Tom Stanton - CEO Jim Matthews - SVP and CFO.

Rod Hall - JPMorgan Amitabh Passi - UBS Tim Quillin - Stephens Inc. Doug Clark - Goldman Sachs Rich Valera - Needham & Company Simon Leopold - Raymond James Paul Silverstein - Cowen and Company Sanjiv Wadhwani - Stifel Bill Dezellem - Tieton Capital Michael Genovese - MKM Partners David Fondrie - Heartland Funds George Notter - Jefferies.

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

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 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 September 30, 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 is now my pleasure to turn the call over to Mr. Tom Stanton, Chief Executive Officer of ADTRAN. Sir, please go ahead..

Thank you, Kevin. Thank you for joining us for our fourth 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 Q4 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 144 million, coming in at the higher end of our range, seasonally down as expected from our 163 million in the third quarter. Total carrier networks division revenues, including both international and domestic, came in at 115.8 million.

Total enterprise revenues were 28.2 million with both divisions coming in within the seasonal range we expected coming into the quarter. Revenues on a geographic basis also came in much as expected with domestic revenues coming in at 93 million and international revenues at 51 million for the quarter.

On a product basis, our core product areas which include broadband access, internetworking and optical came in at 131.3 million in revenue compared to 142.9 million for the same period last year and 148.4 million for Q3 of 2014.

More specifically, total broadband access revenues came in at 82.5 million compared to 88.6 million for the same period in 2013 and 96.1 million for Q3 of this year.

The sequential decline was driven by an expected decline in our international business, which was partially offset by an increase in our domestic business whose sales outpaced our traditional season pattern, posting its third consecutive sequential quarterly increase.

Our internetworking product category came in at 35.7 million compared to 40.3 million for Q4 in 2013. Our optical product category came in at 13.1 million, down from 14.1 million for the same period in 2014. HDSL revenues came in at 5.8 million, down 32% from the same period in 2013.

And total legacy product revenue, including HDSL came in at 12.7 million, down 21% from the prior year. As I previously mentioned, total international sales came in at 51 million.

The sequential decrease from 64.3 million was mainly attributable to a decline in Europe, which was partially offset with the strong performance in our Latin American business. The European decline was due to an expected seasonal slowdown and we fully expect to see an upturn in this business as we start this year.

Here in the U.S., we continue to see improvement in broadband shipments, driven by acceleration in shipments to Tier 2 carriers which were positively impacted by CAF funding. The non-CAF affected markets remained relatively flat, and we did see an increase in Tier 1 spending as well.

Although the enterprise division continued to see relatively soft demand in its carrier distribution channels, the quarter came in largely as expected with a 6% sequential decline. We had another solid recruiting quarter this quarter with 57 new partners added to our dealer base.

As we head into 2015, we see several bright spots that we believe will define the year. Of course in 2015, we expect to begin to capitalize on our significant efforts we have placed in our Tier 1 U.S. market share gains or market share efforts.

We also expect to see continued acceleration of Tier 2 broadband spend as carriers receive CAF funding and other carriers execute on their plans to deploy gigabit fiber in a more meaningful way. We expect continued growth as we saw this year in the Tier 3 space as those carriers move forward with their USF to CAF transitions.

On a broader geographic basis, we expect new product wins and continuing momentum of existing awards will lead to continued growth in Latin America and EMEA. I should note that both of these areas grew in excess of 35% in 2014.

Another area of focus in 2014 was carrier services component of our business, which grew nearly 30% last year, with most of that growth coming in the second half. We fully expect this growth to continue in 2015, as we capitalize on the turf and other awards that we have received in 2014.

From a product perspective, the largest growth area will of course be broadband access, with FTTP growth leading this acceleration. We expect to see strong momentum around our vectoring solutions and in general Ethernet service delivery will be the driver for our carrier and enterprise divisions in both domestic and international markets.

New products such as our 4660 and 5660 families of high performance routers, expansion of our 1500 series of switches and major roll-outs of products such as the 1108 UBE, second generation SLV and our new family of 10 gig edge aggregation products are all expected to contribute meaningfully 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’re starting to respond.

And as on this premise that we’ve 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 demand.

I would now like Jim Matthews to review our results for the fourth quarter 2014 and our comments on the first quarter of 2015. We will then open the conference call up for questions, Jim..

Thank you Tom and good morning everyone. Revenue for the fourth quarter was $144 million compared to $159.1 million for Q4 2013. Broadband access product revenues for Q4 2014 were $82.5 million compared to $88.6 million for Q4 2013. Internetworking product revenues for Q4 2014 were $35.7 million compared to $40.3 million for Q4 2013.

Optical product revenues for Q4 2014 were $13.1 million compared to $14.1 million for Q4 2013. Carrier systems revenues for Q4 2014 were $100.3 million compared to $109.7 million for Q4 2013. Business networking revenues for Q4 2014 were $37.3 million compared to $41.2 million for Q4 2013.

Loop access revenues for Q4 2014 were $6.3 million compared to $9.2 million for Q4 2013. HDSL product revenues for Q4 2014 were $5.8 million compared to $8.5 million for Q4 2013. As a result of the above, carrier networks division revenues for Q4 2014 were $115.8 million compared to $126.2 million for Q4 of 2013.

Enterprise networks division revenues for Q4 2014 were $28.2 million compared to $32.9 million for Q4 2013. International revenues for Q4 2014 were $50.9 million compared to $51.9 million for Q4 of 2013. To provide the reporting of each of these categories, we have published on our Investor Relations web page at adtran.com.

Gross margin was 47.6% for Q4 2014 compared to 48.3% for Q4 2013 and 48% for Q3 of this year of 2014 rather. The decline in gross margins for the quarter compared to Q4 2013 and Q3 2014 was primarily driven by a weak euro compared to the U.S.

dollar and a higher mix professional services revenues in our North American carrier business partially offset by improved product cost margins in our North American business. As expected, our higher mix of professional services revenue was naturally accredited to our operating margins in Q4.

Total operating expenses were $64.5 million for Q4 2014 compared to $66.2 million for Q4 of 2013 and $65.8 million for Q3 of 2014. The decrease in operating expenses compared to Q4 of 2013 last year was attributable to lower selling and G&A expenses.

The decrease in operating expenses compared to Q3 2014 was attributable to a decline in R&D, selling and G&A expenses. Acquisition related amortizations totaled $0.7 million for the quarter. Stock-based compensation expense net of tax was $2 million for Q4 of 2014 compared to $2.2 million for Q4 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 Q4 2014 was $4.4 million compared to $3.7 million for Q4 of 2013 and $2.6 million for Q3 of 2014.

Other income for Q4 2014 included a $2.4 million gain related to settlement of working capital items or an acquisition transition that closed in 2012. The company’s income tax provision for Q4 2014 was a net benefit of $937,000 compared to the tax provision rate as 17.3% for Q4, 2013, and 24.8% for the third quarter this year.

The net tax benefit in Q4 was driven by release of the remaining deferred tax asset valuation allowance partially offset by tax returned to provision adjustments related to a foreign subsidiary. And U.S. legislation extending research tax credits for the 2014 year that passed in the fourth quarter.

All of these items tended to a benefit of $3.3 million. Earnings per share on a GAAP basis assuming dilution for Q4, 2014 were $0.17 compared to $0.20 for Q4 of 2013. Non-GAAP earnings per share before 2014 were $0.19 compared to $0.25 for Q4 of 2013.

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

Inventories were $86.7 million at the quarter end compared to $90.1 million at the end of Q4 of 2013. Net trade accounts receivable were $86.2 million at quarter end resulting in 55 DSOs compared to 50 DSOs at the end of Q4 of 2013 and 56 DSOs at the end of Q3 of 2014.

Unrestricted cash and marketable securities net of debt totaled $353.2 million at quarter end after paying $4.9 million in dividends and after repurchasing 929,000 common shares for $18.4 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 Q1 revenues will be slightly up on the sequential basis, there will be a negative impact on our consolidated revenues caused by unexpected weaker euro currency compared to Q4 of 2014.

This will of course that gross margins as well, taking into account that impact we expect gross margins to be flat to slightly lower in Q1 of 2015. We expect GAAP operating expenses for the first quarter will be slightly up on a sequential basis.

And we expect the consolidated tax rate for Q1 to be in the mid-30s percentage point range for pretax income. We believe the larger factors impacting the revenue and earnings we realized in 2015 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, currency exchange movements, the timing of revenue related to Connect America project, the adoption rate of our Broadband Access platforms and inventory fluctuations in our distribution channel.

Tom?.

Thanks very much Jim. Kevin I think we are ready to open it up for questions. .

Thank you. [Operator Instructions]. And we will take our first question from the line of Rod Hall with JPMorgan. Your line is now open. .

Thanks for taking my question.

I guess my main question for you guys is, I will be curious to get you to comment on the state of regulation and how you feel that affecting the market in first half of the year here? And Tom, maybe if you could give us any specific things, are there any investing communities should be looking for in terms of the Title 2 regulatory decision that would maybe swing things one way or the other? Thanks.

.

That’s a really good question and one that I can probably only touch on just from my knowledge base, because I know that there are a lot of things that are go on in Washington that I told we do not understand, and this would be one of them.

I know what they do is a lot of noise and a lot of the people in our sector were covering that noise towards the tail end of last year. My sense was that there were still things that and the way we're looking at is first of all the larger players seem to be let`s say more mobile.

And talking about Title 2 regulation and more active and talking about Title 2 regulation. So a large piece of our customer base has been relatively silent and we don’t see any change in their activity.

With the larger carriers I think the key is going to be what at least for the near-term is what needs to be done and what has to be done and where the year programs sit from a relative priority perspective as they start looking at trying to position themselves one way or another which if you recall we saw something similar to this back with the unbundling pipes, I think it was in the late 90s or so.

So it's nothing new, I don’t expect this to be nearly that depth, I think the FCC was trying to come up with some compromise, I think at least from my perspective, I feel that the market in general is looking for a compromise and not really expect us to find that, but I think it's just going to be noisy for a period of time..

Tom, do you have any view on the timing on this, I mean it looks like [indiscernible] February, but then I guess it probably drags out quite a way beyond that?.

Right, so it drags out to the extent that at least from my perspective again to the extent that you have a regulatory body that at maybe proceed as overreaching what their authority is and then you end up giving through the courts in order to figuring out what authority really is there and then you end up potentially with legislation trying to increase that authority.

So I fully expect it to be a -- and this is not -- I will be very surprised to see it cleared up this year, but I do think and I think we’ve already seen some of it that we’ll see a softening of stances as people look towards the middle ground..

And then Jim, just a quick one on the gross margin, you have done your guiding for it to be flat to slightly lower, I guess I am assuming that again if currency impact is there anything else going on in the gross margin that we need to be aware of?.

No that’s it really is the currency issue..

We’ll take our next question from the line of Amitabh Passi with UBS. Your line is now open..

Hi. Thank you. Good morning, guys.

I just have two questions, Jim I guess first one for you, is the way to help quantify the impact of the euro both on the revenue and gross margin line and then I wanted to confirm as part of the question that your first quarter revenue guidance was slightly up, does that already embed the impact of the weaker euro?.

Yes it definitely does on your question. In terms of your first question I can really talk more about the fourth quarter as actuals are in obviously.

So the hit on revenue was in the range of about 1% and gross margin -- we’re talking -- obviously we saw a sequential decline and that related somewhat to the currency movement and we talked about our services revenue as well. So, it was certainly in the mix of the gross margin decline..

And then just as a follow-up, I was curious if I look at your international revenue second half ’13 to second half ’14, they were essentially flat despite the big K1 ramp, it looks like LATAM was also strong in the fourth quarter, I guess I am just trying to understand Jim, Tom as we look at 2015, I mean does the overall business grow substantially or do we should of ebb and flow based on seasonal patterns where you probably get a good 2Q, 3Q and then a moderation in 4Q.

I am just trying to get a better sense of why wouldn’t [indiscernible] kind of be underline base business?.

Okay, so, let's start with the seasonal pattern that we expect and we don’t see -- at this point in time we don’t see any reason to change our seasonal outlook.

We’ve got a couple of years behind us on the European business and that looks very much that you’ll see a strong, you see has come out of the gates strong in Q1 and you’ll see an uptick in Q2 and then you’ll see a moderation and probably a downturn in Q3 and definitely a downturn in Q4.

I don’t see any reason at this point to think that, that will be any different than this year. In our U.S. business it's typically soft in Q1 depending on weather, it's typically flat to slightly down.

So the fact that we’re talking about a slightly up quarter means that we’re looking for incremental things and some of that of course will be just the uptick in the European business. And then it starts moderating around the half, Q3 typically is still stronger and then you see a decrease fairly rapidly in Q4.

I don’t see any reason to change that except with the fact that we do expect incremental Tier 1 business to be coming in at some point this year and which depending on the timing of that ramp up may slightly skew that, but I don’t have the visibility to what that would be at this point..

And we’ll take our next question from the line of Tim Quillin with Stephens Inc. Your line is now open..

Good morning and I think you just alluded to it a second ago, but do you have an update on the expected timing of your large Tier 1 project here domestically?.

Yes, really nothing has changed from the last time we spoke. So we still expect to see incremental revenue coming in or say first revenue coming in for that some point in the Q1 that was going to be right towards the end of the Q1.

So, I will tell you customers change timing a little bit but our sense is that we’ll see it right towards the end of the quarter and then we’ll start seeing it ramp up from there..

Okay.

And is there any change in terms of the expected ramp? Do you expect it to get to a full run rate by Q3 or Q4?.

I don’t see -- saying a run rate because this -- there are -- in Q4 there is no doubt that seasonality will impact us. So if you take into effect seasonality and the fact that this is -- there are still projects that come and go the answer to your question is yes.

Do we expect to be kind of in full production at that point in time and kind of the project running at a normal pace yes the answer to that question is yes. I don't want for you to assume it's just going to be flat and just keep going there because projects like this tend to have some peaks and downs. .

Okay.

And then just one last one on that, do you have any greater level of visibility or where are you in terms of the discussions of the second phase of the opportunity? So I think the first part of this is has it a fairly defined geography? The second part is, is more it second source across the entire geography? Where are you in relation shift to that second opportunity?.

As you know we've been focused with the first although going through the first in effect gets you approval for the second.

I mean really what we have kind of been focusing on for this year and the impact that we expect this year is predominantly the first, those discussions will go on and they will continue to go on but right now we're focused on the first.

We fully expect to be able to participate on a broader scale but all of our efforts are right now at the most critical peak which is our first phase and I would expect that to really start contributing more in 2016. .

And we will take our next question from the line of Doug Clark with Goldman Sachs. Your line is now open..

Doug Clark:.

. :.

The orders come with not -- they come depending on the particular equipment, they come with various lead times. I would say it's relatively short. What we do have is a forecast that everybody is kind of marching to. So it's kind of where our visibility is at this point and I won't say we haven't got any orders that are going to be accurate.

But I would say from perceptive you're talking about it's still relatively short lead times from what forecast turns into a purchase order. .

And then also going back to gross margins, I understand kind of the impact of the euro as well as the impact of services.

Looking out over the year I think previously you talked about achieving 50% or re-achieving 50% gross margins, is that still in the range of possibilities considering maybe not the euro but more so the professional services mix?.

So we think it is at this point. .

Great and then I guess one quick final follow-up to that.

Just in terms of the 10% of customers, can you give us any sense for how many there were in the year and how large they were?.

Sure. We can tell you in terms of the quarter and certainly the year we will disclose in the 10-K. So for the quarter we actually had three, okay. We had two that were the usual guy and one that was a Tier 2, was a large Tier 2 customer. .

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

I wanted to follow-up on the gross margin question.

Jim to the degree that you were able to hit the 50% within the year, just wondering how you would think that trajectory would play out, would that be kind of the ramping somewhat steadily through the year or should we expect that to bounce around and what would be the primary drivers of that, would be assumed continued pressure from the euro but maybe internal cost reductions or what exactly would drive that up?.

We talked about the large Tier 1 opportunity and the [indiscernible] accretive to overall gross margins as we see it today, certainly that would help us. We also have other cost reduction activities going on both internationally and domestically that would help in that effort as well. .

And so from an annual perspective, do you have any view of after looking at sort of '15 overall gross margin versus '14, if we could see parity or an uplift there? Is that too tough to call at this point?.

I think that's too tough to call at this point. .

Okay. Fair enough. And then I don't think you have talked much about the new enterprise win you had with your large European customer.

Any color on that and when you expect that to ramp, should we see anything in the first quarter? Is that more of a second quarter ramp for you?.

That's a good question. So the ramp will be relative, let me just say in general. I believe we're going to -- and this is just a belief because I don't have -- I literally don't have [indiscernible] but I believe we will start shipping a little bit in Q1.

I know we are expected, it will ramp up through this year and it would be a relatively slow ramp this year.

The real impact that we expect actually where you start seeing really meaningful and I really mean from an enterprise revenue perspective very meaningful revenue beginning 2016 but you will see it ramp up slowly this year and then start picking up same towards the second half..

Got it.

So how should we think about that enterprise or the internet working business overall for the year I know you can base line sort of with Q4 but it sounds like you’ve got kind of some inventory correction behind you, any color at all on how we should think about that business this year maybe versus ‘14?.

Yes, that’s a good question.

I mean the enterprise business and specifically the enterprise piece of internetworking really had a tough second half and if I look at that second half there are a lot of moving pieces much more so than you go into on a conference call but there are lot of pieces one of them was inventory of course, but if I try to net all of it is basically we have a softer carrier distribution business in the second half than we expected and then we have the inventory correction I think it was in the third quarter.

If we go back and actually get into detail on each of those carriers there really is no market share loss, there are particular inventory issue that some of the carriers specially if you talked about [indiscernible] where there was some mergers that impacted inventory or maybe some delays in rollouts, because of other things that have happened.

They are all kind of specific reasons, none of them feel like they have, they’re not sticking, none of them are reversible and none of them are things that wouldn’t cure themselves but we had several other here in the second half of this year.

So my sense is and if I look at the forecast for the carrier piece of that business we fully expect it to grow in 2015 and kind of return back into a normal cadence. We also have additional products and you have the European that you mentioned that we think will be additive to that.

If I look at our business through our distribution it actually did, it wasn’t a robust year but it actually grew last year and we continue to see kind of momentum picking up there a little bit.

So we expect it to grow whether or not it hits kind of its traditional 10% to 15% growth rate which had been on track for a period of time and then kind of fell off, I don’t know but we do expect it to grow. .

We’ll take our next question from the line of Simon Leopold with Raymond James. .

One or two follow up on some of the trends in Europe, certainly understanding the foreign exchange aspect to it, trying to get a sense of the demand. So as a base line just want to make sure I’m sort of estimating the NSN or former NSN contribution in the December quarter is below 30 million.

So if we can just check on sort of the ballpark of how to think about that.

And then going forward if you can talk a little bit about how you’re thinking about your anchor Tier 1 customer in terms of how much they have left to do in the project versus what they’ve completed and then address some of the pipeline you’ve talked in the past about some incremental smaller wins and a sales pipeline for other meaningful customer awards.

If we can get an update on the pipeline around those products and the European trends. Thank you..

Let me touch on a couple of bases, so first I’ll start that we don’t specifically break out the BBA business but there are multiple customers in that business so we have the one large Tier 1 there, we have more than one Tier 1 there by the way but we have one that is predominately that is definitely the largest customer that we have in that region, but we have several other and they all contributed but if you look at the number and then look at the fact that the BBA business is still by far the biggest piece of that business periodically we’ll see our Latin American business specially when we have both of the carriers that [quicken] [ph] at the same time kind of push up but in the fourth quarter you still think BBA is biggest but I don’t want to try to break that down into 30 million or 40 million whatever it ends up being and Latin America as I mentioned on the piece actually had a pretty good quarter and a pretty good year.

As far as the timing or the length of that project we’re still relatively early into that project and we had expected to be multiple years or probably about a year and half into it or so and there is still a lot of runway I mean and we fully expect it to last throughout this year and we expect it to last through next year.

We had a minimum and to be honest we had to look at stop that data, I will tell you that even as we’re rolling out technology and as you know we saw we're pushing BBA to vectoring, there is new technology that’s coming down I’ll give them incremental speed from where they are today and I talked about FTV and how that could play into this that allowed them to upgrade even things that they’re putting in today.

So we do think it has very long tail and it’s more of a, the way I think about it is cyclical upgrades to the installed base that will allow them to continue increase their speed for some period of time. So it’s not kind of just one fixed thing..

Then pipeline of additional awards in Europe?.

So I’ve mentioned we picked up -- I should say after a long period of time we secured in Middle East towards the tail end of last year we expect that to be shipping this year, that’s probably the -- and I don’t have all of them in front of me, that's probably the largest I am looking at Jim maybe he know it, maybe the largest incremental piece that we’ve picked up in that region.

We have picked up several smaller carriers and we have reengage and actually have -- I'd say upgrade plans to some of the smaller Middle Eastern carriers that actually will happen this year as well. But I will say those two are the biggest.

We have picked up by the way several Tier 2 carriers in the German region as well during last year that will start shipping this year..

And we’ll take our next question from the line of Paul Silverstein with Cowen and Company. Your line is now open..

Couple of questions if I may, first off, Tom, Jim, I am a little bit confused in that if I remember correctly I think historically I don’t know that you said it today but historically you’ve said that you expected a ramp meaningful ramp I think at Deutsche Telekom and you’re expecting AT&T to ship this year.

You just told us that you’ve got a Tier 1 in the Middle East that you won last year that you expect to ship this year. You’ve got several Tier 2s in the Middle East and Germany that you expect to ship this year. And you expect enterprise to improve this year including internetworking.

What are the offsets that will cause you -- I am not trying to be argumentative, I am just trying to understand.

But given all that why aren’t you expecting, why shouldn’t we expect calendar ’15 to be much stronger growth than what it appears you’re talking about? What am I missing?.

One of the things I think you may be missing is we’re only talking about the first quarter. And so we haven’t given full year guidance. And as you know and I think you followed us for quite some time, we that typically don’t give full year guidance. What we do is just try to give people the best view we can for the period of time that we can.

As far as all of the pieces so I think some of them are bigger than others. The Tier 1 carrier is in the U.S. is by far the largest incremental piece. And although they don’t lay out things as specifically as you would like to see I mean that in itself moves the dollar substantial way.

And if I were to guide based off of that a word we would expect strong returns from that this year. We expect the European business -- everything you actually said is totally correct. I think we’re just talking about magnitude here.

I don’t expect the incremental piece that we’re going to get from our Tier 1 European carrier or that we’re going to get for that matter from our carrier in the Middle East to be the same magnitude as what we’re talking about here in the U.S. with that Tier 1 carrier.

So that kind of -- that piece itself is bigger than the other pieces combined actually..

And then on the enterprise piece especially internetworking which have been such a strong growth driver for you historically when hit hard times this year, I appreciate your comments on the second half of ’14 the inventory correction and what went on with you channel -- with your service buying partners.

With that softness in internetworking started at the beginning of last year was actually down albeit not as much as it was in the second half. There was an outright decline in the second quarter last year as well was flat in the first quarter and your enterprise business was even worse from that perspective.

What causes that to get back on track, what’s new and different this year that’s going to cause enterprise in general including internetworking specifically to see meaningful improvement?.

I don’t remember the Q2 number Jim, where were we at in Q2, so we actually had I think if I remember we did around 32 million.

Yes, Q2 was 32.7 million, up from Q1. .

And Q1 was?.

28.8 million..

The numbers [indiscernible]. Your Q2 business in June ’14 was down 6.7% year-over-year and that was 0.1% growth in March in internetworking..

Okay so you’re talking, year-over-year basis..

Yes, there was no doubt that it was I think the difference the disconnect we’re having is really did think that we were -- and we did see some movement coming into this year that made us believe that we’re building momentum in that piece. It was the enterprise business was also negatively impacted. We did do a product transition that hurt that.

It was probably I am going to say in general a couple of million dollars that impacted them this year where we started weaning down O&Ts that were developed in the enterprise business and the carrier piece started taking on responsibility for new generation O&T.

So you saw a shift in O&Ts that negatively impacted their revenue because they basically got out of that business and started focusing more on business versus residential family. I don’t know what to tell you Paul. I mean I think I am fully aware of the state of where that business is in 2014. And I like I said we’ve done a complete review.

I think there has been softness in other companies that we’re kind of selling into the same channel areas too so some of it may have been segmental or the segmentation or the segment that is particularly selling in to. But I would agree that that division needs to do better in 2015..

We’ll take our next question from the line of Sanjiv Wadhwani with Stifel. Your line is now open..

Tom, I just wanted to revisit Title II regulations, I think there’ve been couple of Tier 1s that have made comments about slowing down broadband upgrades etcetera depending on how these regulations pan out and understanding that your Tier 1 in the U.S.

is starting up in Q1, I just wanted to see if you could talk about the risks as you go through 2015 given all these things related to Title II that these projects might go through pits and starts as you progress through the year? Thanks..

That is without a doubt a risk that we have. And I would characterize it as it’s a risk in dealing with specific Tier 1s in general.

Some tend to long -- to be more flexible in their operating plans than others, and if you’re dealing with a carrier that is flexible in the way that they implement their operating plan and there are risks that you have to be willing to take and I would say that that’s something that I have cautioned about on this call when we’ve talked about our Tier 1 potential probably every single time that I’ve mentioned the Tier 1 potential and I would say there’s no difference.

So we have a particular risk that’s highlighted in this year because of some of the things that happened last year.

And I think the thing that gives you solace is whether or not the particular projects you’re working on are projects that are high priority that you elect it need to be done and or projects that can actually be delayed without requiring anything.

Our sense right now is that we are fixing a problem that is a real problem, and that problem will be funded and that problem [indiscernible] it will make whatever cuts ended up being made in order for them to live up to their words on what they’ve said for capital, but that is absolutely a risk that could hit us at some point..

Is this risk more acute or less acute with Tier 2s and Tier 3s?.

It is less acute. I hear zero about it in Tier 2s and Tier 3s, so it is -- you don’t hear any of -- we’re going to spend less because of Title II regulation. Now to be fair, it impacts them in a different way. And it impacts -- the magnitude of that impact is different, so I think that I think in general they have less at risk.

So maybe that’s where some of the positioning comes from, but I have not heard that brought up in a Tier 2 account other than there were particular stamps on the issue, but not in any type of threatening way in regards to capital spend. .

And we’ll take our next question from the line of Bill Dezellem with Tieton Capital. Your line is now open..

You had mentioned I think in your opening remarks that you anticipated that Latin America would also show strength this year and that it did in ‘14 would you talk in a little bit more depth about what you saw in 2014 and then roll us forward to ‘15 and what’s going to be the driver?.

I’ve mentioned that we’d actually grown Latin America in excess I think I’d put in excess of 30% and it is definitely in excess of 30%.

And I think couple of things happened, one is we have a long standing long relationship with the Tier 1 in Latin America that is -- there’s kind of a -- that business ebbs and flows, but there’s always a constant level of activity.

And if you take into account that we do a lot of services there as well, so there’s just ongoing revenue that comes from that customer and us continuing to work with them on rolling out either what they’ve purchased or what they’re going to purchase.

One of the positive things that happened is there’s been some talk about whether or not there would be another phase to the deployment we have. We did receive orders for the beginning of another phase of deployment for our fiber to the node products which we will be shipping this year, so that actually bolsters us even more.

If you recall [indiscernible] previous phase which I think was called phase 3 plus is winding down and we were doing a lot of deployment in services in 2014. And now we have yet another leg that’s been added to and so that was a positive thing.

We also in 2014 added another Tier 1 carrier albeit an MSO in that area and they have started deploying their fiber products with us and we would expect that to pick up, so that’s kind of where that’s the strength comes from off of what was really a good year..

That is helpful.

And that Tier 1 carrier was up and the driver of that increase in ‘14, is that correct?.

Yes I would say that was my sense. I don’t their exact revenue number. My sense was that was probably the bigger piece, but we did a lot of things with the other Tier 1 as well and like I said, those were more services related so you see maybe a negative impact on the gross margin line, but they were -- they did well as well..

We’ll take our next question from the line of Michael Genovese with MKM Partners. Your line is now open..

Just a quick one for me following up on Sanjiv’s earlier question about the potential for delays at the Tier 1 this year, and given that you’ve spoken about that project in two pieces, kind of the piece that you have been moving through the lab and it’s a field on, and then a second kind of more amorphous piece.

I am wondering is that second piece more at risk from some of these issues with CapEx and SDC decisions and that kind of stuff.

Would you consider that second piece, is there a difference between the first and second piece in terms of how much risk there is to CapEx delays, as we move to 2015?.

I don’t know and I can’t speak for what the mindset of any particular individual in the customer base maybe. If you think about the second piece as being -- almost there are pieces that you could argue or react when you are going out and deploying high speed services whether that’s fiber based or not. And then there are pieces that are more proactive.

And the way I think about it is reactive pieces are where you are maybe fixing problems that you have or you are fixing particular market share items that are critical. And then proactive pieces are where you are trying to go after and increase market share, and kind of get in the front.

So if you think about the nature of the words that we are talking about, the first one in my view is much more fixing the problem and the second one is -- has the potential at least a large percentage of the second one is more kind of proactive. So I guess my sense would be to answer your question is yes. .

Okay, that’s helpful. Maybe another one, and I know this is kind of a remedial question, because you have been talking about since the beginning of the conference call. But could you just -- because I am slow, just help me understand the gross margins for the quarter and the guidance. The main factors you are saying are services and currency.

Is there anything else in there that we should think about?.

For the fourth quarter those are the items. .

And for the first quarter it is FX, currency. .

So mix or pricing or any of that is -- are not factors?.

I mean no doubt if we had higher prices, gross margins would be higher. But if you think about it from what we have been modeling and where our thought process is and what we have been voicing those were the changes..

We will take our next question from the line of Tim Quillin with Stephens Inc. Your line is now open. .

Thank you for taking my follow-up. I just had two or three quick questions. But one is on carrier services which you said was up 30% in 2014.

Do you have a dollar amount or what percent of revenue it represented in 2014?.

We do not at this point Tim..

We can say it did not hit 10%. .

Okay.

But maybe hits 10% next year as you ramp up some of that turf vendor opportunity?.

I think that’s going to depend on the overall mix of services versus hardware shipments. .

As you know we have incremental revenue coming in, our expectation is that incremental coming in on the product line basis but it could vary relative to 10%. I hope it does hit 10%. I think that will be fantastic growth for that area. .

And then on investment income. I think that you always said do a good job managing your investment portfolio the realized investment gain in the quarter was relatively low versus historical standards. How should we think about? And by the same token your interest income was little bit higher than maybe that modeled.

Is there some kind of change within the cash portfolio or investment portfolio, or how should we think about that as we go into 2015?.

The way I would think about it Tim going into 2015, if you look at Q3 in terms of the net other income and expense category, it came in at about 2.6 million. I would do that as a normal quarterly run rate as we go through 2015. And obviously we have the benefit of the working capital adjustment coming through Q4.

So it really makes sense for us to some of things that we might typically do in a normal quarter if that makes sense. .

Okay. And then just lastly the other receivable has gone up over the past couple of quarters quite a bit. Can you remind us what’s happening there? And does that work its way down and drive some incremental cash flow in 2015? Thank you. .

We think it can Tim and good question. So actually the December balance is sort of three components there. First of all a part of that relates to the raw materials that we send to our EMS providers and building for -- and they pay those based on terms.

So there is another piece in terms of value added tax that we incur that we have to apply for a refund for, so that’s built up as well. But we expect that, that will begin to liquidate at a faster rate as we go through 2015. And also a third piece is that, we're missing the settlement on a 2012 acquisition.

There was a receivable hung up there at year-end that has since resolved itself, we've been paid on it. So that would reflect obviously a lower balance as we look at it today. So those are the elements that drive it, but we expect that as we go through this year that balance will liquidate at a faster pace obviously..

We’ll take our next question from the line of David Fondrie with Heartland Funds. Your line is now open..

Thank you. I wonder if you can just talk a little bit broadly about the plan on the gigabit networks and how you think that might influence your business going forward over the next year obviously Google has made a big splash in it and I think some of the carriers have responded.

Do you think all this will go forward and just your participation in that?.

Sure, that is I had mentioned in my notes that one of the big drivers for this year is expected to be fiber-to-the-prem and I would say the majority of those and maybe not the majority, a large percentage of those shipments are either gigabit fiber coming out of the door or the gigabit fiber capable versus standard GPON which may itself can be used to deliver different speeds and many times has deployed at less than a gigabit.

It has been -- it is in my view a catalyst for the industry and I think it's a very good thing. We have been participating at the Tier 2 and Tier 3 level for some period of time.

There has been less interest in the Tier 2 space and looking at gigabit fiber or gigabit ethernet in general up until maybe the second half of last year where there were some carriers that were interested in it, but I would say the audience got much broader and pretty much encompasses all the Tier 2s at this point whether they are looking at gigabit either for a specific regions or specific cities.

And in many, many cases they are looking at gigabit ethernet to deploy the businesses and I would say almost all of them have now either plans in the work or plans we plan or deploying this year.

So, we do see that as a positive catalyst for the industry typically as you raise speed levels everything, below that speed level also has to increase by some level. So it's just the kind of lifts all tides over time.

In the Tier 1 space that movement happened earlier, we’ve seen one of our Tier 1 start deploying gigabit ethernet with us and with others that they are deploying in network last year, that actually was kind of a negative for the first part of last year and then in the second half it got fixed because we weren’t fully approved in that carrier but that did get fixed and we expect that to be a catalyst in 2015.

And then the large Tier 1 without a doubt that is high on their mind of deploying and we are right in the middle of those discussions and that’s part of this kind of second phase rollout that we talked about before..

[Operator Instructions] We’ll take our next question from the line of George Notter with Jefferies. Your line is now open..

Hi, guys. Thanks very much. I guess my question on your large Tier 1 projects in the U.S., I guess I mean just a touch on a question from earlier but I guess I am trying to understand sort of the situation there, I feel like that there is a lot of CapEx pressure among that particular carrier.

Has anything change with regard to that Phase 1 portion of your opportunity there, has it been scale down or pushed out timing wise, any changes there at all over the last quarter or two?.

So, in relation to capital discussion, no. As you know I think it was probably somewhere on the third quarter call when I talked about it being pushed out but not since that point in time..

Got it. Okay, great, that’s all I had..

And I do not know of any I mean needless to say we’re asking every day and probably three times a day about kind of where they are with the program because we’re working with all the direct engineers and so I haven’t seen any pressure. We do believe this is high on their priority list to get it done..

And is there approval then already for 2014 capital budget to be allocated to this project specifically or is that something that you're still waiting on?.

Their Budget approval cycle is -- the way that hey typically well, I shouldn’t say typically because I only deal with specific people and so budget approval cycle at this carrier is a fairly fluid thing as you probably know and their budget cycle is fairly fluid. So, what I can tell you is right now everything looks like we’re moving forward.

What they end up budgeting for the second half of this year and for the fourth quarter of this year I don’t know..

Alright, I think that pretty much wrap this up. So, thank you everybody for joining us and we look forward to talking to you next quarter at this time..

This does conclude today’s teleconference. You may now disconnect. Thank you and have a great day..