Tom Stanton - Chief Executive Officer Mike Foliano - Senior Vice President and Interim Chief Financial Officer.

Doug Clark - Goldman Sachs Simon Leopold - Raymond James Rich Valera - Needham & Company Tim Quillin - Stephens Rod Hall - JPMorgan Amitabh Passi - UBS George Notter - Jefferies Sanjiv Wadhwani - Stifel Michael Genovese - MKM Partners.

Ladies and gentlemen, thank you for standing by and welcome to ADTRAN’s First Quarter 2015 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 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, 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, Kevin. Good morning, everyone. Thank you for joining us for our first quarter 2015 conference call. With me this morning is Mike Foliano, our Senior Vice President and Interim Chief Financial Officer.

I would like to begin this morning by discussing the details behind our Q1 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 $143 million, lower than our expectation for the quarter predominantly due to a sharper than expected decline in the euro versus the dollar and secondarily due to the cancellation of our Tier 1 program here in the U.S.

Total Carrier Networks division revenues, including both the international and domestic, came in at $116 million. Total enterprise revenues were $26.8 million. Revenues from our domestic markets came in at $83.5 million or 58% of the total. International revenues came in at $59.4 million for the quarter or 42% of the total revenue.

On a product basis, our core product areas, which include broadband access, internetworking and optical came in at $131.5 million, essentially flat to the $131.3 million for the same period last year. More specifically, total broadband access revenues came in at $84.8 million, up from $81.5 million for the same period last year.

The increase was driven by growth in our European business and the combined – the continued growth in the Tier 2 market space here in the U.S. as well as solid growth in our fiber to the premises business.

Our internetworking product category came in at $34.2 million, basically in line with our expectations as we saw the expected slowness in the market. Our optical product category came in at $12.5 million compared to $12.8 million for the same period last year and HDSL revenue came in at $6.7 million.

As I previously mentioned, total international sales came in at $59.4 million, up 9.3% from the previous year as we saw the seasonal resumption of our vectoring rollout in Europe. In the U.S. market, we did see an expected pickup in the Tier 2 space driven by market share gains coinciding with cap related infrastructure rollouts.

However, sales of the Tier 1 market were negatively impacted by the cancellation of the Tier 1 opportunity in the Southeast and other markets that I previously mentioned. Although we and ADTRAN had completely satisfied the lab requirements and we are scheduled to enter first field application and had received initial purchase orders.

Our program was halted as budgeting issues forced a reevaluation and a redefinition of that program. Needless to say, this is a substantial disappointment to our company and to many of you on the call today. We will continue to work with this carrier as we move forward with other projects of smaller scope that are said to be delivered later this year.

Our enterprise division experienced relatively soft demand in our regional carrier distribution channels and VAR channels that were partially offset by improvement in large carrier channel sales. Now, we move on to what we see for the rest of the year. We expect the Tier 2 U.S.

market to continue to build momentum as carriers accelerate their rollouts associated with CAF-1 funds and start their planning and deployments with CAF-2 funding. Additionally, recent wins for gig Edge [ph] deployments with various Tier 2 and non-traditional carriers will help that segment of the market.

That combined with the incrementally positive movements we expect to see in the Tier 1 space lead us to believe that U.S. will see solid growth for the year. We entered this year expecting solid growth in Europe as well.

And although the demand expectations have not changed on the euro basis, we believe the growth on a dollar basis will be substantially challenged by a weakening euro as we progress through the year.

In light of that, we will be moderating our expense outlook for this year with an expectation that operating income will improve meaningfully in the second half. I would now like Mike Foliano to review our results for the first quarter 2015 and provide comments for the second quarter view as well. We will then open the call up for questions.

Mike?.

the macro spending environment for carriers and enterprises; currency exchange rate movements; the variability of mix and revenue associated with project rollouts; professional services activity levels both domestic and international; timing of revenue related to the Connect America project; and adoption rate of our broadband access platforms; and inventory fluctuations in our distribution channels.

Tom?.

Thank you, Mike. Kevin, at this point, we are ready to open up for any questions they may have..

Thank you. [Operator Instructions] And we will take our first question from Doug Clark with Goldman Sachs. Your line is now open..

Hi, thanks. First, I want to get a little bit more detail on the U.S. Tier 1 opportunity. AT&T has talked about CapEx coming down, it’s got for 2015.

So, I am wondering what happened incrementally over the past two months since the last time you reiterated the timing that led to the cancellation of the project?.

Sure. And I don’t know if I know all of the answers, because we hear – we know what we have been told, but – so as we entered this quarter, we were feeling fairly very confident, because we had actually received some initial orders that we are getting started with the FFA.

The FFA, which is first field application, was scheduled for kind of middle of the first quarter and there would be a relatively quick rollout after that. So, need to say our confidence was fairly high.

The FFA was scheduled based off of the software that we currently – that we had been booking through the lab, so we could work through all of the issues and we are feeling very good. And then now I will tell you that this project is being front ended or sold through a partner.

And during the quarter, it became clear that we are looking at the budgets for the year. This program had come under pressure and under some scrutiny. And basically, we were told towards, let’s say mid to late in the quarter that the program was not going to move forward.

I don’t know if that helps you any or not, but that’s – I also have to be a little careful about, but basically, that’s what happened..

Okay, that is helpful. And then looking at the second quarter revenue guidance kind of up mid single-digits, it is pretty well below normal seasonality and even factoring in some FX, incremental FX headwinds, the European business alone looking at last year’s seasonality was up pretty meaningfully.

Does that imply kind of an under or below seasonal U.S.

domestic business for the second quarter kind of why are we getting to ultimately well below seasonality for the second quarter?.

Yes. So, I think if you look – first off, I think the FX impact from Q1 to Q2 maybe larger in our perspective than yours.

Now, needless to say, we are not through the quarter yet so we don’t know what the total impact it going to be, but I will tell you the model as its still being substantially depressed on a sequential basis and that is without a doubt the biggest impact that we are forecasting versus seasonality.

In the U.S., the Tier 1 budgets that our material got set a little late, so we are probably being a little bit conservative there, but in general, I would say it’s what you are seeing versus seasonality is by far predominantly FX related.

Does that answer your question?.

Yes, thank you. And then if I can just one more. On the gross margin front, similarly related certainly some of it is explainable by FX, but it does appear that the domestic broadband business gross margins have continued to trend lower.

Is there any visibility into a possible reversal or explanation of the gross margin pressure?.

I am going to go back again although it maybe your math on what the exchange rate is our math is different. I have said that in the past that the U.S. business is kind of in the, let’s say 50 to low 50s. And that’s basically what we have been experiencing in Q1. That’s what we experienced in Q1.

That’s basically what we are planning on experiencing in – maybe down 50 basis points because of a higher service related content associated with Cap One rollout. So, we do a lot of turnkey installs there, but I will tell you, it’s still in the same range. The impact we are really seeing is predominantly with our European business..

Okay, thanks..

Okay..

We will go next to Simon Leopold with Raymond James. Your line is now open..

Great, thank you very much. A couple of things I wanted to clarify.

First, just a housekeeping question, if we could get any color you might be able to offer on 10% customers in the quarter, how many, how big domestic versus international?.

Go ahead, Mike..

Yes. We had two 10% customers and one was domestic and one international..

Great. And I wanted to go back on this canceled project, I was a little bit confused by a comment you made Tom about it being reassigned, I think I heard you correctly, I wasn’t quite sure I understood the status of what the customer plans on doing at this point.

In other words, I presume they will still upgrade that legacy footprint and it simply is going to go to one of your competitors, but that timing is uncertain, I want to make sure I understand the outlook for that particular activity?.

Sure. And I have to be careful about speaking for that customer. But I have really said redefined, not redesigned.

And really, I think the net of it is at least from my perspective is, there were basically timing – the timing of a substantial rollout may have changed from our expectation or from what the initial expectations were, which allowed to kind of a re-look at the product set.

So we had a very unique product set, it’s not a product set that couldn’t be in some form or fashion just a functionality wise duplicated. But we had a product ready to go.

So I think when you go and relook at budgets and relook at priorities, sometimes things flip out, and when things flip out, they would allow you to do – they will allow you to change your sourcing plans. And I think that’s what happened here.

I don’t know directly what the plans are, but I do know that we were moving forward on the basis that this upgrade had to happen. Although we were moving forward on the basis had to happen, happened quick, the quick may have changed, but my sense is it still has to happen. So if that helps you..

Yes. No, that is helpful.

So, in the past you have talked about this particular customer has presenting an opportunity worth more than $200 million and I understand that’s beyond the Southeast regional upgrade project, so what’s your assessment today and maybe more specifically, what’s the impact to your 2015 expectations based on this update?.

Yes, that’s a good question. I have tried to address that in my notes. So I am not going to try to forecast the revenue of what very well could be a competitor’s project at this point. And I would like you to ask them that.

But you are totally right that we thought that over several years that this would be in the neighborhood of let’s say in excess of $200 million. And because of that, we are feeling very strong about the year and we are feeling also very strong about the euro because of the imbalance.

And I am sure we talked about this on previous calls because of the rising U.S. margin profile, which doesn’t also have the FX issue associated with it, would be substantially positive for the company. At this point, in re-forecasting based off for that project being gone, we are in the U.S. looking at growth.

And I called this solid growth in my notes, so a solid growth for me is, let’s say mid to high single-digits. And if things go positive, then we may be in the low-teens. That’s what our forecast looks like right now in the U.S. So I would still expect growth out of the U.S.

this year, but the challenging part is we are going to also have European business I would say challenging I guess it’s better than not, but European business that’s growing kind of in the let’s say similar profile, if not slightly stronger with the stronger euro, negative bias on margins..

Great. And then just one last thing, I would like to get your thoughts on is, I picked up the idea of a concept of a white box GPON platform, in other words, an unbranded GPON, and that kind of confused me, I am wondering if you could talk about your perspective of this kind of white box trend coming into your equipment categories? Thanks..

Yes, sure. And I think it’s a – first of all, I think you are talking about a long-term evolution of the network and there are some carriers that let’s say less than a handful of carriers that have adopted that approach and then others that haven’t.

Although I do think that logically it makes sense and you would be correct in assuming that we are definitely at the front edge of that and in fact working with very large carriers on what that definition of that will be.

So the thought is to actually simplify kind of I will say line card and move more things into functional pieces that may be aggregated somewhere else in the network. Architecturally, I think it makes sense. When you talk about central office and the functionality in central office, I think there is an awful lot of opportunity for us there.

But I do think it’s a really long-term vision that it would be probably – it would definitely be premature for me to elaborate here because it’s not something that’s going to affect us in the next couple of years..

Thank you for taking my questions..

Sure..

We will take our next question from Rich Valera with Needham & Company. Your line is now open..

Thank you. Tom, in the past you have talked about two separate programs with the U.S. Tier 1. One, the regional one which sounds like it’s gone.

And there was a second one that was kind of national where you said you had to compete for that one, can you address the status of that program?.

Yes. Mike – I would say it’s effectively gone. I have not been officially notified, but based off of the progress on the first project, which really allowed the opportunity for the second project to happen. So we would have to exit the FFA piece and with that not moving forward at this point, I would say it’s effectively gone.

I did mention and I don’t want to overstate this, but I did mention that we have other programs with this carrier, and our Ethernet related and access related, but they are substantially smaller in scope. And right now, they are on track to start shipping kind of initial shipments toward the very tail end of this year.

I am not going to speak a lot about them until they come to fruition for obvious reasons, but that’s really where our opportunity sets lies with this carrier at this point in time..

Great. And I think it’s recently as your last calls said that you expected another solid year with DT on the vectoring opportunity, I think you said you expected growth this year. I am wondering if you could readdress that comment.

And then if you can give us any thoughts on that program as you head into ‘16, do you think that, that program has another sort of year roughly comparable to this year and how much runway does that program have? Thanks..

Yes, I would expect 2016, at this point without giving you specific guidance, our view right now on this point – on that point is that it will – it definitely continues on to 2016. If you look at where they are in the footprint expansion and their – by the way, take rate on the services is very strong. So I would feel good about that.

We also have – we have won a couple of other awards within that carrier. One of them is very meaningful for us, some enterprise gear that actually starts ticking up in 2016 as well. So I would expect positive contribution on a euro basis.

And I would tell you, on a euro basis this year that business I think I may have already mentioned it, it will grow meaningfully this year on a year-over-year basis. But I would tell you the euro has substantial impact on that. And so I think some of that will be kind of how does the euro end up looking for the second half of the year.

Our internal forecast and what we are modeling right at this point in time shows a negative bias on the euro and that we are expecting continued pressure. I hope that turns out to be a conservative view, but that’s what we are modeling..

Great. And I just want to clarify your comments, those growth comments that you had given for both the U.S.

and then the European piece, was that specifically broadband access or your overall business?.

Overall business..

If you look at the first half, given what you have reported in the 2Q guidance, it would seem like it need significantly better than historic seasonality in the second half to even approach sort of flat for the year for ’15, so just trying to understand…?.

Okay, yes. Let me – when I say overall business I want to make sure. So I would expect the U.S. to be up on a dollar basis, of course through the year. I would not say that about the – when we just blanket international business for the year. So think there will be pressure on the international side. The U.S. will grow.

The international business and definitely in Europe will grow on a euro basis, but I would not expect growth there on a dollar basis and that would probably pressure the Europe, the total company growth rate for the year..

So, without putting words in your mouth, it doesn’t sound like you are expecting overall revenue growth for the year on a dollar basis, is that fair?.

That’s fair..

Thank you. Those are my questions. Thanks..

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

Good morning. Thank you for taking my questions.

Tom, could you specifically as possible talk about the timing of the cancellation of the Tier 1 opportunity? And if there were – I know had been a technical challenge over the past couple of years and you had as you said a unique product set, but at the end, were there technical issues that pushed the customer towards maybe a simpler design than what you offered?.

I don’t believe so. So, timing is – on a timing perspective, I mean, there were conversations that went on through the quarter. In fact, there are still conversations going on now. And what I am doing is giving you my perspective, but I think is a relatively educated perspective on how things have turned out and will turn out.

On the technical perspective, we have had issues. When you go on to the lab and I think I addressed on the last call, we have had issues on software, but I would say not undue issues that you typically find in the lab and some of those issues were ours, some of those issues were the partner that we had. We had cleaned up predominantly by that.

I mean, it was a lab exit kind of software in the fourth quarter. That’s the kind of middish fourth quarter and really saw no other big issues that came up. And our software was ready to exit and go into FFA with that same software load, very early in Q1. So, I am not – I feel comfortable that we have met our mark there.

As far as simplicity of the design, I don’t – I am not aware that in effect I would be surprised if I mean the way you are doing is I think the right way to do it. So, I don’t think that there was a simpler design, simpler way to have it implemented.

I do think that a two-step model is difficult for a carrier like this and I think that, that probably was some of the pressure that we saw. And I think in redefining the program that allowed them to kind of re-look at the whole business model associated with it..

Right. Okay, thank you.

And then could you discuss your turf vendor work, I think you are doing for a couple different providers, but is that progressing as you hoped it would? Is that turning out to be a business that you like? Are you pursuing other opportunities of that type?.

Yes, so, the answer is yes. I mean, Q1 on the services side of our business met our numbers. Q2 will actually be stronger and you will actually see that accelerate through this year and probably, I mean, we have several different customers.

Some are involved in CAF, receiving CAF funding as we speak and some are scheduled to receive CAF funding later on this year. And I would say the predominant piece of that business we will be doing services related work. So, on an operating income perspective, it’s doing what we expected it to do. It’s definitely accretive from where we are right now.

And we are happy with that business. We are – also we have stepped up our services and kind of call it turnkey install, but there is engineering and there is installation of our equipment as well in Latin America and that seems to be going well and that business will be picking up as well this year..

And then just one last question, maybe you just can confirm or discuss whether Jim Matthews’ departure had anything to do with the weakness in the quarter and give us an update on your search for a new CFO.

And one of the things that Jim had done a fairly amazing job with is generating investment gains or a high return on your cash and investment income on the balance sheet? And I am wondering if there will be a change in philosophy both with regards to how you manage that portfolio of cash and investments, but also whether you might consider a more rapid return of capital to investors? Thank you..

Yes. So, let me address the first question and just be as emphatic as I can be. It did not have to do with the quarter. They were – without speaking for Jim, I think many of you on the call probably had talked to Jim. There were family reasons why he departed, when he departed and that was the totality of it. There was nothing else behind there.

Our investment philosophy hasn’t changed. We have the treasurer that pretty much runs that part of the business and nothing has changed there at all. So, we will continue to operate at the same way we have operated it.

From a cash to the shareholder perspective, our cash position continue to grow this quarter and we have in the past and continue to believe that it is our duty to return excess cash to the shareholder and that has predominantly been in a share buyback scenario. We look at that every quarter and I see really no change.

And in fact, based off of kind of current performance, I would – that’s definitely well within the range by which we would view it to be kind of a positive from a shareholder perspective..

And then update us on the timing of your CFO search? Thank you..

Oh, I am sorry. So, we have quite a few candidates that have expressed interest. We are in the midst of an interview process. We have seen some, we will see some more. And you know how searches go and kind of really landing somebody and getting them in the job. But my sense is we will have somebody in the position.

Our recruiting firm is going to shoot me for this, but my sense is we will have somebody positioned by the next time we get on the phone call..

Okay, thanks..

At least that would be my hope..

Alright, thank you very much..

Okay..

We will take our next question from Rod Hall with JPMorgan. Your line is now open..

Yes, hi guys. Thanks for taking my question. I guess I just wanted to circle back on the OpEx flexibility. I know Mike you said that it sounds like revenue growth is going to be flat. You guys are saying that earnings or operating profit should be up implying you will reduce OpEx. I think that’s kind of what you meant by the commentary.

Could you give us any idea how much you might be able to reduce or what’s your flexibility there is just so we can think about what the full year OpEx might look like? And then I also – I mean I know the Tier 1 thing has kind of beaten to death, but I wanted to come back and just make sure I understand what your confidence level, Tom, is it that the business has been awarded someone else or do you think that it’s – can you give some sort of a – how confident you are in that? And if you are pretty confident do you think it was a technology issue? Do you think – what is it that caused the change, but I am mostly just interested in your confidence level?.

Okay. My confidence is very high. To be honest with you, I would not bring it up if my confidence wasn’t somewhat high there. It’s not something that I relish in talking about. So, it’s very high. I do not see a change in that. People do change their mind, but I think that their mind – they have stated where they are going.

As far as the technology or whatever, I don’t think there were any technology issues. We have gotten where we needed to be in the process based off of the schedule of the project. So, I am not aware of any technology issues that would have kept it, but that wasn’t the reason..

One thing the reason I asked that, we see it in other projects. They continue to move toward end-to-end integration and choosing vendors as a result of that sort of thinking.

And I am just wondering did that potentially drive their thinking here? As we are aware some stuff they are doing on the business access, business access systems automation side of things and also in optical that are moving toward automation?.

Yes. I have seen the equipment that – or I shouldn’t say I have seen it physically seen it. But Mike I know which equipment that is competitively being used for this. And there is really – there is not – it’s not a better technology solution the one that we have proposed.

And I don’t – I think the net is there is incumbent there that is very strong, that I think saw a hole in what is probably a very good growth business for them that was not just a Southeast hole, but it was a nationwide hole. And I think they were very aggressive.

And I think that we had a two step model that was – had its own issues associated with it when you try to go in there gets incumbent who really, really does not want to lose the business. And so I think at the end of the day that that model definitely didn’t help us in this situation..

Okay. And then – okay, thanks for that.

The OpEx, can you guys comment at all, give us any idea?.

Yes. So, if you will I would like to put that off until our next conference call. I mean, we gave you a general coder. We expect it definitely in the second half. We have shown our ability to be able to do that in the past when we come under pressure. This is the first time when we really had kind of FX driven pressure.

And – but we dealt with it before and we will do it now. So we do have plans that are firming up and some that have already been literally executed on as we speak. But I would like to be able to give you more color when I can do it in a more concrete way, which would be on the next call..

Okay.

But you guys are definitely saying earnings up this year year-over-year while revenues are roughly flat?.

I don’t know if we said that because – so I don’t think that we are saying that. I said that we would see a significant increase in the second half versus the first half of this year. But that’s all we were trying to imply at this point..

Okay, great. Thank you, Tom..

Okay..

We will take our next question from Amitabh Passi with UBS. Your line is now open..

Hi. Thank you. Good morning guys.

Tom, I guess I wanted to touch on the enterprise business for a bit, I think we have seen now five quarters of sort of declining sales and just wanted to understand, do you think there is now structural elements that are putting pressure in that business or what else is impacting the sales outlook within your enterprise business?.

I think one or two things. One is, if I look at the enterprise business on the product segment basis, the weight is on the IP gateway piece. And in fact, routers typically do good, they did do good this quarter. They were actually up. Switches kind of come and go, they are slightly up or slightly down.

Our IP gateway is probably the predominant piece of that business, that’s number one. And number two, there was an ONT component of that business if you go back I think roughly a year ago. Mike, I am not sure if you have that in front of you, but that was – has been migrating over to the carrier side of the business.

If I look specifically on IP gateways, which is – what’s driving – which drive that numbers up and down, literally if I look at the quarter, there was not market share loss compared to any period of time, and specifically – specific areas of weakness related to CLECs. And that’s really where that weakness has been set up for some time.

If I look at the CLEC market, let me call it competitive carrier market, so a little bit broader than just CLEC, maybe that’s the same term. But non-independent or non-RBOC market, it’s probably the right way to look at it. And if I look at that, no major technological shifts, there are some carriers that are going through mergers.

There are quite a few of those carriers that are going through management changes. And in almost all cases, we are seeing a slowdown from their business side. If I try to reach fundamentally, are they losing market share, they are definitely – the numbers are down.

So needless to say, I mean in looking at that and you are right, it’s been a few quarters now we are looking at that a complete product segment and saying what do we need to do.

We have introduced some products that we think will bolster and augment that, including our SBC product line, which started shipping last year, but that is one of those things that we were viewing at this point..

And just as a follow-up, you spoke about the Tier 2 outlook in the U.S.

I didn’t hear you say much about Tier 3s unless I missed that, I just wanted to get your thoughts around Tier 3 spending trends, particularly in North America?.

Yes, I didn’t talk much about Tier 3 because to be honest with you, the aggregate of the Tier 2 business is so big that it kind of swamps to Tier 3s at this point..

Okay..

And there is so much going on with different phases of CAF funding. Of course, some of those Tier 2s also have done recent acquisitions of carrier properties, which we think are positive towards us because in most of these carriers we have by far predominant market share.

Tier 3s, I would say, they are kind of at least in the quarter where I will call them flattish, they didn’t see a whole lot. The CAF funding rules or the USF to CAF funding are getting clearer, but it’s going to be dominated. I would expect maybe some growth this year. But the real story is going to be in the Tier 2 space..

Got it. And just one final one, if I may, I think you guided to low to mid-40% gross margin for the second calendar quarter, to the extent that the U.S.

does a little better in the back half, would you expect to do – would you expect gross margin to continue to trend up from those levels as we look at the back half of the year?.

So, I am going to speak for Mike and then he could shoot me. I would think yes and this for two reasons. One, yes, the U.S. business will be up and it should be up in the second half. And the seasonal pattern of our European customer is that it really kind of the peaks around Q2 and then Q3 it goes down a little and then Q4 goes down.

So the European content will be less as well..

Okay. Thank you..

Okay..

We will take our next question from Paul Silverstein with Cowen. Your line is now open..

Thank you. This is Greg McNiff [ph] for Paul. Thanks for taking my question.

Two questions, just on the Tier 1 cancellation, do you think other customers, other DSL vectoring customers, maybe at risk given the lack of certification?.

Lack of certification, well, no, I mean, the Tier 1 – let me be clear about this. The Tier 1 in the U.S. is a specific customer that had single sourced their entire access network and was looking for a second source and was looking for a technology solution. We got all the way through to where we were entering the field and it was stopped.

It has – there is no bearing on any other customer that we have..

Got it. Thank you.

And then on the NetVanta business, to what extent would DT have to contribute there to see some sort of turnaround or improvement?.

I am not dependent on DT in order to see improvement on there. I think as I have just mentioned, well, NetVanta. So we don’t report a NetVanta number. My guess is I am going to look at Mike here. Again my guess is the NetVanta number is actually doing well and it’s probably up.

The products that are – now it is also true I believe, I don’t know if that’s NetVanta or total access product..

NetVanta, 46….

So it will actually just be accretive to it. And we had mentioned previously that that was the single largest enterprise win that they have ever had. And it really starts – and I think I have been very open about this that really starts shipping from their full cash perspective strongly in 2016..

Yes. There are some 2015 shipments, but it’s fairly small and the big ramp happens next year..

And these customers seems to be very good at forecasting their numbers. So, it will lift the NetVanta number, but the left – NetVanta number today, I don’t think is depressed. I think the majority of the pressures is on our Total Access IP Gateway line..

Got it. Thank you very much..

Okay..

We will take our next question from George Notter with Jefferies. Your line is now open..

Hi. Thanks a lot.

I wanted to ask about the plan for OpEx reductions later in the year, have you guys, I guess my impression of ADTRAN is that the company historically has been pretty efficient in terms of how it spends its dollar on sales and marketing and R&D and I guess I am just trying to get a better sense for where you guys might have an opportunity to cut costs, is it possible that you guys will look at a portfolio review where you would look at the lines of the business that you are in, it seems like this level of R&D, $61 million, $62 million a quarter, I should say in OpEx per quarter, kind of feels like you are funding a lot of different product areas there.

Is that something you look to do is to turn the portfolio a bit?.

Yes, but I will tell you that’s not a new concept. I mean, we do periodically do that. But I mean we are looking at every area where we can reduce cost. So – and we look at work commitments and we look at the return on those commitments. And yes, needless to say, there will be a lot of scrutiny on that and that’s an ongoing process right now..

Got it, okay. And then I also wanted to ask about deferred revenue. I assume the declines sequentially in deferred revenue have been a function of the CAF funding and the projects and how those projects move to far more revenue acceptance.

Is that the case? And then also would you expect that deferred revenue start to bottom in terms of those declines as the CAF business runs off?.

George, this is Mike. That’s exactly right. That comes from large projects that require additional work to complete. The reduction happened in CAF as well as some of that came from a large project in Mexico that some of that has completed, but I also believe there will be new pieces moving into there along with the pieces moving out.

So, I don’t expect that it will bottom out..

So, you don’t expect that there were at the bottom. We expect it to go up..

Right. And then somebody asked about investment gains or other income I think earlier in the call. My understanding is that there has been a historical ownership of Dialog Semiconductor stock here in the investment portfolio.

And I think if I remember correctly, there was a period of time where guys were selling some component of that stock position on a quarterly basis to drive some of those numbers in the other income line.

Is that now through the model or how much more of that is there left here to monetize?.

George, we really don’t talk about the individual investment pieces in the portfolio. So, I don’t have that in front of me anyways, but I will just say our philosophy – our investment really hasn’t changed..

Okay.

So, directionally those kinds of run-rates in that other income line ought to be consistent going forward, is that fair?.

I think that’s fair depending on what the market is. And there is also on the other income line there are offsets that will come in from time-to-time based out with any type of hedging we do on the euro. So, I think there is fluctuations there..

Okay, great. Thanks very much..

Okay..

We will take our next question from Sanjiv Wadhwani with Stifel. Your line is now open..

Thanks. Two questions on my side. One, just to confirm, it looks as if Q2 might be the bottom in gross margins and then second half, because of U.S. ramping up and Europe sort of ramping down, you should see gross margins hedging high.

I just wanted to confirm that? And then second Tom for you just wanted to get some clarity on your comments around the fact that the Tier 1 solution was a two-step process. I was wondering if you could just elaborate on that a little bit? And I was wondering if pricing played any role on sort of any decisions over there? Thanks..

Sure. Mike, if you – the answer to your question on gross margins is yes, we expect the second quarter to be at the bottom. The two-step process that I was talking about is – we actually were selling through a partner who has been selling it to AT&T. That partner themselves had a required margin in order for them to flow through their business.

And I have no doubt that, that have an impact..

Got it. Alright, that’s helpful. Thanks..

We will take our next question from Michael Genovese with MKM Partners. Your line is now open..

Thanks a lot. Hey, I just want to understand the assumption about 2Q gross margins a little bit more.

I mean, I guess you are assuming in that a similar level of depreciation in 2Q is what we saw in 1Q for the euro, is that the right assumption that you are making?.

Our assumption shows that it will continue to fall. I think we are hearing a lot from the big banks and the guys that track this that they expect parity potentially by the end of the year. So, we are trying to take some of that thinking and model it out as we go..

Okay. So I mean basically how dependent is the gross margins in the back half of the year to whether this keeps happening or not or whether we kind of finish this and maybe get to parity or get to where we are going by the middle of the year.

So, I mean, can you say with certainty that gross margins have hit the bottom in 2Q and is that really dependent on what else currency does in the back half of the year?.

Well, we have a model for Q2 that’s already baked into the numbers that we have. And so if it were to take a substantial decline from what our current thinking is, it could impact it, but we are charging our way through Q2 as we speak. And we think we have covered the base there.

So, we think we are conservative enough in that number to feel good about it. In the second half, if the euro were to fall below parity, it would impact us. The positive piece that we have in the second half of the year is that the European portion of that business also declines, because of the project nature. So, the U.S.

will have more of an impact which across the board is higher gross margins..

Okay. And then on the OpEx, I just want to make sure I am not missing anything that you are saying.

So, I hear you saying that there is room to cut OpEx in the back half of the year, but I just want to make sure I didn’t miss any kind of quantitative goalposts around that on what the size of that reduction could potentially be?.

No, you didn’t miss any. I will talk about it more extensively on the next call. What we are trying to do is directionally let you know what we were thinking about OpEx and we will have more detail, but I will leave it to say that we do expect operating margins to substantially improve from the first half levels..

Okay. And then finally also to be clear on what you are saying as opposed to what analysts on the call are saying. I heard this discussion of flat revenues for the year. And I couldn’t figure out whether that was guidance or not or just a discussion point that came up in the Q&A.

What’s your take on this flat revenue level for the year?.

That’s a good point, because we typically don’t guide out a quarter. And I would not try to tell you that I have any surety about what’s going to happen in the fourth quarter of this year. But I would say in answer to a question that’s kind of the way that we are seeing the business at this point, which is up in the U.S.

And then international was being substantially pressured by the exchange rate..

Got it. Okay. Thanks, Tom..

Okay..

Okay. At this point, I guess we have no more questions. So, I appreciate you joining us on the call and we look forward to a positive call in the second quarter of this year. Thank you very much..

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