Thomas R. Stanton - CEO and Chairman Roger D. Shannon - SVP of Finance, CFO, Secretary and Treasurer.

Ashwin Kesireddy - JPMorgan Paul Silverstein - Cowen and Company Doug Clark - Goldman Sachs Sanjiv Wadhwani - Stifel Nicolaus and Co. Michael Genovese - MKM Partners Rich Valera - Needham & Company George Notter - Jefferies Simon Leopold - Raymond James Greg Mesniaeff - Drexel Hamilton Tim Savageaux - Northland Capital Markets.

Ladies and gentlemen, thank you for standing by and welcome to ADTRAN’s Fourth Quarter 2015 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After 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 the 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 costs, manufacturing efficiencies and other risks detailed in our Annual Report on Form 10-K for the year ended December 31, 2014 and Form 10-Q for the quarter ended September 30, 2015.

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. Please go ahead, sir..

Thank you, Don. Good morning, everyone. Thank you for joining us for our fourth quarter 2015 conference call. With me this morning is Roger Shannon, Senior Vice President and Chief Financial Officer. I’d 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 $139 million, slightly higher than expected driven by strong performance here in the U.S. Our total carrier networks division revenues, including both international and domestic markets, came in at $116.7 million. Total enterprise networks revenues came in at $22.3 million.

Revenues from our domestic markets came in at $112 million or 81% of the total. International revenues came in at $27 million for the -- or 19% of the total. The strong regional shift in sales was predominantly due to growing momentum in the U.S. broadband market and a slightly stronger than normal seasonal decline in Europe.

Carrier sales here in the U.S. were up 37% over the same period last year and down a less than seasonal 4% sequentially. The year-over-year growth in this area came from increased sales in both Tier 1 and Tier 2 accounts.

On a product basis, our core product areas which include broadband access, Internetworking and optical came in largely as expected to $129.1 million. More specifically, total broadband access revenues came in at $84.9 million with solid performances across in most of the U.S. product areas and continuing momentum in our service group.

In North America, we continue to see a solid performance in Gigabit GPON shipments and a very strong performance in Vectoring/VDSL2 shipments and CAF-related VDSL shipments.

Our Internetworking product category came in at $30.3 million down 15% from Q4 of 2014 as a pickup in Tier 1 sales was not able to overcome continuing slowness in IP gateways sales to the CLEC and MSO markets. Gross margin and OpEx came in better than we expected as we exceeded our operating target set earlier this year.

Moving to the future and what we see ahead. As many of you on the conference call are aware, the access market in most geographies has been in a cyclical slowdown, which is limited growth in many areas most notably for us here in the U.S. That in combination with the challenging currency market made growth in 2015 very difficult.

Having said that, they required a few accomplishments and movements within our customer base that we believe maybe catalyst for change in the future. U.S.

AFTER CAF transition is one of those catalysts; over $3 billion per year is being made available to incentive broadband build out in areas that have been economically challenging for carriers to deliver.

That when combine with the regulatory commitments to upgrade millions of lines given on the hills of recent acquisitions helps set the stage for a significant investment cycle.

Further amplifying this cycle is the significant upgrade cycle of MSO carriers to DOCSIS 3.1 in PON technologies to substantially increase the availability of the Gigabit services. Several carriers here in the U.S.

and around the world have announced plans to begin initial deployment of these technologies in 2016 with significant accelerations to follow in the upcoming years. Needless to say this cycle will change the definition of the acceptable broadband service and significantly change the competitive landscape.

And although the timing of the material change may be debated or fluctuate we believe the landscape is changing. Of course ADTRAN needs to be prepared with the leading edge technologies necessary to benefit from this cycle.

In 2015 ADTRAN announced and trailed the world’s first Class-G optical products significantly reducing the cost of deployment for next generation optical access system. ADTRAN’s access platforms now support, GPON, X-GSPON and GPON-2 and EPON.

In Q1 ADTRAN will be trialing its first 10 gig EPON in various configurations developed to meet the unique requirements of the MSL market. Also in Q1 ADTRAN will be trialing the industry’s first virtual OLT system, including both hardware and software in collaboration with the global Tier 1 carrier.

End-to-end fiber connectivity is the ultimate goal for most carriers however due to cost network architecture and regulatory constraints, copper connectivity remains a reality. Technology such bonding, vectoring, super vectoring and G.fast allow carriers to deliver over 1 gig utilizing their existing infrastructure.

In 2015 ADTRAN began trialing multiple configurations of super vectoring in G.fast and we exited the year securing a major award by a Tier 1 carrier here in the U.S. for G.fast. And additional super vectoring award by Tier 1 carrier in Europe was also received at the end of last year. We expect both of these to deliver in 2017.

In 2016 we expect the positive momentum we have seen associated with CAF builds to grow as ADTRAN customers who in total have accepted $9 billion and price cap carrier CAF to funding begin deployment. Current expectations are for rate of return carrier rules to be finalized sometime in Q1.

We also expect to see the start of incremental spending associated with the PUC commitments following recent acquisitions.

Additionally, we continue to progress in our efforts to secure additional Tier 1 market share both here and abroad, as most Tier 1 carriers around the world begin addressing competitive and economic factors and accelerate deployment plans using GPON, next-generation PON, G.fast and various forms of Vectoring.

I’d now like Roger Shannon to review our results for the fourth quarter of 2015 and provide comments on the first quarter view as well. We’ll then open the conference up for questions.

Roger?.

Thanks, Tom and good morning. Revenue for ADTRAN’s fourth quarter was $139 million compared to $144 million for Q4 2014 and $158.1 million for Q3 of 2015. For the full year 2015 revenues were $600.1 million compared to $630 million in 2014.

Looking at our core products Broadband access product revenues for Q4 2015 were $84.9 million compared to $82.5 million for Q4 of 2014 and $94.1 million for Q3 of 2015. Internetworking product revenues for Q4 2015 were $30.3 million compared to $35.7 million for Q4 2014 and $38.1 million for Q3 of 2015.

And optical product revenues for Q4 2015 were $13.9 million compared to $13.1 million for Q4 2014 and $13.7 million for Q3 of 2015. In our legacy products, HDSL product revenues for Q4 2015 were $4.9 million compared to $5.8 million for Q4 2014 and $7.4 million for Q3 of this year.

Other products were $5.1 million for Q4 of this year compared to $6.9 million in Q4 of 2014 and $4.7 million in Q3 of 2015. For our product categories, carrier systems revenue for Q4 of this year were $102.9 million compared to $100.3 million for Q4 of 2014 and $111 million for Q3 of this year.

Business networking revenues for Q4 2015 were $31 million compared to $37.3 million for Q4 2014 and $39.1 million for Q3 of 2015. Loop access revenues for Q4 2015 were $5.2 million compared to $6.3 million for Q4 2014 and $7.9 million for Q3 2015.

Carrier networks division revenues for Q4 of this year were 116.7 million compared to $150.8 million for Q4 of last year and $131.3 million for Q3 of 2015. The enterprise networks division revenues for Q4 of 2015 were $22.3 million compared to $28.2 million for Q4 of 2014 and $26.8 million for Q3 of this year.

Turning to our geographic mix revenues, domestic revenues for Q4 of 2015 were $112 million, up $18.9 million from the $93.1 million in Q4 of last year, but down from $119.5 million in Q3 of this year. International revenues for Q4 of 2015 were $27 million compared to $50.9 million for Q4 of last year and $38.6 million for Q3 of 2015.

As discussed in prior quarters, the year-over-year reduction includes the effect of significant decline in the euro/dollar exchange rate. The quarter-over-quarter reduction is primarily driven by seasonality factors. We’ve published a reporting of each of these categories on our Investor Relations webpage at adtran.com.

Our Gross margin for the fourth quarter of this year was 44.9%, down from 47.6% for Q4 of 2014, but up from the 44.7% for Q3 of 2015. The decline in our gross margin for the quarter compared to Q4 2014 was primarily due to continued weakness in the euro/dollar exchange rate.

The improvement in our gross margin this quarter compared to Q3 was primarily driven by regional revenue and product mix shifts. Total operating expenses were $59.6 million for Q4 2015 compared to $64.5 million for Q4 of 2014 and $62.6 million for Q3 of 2015.

For comparison purpose Q3 2015 operating expenses were $61.7 million net of nonrecurring charges that occurred in that quarter. The decrease in operating expenses compared to both Q4 of 2014 and Q3 of 2015 was attributable to realized saving from previous quarter’s structural changes and ongoing expense controls.

Operating income for the quarter just ended was $2.8 million compared to $4 million in Q4 of last year and $8.1 million in Q3. Looking at our supplemental information restructuring expenses were $21,000 in Q4 of 2015 compared to zero in Q4 of 2014 and $900,000 in Q3 of this year.

Acquisition-related amortizations totaled $500,000 for the quarter compared to $600,000 for Q4 of 2014 and $400,000 for Q3 of 2015. Stock-based compensation expense net of tax was $1.7 million for Q4 of 2015 compared to $2 million for Q4 of 2014 and $1.5 million for Q3 of 2015.

Supplemental information for nonrecurring charges, acquisition-related expenses, amortizations and adjustments in connection with the most recent acquisitions and stock-based compensation expense have been provided in our operating results disclosure.

All other income, net of interest expense for Q4 2015 was $2.4 million compared to $4.4 million for Q4 2014 and $2.8 million for Q3 2015.

The company’s tax provision for Q4 2015 was a net benefit of $503,000 or an effective rate of negative 9.65% compared to a tax provision rate of negative 11.21% for Q4 of 2014 and tax provision rate of 35% for Q3 of 2015. The net tax benefits in Q4 of 2015 and 2014 were driven by U.S.

legislation extending research and development tax credit, the past in the fourth quarter of both years. Going forward the R&D tax credit has been made permanent. Net income for Q4 of 2015 was $5.7 million compared to $9.3 million in Q4 of 2014 and $7.1 million in Q3 of this year.

Earnings per share on a GAAP basis, assuming dilution for Q4 of 2015 were $0.12 per share compared to $0.17 per share for Q4 of 2014 and $0.14 for Q3 of 2015. The extension of the R&D tax credit in Q4 resulted in a $0.06 per share earnings per share benefit in the quarter.

Non-GAAP earnings per share for Q4 of 2015 were $0.16 per share compared to $0.19 for Q4 of 2014 and $0.19 for Q3 of 2015. Non-GAAP earnings per share exclude the effects of nonrecurring charges incurred to reduce our operating expense rate, acquisition-related expenses, amortizations and adjustments and stock compensation expense.

The reconciliation between diluted GAAP earnings per share and diluted non-GAAP earnings per share is provided in our operating results disclosure. Turning to the balance sheet, inventories were $96.7 million at quarter-end down from $100.7 million in Q3 2015.

Net trade accounts receivable were $71.9 million at quarter-end, resulting in a reduction in our DSO to 48 days compared to 57 DSOs at the end of Q4 of 2014 and 50 DSOs at the end of Q3 2015.

Unrestricted cash and marketable securities, net of debt, totaled $272.8 million at quarter-end 2015 after paying $4.5 million in dividends and repurchasing 22,600 common shares for $400,000 during the quarter.

Looking ahead, 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 into which we sell and the fluctuation in currency exchange rates in international markets we sell into may cause material differences between our expectations and actual results.

However, our current expectations are that our Q1, 2016 revenues will be flat to slightly up compared to the quarter just completed. Taking into account, currency exchange rates and anticipated mix, we expect that our gross margins will be consistent with quarter four’s results.

We also expect that operating expenses for the first quarter will be consistent with our prior guidance of a $60 million area run-rate and we anticipate a consolidating tax rate for Q1 to be in the mid-to high 30% range with the permanent status of the R&D credits now factored in.

We believe the significant factors impacting the revenue and earnings realized in 2016 will be the following.

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, the timing of revenue related to Connect America Fund projects, the adoption rate of our broadband access platforms and inventory fluctuations in our distribution channels.

Finally, as mentioned on previous call, ADTRAN is evaluating the possibility of a change in segment reporting of financial results to better align with the company’s operating strategy going forward. With that I’ll turn the call back over to Tom..

Thanks very much Roger. At this time Don, I think we’re ready to open up for any questions they may have. .

Certainly. [Operator Instructions] We will take our first question from Rod Hall with JP Morgan. Your line is open, please go ahead..

Yeah hi, thanks for taking my question, this is Ashwin Kesireddy on behalf of Rod. Tom, could you confirm what’s driving the strength in U.S.

broadband access now? Other vendors have seen some early CAF2 spending from Windstream have you seen the same? And also it appears like handful of price cap carriers have not yet started CAF to deployments when do you expect most of them to start deployment under the program? And then I have a question for -- a follow-up question for Roger..

Yeah, sure. So I’m hesitant to talk about specific customer, because sometimes that’s problematic for the customers. I’ll say we saw some CAF2 in orders in Q4. We may have shipped a little bit of that CAF-2 or CAF2. And that was from -- so we had CAF1 and CAF2 shipping in Q4.

And we would expect more than one carrier to be ordering and probably shipping in Q1 as well, if that helps..

Okay, thanks. And can you give us any more color on what’s going on with the rate of return carriers.

And I understand there were some federal trials towards the end of 2015, do you have any update there?.

Go ahead Roger..

Yes. That was not along the FCC’s calendar at January as some thought that it might be. We think that is possible that the rules may come down at the February meeting. So hopefully we’ll know more at the end of the first quarter on the rate of return carriers..

Great, thanks.

One last question on the international revenue, can you tell us what was international revenue growth or decline in constant currency?.

Ashwin I don’t think we have that in front of us. And I’d have to pick the quarter so on a year-over-year basis, and there would still have a significant decline. But Ashwin I don’t have that number in front of us right now..

All right, no issues. Thanks very much. .

Okay. .

And we will take our next question from Paul Silverstein with Cowen and Company. Your line is now open..

Thanks.

Tom, I appreciate the sensitivity in particular customer disclosure, but is there anything additional you could add on the two new Tier I, ones you referenced the one domestic and one I think you said European?.

Sure. The European one is I can give some color without getting into too much trouble here. So both on first of all let me say we’re not expecting shipments until 2017. The carrier in the U.S. is a large carrier that have been going through an RFP process here in the U.S.

for a significant portion of 2015 that was finally awarded in Q4 that roll out is for High bit-rate services predominately for MDUs and it’s part of a much broader roll out plan that they have. In Europe it is all about the same thing of getting higher connectivity speeds for using super-vectoring for residential services.

I’m not sure what else I can say about that except here again it’s not delivering until 2017..

Okay. And then one more if I may, looking at the numbers it looks like the investments cases almost flipped i.e. if we look back in time following your acquisition of Nokia Broadband that was the big driver and you had grown strength there quite a while. I don’t know if this is a more persistent trend.

But looking at the numbers over last three quarters while U.S. businesses improved it looks like the non-U.S. has gone just the other way were it was down 45% year-over-year this quarter, the last two quarters we’re particularly weak as well.

Is there some anomaly, is this a one-off albeit over three quarters or looking at over the next year should we expect this type of weakness in the non-U.S.

business and what’s driving it?.

Yeah. So there are two things driving. If I look at for the total year without a doubt the biggest driver was fluctuations in the currency market and we’ve been pretty consistent in pointing it out when that was the case.

So you have to haircut that, if you look at the last three quarter of course that was exaggerated by the fact that if you look at Q1 it was incredibly strong for our European business.

So we had a movement of business from Q4, let’s say would have been Q4 in a normal quarter that actually occurred in Q1 and that’s why we talked about the slide out and a more than seasonal decline in our European business, which we actually did see.

We expect Europe to be stronger in Q1 we expect to actually pick backup not to the levels that we saw this year because we expect them to be on a more normalized pattern. If you look at international in general in 2016 the thing is we don’t know what the currency is going to do.

So if you look at it kind of on a constant currency basis right now without knowing any better including Telemax [ph] we're basically saying flattish. So your premise, I agree with you, we had international sales growing and a lot of the U.S. was declining. Now we show much stronger about the U.S.

market which of course is positive on multiple funds including the margin level. And in the international market until we actually bring on some of these awards, which is 2017 we are expecting basically a flat market on a constant currency basis..

Okay. And Tom just to make sure I heard you right with respect to your non-U.S.

business for the first quarter you are expecting it to be up sequentially albeit less than the first quarter of last year? Is that of ‘15?.

Yes..

Okay, great. I appreciate it. I’ll pass it on. Thank you..

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

Hi, thanks for taking my question.

My first one is just a higher level question particularly on North American CapEx, what are your expectations for budget releases and the timing around those in the first quarter embedded within your guidance?.

We’re expecting typically the smaller the carrier the easier it is for them to release their budget.

So we are expecting build outs to be planned and start shipping in Q1 for let’s say Tier 2 carriers or the smaller Tier 2 carriers and our expectation is as is typical that you would see the larger carriers not really fully release their budgets until the tail end of Q1 and then start seeing more material shipments in Q2. .

Okay, that’s helpful.

And then I appreciate the color on the kind of G.fast and super vectoring wins is there additional opportunities or RFPs out there that you’re also pursuing? And then one just housekeeping item 10% customers for the full year could you give us if there were into to what revenue percentage they were for the year?.

Sure so as far as the other ones yes there are several awards going on, we still have -- we have more troubles going on in G.fast and to my recollection any other product we’ve ever launched. And I think we actually have more trails than any other vendor by the way in the industry at this point.

There are several RFPs out there several of them are fairly large including in Europe and in the PAC Rim area and they are just progressing one of them is very, very close to award I’ll maybe as close as you can get to an award and there is again a finalization of what timing and things would be for whoever that vendor is and then one of them are still yet to be determined.

So those are the two bigger ones. So I think that answers your question. As far as the 10% go ahead….

Yes we added two 10% customers for 2015..

Can you give us any detail as to what percentage of revenues they were?.

No that would be disclosed in our 10-K..

Okay, got it. Thank you..

And next we will take our question from Sanjiv Wadhwani with Stifel. Your line is open, please go ahead..

Thanks.

Tom just one broad level question when you look at CAF2 I think there is some debates going on whether it’s incremental or substitutive just curious to get your thoughts around that? And then just confirming on the European carrier as far as constant currency are you expecting that carrier to be kind of flat this year compared to last year or do you expect it to grow a little bit? Thanks..

Okay. So let me take the second one, so on the carrier in Europe basically what I’m trying to do is be able to give myself a little bit of latitude. There are negotiations still going on as to what the extent of the market share award is that we’re going to get this year.

If I look at international in general we have some puts and takes and my sense is and our forecast at this point is basically flat on a constant currency basis, so that’s kind of where we are.

We have a customer in Latin America that can and often does surprise us with upside we’re not factoring really any of that upside into our forecast at this point in time and just trying to be relatively conservative on that.

And your first question again please?.

Just on CAF2 yeah debates on incremental or substitutive so just trying to get your thoughts around that?.

Yeah that’s almost an eye of the holder type question, so the way that we’re looking at it is if I take a look at spend and the forecasted spend and in many cases especially the Tier 2 carriers we’re building plans in conjunction with them.

So if I look at the spend that they’re spending with us with in this realm of CAF2 versus what they were spending with us prior to CAF2 without a doubt it is incremental to our revenue, so that’s the way we look at it.

Now whether or not their entire capital budget is less or more to be honest with you I’m less worried about that whether or not they buy less routers or do less back office whatever I’m okay with that as long as my hope is, is that in the excess space that we’re playing in we see an incrementally larger wallet share and that’s the way we look and that’s what our current forecast reflects..

Got it, that’s helpful. Thank you..

Okay..

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

Thanks a lot. Tom first of all I wanted to just confirm that this rate of return piece of the CAF project that we’re expecting to get news on in the current quarter is same as the Tier 3…..

Yes..

Program that we’ve talking about and specifically $1.8 billion a year I think and my question is forgetting news in the first quarter do you think that -- are you fairly certain that there’ll actually be dollars dispersed by the second and third quarters of this year?.

The way we are looking at it right now is we are not factoring a lot of that into second and third quarter that matter fourth quarter and the reason is even now for the rules have been set, it takes a while for carriers especially Tier 3s to digest with those rules are and what that means to their operating business and how much they are actually going to spend.

So although we think anytime if you’re incrementally putting in $1 billion to $2 billion into a market for a year, we do think that there will be a positive impact to that how those rules come out, how positively they are viewed and how quickly they are accepted or things that right now are just out of our control.

So we are not factoring in a lot of that, we’re basically we expect the Tier 3 market to be stronger for us this year because in general the market in the U.S. is stronger. But we are not factoring a big bump this year we would expect that next year..

Fair enough. When you look at a program whether it’s $1.5 billion or $3 billion, is there a back of envelop the way that you just look at it and say hey maybe 20% of that is our opportunity or is it really case-by-case and you can’t....

It is case-by-case, but the number is big enough to where you think you would have the law of averages working on you and the numbers that we have used in our planning and are generally accepted because of the history predominately with broadband stimulus is somewhere between 10% and 15% would actually fall to the access equipment piece.

That kind of varies carrier-by-carrier and architecture-by-architecture. But that’s the general rule of thumb I think that that most people use..

Great. And then last question maybe for Roger.

Just specifically for the first quarter, just help me more specifically think about the mix between expected if we are flat or slightly up and the mix between international, which I’m sure is going to grow, can you help quantify that in anyway, but also what are puts and takes that gross margins come out flat in that wash?.

I’m going to answer for Roger because I’m putting a hand over his mouth right now. Virtually putting a hand. So as far as the international we expect international to be stronger. We expect it to be stronger than Q4, I mean it’s not going to -- I think we’ve kind of given just on this call a range of not as high as it was in Q1 of this year.

So if you kind of go back historically and take a look at what the international business has done and kind of drive from that I think you’ll kind of get a sense with that. Really on the U.S. market, the U.S. market is typically seasonally down.

The total market by the way, the total ADTRAN revenue is typically seasonally down and look at where we’re at mid-single digit if I recall is that right Roger? So we do expect a strong environment than it is typical in Q1, but having said that we’re not at a point to where we want to just kind of unleash it being fantastic.

So we are expecting incrementally stronger driven predominately by on a sequential basis by growth in the European market. Having said that that also means that the U.S. market will probably be not as down as it typically has been..

Okay.

And the gross margin piece how that comes out flat, just what are the puts and takes in the gross margin?.

The puts and takes are well a couple of things, obviously the domestic versus the international mix to the extent that there is a larger than expected increase in the international or as Tom just mentioned a higher than seasonally typical mix in the domestic for the first part of the year.

Also to the extent that the mix in services changes on the domestics….

Yeah, I think if you look on the sequential basis we had a pretty strong. I mentioned it on my notes we had a pretty strong services quarter in the U.S. so we would expect a little bit stronger product quarter not as strong as a services as people get rolling you typically miss the first part of the quarter on a services installation basis.

So more product in the U.S., less services in the U.S., stronger international and the net of that is basically flat..

Thanks a lot..

And Tom I want to make one correction to a comment regarding the 10% customers. For the full there were three 10% customers. Again we’ll have further disclosure on that in the 10-K..

And next we will go to Rich Valera with Needham & Company. Your line is open..

Thank you.

I was wondering if you’d be willing to comment on how you view historical seasonality into 2Q it’s a pretty wide range over the last several years and whether you think you might be above or below that historical seasonality this year given some of the programs you know that that will be ramping as we move into that second quarter?.

That’s a really good question. We expect without a doubt Europe will be stronger that will drive the International number to be stronger. So we’d expect a sequential increase we definitely expect a sequential increase in the U.S.

market whether or not it will be seasonally we’ll talk about that of course on the next call, but in general we’re expecting this year to be better than 2015. So through the year we would expect it to continue to get better and then we would expect a normal decline in the fourth quarter..

So in terms of that playing out and I’m guessing you don’t really want to answer this, but would you expect better than historical seasonality as we move through the year as that sort of momentum picks up?.

Well let’s do this, we typically give guidance on a quarterly basis so I would hate to get that ground I would say we expect this year to be better than 2015 and kind of leave it at that and we expect a normal seasonal pattern in this year which we’ll expect growth in Q2.

Our new seasonality is kind of Q3 is right around the Q2 level and then you’ll see a decline in Q4..

Okay….

To be honest with you, I don’t have a granular enough forecast even if I wanted to bring that up that I would say have faith in, we have a sales forecast but at this point in time people are still finalizing their budgets a lot of people want to get CAF done as quickly as possible.

Some of them aren’t in a position to get it done as quickly as possible. So a lot of that is being worked out right now..

Got it.

And there has been a pretty broadly discussed Vectoring program with CenturyLink they had a trial on a specific city for and potentially going to ramp that pretty significantly I don’t know if you’re able or willing to give any color on that program?.

They’ve done a really good job of giving color themselves I will tell you from our perspective that program is going very well. I think it’s doing what they expect to do, but I have to leave that to you to ask them, but we’re very bullish on the potential for that.

And it points to a problem that many carriers if not most carriers have which is it is economically viable to deploy to larger urban areas, fiber which is a large percentage of the market and we’re very much focused on that, but at the same time you still have an awful lot of your network that is just economically challenged and doing something like that.

We’re now to a point now with the different copper Vectoring technologies, these are best technologies in bonding to where you can truly have a kind of market leading deployment over copper as well as using fiber and I think CenturyLink’s initiative is a fairly bold initiative in trying to prove that case point out here in the U.S..

Great, thanks for taking my questions..

And next we will go to George Notter with Jefferies. Your line is open..

Hi guys, thanks very much. I guess I’m trying to better understand sort of what the longer term trajectory on gross margins ought to look like.

I guess if I look backwards over the last couple of years you’ve seen certainly a fair amount of gross margin decline I guess the question from me how much looking back is related to FX, how much looking back is related to the growth in the services business or there is another organic components to the gross margin erosion and how do you think about those pieces on a go-forward basis? And I know the question has been asked in several different ways over the course of the conference call, but I think it’s a pretty fundamental question going forward.

So….

Yeah I agree and it is it’s so complicated to answer, I don’t think figuring out the euro impact is that difficult. Because it’s fairly public and it’s you know that that’s a largest part of our international revenue at this point on a year basis.

That was the biggest decline that we saw in 2015 without a doubt in our gross margins was the impact of the euro. The services piece, so let me talk about this year, so we expect gross margins to improve this year, that improvement is directly tied to an increase in the US business versus the international business.

There is a pull down on that gross margin because of our services revenue, and I will go back again and tell you and it is absolutely without a doubt incremental to operating profit and on a percentage basis. So operating income it is accretive to our product gross margins. But having said that that is a pull down.

And we expect the overall including the mix on where our forecast is right now for services to be up this year. If you think that we were kind of in the 44-45ish range for the entire year we expect that to be up somewhere between 100 to 200 basis points. Is that correct I am looking at you. .

On the gross margin line. .

Gross margin line. .

I think we're seeing it’s flat..

For the year. .

Yeah. .

Yeah for the year we’re expecting to be up although Q1 we’re expecting to be down. We expect the U.S. business to get stronger as we go through the year..

That's right..

Got it, thank you..

Okay. .

Next we will go to Simon Leopold with Raymond James. Your line is open. .

Great, thank you for taking my questions. A couple of things I wanted to clarify, first I want to go back to your commentary on the tax rate given that we have the R&D tax credit.

I want to make sure first of all I heard you correctly that you forecast mid to high 30s tax rate, is that what do you said?.

Right, that’s correct for the first question. .

So I guess I’m a little bit puzzled because when I look back at 2015 for the first three quarters of the year the tax rate was in that range 37% and change without the R&D tax credit.

So I’m just wondering if there is a simple explanation of why you’re not seeing more of a benefit?.

Well it’s a process that is you calculated at the beginning of the year on a quarter-by-quarter basis. So we look at the expected mix in the U.S. business, the international business and then other items that would fall into the calculation such as FIN48 matters.

And then as the years goes on taking into consideration how those events occur, how that mix actually plays out. And going forward quarter-by-quarter we’ll adjust that tax rate.

So what you see in the last couple of years in 2014 and 2015 is obviously that with the R&D tax credit not being permanent and actually it not being passed by congress and signed into law until almost the 11th hour you’d have a negative rate in the fourth quarter as that was finally baked in.

So as we look at it this year, kind of taking those factors into consideration US domestic mix the FIN48 matters as well as the R&D tax credit, which has to play out over the course of the year.

The rate certainly will start out at a higher level and then as we move throughout the year that would be adjusted according to actual results and projections for the rest of the year. .

And if you got a higher U.S.

mix that should help for a lower tax rate or in another words you get more R&D tax credit if more of your revenue comes from U.S., is that correct?.

I think it’s actually I agree with you. I think again it depends on the jurisdiction of where the international sales are. Obviously the U.S. tax rate is higher than basically all countries and as you say if factoring the R&D outside of that and on the jurisdiction of the sales internationally. .

Okay. And then just shifting gears the Internetworking business we haven't really talked about that on this call today much in terms of the Q&A discussion, but I can’t help but noticed the revenue there while notoriously lumpy has -- was a bit light this quarter. And I recognize that’s a tough comparison versus September.

But if we look at the long-term trend Internetworking as a segment it’s been coming down, could you help us understand what’s going on there how much is macro, how much is product maturity any kind of inside you can give us towards how to think about that segment of the business?.

Sure. And it has been a tough one to forecast. So -- and you did hit on the two bigger points there, one is we do have there is just flat out sluggishness in the CLEC market which I pointed out in our -- in my notes that has persisted for some time right now.

We don’t see a significant market share change there, it is and if I look at the sales into those customers each of one them has a particular reason but that is just been slow. We do also sell to MSO carriers which is traditionally has been a fairly consisted market.

We went through some inventory issues with one of our larger MSO customers and looking at the inventory pull down and the actual inventory rates that actually did not clear itself up in Q4. So that was problemental to that customer coming back online.

Having said that, we’re continuing to progress forward with that product line IT gateways is the product line that is the one that is causing the distress in internetworking. And we just in this quarter actually excuse me in Q4 we won another large MSO here in the U.S.

for Internetworking products, for our IT gateway products and that starts shipping sometime around the half. So we’re continuing to pick up market share but having said that until we get out of kind of this period in softness in the CLEC market, we’re not expecting a significant growth in our internal plans even as we do pickup market share. .

Thanks. And one last one if I might. In prior calls when we’ve talked about the issues with foreign exchange you’ve suggested that you’ve expected your largest international customer would purchase more units in 2015, but that foreign exchange would lead to less revenue.

I’m just wondering if with the year behind us now, whether or not you delivered on that target of shipping more units into that top customer. .

I don’t know I mean so when I say units, I don’t know so basically if you say on a constant currency basis I think is probably your question..

Sure. .

Constant currency basis for the broadband business. My sense would be probably not, when we saw kind of a wholesale shift in Q4 into Q1 of this year and so I’ll go back and check the math if my sense is probably I wouldn’t be surprised if it was a little down even on a constant currency basis..

Thank you very much. .

Okay. .

Next we will go to Greg Mesniaeff with Drexel I’m sorry, Drexel Hamilton. Please go ahead..

Yes, thank you. In your introductory remarks you talked quite a bit about currency fluctuations and its impact on business and revenues.

Any color on the impact of those fluctuations on component pricing if there is anything there?.

Unfortunately not. We buy and that is the kind of rude issue that we have most of the components that we buy are in on a dollar basis, including products that we sell to Europe and Asia and Latin America. So we’re getting paid in euros in many cases or in pesos and then we’re paying our component suppliers in dollars..

Got it.

And as just a quick follow-up, can you talk a little bit about any product refreshes that you have slated for 2016?.

We’ve got, it’s on. I talked a little bit on the call so we are launching and have been actually in the midst of launching significant upgrade in our optical product line those broadband access optical product line including our Class G optic switch we’re now trialing. You will see TWDM product to about next year which is NGPON2 next year.

I also talked about our virtual LLT system which we are trialing with a Tier 1 carrier here in the U.S. that is a significant upgrade. And if you think about where ultimately SDN can go to and what people are looking for that’s a product that right now we’re in the midst of a trial or gearing up for a trial with a carrier here in the U.S.

So you’ll see a significant refresh on the optical side and on the system level side. On the copper side the biggest thing going on right now is super-vectoring in G.fast. We have the broadest line of G.fast products on the market by far. We support a multiple chipsets where most companies support a single chipset in their G.fast products.

We have the best performing product out there and we have multi-port configuration and that is truly a completely different product line if not really part of the 5000 per se it’s a kind of standalone product. And then super-vectoring is just being rolled out across a broad footprint of our product lines including the 5000 and the hiX.

All of those are at some level of completion and will be announced throughout 2016..

Great. Thank you for the detail..

Okay..

Next, we will go to Matt Dean with Titan Capital [ph]. Your line is open..

Great, thank you. I was curious that you stated that you have -- you're looking at the [indiscernible] customer base that they’ve committed to taking roughly $9 billion in CAF2 funding.

I was curious how does that compare to CAF1 and is that $9 billion is that all the CAF2 that exist out there or would you expect additional commitments even above and beyond that CAF2 funding?.

The $9 billion is for the rate of return carriers, which are people tend to think about them as Tier 1 and Tier 2 carriers and that is basically if you look at the dollars that they have accepted which is roughly $1.5 billion per year over the next six years that’s where that number comes from and as far as available will that -- the available was not much more I think it may a $200 million more or something like that, that didn’t get accepted per year.

So the upside to that is basically zero. Go ahead Roger..

I am sorry, to correct you, the first is for the market cap carrier..

Okay. So Tier 1 and Tier 2 is where the $9 billion come from and that’s a fairly they’ve signed up for the FCC to do deployments on particular footprint expansions and that’s fairly fixed at least in my mind I don't think it’s going to change dramatically.

The only way it will change is if they don’t live up to their commitments on deployment and I’ll just remind you that once they receive the money for a year so let’s $1.5 billion this year they have to show progress in deploying they have to deploy 20% this year by the end of this year and show to the FCC that they actually made their progress or else those funds get haircut going forward and they have to do that for the next five years.

There is another pocket of money which is this pocket of money that kind of gets at least clarified hopefully this quarter which are for the rate of return carriers and that’s almost another $9 billion, it’s actually more than that, it’s $1.8 billion per year for 10 years and that has really kind of yet to start flowing.

So that’s where the upside would be on the CAF piece..

And I think this is public knowledge I mean currently the Tier 3, the rate of return carriers receive Universal services Funding USF that’s going to be obviously changing with these new rules coming out from the FCC for CAF2.

They are talking about a bifurcated plan two components to it a model support plan kind of like CAF2 for price cap carriers and we just mentioned and then an existing mechanism kind of a price support rate of return model like the U.S. have today.

So again I’m not going to get into what the FCC is going to do that you can look that up, but that’s the information as we understand it right now..

That’s also the question how that compares to CAF1, CAF1 was really a fixed program I think it was initially $500 million and then they kind of rolled into CAF1 Phase II which forwarded some more of that money forward. But it was a fix dollar amount substantially less..

Okay. And you talked about the 20% that needs to be committed or spent this year of the $1.5 billion.

I was curious you said a number of carriers seem eager to spend it or get it up there as quickly as possible is that a number that they’re far going to exceed as you’re sitting here today the 20% is frankly a relevant with most of the carriers and are they going to go well above and beyond that is that how you’re viewing that?.

I don’t expect that I think it will end up what people are doing what they have to do to make their commitments. Some of them want to get it done forward and then just kind of reap the benefits in the latter years, but in general I don’t expect so and let me make sure and clarify this they don’t have to spend 20% of the money.

They don’t have to spend $1.5 billion that’s coming this year they have to cover 20% of the footprint and however they do that so some of them may do the easy ones first, which inherently will be less expensive and some of them may do the hard ones first and someone will probably do a mix.

So it’s not directly dollar related to its performance towards their commitment in getting coverage..

And you talked about the access piece of things for the $1.8 billion piece of business that exist out there is being I think did I hear 10% to 15% of….

Yeah the general rule of thumb it’s kind of an industry that’s really not my number. It does equate fairly correctly to what we saw in broadband stimulus yes..

Okay.

And is that similar for the CAF2 as well that 10% to 15% number?.

Yeah there is nothing inherently different about what they’re doing there from a macro level. So we’re comfortable that that’s I mean it may turn out different but we’re at this point we don’t have a better number than that..

Okay great, thank you..

Next we will go to Tim Savageaux with Northland. Your line is open..

Hi, good morning..

Good morning..

Just a real quick question on kind of growth expectations domestically for 2016 you had indicated kind of flattish maybe little down expectation internationally, the domestic business has growing around 20% in the last couple of quarters in I think your kind of implied guidance and given the weakness last year would be higher than that, but what sort of growth expectations should we be carrying growth expectations in that range over the last few quarters into 2016 for the full year? And would that include anything sort of material in terms of major new Tier 1 business or should we look at that more as kind of run rate business? Thanks..

Okay. So we typically won’t give a dollar number on full year guidance what you said is absolutely correct we expect this year to be up. We expect this year to be up on the domestic business, we expect the international business to be relatively flat and that’s basically from lack of better visibility to tell us one way or the other.

We expect the company to be up we had a fairly strong U.S. wasn’t just in the last two quarters, the total year was actually fairly strong for the U.S. carrier market. That’s probably as we get through the year and we see how CAF2 unfolds we absolutely will give more color, but it’s still yet to be seen.

We think we’ve got a good handle on Q1, but we really don’t have strong visibility pass that in the U.S. market. I do want to -- if you’ll allow me during your time also I wanted to go back to Simon’s question, so Simon your question on a unit basis the answer to that question was yes, DT was actually up on a year-over-year basis so sorry about that.

Any other questions Tim?.

No, that’s great thanks..

Okay. I think we’re out of time, in fact I know we’re out of time. So I do appreciate everybody participating on our call and we look forward to talking to you again next quarter..

This concludes your teleconference. Thank you for your participation. You may now disconnect..