t any risk, but I can tell you from -- and I’m not going to speak about AT&T or that specific comment, but I .-- with our customer the, the commandment that we are getting from the customers is as strong as it’s ever been and I think everybody wants to get this rolling..

Okay.

And then in the international business, was your large European customer the primary reason for the big quarter-over-quarter increase, or were there other major customers that drove some of that as well?.

There were other major customers, but the primary is a big primary. But I mentioned parts in the Middle East that actually picked up and those are meaningful pickups, but the primary customer is a very large customer..

Okay. And do you have any sense -- you said that that customer is pretty good about forecasting but has some seasonality there.

Do you have a sense of what that project might look like in 2015 and 2016 or can you give us kind of a flavor of how it will progress from here over the next three years?.

Our sense is that 2015 will be larger and there are several things in the works with this customer on technology roll outs associated with the MSANs that could be very meaningful. I can tell you our sense is 2015 will be larger. I haven’t really looked at 2016 in a while.

We had initially planned on this being more even keel once we get to a ramp, but it looks like it’s going to actually continue to ramp at least through 2015 and I haven’t really looked at 2016. So I couldn’t give you a good flavor on that. I don’t expect it to fall off the cliff. This is a multiyear project and we’re early into it still.

But I don’t know exactly how that 2016 will look like compared to 2015. .

Okay. And then just a couple of other quick questions. Number one, I just wanted to get a sense of the legacy revenue.

Is that entirely U.S, or significantly U.S, or is there international? And then the second question is could you give us any update on expectations for CenturyLink, which had been a top 10 or a 10% plus customer, but had been declining from 2011 to 2013, if you expect that customer to be stable.

Or is that -- when you talked about Tier 1, some Tier 1 weakness, is that something that you are seeing there as well? Thank you..

On the legacy products. .

Sure Tim. On the Legacy products the large majority of that $11 million number is domestic. .

I think it’s over 90% or so..

Well over 90, yeah. .

Thomas Stanton:.

CenturyLink:.

And we’ll take the next question from Sanjiv Wadhwani with Stifel. Please go ahead..

Thanks. Two questions. Tom, I wanted to clarify your comment about the turf win. Just wanted to get some clarity on that means. Is this sort of a standalone services initiative, or is there something else in that? And then second question was on international. It hit 45% of revenues in 2Q. Obviously that's going to be variable going forward.

But if you look at next year, you're expecting your large international customer to grow. You also have a domestic Tier 1 picking up in Q1 starting next year. So I just wanted to get a gauge of how you thought international will trend as a percentage of revenues next year..

That’s a really good question. First, I’m going to answer the turf piece. I did mention we’d won a couple of turf awards that were kind of each one 50% of the nation. I know one of them is a large services award. So it includes stuff that isn’t necessarily at trend.

We had talked about getting into the services business a couple of years ago and one of the reasons for that and that’s continuing to go on and actually we’re just being successful. I know for a fact one is broader than that. On the second one I just don’t know. I don’t know if it’s a broadband specific or not.

Then of course we won a significant amount of services piece that will be shipping through next year associated with the CAF awards that we just recently won. I hope that covers that question.

And the second -- as far as the revenue mix, that’s a really good question if I look at what we’re expecting and Jim is probably going to not be happy with me, and I will tell you this is just – we have no purchase orders for the Tier one carrier here in the U.S associated with next year.

But if I look at what we’re expecting, we would expect just based off of that for the percentage of revenue in the U.S to actually tick up as a percentage to what it is this year in relation to international revenue.

The international revenue will grow, but we’re talking about a fairly large project starting next year that it -- I can’t – if I set the first quarter aside where that’s ramping up, if I look at the balance of the year, I would expect our US business to actually grow at a faster rate than our international business. .

And we’ll take the next question from Simon Leopold with Raymond James please go ahead..

Thank you very much. I wanted to see if we could follow up a little bit on the customer concentration in the quarter.

I know you don't give explicit detail on a quarterly basis, but if you could give us a sense of how many customers you did have exceeding 10% of revenue and any color in terms of geographies or profile you could offer?.

Sure Simon. There were two 10% customers, one domestic and one international..

Great. And in the past, you had talked about international opportunity beyond the major one you've won in Germany. I think you talked about two incremental -- I don't recall if they were Tier 1 awards but at least incremental awards internationally in Europe.

Can you give us a status update on those projects?.

Yeah, this is Tom. We’ve won several tier 2s.I’ve talked about the business in Europe being broader than just that one customer and the growth actually on a year over year basis being broader than just one customer.

I also mentioned in my notes that we did win a tier 1 in the Middle East and I had talked about by the way I think a couple of quarters ago about another tier one in the Middle East and this is a different one. It’s moving forward there. Specifically in Europe I would say it’s moving forward. I would love it to be faster than it is.

But if I look broader than Europe I would say we’re pretty happy..

And when we look at the products that are benefiting from this, it seems to be a good indicator that the acquisition you made of the NSN products was a good idea.

Can you give us some help in terms of trying to understand how big that piece of business is in terms of the base of products you acquired, the nonorganic strength?.

I’m not sure I understand this..

Simon, I’m going to try to address that question the best I can. Our international revenue as we said is $79.1 million. I would suggest to you that that the majority of that is the acquired business. We don’t disclose the acquired business revenue, but I think Simon that’s the best I can do for you right now. .

Maybe let me ask this a slightly different way.

If we look at the increase in international revenue from the prior quarter, is the vast majority of that increase coming from the acquired products?.

Yes. .

Okay. That's really, really very helpful. That's what I was looking for. Then just one last question for me then is when I look at the domestic business, a pretty significant decline on a year-over-year basis.

Can you help me understand what's different in terms of the business mix domestically year-over-year?.

So if you look at the quarter and year over year and look at -- so there are two components, the Enterprise piece and the carrier piece. The Enterprise piece is down year over year, but I told you it was up 13 something percent sequentially. It was a tough comp for them.

They actually fell a little bit and then started picking back up really this quarter. And it was IP gateways I think was the biggest thing which by the way as you know is carrier related spending, typically the CLECs. And so that product line has a big impact on that business. It is absolutely picking up.

I’ve talked about some MSO business, additional MSO business that we won and we are feeling good about the trajectory of that business going forward. On the carrier side, the biggest decrease is the comp to tier 2 Broadband, tier 2 and tier 3 Broadband spending as compared to last year and the second largest thing is HDSL. .

And we’ll take the next question from Bill Dezellem with Tieton Capital. Please go ahead. .

Earlier in I think it was the opening remarks, you mentioned a number of wins that you had this quarter.

Would you please characterize the significance of them, either individually or in aggregate, please?.

I’m going to have to get my list of what I mentioned. I can without a doubt tell you in aggregate they’re meaningful because included in those wins that I listed were some CAF awards as well as incremental market share awards in the tier 2 space and those are without a doubt meaningful awards.

Some of the other ones – the other one I mentioned was the gigabit, the IPTV service award with a tier 2. I think that will start slow. I don’t think it will be at the same level as the CAF awards which have very direct and let’s say augmented funds that are going towards fairly large build outs. .

And the other one was managed service, managed voice service..

Yeah. The managed voice service for the enterprise business is actually a meaningful award, but it’s here again not the same level as what we are talking about with the CAF awards. .

And so relative to those CAF awards, would you share with us the timing of when you would expect those to ramp, and if there is a second phase of ramp that you anticipate?.

They’ll start ramping in this quarter. So we’ll actually see revenue this quarter. We see the pickup next quarter and we expect a positive year out of those through 2015..

Okay. So these are the same ones that you had referenced in response to a prior question that it was ramping this quarter..

That’s correct..

Thank you.

And then what insights can you share relative to the Internetworking business, and what you might feel like you need to do to stimulate growth in that business?.

The internetworking business is similar to the question that was just asked. The internetworking, business a large piece of that internetworking business is IT gateways and that’s a large enough piece to where it dominates where the internetworking business ends up.

If I look at the internetworking business itself, it includes things like switches and routers. And if I look at our switch business has been growing very positively. But internetworking because of the carrier spend associated still dominates it. We’ve just started a recent review, our integral projections we have 65 plus market share there.

We have incremental accounts that we will win in let’s say probably the next nine months. We’ll be able to grow market share there. But that market tends to be a little bit cyclical. And when it grows it grows real well and when it stalls it stalls.

I would say we think we are no longer in a star mode, but I can tell you it’s a robust growth mode either. Go ahead..

I'm sorry.

Is that specifically IP gateways you're talking about?.

It’s predominantly -- there several different products in there, but it’s dominated by IP gateways..

Thank you. I cut you off on another thought you were going to have..

That thought has left my mind, so I’m good..

And we’ll take the next question from George Notter with Jefferies LLC. Please go ahead..

I just wanted to follow up on the two turf contracts that you mentioned earlier. Are those Tier 1 customers? I think you mentioned they accounted for half the country each. I guess that implies tier 1 operators. I guess I'm trying to understand why the turf business makes a lot of sense for ADTRAN.

I suspect that the margins are pretty different than what you guys have been used to historically. It sounds like in one of those cases it doesn't necessarily include just ADTRAN equipment but other vendors' equipment as well. Can you just kind of talk about that and what the bigger picture is for ADTRAN in that business? Thanks..

Sure. So to directly answer your question, one is a Tire 1 and one is a large Tire 2. And as to why it makes sense, it makes easy sense for us when we’re talking about ADTRAN products, because there’s a significant differentiator.

If you look at our large competitors, it’s beneficial to compete with them with this being as they offer these type of services as well, so it kind of puts us in a different tier.

And in many cases especially when they’re purchasing our equipment, I think we also win an expertise to the project and we actually get the project up and running and recognized. I think there’s a strategic benefit when it’s our project.

When we started rolling into some of these CAF deployments, you’re really talking about fairly large geographic area that you’re covering.

And if you’re covering them, some many times with contractors, but once you have that technology base in place, the incremental work that it takes to do other equipment, being as you already have to have the infrastructure in place to install your own equipment is fairly minimal.

And the cost associated with doing your product, once you have the manpower and the expertise in place versus somebody’s else product gets to be fairly minimal. We talked about this when we first started this initiative maybe three years ago about it on a gross margin basis it is dilutive.

On an operating margin basis and I just looked at these numbers maybe a week ago, it is very accretive. So we’re very bullish on it..

And then just as a follow on, how big do you think this business could get for you next year out of curiosity? Could it be more than 5% of revenue, 10% of revenue?.

The answer is -- probably we have some, I’m sure some of our services people on the phone, listening on the phone and then they probably really do not want me to answer. I think it’s I think realistically somewhere in between those two numbers is doable, especially with the CAF piece. I think that’s the right range.

I think more than five, maybe less than 10. It could cross the 10 threshold. .

And we’ll take a follow up question from Tim Quillin with Stephens. Please go ahead..

Hi. Thank you for taking my follow up. I just had a couple of quick follow-ups on the enterprise business. One, are you seeing any growth in the old Bluesocket business? And do you see any incremental opportunities with new funding for Wi-Fi for schools and libraries? And the second question is an easy one.

What's the breakdown between domestic and international on your enterprise business? Thank you..

Okay, the answer is yes. I don’t have to growth in front of me, but it absolutely was a grower this quarter and the second half I think is going to – A lot of it is the reason you’re talking about. We have two different initiatives with Bluesocket.

We have a value added dealer base that in many times calls with our help into schools and municipalities and that business has actually been strong and picking up. And I think we’ve probably announced several of the awards that we’ve had over the last few months. We also have a carrier initiative which is longer gestation period.

I talked about some of the awards that we have. Those services are still just now rolling out with the larger carriers, but it is definitely -- the education piece you’re talking about has definitely been positive. I don’t know if we break out Jim though..

So on your enterprise question, Tim, I would have to say today the large majority of those revenues are domestic. However we think that we’ll begin to see some diversification. I think we talked about on prior calls an award internationally actually in Europe with a large carrier for an enterprise application..

And it is a substantial award but it is -- as with any large carrier it takes a long time to get to the exit point. So we’re still early on the exit point, but it’s a very large award for the enterprise business..

And it appears we have no further questions at this time. So I’ll turn the program back over to our presenters for any closing remarks..

Thank you Keith. Thank you everyone for joining us on our call and we look forward to having some good news on the next conference call. Thank you very much..

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