Tom Stanton - CEO Roger Shannon - CFO.

Ashwin Kesireddy - JPMorgan Doug Clark - Goldman Sachs Michael Genovese - MKM Partners Rich Valera - Needham & Co. Paul Silverstein - Cowen Victor Chiu - Raymond James Bill Dezellem - Tieton Capital Tim Savageaux - Northland Capital Doug Clark - Goldman Sachs.

Ladies and gentlemen, thank you for standing by and welcome to ADTRAN's Third Quarter 2016 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, 2015 and Form 10-Q for the quarter ended June 30, 2016.

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

Thank you, Robbie. Good morning, everyone. Thank you for joining us for our third quarter 2016 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 Q3 results and I will end with some comments on what we see for the future.

Roger will then discuss our Q3 performance in more detail, and we will then open the call up for any questions that you may have. As we stated in our earlier press release, revenues for the quarter were 168.9 million, coming in ahead of expectations, up 4% sequentially and 7% year-over-year.

Our total network solutions revenues including both international and domestic markets came in at 136.3 million and total services and support revenue came in at 32.6 million, a new record for the Company.

Revenues from our domestic markets came in at a 127.7 million or 76% of the total and international revenues grew to 41.2 million for the quarter, or 24% of the total. On a year-over-year basis our domestic revenues grew 7% as we saw strong growth in our service business and continuing momentum in CAF II and vectoring demand.

These positive trends affected both our product and services revenues and both Tier 1 and Tier 2 accounts. Our international business was up sequentially 42% and up 7% year-over-year. This quarter was helped by returning strength and vectoring shipments in Europe.

Moving down a little deeper, our access and aggregation category had a solid quarter growing 18% sequentially and 17% over the same period last year. This growth was broad based as we saw growth both domestically and internationally.

Customer devices was down sequentially after a strong Q2, but that product category continues to perform well and as expected growing nearly 10% through the first three quarters driven by strong demand in ONTs and EFM. During the quarter, we continue to make advances in our Mosaic cloud architecture.

We started the quarter announcing our Mosaic SDN cloud platform and our Mosaic NFV operating system. That was followed by the introduction of our orchestration and control functions within Mosaic. We exited the quarter having completed lab certification for our Mosaic software with one of our Tier 1 here in the U.S.

and continue to work with other Tier 1 and Tier 2 carriers in the U.S., Europe and the Middle East. We believe ADTRAN is the only access under with SDN controls software modularity and application virtualization and is leading the development towards the next generation of Access architecture.

G.fast continues to gain momentum around the world and we ended the quarter having been awarded primarily supplier with yet another Tier 1 carrier in the EMEA region. Our awarded Tier 1 business here in the U.S. continues to progress well as we formally exited the lab process and entered first field applications for the first phase of deployment.

Finally, our NG-PON2 initiatives continue to progress well as we’re bringing to market the world's most advanced fiber access solution utilizing multi-wavelength TWDM-PON, virtualized OLTs and SDN control. Looking forward our focus remains on being the world's most comprehensive access solution provider.

With clear industry-leading solutions in fiber access and ultra high-speed copper with the world's most complete access virtualization product, we believe we are well-positioned to capitalize on the evolution in access as carriers around the world upgrade their infrastructure to meet customer demand.

I would now like Roger Shannon to review our results for the third quarter of 2016 and provide some comments on the fourth quarter as well. We will then open the call up for any questions.

Roger?.

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

With that, I’ll now turn the call back over to Tom..

Thanks very much, Roger. Robbie at this point, we're ready to open it up for any questions people may have..

[Operator Instructions] And we will take our first question from Rod Hall with JPMorgan. Please go ahead..

This is Ashwin on behalf of Rod.

Just a clarification, apologize if I missed this, but did you quantify how much of an impact did you have in gross, margins, because of the increase warranty expense?.

We didn’t break that out, the reason is we’re still in negotiations with some of these -- well with a couple of the third parties. So did not -- what I’d tell you is, it was over a point, it was materially over a point, the impact in the Q3, but we haven’t broken out the exact dollar amount..

Okay.

If we could go back to the European restructuring, it gets started in the quarter, is that mostly done or do you still -- are you still in the progress of making the [multiple speakers]?.

It’s mostly done, there may be a little bit of cleanup from an accounting perspective in Q4, but it’s mostly done..

My last question really is on services, could you just comment on what’s driving the strength here.

Is it sort of related to any specific project, how should we think about that going forward primarily into next year?.

Well, it is driven by projects and I think you’re probably aware of the projects. So CAF II is a big driver, we expect CAF II to continue on into next year. We have fairly large vectoring deployments going on here in the U.S.

We would actually based off of what we are hearing and what you are seeing in the press, we would expect that to actually be materially larger next year. So I would expect we should have a strong services number in Q4 and I would expect it to actually grow next year..

And we'll take our next question from Doug Clark with Goldman Sachs. Please go ahead..

My first one is on the international piece, a nice sequential growth and I think you commented on part of the improvement coming out of Europe and vectoring in particular.

So is that growth attributed to the one historically large European customer and related to that last quarter actually for the past two quarters you’ve commented on increased competition or potential share shift in that customer account.

What are you seeing in that large European customer and what is your outlook at least for the fourth quarter or near term? Is it going to remain at these levels, fall back, et cetera?.

Yes, so they were definitely strong in Q3 than we planned and yes it is driven, I would say we have other customers in the region, but the biggest piece was driven by the larger vectoring that we're doing there. Really, I don't know if I would call it a share shift.

I think you had -- they were focused on different footprints at different times and that kind of benefited us in Q3. We think that will be benefit us in Q4 as well, so it's just -- I mean, it's kind of what you say, which is just more focusing back on our product or on our region..

Okay that’s helpful and then on G.fast broadly you mentioned some of the U.S. win and another European Tier 1 win. There have been some large notable customers like British Telecom and CenturyLink that have assumingly gone to other G.fast equivalent providers.

Can you talk about the competitive environment, what you're seeing from a kind of share of wins? Are you still involved in those customers that I just mentioned that seemed to have gone to competitors?.

Yes, so we got two different types of things going on there. So the European customer you're talking about, yes, we're still involved. But I would say, we're not in the driver seat there and they have been fairly transparent about their process. We still have an ongoing trial there.

We're continuing to try to show the benefit of our technology which is materially differentiated from the other competitors there, but we still have a lot of work to do. In the U.S., I think it's a completely different thing, I think the customers included the ones that you talked about in the U.S. are still very much open.

We're still doing things with that customer in regards to G.fast. I think it's just a matter of timing..

Great, actually and one follow-up on G.fast as well, the U.S.

customers in particular that’s now exiting lab trials and going into deployment, can you give us a sense for kind of the size and scope and perhaps slope of the deployment there, just to help level set us?.

Sure, let me be clear about this, I said first office deployment which means it's still kind of a trial phase. It's out of the lab, but it's actually out there with live customers now and there is some kind of soak period with that before they really open up the flood gates and start deploying it in mass.

The reality is I don't know that's a customer, it's very difficult to forecast. We're very happy that we got through this piece. The first phase of this -- there are at least a couple of phases to this, the first phase of this of course is kind of the gating item to start receiving purchase orders and things.

So we’re happy with where it is but I am not at this point trying to put a number, definitely not a timing number, I think our belief on the total size of opportunity hasn’t changed, but I can’t tell you exactly what it will be even at Q1 at this point..

We’ll take our next question from Michael Genovese with MKM Partners. Please go ahead..

Great. Thanks a lot.

So there is certainly a change in the international business compared to what we heard on the forecast on the last call, it sounds like it was all one customer in Europe, but I just want to check with -- was there anything in Latin America that was different and why did that project get pulled forward again, the European one after getting pushed out?.

Even the best theories don’t forecast well and this was I think the demand outstripped what they were planning on. So, but the answer to your question is, as there were other customers that were up in Europe, but this one kind of led the phase.

You know another thing going on here that was they have recently awarded business for their next phase of deployment, we did very well on that award and we’ll start seeing that shift in 2017 as well and that will be on top of whatever we’re doing today fulfilling on our existing devices. .

Okay. Great.

And then on the Q3 market, reading between the lines it seems like Tier 3 was probably pretty weak in the quarter and is there a delay there, is there -- I think waiting for the CAF funds and should we expect Tier 3 to do better in 2017?.

Well I hope so, we’ve always been a little raised on Tier 3 because I think it’s -- first of all it’s a is a very disaggregated customer base and so everybody is thinking differently about what they want to do. I think the next point in time is in November.

Roger?.

That’s right. So the rate of return carriers, the Tier 3 carriers are expected to make their decision in November between staying with the rate of return model or the alternative Connect America model which more a price support model like the price cap.

So we’ve said that we haven’t included any forecast or expectations in this year’s revenue for Tier 3 but as we’ve said before we still expect it to be positive for next year..

At some point it’s going to kick in and they’ll have made all their decisions and they’ll have gotten their models right, but it’s been definitely a protracted decision process. .

Okay, great. And then final one from me right now, on the gross margins, I understood there is some onetime issues in the gross margin in the quarter.

But is there also still a significant regional mix difference, the strength in international is part of the reason that we are down on the gross margins?.

Well if you look at just gross margins and there are three buckets that we tend to look at and one is international versus domestic, and international typically is lower although that can be mitigated or exacerbated by the product mix that we ship into that region.

So when we ship chassis we don’t do so well on gross margin and when we ship line cards we do materially better. But yes, to answer your question, it’s yes on that. And then the other one of course is services which has lower gross margin and is accretive, there is very little operating expense associated with that but does have a little gross margin.

So as you see in our gross margins, excuse me our services business picked up, but that hasn’t been accretive to gross margin, although it’s been accretive to operating income..

Just as a follow-up, then, just why is vectoring and/or CAF II have a richer mix of services than other businesses? I'm just trying to understand..

Yeah, when they started doing both of those projects CAF and vectoring. We have, I don’t know if it’s coincident, I think probably it has to do with just staffing levels and being able to manage their run rate versus major projects like this.

But the customer base has been much more open to allowing third-party to go on and do the installations and that’s for both of those. And we don’t see that changing, in fact probably accelerating next year we’ll see. We’re expecting very good business out of our services business next year..

Okay. Thanks for all the questions..

And we’ll take our next question from Rich Valera with Needham & Co. Please go ahead. .

I have a follow-up on the gross margin. It sounds like you had over 200 basis points of what I'd consider nonrecurring items in the gross margin, the restructuring plus the warranty expenses. Yet you are only calling for a slight improvement from that GAAP gross margin, which includes those in fourth quarter.

Are you expecting any more warranty expenses in the fourth quarter? And if not, why wouldn't you get a little bit more of a bounce in the gross margin?.

There may be and we’re trying to make sure that we’re cautious around the potential impact of that. But we’re also taking into account the fact that, there will be a lot of push to get services done in the Q4, so at the end of the year everybody wants to get their projects done.

So you’ll see our services business go up and then we talked about the strength in Europe and the fact that would drive it.

So it’s really probably -- I would call it more of a -- I don’t know if you call it product mix, but differently business mix, where you’ll see a stronger Europe than we had anticipated and then you're going to see a stronger service profile And then there is some worry about should we -- just making sure that we capture all the basis on the warranty recall..

Got it. So as we think about next year, presumably you are through this warranty issue, or at least if you look at the year in total, much less impact from it, and does the mix we think skew a little bit more North American, so in general, you have a -- I'm just trying to think about how we should think about gross margins as we head into next year..

That’s a good question. So the reality of that, I really don’t know yet. We’ll definitely know on our next call and give some color on that. So, but the drivers are -- without a doubt services are going to be higher next year. Our vectoring bills and product shipments in the U.S.

will be materially higher next year because there is some big projects that have been announced. We of course start shipping G.fast here in the U.S. next year.

The offset to that growth is or I should say offset but the counter balance of that growth is, we expect our European business to be materially higher, because of the new footprint expansion that we were just avoided..

Got it..

I really don’t know the mix of that right now at this point..

Understand, a lot of moving pieces. Just following up on that international business.

Any update on your Latin American customer, where you were kind of behind on some lab trials? Have you made any progress there?.

Two steps forward, three steps back. So yes, we’re still going through the lab process on two different or really three different initiatives, two of them are PON related. We still fully expect to be out by the end of this year.

That customer is going through its own work from a regulatory perspective, I think that it’s fair to say that they’re looking hard at the regulatory changes that have been made over the last six months, which affect them.

So it’s a very -- it’s sooner or later the product has got to build out and I think hopefully sooner later than later, but from a lab perspective we’re good, we should be out this year. But I think it's still kind of an unknown as to when that spigot kind of turns back on..

Got it. Just one more from me.

Can you say how much revenue you are expecting the CommScope acquisition to contribute in the fourth quarter?.

Not a lot. I mean we may be surprised there, but we are trying to be really cautious about that. I mean that the CommScope piece was very good for us strategically without -- it got us much better positioned with some U.S.

MSOs and got us into a position to be able to actually talk about broader products and not just products that were being sold there. So we’re very happy strategically, but we did not buy it for the revenue. We bought it to really kind of open the doors that we were trying to expand into.

And having said that there will be some contribution, but I wouldn’t call it materially..

That’s helpful. Thank you, gentlemen..

Okay. And just one little last piece of that, there are some awards that have not started shipping in that area, that we’ll start shipping next year. And I think there may have been actually press releases about that maybe prior to our acquisition. So some of that stuff is still not cooked in yet as well..

And we’ll take our next question from Paul Silverstein with Cowen. Please go ahead..

Paul, are you there or are you on mute?.

Paul, check the mute function on your phone. Okay. We’ll take our….

Yes, guys.

Can you hear me?.

Yes. Yes, Paul..

On the gross margin guidance, I just want to make sure I understood the guidance going back to Rich's question.

I thought I heard you say that you expect it to be slightly better than the GAAP number, but are you saying that you expect it to be up sequentially, albeit slightly? What exactly are you saying?.

Yeah, on a GAAP basis, sequentially up from Q3..

All right. My larger question on gross margin is putting aside the near-term issues on the warranty, Roger, what's the reasonable -- what's reasonable peak that you could attain over the course of the next year and longer term in terms of the trajectory? Any thoughts you can share with us? And then I've got a couple more, if I may..

We’re really not going there yet.

As Tom just mentioned just a few minutes ago, when you look at Q4 and the reasoning behind that guidance, there is business mix related to international and as well as to the services, but we’ll certainly give more of an outlook at the end of the year looking at 2017, but we’ve really not approached the subject of longer term cyclical..

Some of it, that’s going to be very dependent on mix of course as you know Paul. So the good thing is I think we came in thinking we would improve 100 to 200 basis points this year.

I think we are still confident that -- and that would be for the full year, and we’re still confident we’re able to do that and then we’ll take a look if there is any change to where that put us at, which was kind of 45-46 which was materially better than last year and then we look again this year and we see the improvement as we go further into our planning process..

All right. And Tom, I heard you reference -- I think I heard you reference a new Tier 1 EMEA win. Is there any insight you can share with us? The nature, the magnitude, et cetera..

Yeah, it’s a customer that is very -- in fact there was a press release, we have a couple, one -- we did one in -- the last one and the one I was more referencing was the Zac move from a trial to deployment. And we were able to capture the prime aware in that country in Israel.

They're very bullish on G.fast, so -- and it's not just G.fast, it also includes our Mosaic infrastructure. So we're -- that's one that -- that’s the company that’s fully utilizing what our capabilities are. So we're very happy about it. We haven't tried to voice any revenue projection on it.

Although I would tell you that customer periodically is a very strong customer for us..

All right. And then more generally, in the past you made referenced a number of opportunities abroad of various sizes, ranging from significant to perhaps less significant.

Can you give us an update in terms of opportunities that are out there that remain to be awarded and could be awarded over the next year, putting aside whether or not you win?.

Yes, there is quite -- I don't want to necessarily list them here for obvious reasons. But I would venture to give most of them by far, most of them have not been awarded. I mean the last look I had we were seven -- we were actually -- at this point in the quarter -- early in the quarter we were well ahead of 70.

My guess is we’re probably closer to 90 now in different trials going on with G.fast. So it's just very early in the cycle.

And then it’s not just G.fast, I’ve mentioned in my notes NG-PON2 where we're really making some great progress on the development side without a doubt we have the most technically advanced product in the market, not just NG-PON2, but in the access space in general.

So, there are a lot of opportunities out there and I would say very small minatory that’s actually closed..

Tom, it's obviously a huge number, but out of those, how many of those would be potentially significant?.

You kind of asked a similar question last question, I heard that I answered it. So I thank you now. Most of the -- I shouldn't say you do know, but most of the companies are fairly public on what they're doing on G.fast. So there are enough for us to be excited about.

And then when you say less than significant, when you're talking about Tier 2 carrier, two of those can really move the needle. So there is just enough of them out that we're feeling really good about the access space right now..

All right. One last quick question. Can you show us what U.S.

product revenue did for the quarter?.

I don't know if we would -- do breakout U.S. and --..

We haven’t broken that, we break out obviously the product and the services we break out break out..

Let me just see what we’ve broken out and we can follow up and see what we have broken out..

All right, I'll take the rest off-line. I appreciate it. Thanks, guys..

Your next question is from Simon Leopold with Raymond James. Please go ahead..

This is Victor Chiu in for Simon Leopold. I just wanted to circle back really quickly on the international piece. From your previous comments, it seemed that you implied that the growth from that customer wouldn't come back until 2017. And that's kind of how we forecasted and built out our growth, in our model at least.

So I guess my question is how does the strength this quarter impact your previous thinking for 2017 growth from that customer?.

I still think 2017 is going to be stronger. So we have -- what we seem here is we’ve had footprint awards historically and what we’ve see them do is basically accelerate in this quarter and we’ll see some next quarter as well accelerate into that existing footprint. The incremental piece will have next quarter and that can be lumpy.

So you are absolutely right in that coming into Q3 we were less optimistic and then as it happens periodically in our business, the customer changed their mind.

Next year though we have an incremental piece which is we have aggregate growth in the footprint that we’re going to be deploying into and this is kind of Greenfield for them in relation to these products. So that will be on top of whatever would historically have done..

Okay, that's helpful. And I just wanted to ask about the domestic portion. It seems that on the opposite side of that, had you not seen that international piece come back this quarter that domestic would've been quite weak.

So can you kind of give us a little more color around the specific -- which things in particular were the biggest drivers for that weakness? Was it primarily the G.fast trial?.

I don’t think I would characterize it as weak. I mean from where we came into the quarter we did better than we thought and that better than we thought --..

For the domestic piece you did better than you thought?.

No for the total company, and that’s better than we thought coming into the quarter on a revenue line without a doubt. And that’s better than we thought coming into the quarter was driven predominantly by international, but that’s not saying domestic didn’t come in very close to where we were at..

Okay. That's helpful. Thank you..

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

Couple of questions. First of all, in the press release, you made a comment that ADTRAN's capabilities is proving to be a catalyst for change within the industry.

Would you please expand on that comment?.

Sure. So our Mosaic -- and I am really speaking predominantly in that comment about our Mosaic architecture. So when I say we’re leading the industry and in kind of in an SDN-defined -- SDN platform, I'm serious.

We have done a significant amount of work in virtualizing a lot of our functions and using SDN control and orchestration and customers want that but not all customers are ready for that.

And we’ve been able to build mediation layers that allow them to actually move forward with deployment under their existing OS’s and get themselves ready for a transition to a true SDN controlled network. And that’s been very resonant -- resonating with our customers.

Now, there are customers where it doesn’t -- it’s not always -- there are customers that are flat out aren’t ready and those we will just sell our traditional EMS and that’s what we’ll go to market with and that’s what we’ll actually compete with.

But I would say there is a large percentage and them that are ready to make this jump and they see us as an enabling platform. If you’re in an RFP today and you’re looking at G.fast or if you’re in RFP today and you’re looking at NGPON2.

You can do it the old way, or you can do it the new way and right now we’re making a lot of headway in getting people to do it the new way..

That's helpful, thank you. And then I'd also like to tackle the gross margin, but from a slightly different angle. The service gross margin was down sequentially and yet, the revenue piece was up. And so that seems a little counterintuitive when we would thought you would've had some economies of scale there..

Yes. So you’re right, but there are two things that affect that. One is mix, so we do engineering work, and honestly engineering work typically come in hindsight more at the front end and it makes logical sense.

So you have a lot of engineering work upfront, which is typically higher gross margin and then we do the installation work towards the back end of the quarter with just lower gross margin. And so I think we probably saw -- I know we saw an impact because of that mix.

And then when you are growing as fast as we’re growing our services business today, you are not as efficient as you should be and there is no doubt that we have some work to do or improving the efficiency as we scale up.

So the higher revenue in and off itself until you get a model that you can flow through and scale up, is not necessarily a driver for higher gross margin at this point for us..

Great, thanks. And finally, I'd like to shift to the Israeli announcement. Would you provide a bit more detail beyond kind of what you just generally alluded to there in terms of not only size, but why you are selected.

And I think it's a little bit unique for you to be the prime and what the implications are to that as us as investors?.

Yes. So I hate to call us being prime, because we do that in several of our customers, including some of the ones we talked about on the call today. But one I think -- so the driver, one of the big drivers of course was the Mosaic access architecture that I talked about the SDN control access architecture.

So we have a customer there that very much wants to move their network forward and move it the way that they operate forward and be able to benefit from a next generation design. Our G.fast products themselves which will be controlled under this architecture.

We do have some differentiation, we’re kind of agnostic in the chipset, where most people have chosen one or the other. And that gives careers some comfort as to being able to have more control over where the roadmap goes. And we do our normal things, which is, we try to just eke out every bit of performance we can out of the product.

But I would say the big differentiator for us with that was the Mosaic SDN piece..

Israel clearly has a high technology component, which I would presume would imply that they demand a high level of bandwidth.

As we think about the size of that contract or business with them, how does that compare, say, with your vectoring customer in Europe?.

The vectoring deployment in Europe with that customer is very broad. So I wouldn’t not put it on par with that. I think that there are -- what we have seen before with this customers that they are periods of time where we’re kind of, we’re hit with a lot of business and that may roll up into a particular quarter.

But I wouldn’t say that it’s the same size as what we’re doing with vectoring. Vectoring in and off itself, I think is just kind of under sold, it’s just now picking up other careers within Europe. Super vectoring is just starting to be deployed, it will start being deployed really next year. And vectoring in the U.S.

has been non-existent or up until the Salt Lake City trials. And then you saw that carrier move forward in an accelerated fashion this year, which is benefitted both our products and services and they move aggressively next year as well.

Not only that but we have carriers in the Tier 2 space that for the first time are really pivoting and looking at that technology to get somebody in the U.S. that’s been able to make it work. It has shown that it’s actually economic to deploy and is actually got a sticky customer rate.

So G.fast is a great technology and we are very much behind G.fast, but I do think some time to vectoring and super vectoring maybe don’t get the credit that they deserve and really we’re kind of pivoting towards the real sweet spot in our vectoring in 2017.

Thank you, Tom. I actually said that was going to be my last question.

But given what you just said, would you please highlight to us where you think vectoring is most appropriate versus where G.fast would be most appropriate? And why a carrier would deploy one in a certain situation and not another?.

Sure, so if you want to deploy in the access network and you’re trying to hit a bunch of homes. So you can use either technology, but the cost differential is pretty big. Vectoring, the reach of vectoring is multiples of the reach of G.fast.

So let’s say that you want to deploy a 100 to 200 Meg network, vectoring and super vectoring do great and the cost benefit of being able to deploy that architecture to get 100 to 200 Meg to a customer beats anything else that’s out there.

If you’re trying to get a gigabit of speed that’s where you look at G.fast and of course because of the range limitation, you’re going to have to build that fiber much closer to the house or the MDU, which is why initial deployments are pretty much focused on MDUs, because of their access and where those locations are and then as you try to move a gigabit to more single family housings, you’ll see it play into there.

But it’s really -- it’s much more cost -- it’s still cheaper than fiber-to-the-prem, but it’s still substantially more costly than super vectoring is..

We’ll take our next question from Tim Savageaux with Northland Capital. Please go ahead..

First, just a real quick one. Not sure I heard you mention 10% customer exposure in the quarter. I wonder if you could cover that, and maybe note how many in U.S. versus international or what you are comfortable disclosing..

Yeah, I just mentioned that in the comments there were three 10% customers, two domestic and one international..

It's what I would've guessed and sorry for missing that. To follow up, I want to go back on kind of the U.S. versus international front, and especially if you expect international revenues to kind of hang in at this elevated level in Q4.

That is implying kind of the first year-on-year decline in your domestic business that we've seen in quite some time and perhaps even more notable if you affect for services as well. So I just want to focus back on that and see whether there is anything kind of developing from a trend standpoint with regard to the U.S.

market, whether this is just sort of a balancing out of strength earlier in the year or if you can talk about the dynamics and maybe outside of the CAF II and services stuff in the U.S. market in general..

Yes, so I think the premise there is that we just started with maybe the confusion because we never said that the international business was going to be flat Q3 to Q4. And I am looking at the chart. I would be very surprised as the U.S. business was down on the European basis. So I mean just not coming from that same space.

We expect the international business to be stronger than we may have guessed in Q2, but I am not expecting it to be sequentially flat..

That helps a lot. If I can just -- since that was a quick one than expected, maybe I can --..

This one not just where you are, so --.

Yes. Maybe I can toss one more in there, which is back on the kind of cable MSO focused business and the acquisition. I assume the revenue contribution for Q4 is not zero, so I think probably low single-digit millions is something I would assume. And in general, I wonder if you can describe the growth opportunity for 2017 in the cable space.

How material that is, how material a portion of your current business that is. And that will be it for me, thanks..

So, the low-single digit million is the right way to think about it for Q4. Their problem is I don’t have confidence on our forecast because the business is relatively new.

The amount of business that we do in the MSO space, it's predominately been CPE business it's been stuff from our enterprise products, so this is kind of, I don't want to say the first, but this is a material infrastructure change or these are the leader infrastructure, more infrastructure products.

So it will impact that in a material way and then we could be looking at tens of millions next year, but I think it's too early for us to try to forecast that in a firm way to you. We'll give you some color on that on the next conference call..

And we'll take another question from Doug Clark with Goldman Sachs. Please go ahead..

Just a follow-up actually to that first line of questioning there. On the domestic business, maybe not looking at fourth quarter, but in third quarter, it came down sequentially. And I'm just wondering how to reconcile that with kind of the building tailwind of CAF.

So assuming CAF and services did grow, which pieces declined in the third quarter on a sequential basis in the US or domestic?.

Yes, if you look at the products that you'll see broadband did well. We have traditional products, which is legacy, but we used to call legacy products but stuff like HDSL some, we do some powering shows and things like that. And we did see a material decline in that business, but just that not a surprise.

I mean that’s a very lumpy piece of business there. And if you look at our year-over-year, than you know there is kind of some one-off that happened in that business versus last year that made that materially different. I think that probably -- that was the biggest piece.

The CPE business in general, it was down sequentially although it's up fairly strong over the entire three quarters. We expect it to be up in Q4, but in traditional products and a slight down tick in the CPE business..

Okay, that's helpful. Yes, that does. And then one kind of model-related question.

What would the non-GAAP tax rate have been kind of excluding the purchase gain?.

It would have been 25%..

Okay.

And just to be clear, that came in kind of below kind of your expectations of mid to high 30% because of the higher international mix, is that right?.

Yes, two things. The higher national mix and as I mentioned in my notes there were some benefit from an updating of our R&D tax credit..

And that was a one-time item, meaning not to recur in the fourth quarter based on your guidance?.

We’re not projecting that yet in the fourth quarter, we’re still working on that for the current year..

Okay, great. Thanks..

Okay. I think that was our last caller. So thank you everyone for joining us on our call and we hope we have a great fourth quarter and we look forward to talking to you again this time next quarter..

And this concludes today’s program. Thank you for your participation. You may now disconnect..