Tom Stanton - Chief Executive Officer Jim Matthews - Senior Vice President and Chief Financial Officer.

Ashwin Kesireddy - JPMorgan Sanjiv Wadhwani - Stifel Rich Valera - Needham & Company Doug Clark - Goldman Sachs Tim Quillin - Stephens Inc. Simon Leopold - Raymond James Tejas Venkatesh - UBS Bill Dezellem - Tieton Capital Cobb Sadler - Catamount Ted Moreau - Barrington Research George Notter - Jefferies.

Ladies and gentlemen, thank you for standing by, and welcome to ADTRAN’s Third 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.

During the course of the conference call, ADTRAN representatives expect to make forward-looking statements, which reflect management’s best judgment based on factors currently known.

However, these statements involve risks and uncertainties, including the successful development and market acceptance of core products, the degree of competition in the market for such products, the product and channel mix, component cost, manufacturing efficiencies and other risks detailed in our Annual Report on Form 10-K for the year ended December 31, 2013 and Form 10-Q for the quarter ended June 30, 2014.

These risks and uncertainties could cause actual results to differ materially from those in the forward-looking statements which maybe made during the call. It is now my pleasure to turn the call over to Mr. Tom Stanton, Chief Executive Officer of ADTRAN. Sir, please go ahead..

Thank you, Tasha. Good morning, everyone. Thank you for joining us for our third quarter 2014 conference call. With me this morning is Jim Matthews, Senior Vice President and Chief Financial Officer. I would like to begin this morning by discussing the details behind our Q3 results and I will end with some comments on what we see for the future.

As stated in our press release, revenues for the quarter were sequentially down versus our initial expectations of being flat to slightly up. The quarter came in at $162.9 million.

The sequential decline was driven primarily by decline in our international business along with softness in our enterprise business, which was partially offset with an increase in our domestic carrier business.

Total carrier networks division’s revenues, including both international and domestic, came in at $133 million, down from $143.5 million for Q2 of this year. Total enterprise revenues were $29.9 million. Domestic revenue came in at $98.6 million and international revenues were $64.3 million for the quarter.

On a product basis, our core product areas, which include broadband access, internetworking and optical came in at $148.4 million in revenue compared to $158.1 million for the same period last year and $165.1 million for Q2 of this year driven largely by the domestic enterprise softness I mentioned.

On a sequential basis, the decline in core products was again driven by a decline in our international business and our domestic enterprise business partially offset by an increase in our domestic broadband access and optical product areas.

More specifically, total broadband access revenues came in at $96.1 million compared to $98.1 million for the same period last year and $108.3 million for Q2 of this year. The sequential decline was driven by a decline in our international business partially offset by an increase in our domestic business.

Our internetworking product category came in at $38.6 million compared to $43.3 million for the same period last year and $41 million for Q2 of this year. Our optical product category came in at $13.7 million, down from $16.6 million for the same period last year and down from $15.8 million in Q2 of this year.

The sequential decline relates largely to lower international sales again partially offset by higher domestic optical shipment. HDSL revenue came in at $8.4 million, down 27% from last year’s period and total legacy product revenue, including HDSL, came in at $14.5 million, down 25% from the prior year, but both areas were up sequentially.

On a geographic basis, total international sales came in at $64.3 million, slightly up from the same period last year. The sequential decrease from $79.1 million was mainly attributable to a decline in Europe as a large project there had a seasonal slowdown.

Much of this decline was anticipated and we fully expect to see an upturn in this business as we start the New Year. The carrier business in the U.S. was mixed. We did start to see the impact of CAF funding, namely with some Tier 2 carriers, but we are still in the early stages of that rollout.

The non-CAF affected markets remained relatively flat and we did see an increase in Tier 1 spending. Coming into the quarter, we expected our enterprise division to see sequential growth from the $32.7 million in the second quarter.

However, our enterprise sales were negatively impacted by softer demand and inventory correction, primarily at two distribution partners.

Enterprise product sales on a sales through basis for both carrier and VAR channels, although down year-over-year were essentially flat as compared to the second quarter leading us to believe that the prominent reason for the net sequential change in revenue for that division was lower inventory levels in our distribution channel.

We had another solid recruitment quarter adding approximately 70 new partners to our dealer base. Although revenue did come in lighter than expected, we are able to continue to progress on several fronts. On the last call I mentioned, several awards in various regions, including Latin America, the Middle East and here in the U.S.

All of these projects continue to move forward and we began initial shipments to the major Latin American MSO in the latter part of the third quarter. The others are expected to have initial shipments beginning in late fourth or first quarter.

During the quarter, we also continue to add to our Tier 3 customer base and grow the adoption of our ONE optical product line. We currently have over 60 carriers around the world who are in various stages of deployment with this product.

Our service business which I have previously mentioned, also continue to progress well and we expect to see meaningful growth from this area in 2015. As all of you know, higher bandwidth and IP services have entered the mainstream of carrier and consumer concerns.

The lack of investment in this area has become a competitive and sometimes political barrier to carriers around the world and they are responding. It is on this premise that we have steered our R&D and have pursued our geographic expansion.

We expect to see accelerating activity in 2015 as carriers embrace next generation access technologies to strengthen their competitive positions and meet their customers’ growing demands. I would now like Jim Matthews to review our results for the third quarter of 2014 and our comments on the fourth quarter of 2014.

We will then open the conference call up for questions.

Jim?.

Thank you, Tom and good morning everyone. Revenue for the third quarter was $162.5 million compared to $177.4 million for Q3 of 2013. Broadband access product revenues for Q3 of 2014 were $96.1 million compared to $98.1 million for Q3 of 2013. Internetworking product revenues for Q3 of 2014 were $38.6 million compared to $43.3 million for Q3 of 2013.

Optical product revenues for Q3 of 2014 were $13.7 million compared to $16.6 million for Q3 of 2013. Carrier systems revenue for Q3 of 2014 were $114.1 million compared to $120.8 million for Q3 of 2013. Business networking revenues for Q3 of 2014 were $39.7 million compared to $44.2 million for Q3 of 2013.

Loop access revenues for Q3 of 2014 were $9.2 million compared to $12.4 million for Q3 of 2013. HDSL product revenues for Q3 of 2014 were $8.4 million compared to $11.5 million for Q3 of 2013. As a result of the above, carrier networks division revenues for Q3 of 2014 were $133 million compared to $141.3 million for Q3 of 2013.

Enterprise networks revenues for Q3 of 2014 were $29.9 million compared to $36.1 million for Q3 of 2013. International revenues for Q3 of 2014 were $64.3 million compared to $64.2 million for Q3 of 2013. To provide the reporting of each of these categories, we have published them in our Investor Relations page at adtran.com.

Gross margin was 48% for Q3 of 2014 compared to 46.5% for Q3 of 2013 and 49.3% for Q2 of this year.

The increase in gross margin for the quarter compared to Q3 last year was primarily driven by improved gross margins in the acquired broadband access business partially offset by a less favorable customer mix and higher services mix in our organic business.

The decrease in gross margin for the quarter compared to Q2 of this year was primarily driven by a less favorable customer mix and the acquired broadband access business and a less favorable customer mix and higher services mix in the organic business.

Total operating expenses were $65.8 million for Q3 of 2014 compared to $65.3 million for Q3 of 2013 and $67.5 million for Q2 of 2014. The increase in operating expenses compared to Q3 last year was attributable to higher R&D expenses partially offset by a decline in selling, marketing and G&A expenses.

The decrease in operating expenses compared to Q2 of this year was attributable to a decline in R&D and selling and G&A expenses. Acquisition related amortizations totaled $0.8 million for the quarter. Stock-based compensation expense net of tax was $1.8 million for Q3 of 2014 compared to $1.9 million for Q3 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 Q3 of 2014 was $2.6 million compared to $2.8 million for Q3 of 2013 and $2.5 million for Q2 of this year.

The company’s income tax provision rate was 24.8% for the third quarter of 2014 compared to 18.9% for the third quarter last year and 34% for the second quarter of this year.

The lower tax provision rate for Q3 last year largely relates to the significant improvement in profitability of the acquired Broadband Access business and benefits from research credits during that time period. Legislations for extension of research credits for 2014 has not passed as of the end of the Q3 2014.

The decrease in the tax provision rate for Q3 this year compared to Q2 this year was largely attributable to reductions in 1048 reserves and lower annual pretax income. Earnings per share on a GAAP basis – excuse me assuming dilution for Q3 2014 were $0.21 compared to $0.28 for Q3 of 2013.

Non-GAAP earnings per share for the quarter were $0.25 compared to the $0.32 for Q3 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 $86.9 million at quarter end compared to $93 million at the end of Q3 of 2013.

Net trade accounts receivable were $99.3 million at quarter end resulting in 56 DSOs compared to 56 DSOs at the end of Q3 of 2013. Unrestricted cash and marketable securities net of debt totaled $365 million at quarter end after paying $4.9 million in dividends and after repurchasing 400,000 common shares for $9.1 million.

The book and ship nature of our business, the timing of revenues associated with large projects and the variability of order patterns of the customer base we predominantly sell into may cause material differences between our expectation and actual results.

However, our current expectations are that Q4 revenues will be seasonally down and taking into account our European order patterns we expect a sequential decline in the low to mid-teens percentage range. We expect GAAP gross margins will be in the range of flat to slightly up for the fourth quarter.

We expect GAAP operating expenses for the fourth quarter will be approximately flat on a sequential basis. We expect that the consolidated tax rate for Q4 to be in the low 30s percentage point range for pretax income. We believe the larger factors impacting the total revenue we realized for the fourth quarter of 2014 will be the following.

The macro spinning environment for carriers and enterprises, the variability of mix in revenue associated with large project rollouts, professional services activity levels both domestic and international, the timing of revenue related to Connect America projects, the adoption rate of our Broadband Access platforms and inventory fluctuations in our distribution channel.

Tom?.

Thank you, Jim. Tasha, at this point we are ready to open it up for any questions people might have..

Thank you. (Operator Instructions) We will take our first question is from Rod Hall with JPMorgan. Please go ahead..

Hi. Thanks for taking my question. This is Ashwin on behalf of Rod. I hope you guys can hear me..

Yes..

I want to check on the gross margin target which you had previously put out like achieving low-50s by the end of 2014.

I am wondering if that’s changed, are you still on track on that – for that?.

Well, our guide that we just spoke to was flat. This is slightly up in Q3. We did talk about an increase in services business as well for the quarter. And our services business is actually very good business for us, so although it may weigh on gross margins, it’s very healthy from an operating margin standpoint.

I mean it’s actually all of our services business is actually nicely above 30% operating margins, so that’s good business for us..

Okay.

Can we shift to optical access, should we be expecting optical access to sort of return to good anytime soon possibly in the first half, it will be helpful if you could walk us through some of the drivers that you think can help this business?.

Yes. So the optical access product category itself I think is going to be kind of lumpy in this range, that’s been lumpy over the last year. We have seen some growth from it in – some of you may recall a few calls back where we talked about one of the large carriers in the U.S. starting to adopt it for Ethernet over SONET.

The predominant growth in our optical business, so it’s going to be showing up in the broadband line, so our ONE product line, a large percentage of that actually flows through the broadband segment because it’s Total Access 5000 based. And you will see our GPON product area a large percentage of that would be flowing to our broadband base.

So I think that that’s where you are going to actually see more of the optical growth and so..

Okay. Moving to the enterprise segment is – are you seeing any signs of sort of completion of correction and ton of inventory I know you said it’s concentrated just to distributor partners. But are you kind of seeing any signs of reversal of that correction.

Also it will be interesting if you could comment on trends in Europe for Q4 and the first half?.

Okay. So let me take the first piece. So the enterprise business did surprise us. We had some momentum coming out of the second quarter. We had very good deal flow coming out of the second quarter and we were projecting growth off of the second quarter, so us coming in actually lower than Q2 was somewhat over-surprised.

And I have mentioned this in my notes but I would characterize as we had two things happening.

The – one is the environment definitely got softer through the quarter and we have really saw a push out of deals and I have questioned that a lot here internally and literally we can see where that we were expecting to close in the Q3 timeframe just didn’t close, so that impacted things.

And then there was the inventory piece and the inventory piece I mentioned a little bit about sales out of the distributors. And by that I mean we booked revenue as we sell into distribution partners. And then we can have some visibility as to what the sales out of those distribution partners are.

And we saw basically that the distribution sales out was basically flat to Q2. So the environment, the sales itself were basically flat coming out of those areas.

And if I look at the decline in revenue, I would say that that’s kind of $2 million decline was basically the inventory piece that we saw and the rest of it was just – the non-growth was just basically a flat market from Q2.

Does that answer that piece of the question?.

Got it..

Okay.

And then as far as the European piece we – the order pattern of Europe is we – it’s kind of peak in the second quarter that we see a fairly good first quarter and then it kind of ramps up through the second and you will see a decline in the third and then decline yet again in the fourth and that’s what we are expecting this year and that’s what we are expecting next year.

The level of activity that’s projected is actually at this point in time up next year versus this year, so we are expecting some benefit from there. We have also – I have mentioned that we have won – we have actually won a couple of other awards within that carrier.

One of them is the enterprise, very significant for the enterprise business, which will start next year probably in the first half. And then we wanted some incremental business there as well.

So, we would expect the total numbers for next year to be stronger than this year, but I would expect it to have the same profile, which is pretty strong first quarter, definitely strong second quarter, and then tailing off in the third and fourth..

Okay, thanks guys..

Okay..

Thank you. Our next question will come from Sanjiv Wadhwani, Stifel. Please go ahead..

Thanks. Couple of questions. Jim, I am looking at your guidance for the fourth quarter and it’s down sort of low to mid-teens and we are talking about sort of seasonality with this European carrier.

I am wondering overall when you look into 2015, should we be looking at it sort of different seasonal pattern compared to what you have had historically in the past? And I have couple of follow-up questions..

As we look into 2015, is that correct?.

Yes, just wondering if sort of seasonality changes in 2013 versus what you have historically had in the past?.

Sanjiv, let me take a whack at that first and Jim, please correct me of anything you think is right. I think the answer to that is we have seen that shift already start happening and it started happening when we brought in that carrier and that is that carrier in the current environment.

So, if I assume no new market share gains, if I assume that we don’t bring on our Tier 1 carrier didn’t exist here in the U.S. then I would say we are saying the strength of that European carrier will probably be even stronger next year in the second quarter is what it is. So, you end up having the U.S.

business continuing to grow from second to third, but you have the European business declining from second to third. And then both of them will decline in the fourth. So, that is the shift where we typically back when we were 100% U.S., you would see us grow from second to third without a doubt, I mean, very rarely would you not see that.

With the international content being what it is today, you are seeing that decline having an impact on that U.S. growth. And we saw it by the way the same thing this quarter, the U.S. grew, the European was just down more.

Did that answer your question?.

Yes, that’s helpful. Just one follow-up question, any updates on the Tier 1 U.S. carrier where we are on that? Is it still sort of the fourth quarter situation where you could see some deployments or I will be looking into 2015 at this point of time? Thanks..

Yes. I think even in the last call we are talking about most of that shifting out of this year and into the early part of next year. And all of that is still exactly where we think it is. So, we may see some activity in the fourth quarter.

We are not projecting that at this point, but we really think the activity really starts ramping up in the first quarter beyond next year..

Got it. Thanks so much..

Okay..

Thank you. Our next question will come from Rich Valera with Needham & Company. Please go ahead..

Yes, thank you.

Wanted to get your thoughts on your two big international projects as you look into next year, whether you think those are up or down from this year, so you have your big European projects with the NSN business and then you have the Latin American project that’s been ongoing for quite a while and I think you are winding down the first phase of that.

Just wondering how we should think about those two projects as we look into next year on a year-over-year basis?.

The European project is much easier to get your arms around just because of the nature of the way that they order equipment. And our expectations for that we definitely have next year not just – and we have some good things helping us there. I had just mentioned that we have also won some additional business within that carrier.

Some of that is enterprise business and some of that is carrier-specific business, more in the optical area. So, we expect that, that will grow next year. We are – usually what happens with our Latin American customer is we get towards – we ship equipment than we do install and we are heavily involved in the installation of that.

In fact, Latin America was actually up this quarter. And as we get towards the tail end of that installation, they start to get and that’s what we are expecting. As to exactly when that happens next year, I really don’t know. That’s typically very much a – it’s a delay, delay, delay and then it’s a fire drill.

And I would fully expect that to happen next year as well. So, where that happens next year? I don’t know. We did also I mentioned started shipping to a fairly large, a very large MSO in Latin America, which will also be positive. So, if I look at the region, the Latin American region, we would expect that to be up next year..

Great. Got it. That’s helpful. And then just revisiting the gross margin question, you talked before about this 50% sort of level for the entire company, a lot of that was based on cost reductions you expected to enact throughout the product range, but then particularly in the acquired products.

So, I wanted to understand sort of where you were on those cost reduction plans, are those all on track? And is 50% still the number given the higher level of services business you are anticipating going forward?.

Well, Rich, this is Jim. I will answer that. So as far as the cost reductions, we continue to have cost reductions project going on, on the hardware piece or the product piece of our business that, that will continue to cut in. The results of that will continue to cut in as we go through 2015.

So, that will provide we believe upward pressure, if you will, on gross margins. Now, there is a situation with our services business, which again is very good for us and we saw sequential increase in the quarter. And as Tom said in his notes, we expect that that business will grow as we go through 2015.

So, I think we are looking at a mix issue in terms of where gross margins will, on a consolidated basis, fallout. Now, what I want to emphasize that the services business again is very nicely profitable for us. And from an operating margin standpoint, we are looking at over 30%. So, that’s good accretive operating margin business for us..

But just I guess to put a final point on it, do you expect that to maybe result in something less than a 50% overall gross margin as sort of your medium term rate, because due to the services mix?.

I don’t think so. We don’t think so. We do believe that as we go through 2015 that that’s achievable..

Got it. Okay, thank you..

Thank you. (Operator Instructions) We will take our next question from Doug Clark with Goldman Sachs. Please go ahead..

Great, thanks. One quick clarification or follow-up on the large U.S. Tier 1 customer, I understand you more or less reiterated the timing and the fact that labs exit could come at some point in 2014.

Just wondering if you could give a little bit more detail on some of the comments that you made in the past, I mean, is this still a multi-hundred million dollar opportunity and how much of this is a timing issue as opposed to it being a certainty of a customer win in future deployments?.

There is nothing that has changed our opinion on the size of it. We continue to receive forecast information that reiterates the size of what our initial thoughts were. So, the answer to your first question is yes, we still think if it is in the multi-hundreds of millions dollars over the term.

Everything – every hiccup that we have seen so far has been, has had to do with lab exit and I will say it’s basically one hiccup, which I talked about on the last call. So, to us, it’s totally a timing and the sooner the better.

Having said that, the big carrier and they change their timeframes and so we are still watching it very closely, but nothing has changed our opinion on the size or at this point in time on where we expect the revenue to come in at..

Okay, thanks. And then on the other domestic U.S. carrier business, you did mention that the Connect America Funds started to have an impact in the quarter.

Can you talk a little bit more about the trajectory of the impact? Is this something that’s going to play out over the next several quarters or through 2015 and perhaps longer?.

I think definitely through 2015. So, I had mentioned in the last call that we started seeing some real activity around some of the Tier 2s, one Tier 2 in particular, it actually started moving forward fairly aggressively. That did start to come through this quarter.

And we right now have plans for that to continue on through 2015 at a more accelerated pace. So, we would expect the CAF fees to at least play out through 2015. It’s more difficult for me to say what happens after that.

Although I will say that we have different carriers on different phases and if you look at the totality of the carriers that are looking at the CAF funding I would say we are very early in the deployment cycle. So I could see it play out longer than that.

The real thing that we are looking for, which has got a much more longevity is this conversion of USF to CAF, which is an ongoing benefit for some of the Tier 2s, but predominantly the Tier 3. That has not really played itself out.

Our Tier 3 business was actually up sequentially Q2 to Q3, but I would say that, that market is still somewhat, hasn’t fully embraced the CAF model yet..

Great, thank you very much..

Okay..

Thank you. We will take our next question from Tim Quillin with Stephens Inc. Please go ahead..

Good morning and thank you for taking my questions.

Just regarding your opportunities with your Tier 1 service provider, would you be able to help us size up what your first specific opportunity is that you are preparing for lab exits on right now? And then on maybe the larger opportunities or second source opportunities for upgrade, is there any concern that if the technology is just towards more of a fiber upgrade path versus a vectoring upgrade path if that lessens your opportunities?.

Okay. So as far as the first piece of that, so the first area is I am trying to think of making sure I don’t get in trouble here, it’s a very, very specific regional deployment, very large in and of itself.

And I guess I am not sure exactly what to say other than the fact that we are expecting that particular piece to really start rolling out next year. And the way that we have characterized it before is we view that as kind of half of the total opportunity.

So, it’s a very meaningful piece and it was the one that is the most finite, because in X number of houses that we are trying to – that you deploy the service to a product.

To get to your second part of the question, the answer is yes, it very well could be more fiber centric and that doesn’t bother us at all, because the award that we are talking about and the approval cycle that we are going through includes not only our fiber to the node and our UBE product line, but it includes our fiber to the prem product line.

So, even in this initial rollout, there will be both fiber to the prem and kind of more VDSL technology being deployed. So, if that ends up moving more fiber centric, that’s not negative to us..

Right, that’s helpful.

And then on that first opportunity that’s more finite in nature, can you give us a sense of the timeline of the deployment?.

Well, assuming that we were to that is we have a timeline that is – that starts early in 2015.

My only reluctance is, is that timeline sometimes shift, but my sense is everybody wants to get this thing rolling in early 2015 and it will ramp from the first quarter will be less than the second quarter that is shipped and then it will ramp up probably what we have seen before is it kind of ramped up to kind of steady state rate in about three quarters.

And at that point in time hopefully we are moving past just the regional project into a much more wider scale deployment..

Right.

And that first finite project though, would it take a year or two years or three years or how long would it take to complete?.

That’s a good question. My sense is we are talking about something over a year, but probably not two years..

It’s okay. And then just last question on the turf-bender work, can you give us a sense of what percentage of revenues you might expect that to represent in 2015? Thank you very much..

As you look at that total services business, I mean, the question I think will be will it cross the 10% line on the total services line?.

That’s right..

And in 2015, our total services business, which includes our international piece as well as the turf business here in the U.S., could definitely cross that 10% line. If I look at just the U.S. business, I think it would have a hard time in 2015, it could, but I would think it would have a hard time in 2015 crossing that line..

Okay, that’s great. Thank you..

Okay..

Thank you. We will take our next question from Simon Leopold with Raymond James. Please go ahead..

Thank you. Couple of housekeeping and then some trending questions.

First of all, any color you can offer on the number and characteristics of the 10% customers?.

Sure, Simon. The number of 10% customers hasn’t changed from Q2. So, we still have one domestic and one international..

Great. And in terms of the guidance, you did talk about the trending in the internetworking business as being a bit slow, just wondering if that the issues you talked about that affected this quarter, whether you expect internetworking to be greater or less than the mix in the fourth quarter.

How you thought about that within the guidance?.

Internetworking, so internetworking includes some carrier products and some enterprise products.

So, Simon is your question in more relation to enterprise?.

Well, I guess overall, I am trying to figure out what to assume that entire business will do in the fourth quarter.

So, your overall guidance for kind of teens-ish sequential decline, I am just trying to think should I think of internetworking behaving similarly to the overall business or whether it’s at or above?.

Yes. So, Jim mentioned something in his comments, they would be easy to overlook, which is explicitly when we talk about the decline sequentially, he explicitly pointed out the decline in the international business and predominantly we are talking about the European business.

So, I will again tell everybody that is a 100% just has to do with the seasonal way that they deploy this, I’ll call it seasonal, but it’s basically ramp up early and then ramp down and then ramp back up. So, the decline in that business is substantially greater than what we are expecting for in the decline in U.S.

business, which would include both the carrier and the enterprise business.

Did that answer your question?.

Okay, somewhat, somewhat. And the other issue, which you didn’t talk about either, because it’s not an issue or because you don’t know maybe is just the effect on exchange rate. I think what we have been struggling with is with your higher European exposure and the weaker euro to the dollar that, that may affect your customers’ budgets.

They budget in euros and they may be paying or you are converting to dollars.

Do you have the ability to give us some sense of what the impact is of exchange rates on the international, particularly European challenges you are facing?.

Well, Simon, I can – it is something that we look at, but if you look at – if we look at the impact on total consolidated revenue for Q3 on the change in exchange rates say from Q2 to Q3, we are looking at about 1% impact on total company revenue at that cost..

And in terms of the fourth quarter outlook given that the euro is much weaker versus the dollar, they basically have less money to spend?.

So, in terms of the less money…..

They are paying in euros, Simon..

Yes..

Yes. So, they are paying in euros. They have set a budget in euros. You are going to convert it to dollars..

Right..

The euro was down about 8% versus the dollar over the quarter.

And so I am surprised it’s only a 1% impact, that’s what I find a little confusing?.

Yes. So, what we look at Simon is the average exchange rates that we incurred based on revenue timing in Q2 versus Q3. And also the guide, the revenue range that we gave for Q4 also includes some level of negative impact for the change in average exchange rates from Q3 to Q4, okay.

So, we have included that, the impact of that in the revenue range that we gave..

Okay.

And then one last one and I would like to think about this as more of a bigger picture trend, not focusing on exactly this quarter or next quarter, but how are you thinking about the materiality of these 1 gigabit projects, you had a number of announcements over the quarter about wins and progress, I am just trying to put this in context of materiality in terms of maybe 2015 as well as longer term?.

I think it’s easier to talk about that in longer term than just 2015, but the materiality is not so much these specific wins. I mean when we would win a city or win a municipality that’s the positive thing. But the dollar impact of one particular one is not that significant.

I think the materiality of those and one of the questions earlier on is, are we going to see more fiber-centric deployment? There is no doubt that the sentiment within the carrier space and the sense of urgency they have towards deploying faster broadband is going up and I would say it gone up some this year, you see people laying concrete plans, you even seen the Tier 2s now laying concrete plans for doing gigabit services and rolling out broadband and even some of the most reluctant ones are now coming up with plans and trying to figure out how they are going to fund that.

So I think the longer term impact is very positive because as you know you kind of hit a tipping point where all of a sudden a gigabit service or a very high-speed broadband service becomes the norm. And once that happens even the most reluctant carriers have to do something about it.

So I think longer term it’s very positive, I think it’s very good movement for us as to how it plays itself out in 2015. We are going to see some of that with our Tier 1 carriers in the U.S. We have two Tier 1s that are very much involved in broadband deployment.

And there is no doubt that that undercurrent growth is driving their plans for 2015, so I think it will have a broader impact pass that..

Great. Thank you for taking my questions..

Thank you very much..

Thank you. We will take our next question from Amitabh Passi with UBS. Please go ahead..

Hi, this is Tejas filling in for Amitabh. Just a couple of quick ones for me, in your 4Q revenue guidance what is implied for U.S. and international sequential growth and specifically will U.S.

also see close to low to mid-teens decline in sales in 4Q?.

The U.S. we don’t expect to see as much of a decline as our European business..

Got it..

So the answer to your question now the U.S. won’t decline the same amount the European business will and will decline less than the average..

Okay. Got it.

And as a follow-up maybe you could give us some color on margin implications for the ramp with the large Tier 1 in the U.S.?.

At this point in time we would see them accretive to the corporate average..

Got it. Thank you..

Thank you. We will take our next question from Bill Dezellem with Tieton Capital. Please go ahead..

Thank you. A group of questions, first of all, relative to your large U.S.

deployment, you had mentioned that that’s going to start as a regional deployment and you have also referenced that being a multi-hundred dollar deal, is that multi-hundred dollar win just for the region or is that making the assumption that it does roll out beyond that?.

That’s for the region..

And how – and what – so if it were to rollout across the country how much larger would it be, a magnitude of three fold, five fold…?.

So there are some very specific things that we are trying to get done and I really do need to be careful here about customer concerns about the information here.

But the way that we have characterized it in the past is we look at them equally as far as potential and it’s because one has a very definitive number associated with it, and the second one does not.

So the second one is more speculative, it definitely has the potential to be larger, substantially larger depending on the period of time and the deployment of gigabit services. But it is not as finite in being able to understand what the numbers are associated with it, so we tend to look at them as being equal weight.

It’s probably just a – I don’t have any better way of calculating that until we actually start the broader scale rollout..

From a very basic way to think about it there would be two regions one that’s planning on beginning in the first quarter likely that could be hundreds of millions and then a second region that could be larger than that, but the certainty of it happening is less?.

No. Well, yes and no, so the larger region is the entire footprint and the intention is – and this is the intention of the project is we will be able to be deployed in the entire footprint.

Much of the work that we are doing today will allow us for that deployment in the entire footprint, so it’s not one region versus two, its one region versus the entire network. And second piece of that I don’t know if that answered your question..

Does that answer your question, Bill?.

It did. Thank you..

Okay..

Allow me to shift to the European carrier if I may.

You had referenced I believe within your opening remarks that you have had additional wins there, would you provide us further detail behind those wins and incorporate some dollar thoughts into them also, please?.

Yes. The one that I can talk about the easiest is the we also won a enterprise award which we talked about a couple of quarters ago and said that this was going to be a long-term lab exit process. And there are a couple of phases to this project. We should be exiting the lab I believe in the first quarter of 2015 is the last look I saw at it.

And I had characterized it then and I would still characterize it the same way although it would take time to ramp. This is the largest enterprise award we have ever had. So and that would start – they should start shipping in 2015, it should be in the first half of 2015.

And you will see it ramp up and we will see – we expect a very substantial ramp in 2016 of that business..

Your current win is hundreds of millions and this is larger than that?.

No. I said this is the – it’s not as big as the current project, we have with them. I said it is the largest enterprise centric award that we have ever had regardless of the region..

Great. Thank you for the clarification, that is helpful.

And are there other – you had mentioned other wins in your opening remarks, what more can you say about those in terms of timing and size?.

Some of it we have and we talked about, so we have in the Tier 2 space there are several gigabit award wins specifically..

Tom, I am sorry, I was thinking specifically at the European carrier?.

Okay. At the European – there is a optical piece that we have won, but I am reticent to talk too much about that at this point. Those are the two new wins thought at that particular carrier..

And can you share timing of that optical piece?.

It will be in 2015 probably before the half but I don’t want to guarantee that, but it would in 2015..

Alright. That is helpful.

And then you actually segued a little bit earlier that I would like to go next which is wins that you can talk about beyond the European carrier and the domestic large scale?.

Okay. So I did mention a couple of Tier 2 awards on the last call. Those have not started shipping yet. Those will start shipping here again in the first half of 2015. We did of course win a large Tier 2 market share award, which we did start seeing some impact at the end of this quarter and we expect that to carry through all through next year.

Latin American MSO, there is a very large cable provider down there that has chosen our products for fiber deployment PON as well as for ONE. We started seeing some small benefit of that this quarter but that will carry on through next year and predominantly to ship through the next year.

And in the Middle East we have won a carrier award there which will also start in 2015, here again in the first half of 2015, but that has not started shipping yet as well..

Thank you.

And then finally, over the last 12 months you have reduced your share count like something in the neighborhood of 6.5% and with the share price down and it sounds like you are confident about the future quarters increasing and having 40% of your market value in cash, are you feeling like it might be time to accelerate that share buyback program?.

We have been very diligent in lowering our share count and returning the value to shareholders that way at current with our expectations on what the future quarters are going to look like from my perspective it seems like a very light thing to be doing..

Thank you..

Thank you. We will take our next question from Cobb Sadler with Catamount. Please go ahead..

Hi guys. Thanks a lot for taking the question. I had it on your new customers, could you talk about whether those customers will be taking services and enterprise or is it just broadband deployment.

And could you talk about particularly the European, the new European customers, could you size those relative to your existing major European customer, I am just trying to gauge how big these kind of deals that you haven’t started recognizing revenue on are and what the products they will be taking and kind of what the margin profile might look like relative whether they take services and/or enterprise?.

Okay.

Would you mind repeating the first part of that question please?.

Yes, it was just the new customers, so the size relative to you major European customer?.

Okay. So the major European customer that we have today is doing the largest deployment in Europe or really in that part of the world right now. So I don’t see anything that’s of the same size.

If you aggregate the customer base here, I still don’t think it’s not going to double what we are doing in Europe today, it’s just the largest thing going on there. If you look at the U.S. and the Tier 2 CAF pieces that we have won they definitely will have an impact on our Tier 2 number and our Tier 3 number.

I don’t expect them to be the size of the Tier 1 award that we have here that we have talked about on the call here, in the U.S. I expect them to be meaningful and I expect them for instance in aggregate to be on the order of what our tier – current Tier 1 deployment is here in the U.S. but it won’t be as large as the new one.

Does that make sense?.

That does and just as it relates to Europe I mean how, can you tell us how many Tier 1s that you may have – I have realized you have existing customers there but new ramp that may materially increase at a particular carrier I mean how many new projects do you have I guess with carriers outside let’s say Deutsche Telecom in Europe?.

We got quite a few carriers. But the only thing that I can tell you we have won definitively is the one in the Middle East. The other ones we have ongoing business with them. They ramp up, but this is not a new project is what’s going in the Middle East..

Okay. It sounds good. And then just last question on kind of the smaller U.S.

Tier 1 is always the age old question about what’s going on with market share there and your decision being out of Monroe or whatever, I mean is the share there relatively stable and are you seeing any changes there?.

I would say it’s relatively stable and it’s probably been relatively stable since the beginning of the third quarter. I think I mentioned on the last call we had a lab exit issue with some of our PON products and that put us in a bad situation. That has been resolved and we have large – we have seen a pickup in our PON shipments in that area.

So I would characterize it as stable and hopefully we will be able to move that forward next year..

Okay. I appreciate you taking the questions. Thanks a lot..

Okay. Thank you..

Thank you. We will take our next question from Ted Moreau with Barrington Research. Please go ahead..

Thanks for taking my question. I appreciate it.

Hopefully I didn’t miss this earlier but I just had one question on the European business guys, do you think the miss in the quarter was more tied to the macro environment or was it just since it’s a new – relatively new project for you guys just didn’t have a good feel for the seasonality aspects of that business in the second half of the year if you could talk about that? Thanks..

Yes. I understand the miss with that customer in pretty good detail. And first of all, it’s not macro, it is – we had – this customer is very good at forecasting.

We had a set of alternatives on some funds and products that we ship to them and they change their mind on the alternative with the option A or option B and they came into the quarter thinking they were going to go option A and they ended up going option B. And that, that is the totality of the miss there.

So, it was not a macro thing, it was just a decision that they made. Without getting into way too much detail here, ultimately that choice towards option B is beneficial to us. We will end up getting higher revenues over time, but it’s an over time revenue versus the one-time revenue. And that’s where the miss was..

Okay.

And so then it’s just a change in how they are viewing the type of technology they are using?.

Yes, it’s not even a technology thing..

Okay..

It is – you can – it was not a technology choice, let me not go any further than that, because I don’t want to get into level of detail here, but it was literally you can buy something one way or buy it another way and they just chose the things in mind and bought it the second way.

And ultimately that means more revenue for us, but it means it did impact the quarter..

Okay, alright. Well, thank you so much. I appreciate it..

Okay..

And we will take our next question from George Notter with Jefferies. Please go ahead..

Hi, thanks very much guys. I wanted to ask some questions about the nature of your services business and obviously it’s becoming a bigger piece of the revenue stream going forward. But I guess I am surprised at how high the operating margins there seem to be, it’s not very typical relative to other services businesses we see.

Can you just remind us like exactly what’s in there? Is it more maintenance contracts? Is it more kind of construction types of services? Just walk us through sort of the mix of business you are experiencing there and why that translates into a 30% operating margin? Thanks guys..

Hey, George, it’s a combination of things. You mentioned maintenance contracts. We do have maintenance or support contracts with many of our customers, not only internationally, but also domestically, for example, in terms of our enterprise products. And we do provide certain levels of support based on programs that our customers like to have.

We also have contract services business that relates to deployments. And these are deployments where obviously we have a high value sort of component to that. It’s not your typical digging trenches, where some of your other service companies are really focused on it’s more of the high value activities in terms of installation of our product..

Okay.

So, is the mix of that business then more skewed towards maintenance contracts or would it be more skewed towards these high value kind of services pieces?.

I would say historically it’s been continue to be probably more of the high value piece. I mean, we have maintenance contract with different carriers, but if you look at the aggregate of the business we have coming in a large percentage of it is the EF&I business..

Got it.

So, it sounds like it’s not – is it more consulting then or is it actual installation of ADTRAN gear or equipment itself?.

We do engineering on some projects and we do installation on other projects. And I understand kind of the root cause of the question, which is depending on what the mix of that is in the quarter could it be – could it negatively impact and the answer to that question is yes, some pieces of our service business have more margin than the other.

Our sense is today that even if you take the lower margin pieces of our business, it is still accretive.

And now, it may not be 30% if I take that lowest, I think what Jim is talking about is more of the mix of all of our services business, but even if you take the lower pieces of our – or the lower margin pieces of that services business, we still think it is accretive to our overall operating margin..

Got it. Great, thank you very much..

Okay. Alright, Tasha, I think we are at the end of our allotted time here. So, thank you very much for everybody joining us on the call and then we look forward to talking to you in the quarter..

This concludes today’s conference. You may now disconnect your lines and have a wonderful day..