Ladies and gentlemen, thank you for standing by, and welcome to ADTRAN’s Third Quarter 2020 Earnings Release Conference Call. [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 continued spread and extent of the impact of COVID-19 global pandemic, the ability of component supplies to align with customer demand, the successful development and market acceptance of our products, competition in the market for such products, the product and channel mix, component costs, manufacturing efficiencies and other risks detailed in our annual report Form 10-K for year ended December 31, 2019.

These risks and uncertainties could cause 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 Tom Stanton, Chief Executive Officer of ADTRAN. Sir, please go ahead..

Thank you, Ian. Good morning, everyone. We appreciate you joining us for our third quarter 2020 conference call. With me today is ADTRAN’s CFO, Mike Foliano. Following my opening remarks, Mike will review the quarterly financial performance in detail and then we will take any questions that you may have.

I would like to begin by expressing our concern and sympathy for those affected by the ongoing global pandemic that has touched our employees, customers, partners and suppliers. The current times have changed the way we communicate, work and learn, and I remain encouraged by our perseverance in the face of such adversity.

With these challenges, it is more critical than ever to connect people, communities and businesses with each other. The results for our third quarter demonstrated solid execution against our plan. This included broad-based demand across our customer segments with regional and emerging service providers leading the way.

We were also making great progress with Tier 1 fiber access projects that we announced earlier this year and continue to have very strong momentum on new customer acquisition across a broad base of market segments. From a top line perspective, revenue for the quarter was $133.1 million or 44.3% gross margin.

Network Solutions accounted for 87% of the revenue at 115.2%, while Global Services contributed $17.9 million. During the quarter, we had 110% service provider customer and 110% distribution partner, along with strong contributions from both our direct and distribution channel partners that serve the regional broadband service provider market.

We added 38 new service provider customers during the quarter, bringing the total to 99 for the first 3 quarters of 2020. These new customers range from global Tier 1 operators to electric cooperatives, municipalities, cable MSO and regional broadband providers.

The new customer traction remains positive, reinforcing our belief that we are in the early stages of a generational communications infrastructure network upgrade cycle, driven by a confluence of favorable government, regulatory, technology and competitive factors.

The strength we saw during the quarter was fueled by our continued momentum with regional broadband operators who were up 60% year-over-year and 33% quarter-over-quarter. We were also helped with a solid performance for our U.S.

Tier 2 customers, who were up 18% year-over-year as they started to emerge from restructuring and are again investing in their network expansion. In Europe, our revenue from emerging alt-net providers was up 76% year-over-year and 20% quarter-over-quarter and highlighting our growth in those regions.

For the third quarter, our fiber Access & Aggregation business grew 34% over the previous period and increased 66% on a year-over-year basis. This continues to be our top sales category.

Within fiber access, our PON OLT revenue grew 31% quarter-over-quarter and a strong 77% year-over-year, which we believe is significantly outpacing the growth in the general market and will continue to step up our market share position in this key segment. We also saw a strong revenue contribution from our U.S.

regional broadband service providers, growing 37% over the previous period and 58% over the previous year with a broad-based growth above across both direct and distribution channels.

From a supply chain perspective, lead times remained extended on some key components and vendors, but our operations team took several proactive steps to mitigate logistics and component availability challenges to meet our customers’ needs.

In our efforts to address these needs, we have increased our inventory levels and incurred increased freight costs due to decreased capacity associated with higher transportation rates and expedite fees.

From an organizational perspective, the structural changes that we have implemented over the last 12 months continue to improve our operational efficiency. The company has achieved material reductions in operating expenses through control and expense management and we are ahead of our plan for the target operating model moving forward.

On the product side, we are focusing on growing our wallet share with our service provider customers in addition to selling fiber access OLT we are growing our residential gateway business.

Residential gateway revenue grew 20% quarter-over-quarter and a strong 64% year-over-year as we increased the number of OLT customers also buying our RGs by 17% year-to-date.

In addition to RG attach rates, we have also focused on increasing attach rates for Mosaic software subscription services as we migrate customers from Mosaic suite in our upcoming Mosaic one virtual control center. On October 29, the STC began its 904 auctions for $16 billion of RDOF broadband subsidies.

There are 386 qualified bidders that represent over 700 operators, whereas the Connect America Fund was targeted to the large price cap carriers providing a first right of use.

The RDOF subsidies provide an opportunity for rural, local exchange carriers and community broadband providers such as, rural electric follow-ups, to receive 10 years of funding. We expect to see RDOF funding to begin to positively impact our revenue, beginning in the mid-2021 timeframe.

In Europe and around the world, the strategic importance of 5G and fiber broadband infrastructure is causing governments to carefully reconsider the security risks of their networks and implementation policies and are implementing policies to ban high-risk vendors from participating in these network builds.

As a result, ADTRAN stands out as a safe, technically advanced alternative to those high-risk vendors as national operators look to limit capital, replace high-risk vendors in their network. 2020 has brought forth a number of challenges that none of us could have envisioned.

However, we have risen to these challenges and are emerging as an even stronger and more resilient company. We have achieved much thus far in 2020 with the material benefits just beginning to bear fruit and as they start to begin to be more fully recognized next year.

We have much to be excited about, including the growing number of new customers selecting our products and services, to build out or upgrade their networks with rapid adoption of our Mosaic platform and subscription services in our SDX solutions as Tier 1 operators begin their transition to the network of the future and the promise of RDOF awards and being able to help regional service providers, utilities and municipalities provide gigabit services to the communities that they serve.

I am proud of our company and our employees for the success we have seen thus far this year. We look forward to a strong finish to 2020, and have a bright outlook as we look ahead into 2021. Mike will now provide an review of our financials and following his remarks, I will open up to any questions that you may have..

Thank you, Tom and good morning to all. I will review our third quarter results and provide our view for the fourth quarter of 2020. During my report, I will be referencing both GAAP and non-GAAP results.

With respect to non-GAAP financial measures that are discussed on this call but are not presented in our earnings release, reconciliations to their comparable GAAP measures are published in a supplemental financial schedule that appears on our Investor Relations web page at www.adtran.com.

For non-GAAP measures discussed on this call that are presented in the earnings release, reconciliations are contained within the release. The supplemental financial schedules on our web page also present certain revenue information by segment and category and other non-GAAP reconciliations, which I will be discussing today.

As Tom said, ADTRAN’s third quarter revenue came in at $133.1 million compared to $128.7 million in the prior quarter and $114.1 million for the third quarter of 2019.

Breaking this down across our operating segments, our Network Solutions revenue for the third quarter is $115.2 million versus $111.3 million reported for Q2 of 2020 and $94 million in Q3 of 2019.

Our Services & Support revenue in Q3 of this year was $17.9 million compared to $17.4 million reported in the second quarter of 2020 and $20.1 million for the third quarter of 2019.

Across our revenue categories, Access & Aggregation revenue for quarter three of 2020 was $85.4 million compared to $82.8 million in the prior quarter and $65.1 million in quarter three of 2019.

Revenue for our Subscriber Solutions & Experience category was $43.1 million for the quarter versus $40.4 million in quarter two of 2020 and $42.5 million in quarter three of 2019. The Traditional & Other products revenue for the quarter was $4.6 million compared to $5.5 million for quarter two of 2020 and $6.5 million for quarter three of 2019.

Looking at our revenues, geographically, domestic revenue for Q3 2020 was $92.8 million versus $84.5 million reported in quarter two of 2020 and $83.1 million in quarter three of 2019. Our international revenue for the quarter was $40.3 million compared to $44.3 million for quarter two of 2020 and $30.9 million in quarter three of 2019.

For the third quarter, we had two, 10% of revenue customers. Both of these were domestic customers. Our GAAP gross margin for the third quarter of this year was 44.3% as compared to 41.5% last quarter and 40.6% in the third quarter of 2019.

Non-GAAP gross margin for quarter three was 44.5% as compared to 41.6% in the prior quarter and 41% in the third quarter of 2019. The quarter-over-quarter increase in both GAAP and non-GAAP gross margins were driven by increases in volume as well as favorable product and services mix and lower freight-related charges in the current quarter.

The increases in both GAAP and non-GAAP gross margins on a year-over-year basis were driven by increases in volume as well as product mix, which were partially offset by higher freight-related charges and expedite premiums.

Total operating expenses on a GAAP basis were $54.4 million for quarter three of 2020 compared to $59.5 reported in the prior quarter and $62.7 million for quarter three of 2019.

The quarter-over-quarter decrease was primarily related to market-driven decreases in our deferred compensation expense as well as expense reductions in both R&D and SG&A as a result of our restructuring program initiated in 2019 and reduced travel expenses, offset by increases in some restructuring-related costs.

The year-over-year decreases in operating expenses were a result of lower expenses in both R&D and SG&A and lower travel-related expenses, partially offset by market-driven increases in our deferred compensation expense and an increase in contract services costs.

On a non-GAAP basis, our third quarter operating expenses were $49.4 million compared to $52.3 million in the prior quarter and $59.4 million in quarter three of 2019.

Both the non-GAAP quarter-over-quarter and year-over-year decreases in operating expense were primarily driven as a result of our expense reduction efforts and lower travel-related expenses.

Operating income on a GAAP basis for the third quarter of 2020 was $4.5 million compared to an operating loss of $6 million in prior quarter and an operating loss of $20.3 million reported in Q3 of 2019.

Non-GAAP operating income for quarter three of 2020 was $9.9 million compared to an operating income of $1.3 million in Q2 of 2020 and an operating loss of $12.6 million in quarter three of 2019.

The quarter-over-quarter and year-over-year GAAP and non-GAAP profitability was driven by higher sales with favorable gross margin mix and reduced operating expenses.

Other income on a GAAP basis for the third quarter of 2020 was $1.5 million compared to other income of $8.4 million in the prior quarter and other income of $1.9 million in quarter three of 2019.

Our non-GAAP other income for the quarter was $900,000 compared to other income of $5.7 million in Q2 2020 and other income of $2.7 million for quarter three of 2019. The decreases in both GAAP and non-GAAP other income as compared to quarter-over-quarter were primarily market-driven caused by changes in the valuation of our investment portfolio.

The decrease in GAAP and non-GAAP other income on a year-over-year basis was primarily driven by realized foreign exchange losses offset by market-driven upsides and the valuation of our investment portfolio.

The company’s tax provision for the third quarter of 2020 was $600,000 of expense as compared to an expense of $1.6 million in the prior quarter and an expense of $27.7 million in the third quarter of 2019.

The current quarter tax expense was primarily due to profitability in our international operations, as the deferred tax benefits generated by our domestic operation continued to be offset by changes in our valuation allowance.

The tax expense in the third quarter of last year was the result of a valuation allowance against our domestic deferred tax assets. GAAP net income for quarter three of 2020 was $5.5 million compared to a net income of $800,000 in the prior quarter and a net loss of $46.1 million in the third quarter of 2019.

Non-GAAP net income for the third quarter of 2020 was $7.9 million as compared to an income of $1.6 million in the prior quarter and a loss of $2.8 million in quarter three of 2019.

Earnings per share, assuming dilution on a GAAP basis, was $0.11 per share as compared to $0.02 per share last quarter and a loss of $0.96 per share in the third quarter of 2019.

Non-GAAP earnings per share, assuming dilution for the third quarter was $0.16 compared to an income of $0.04 per share in the prior quarter and a loss of $0.06 per share in quarter three of 2019.

Turning to the balance sheet, unrestricted cash and marketable securities totaled $132.2 million at quarter-end after paying $4.3 million in dividends during the quarter. For the quarter, we used $7 million of cash from operations.

Net trade accounts receivable was $100.2 million at quarter end, resulting in a DSO of 69 days compared to 67 days in the prior quarter and 73 days at the end of the third quarter of 2019. The variability in DSOs quarter-over-quarter and year-over-year is mainly attributable to the timing of shipments during the quarter and customer mix.

Net inventories ended the quarter at $120.3 million compared to $106.1 million in Q2 of 2020 and $104.9 million at the end of Q3 2019. The increase in our inventories for the quarter that just ended was in preparation for new product ramp-ups and strategic inventory buffer purchases made to ensure supply continuity during the pandemic.

We believe that we are positioned to maintain adequate liquidity in the current environment.

Looking ahead to the next quarter, the possible effects of the ongoing COVID-19 pandemic, the ability of component supplies to align with our customer demand, the book and ship nature of our business, the timing of revenue associated with large projects, the variability of order patterns into the customer base in which we sell as well as the fluctuation in currency exchange rates in our international markets may cause material differences between our expectations and the actual results.

We expect that our fourth quarter 2020 revenue will be in the range of $122 million to $132 million. After considering the projected sales mix, we expect that our fourth quarter gross margin on a non-GAAP basis will be in the range of 41% to 42%.

We also expect non-GAAP operating expenses for the fourth quarter of 2020 will be between $50 million and $51 million.

And finally, we anticipate the consolidated tax rate for the fourth quarter of 2020 on a non-GAAP basis will be a benefit at a mid- single-digit percentage rate, resulting from the expected mix of domestic and international income in the quarter.

We believe that the significant factors impacting revenue and earnings realized in 2020, will be component availability, a macro spending environment for carriers and enterprises, the ongoing effects of the COVID-19 pandemic, the variability of mix and revenue associated with project rollouts, the proportion of international revenue relative to our total revenue, professional services activity levels in both domestic and international markets, the adoption rate of our broadband access platforms, potential changes in tax laws, currency exchange rate movements and inventory fluctuations in our distribution channels.

Once again, additional financial information is available at ADTRAN’s Investor Relations web page at www.adtran.com. Now, I will turn the call back over to Tom..

Great. Thank you, Mike. Megan, at this point, we’re ready to open up for any questions people may have..

[Operator Instructions] Your first question comes from line of Rich Valera of Needham & Company. Your line is open..

Thank you and good morning. Tom, you mentioned that you – it sounded like you mentioned you got a new Tier 1 in Q3 when you talked about your new customers.

Just wanted to clarify, is that the case? And if it is, can you say anything about that, that win?.

I did actually say that in my notes. In reality, we did announce a new Tier 1 at the end of September, which was for fiber extension. And we did pick up another Tier 1 customer within the quarter where they expanded their programs with us to include a different variation on the technology that we had been previously awarded.

So there has been, but I didn’t mention it in my notes..

Got it. That’s helpful. And then I think you also mentioned that you’ve made good progress with your previously announced Tier 1s. And I guess, those sort of include, among others DT, Openreach maybe in the unnamed U.S. Tier 1.

Is there any updates you can give us on those in terms of progress and/or revenue expectations – initial revenue expectations?.

Yes. So, one of those is a brand-new customer for us, as you’re aware. And all three of them are going well. All three of them are at different stages of lab work. We actually have received some POs from the new customer, but that’s associated with initial, say, initial lab work and kind of some of the software work that we’re doing for them.

So we actually – so that actually booked and shipped in the quarter, but all 3 of them are going well. And we expect material revenue contributions from them to really start in the first half towards the tail end of the first half of next year..

Got it. And then a question on RDOF, you’ve talked about it being kind of a mid-21 revenue opportunity. I think some of your competitors have suggested maybe it’s more of a 2022.

Any further clarification on your thoughts on timing, is that sort of 3Q ‘21 or 4Q, any thoughts on that?.

Yes. Yes. And I guess, here again, this is the drift – when does it – it’s one of those things that’s going to start. It will start slower. You have so many participants. Some of them have plans completely worked out. Some of them don’t, the plans that at all. They’ve been just focusing on the bidding process.

So I think you’ll start seeing it in the – around the half, and then you’ll start seeing it ramp up from there..

Got it. Maybe just one more, Mike, modeling question on OpEx levels, if we are looking into next year and you don’t give guidance out there, but if we are trying to think about what an OpEx number looks like, it’s kind of a normalized T&E level.

Any thoughts on how much that maybe adds back into the model as T&E gets back to some kind of normalized level?.

We expect – we’ve had a plan to get to about where we are right now, and we expect that we’re going to hold that into next year. So I wouldn’t try to model any increases. I think like a lot of companies, everybody is rethinking the whole T&E going forward.

So I think you’re – your model going into next year, should look a lot like what we’re seeing at the end of this year..

Very good. Thank you for that Mike. I will see the floor. .

Thank you..

Your next question comes from Rod Hall of Goldman Sachs. Your line is open..

Hi, thanks for taking my questions. This is Bala Reddy on for Rod.

Just to start off, could you give us some color on what you’re seeing in terms of broadband demand and activity here in the U.S.? And maybe try to handicap that across the Tier 1, 2, 3, yes – and also, how you’re thinking about the sustainability of the momentum into next year?.

It’s a lot of activity, and I touched on the growth rates in the Tier 3 space, a lot of activity in the Tier 3s, which is just separate from what’s going on with RDOF. So a lot of network upgrades. We rolled out our combo card, which is the 10-gig solution, a good pickup on a combo card.

And so just a lot of activity and I think a lot of it has got to do with just end-user demand based off the environment that we’re in. People understand the importance of good connectivity. Same thing in the Tier 2s, I think.

The Tier 2s finally getting past whatever financial issues they may have had and some of them have started executing – one of them explicitly started executing on expansion plans. And I don’t see that stopping. And I think the other one actually has kind of woken up and getting better. And that includes not just those, but some of the MSOs as well.

So I don’t see a near-term end. In fact, I see people planning farther out then and kind of figuring out how they’re going to readjust to what may be a different work environment in a lot of areas than what they had going into this pandemic. And I don’t think it’s all pandemic-driven either.

I mean the activity that’s going on the Tier 2s has been part of their stated plan. It just got put off. The Tier 3s have been heating up for some periods of time, even prior to that. I mean, we had solid growth in that space last year as well. And then the Tier 1s, we really, in the U.S., we’re in the cable MSO space, and we’re – with large carriers.

And with one of the large carriers here in the telco space in relation to PON. And I would say, the activity there is – I would say, we’ve seen good activity. I wouldn’t call it earth-shattering, I would say, it’s solid. And there’s more – a lot of that work is really trying to figure out what they’re going to do into next year.

So I think a lot of that is just – I think the real pickup there will possibly be a year – this time next year, maybe a little bit earlier than that.

Did that answer your question?.

It does. It does. Thanks so much. And just try to quickly follow-up on the gross margins. I know you mentioned about the volumes and product mix.

Maybe could you expand on it a little bit like, what volumes you are talking about?.

What – so it’s product mix. I mean, at the end of the day, it’s – we’re selling without getting too deep into that. We’re selling PON – one of the things, if you step back and look at what our business has done, we’ve really made the transition from copper to fiber.

And some of the fiber components that we’re selling, specifically, when you’re talking about OLTs and stuff, just have a richer mix. We also have based off of international and domestic revenue mix, we have a material difference in those gross margin profiles. Those are probably the two biggest things that were driving gross margin difference..

Thank you..

Okay..

Your next question comes from the line of Paul Silverstein of Cowen. Your line is open..

Tom, just a clarification, first, before my question, to the response to the previous question, obviously, I trust non-U.S. is lower margin than the U.S. as a general proposition.

But on the product piece of the revenue, I apologize, if you just said this, the margin differential, it’s more favorable for your fiber-based or less favorable? Is that the distinction you’re making in terms of the product mix influencing the gross margin profile and what is the key difference there on the product side?.

I would say what’s happening in the fiber space is we’re selling – the mix towards OLTs is much higher..

Got it. No OLTs broadly....

Pretty sustaining footprint, exactly, right..

Got it.

So that’s the key driver in the product mix?.

That’s probably – I don’t have them listed, but that’s definitely in the top three. We look at it really strong with it, true..

I apologize. Mike, the question I ask you every quarter in terms of long-term margin profile, you obviously just had a very good margin quarter, driven by both volume and the shift to OLTs. You’re guiding back to your traditional guidance in the low 40s for the December quarter.

Has there been any change in your view about longer term? Are you still looking at a low 40s gross margin profile longer term or with the benefit of volume which shift to OLTs, can that be better than that? And then I’ve got one follow-up question..

Yes. I think I would say, low to mid or somewhere right in that range. And you see variability in here. Remember, in Q1, we were pretty hot also. So it jumps around a lot. So I tried to project this by looking at what we see. But we are a book-and-ship business and what comes in during the quarter is a little bit hard to test.

But I believe that, that 41% to 42% guidance is probably what the mix will turn out to be for the quarter..

I think the variability also is the thing that – maybe think about, PON, we don’t have – we don’t know exactly what Tier 3s will do next year. The Tier 3s are strong, that typically helps us because not just the nature of what they buy but also the software components associated with that. So that tends to drive more strength.

The thing that we’re trying to factor in, at this point and not changing the longer-term guidance is, there is a real potential for material international revenue upticking next year. And whether or not the Tier 3s here in the U.S. are going to keep pace with that, it is kind of the thing that we just have to look and see.

There’s no doubt that the pressure – some of the pressure has been alleviated in places like Europe because of the stance on some of the vendors there, but there’s still a hangover effect on all of that. And the stronger that, that business is, you’ll tend to see a weakness in the gross margin..

So Tom, the statement you just made, it sounds like you made good progress in Tier 3, what percentage of total revenue are Tier 3 today?.

We really don’t break that out. I will tell you, it’s very – it’s material. It’s over – let me pick a number. It’s over $50 million, but we don’t break that out..

One quick final question, if I may. I know it’s hard predicting the future, but assuming you get the revenues you are expecting from these new Tier 1 wins. Tom and Mike, do you have any visibility as to what the margin profile at – in total? I am not asking any specific customer, but on the Tier 1s.

Would that be consistent with current margin structure? Would it be dilutive? Would it be accretive, any sense?.

So I am going to talk you about international gross margins. It would probably be a little accretive to international gross margins, but it would be dilutive to total corporate gross margins. .

Alright. I appreciate it. I will pass it on. Thank you..

And that’s the mix I’m talking about. How much does that pile in? That gets better over time. How much does that pile in versus what is going on with the U.S.

market in Tier 3?.

Your next question comes from the line of Bill Dezellem of Tieton Capital. Your line is open..

Thank you. A couple of different questions. First of all, the two Tier 1s, the one that you won and the one that – with a new program that you specifically called out.

Would you talk about the ramp and the timing for material revenues? And is that different than your comment about late in the first half of next year that you made to a bigger comment? And then the second question is, can you talk through just the European country shutdowns that are happening once again here in the last few days and what implications, if any, that has for you?.

Sure. Let me start with the first one, of course, and it’s – the first half ramp that I was talking about was really around the previous SDX awards of the customers that we have talked about and really, I am talking about in totality.

There are some different dates on all of those, but we will start seeing as a combination, we will start seeing material revenue around the half of next year. As far as the new ones, one is going to be fairly quick, but it’s as far as seeing any revenue. Yes, I think it’s – I don’t have a good sense of timing as to when that picks up at this point.

I think that they want to get started, and they have some very targeted areas. And then I want to kind of see how it works. The other one is, very specific. And Mike, I don’t recall the date on that.

I think it’s third quarter of next year?.

Yes..

Right. And that one is big, it’s a well-known customer to us. They have very specific plans with very specific revenue targets associated with it. The current date is third quarter of next year, I will tell you that these things tend to slip a little bit.

Besides that, what I was talking about before was really the fiber piece as far as the shutdowns are concerned, other than – it really hasn’t – we have been operating in a relatively shutdown, and via many ways from an end-user demand and really no difference. And we haven’t seen any near-term changes in the way that they are operating.

Where it really affects us is, when you are trying to meet with customers and really with the lab activity we have gone on around the world right now, it tends to impact that. So far, we have able to maneuver around that. I’m not aware of any material delay because of the quarantine situation that we are in. And I don’t expect it.

I think especially our bigger customers, even our smaller customers now I think about going on in Europe, have kind of developed an environment where we can talk to their counterparts in the lab, work through issues. In many cases, get into the system themselves remotely and operate the way we need to operate.

So I’m not – everyone who are here about week delay here, there. And – but that’s not that frequent..

And then deployment is not impacted by stay-at-home orders?.

Yes, no change in that.

And even in Europe, what we were seeing is, as far as infrastructure in especially, with the new awards, we’re talking about real material infrastructure builds to begin with, because they are really talking about building out footprint, either replacing existing infrastructure that they have or expanding footprint in many cases, there’s been no change in those plans..

Great.

And if I may throw in one more question, Latin America, what are you seeing with your important customers down there?.

So there – in the Caribbean, we are actually doing well. We have some strong – I don’t want to overplay it at this point. We have some activity going on in places like Brazil, where they are also, of course, honestly, as the XGS, maybe the XGS is kind of the architecture, people want to go to. And so there are large carriers.

There’s not a large carrier that isn’t looking at a migration towards XGS, 10-gig. And if you’re going to do that, you are going to do that with a virtualized system like the SDX. So there is activity going on there. Those tend to be longer term. We do have one traditional customer down there.

There are still ongoing negotiations with that customer, but there’s no material change at this point..

Great. Thank you for the time..

Your next question comes from the line of Fahad Najam of MKM Partners. Your line is open..

Sorry I am on mute.

I apologize, if you have already addressed this, but are you seeing any significant pull-in of orders from your customers?.

No. No. We did at the beginning of the pandemic. So if you think about kind of the end of Q1, we saw a material increase in order activity. I think at this point in time, I would say that the order rate is reflecting what their demand is. I don’t see any real – we do on particular products.

I talked a little bit about the fact that we’re still having some supply issues, most predominantly with silicon. But – and in those cases, we may really try to nail down our forecast with them and try to get and reach further out, but that’s really not the norm..

Okay. That’s helpful. If I look forward to next year with all these Tier 1 ramping, how should we be thinking about your customer concentration? Is most of the growth has come from....

Good – really good question. Yes. So we are adding Tier 1 customers as well. So the good news is that there will be more Tier 1’s to kind of spread the fluctuations around within, but having said that, we are also adding more Tier 1s. So you have got that issue. We are adding Tier 3s.

And I use Tier 3s, I am really talking about alternate carriers of all different types. We are heading municipalities on a very fast clip. I mean we usually have an internal announcement here something that goes out. And we have a weekly update here, and there’s always a municipality that’s being added.

And we’re adding Tier 3s to traditional Tier 3 carriers at a very quick clip. I think I mentioned before, it was 30-something on customers, large percent of those were the alternate type carriers. So from that perspective, and by the way, I mentioned, we had a distribution partner, it was at the top 10% customer, that is not typical.

I do believe that, that will be typical going forward because I do believe – and those are all being sold. Those are one of our conduits to that alternate carry, that municipal space, Tier 3 space, so – and utilities. So that base is growing. Now when we get into this time next year, it will still be kind of early in the cycle of some of these wins.

But we get into this time next year, it’s really how are those Tier 1s comparing to the growth rate within the Tier 3s. I have no doubt we’ll be more diverse, but we’re adding Tier 1s at a nice clip as well. So – but we will have more customers, which will help in that diversity. And then one other thing I just want to add.

I mentioned before, the tax rates on our CPE gear and our RGs and some of our new WiFi solutions is really going well, which will help add in that product diversity as well. It is something we are focused on..

That’s really helpful. Thanks for the color on that. I think one last question for me is, more topical, a big picture view. I think AT&T recently announced that they are going to stop selling their copper-based DSL service.

It seems like a secular shift towards fiber is ongoing and it should – with all the major Tier 1s around the world, just migrating towards fiber, can you talk a little bit about your competitive positioning in win rates in the fiber, is it similar to copper that your previously – or is it actually better on the basis of?.

I would like to talk about it. One of hangovers that we had gone through, we have had a couple of programs, really one big program that kind of – that was copper-based that died and then, which causes an issue. But really, it was the longevity of the copper and the R&D requirements associated with that copper versus the fiber.

And I think this is the first quarter, and depending on how you count it, were you really seeing fiber eclipse copper within our revenue? And so to us, that’s a big milestone. And it really – because there is a lot of work to make that happen. So I am happy with the shift within the company.

And if you look at the R&D spend, the R&D spend is predominantly fiber-based, has been for some time. So I’m glad to be able to see the revenue kind of mimic what it is that we’ve been doing internally here. Competitively, right now, we are in a very good position.

We have launched new flexibility, new capabilities in there, our Total Access 5000 platform product, which has been in the market for a long period of time. We have upgraded the switching capability, and we are the only – well, I should say the, only.

And I have heard other people are working on one, but we are shipping combo card, which is the XGS 10-gig and two nodes, standard 2.5 gig within the same card profile, which is unique in that customer base and getting a lot of traction because people don’t want to have to go out and replace infrastructure, they don’t have to.

When I talk about the XGS, there’s just nothing else out there, completely disaggregated. It is next-generation system that people have been talking about for five or six years. It’s actually now out in the market. We’ve actually shipped it to paying customers.

It is what has been selected by pretty much every Tier 1 that we have won in relation to PON, and we think it is – there’s nothing else that will touch it right now. There are people that are kind of trying – are reacting to it, but we think we have a good headway in the R&D that we put into it..

That’s good. Appreciate it. Thank you..

Thank you..

Your next question comes from the line of Tim Savageaux of Northland Capital Management. Your line is open..

Good morning. Yes, to a lot of my questions on that last one there. But I will say that, actually, Nokia made the same comment this quarter with regard to....

I can’t believe it..

The fiber eclipsing – the fiber eclipsing copper in their Access business.

So that would seem to be – well, what comment were you talking about?.

I was talking about the SDX. I was talking about what they were doing, talking about their disaggregated solution..

Okay, I see. A little competitive intensity there, but that does suggest there’s an industry-wide trend toward copper going on. And so thanks for clarifying that fiber was larger this quarter. I wanted to follow-up back up on the Tier 3 comment. I mean that $50 million, that’s a quarterly number that you base for the size of the Tier 3 business? Okay.

So well, that’s interesting..

That’s larger than $50 million – like I said, we don’t give guidance....

Yes, I hear you. Okay, yes. And that would make it your largest segment, if you look at kind of international, U.S. Tier 3, Tier 2 and Tier 1 by some distance, actually.

And you are obviously seeing good growth there, and you had a lot of impressive growth numbers in various segments, most of which would seem to imply something on the order of kind of a, I don’t know, 30% year-over-year decline among U.S. Tier 1’s or other parts of the business that are domestic-based.

And I’m guessing that may be a function of the copper programs that you referenced, but is that about right? And what does it take to kind of – will it take the new deal coming in to kind of stabilize and make that grow or how are you looking at that part of your business?.

Yes, firstly, I don’t think it’s Tier 1’s. I think it I think in Tier 2’s and Tier 3’s on a year-over-year basis, we have been good. I think the issue that we had last year was predominantly on a comp basis, was predominantly Telmex.

And so we had a large copper-based program going on with them, that was tens of millions a quarter, and it just completely stopped. So the whole that you are talking about in the North American market is Telmex, not – it’s not the U.S. carrier base. And that was very much a copper-based vectored, DSO solution that they are rolling out.

I think I just answered your question, is that....

Yes, in part. And last one for me is, as you think about your potential international growth next year, obviously, should the Tier 3s continue to grow 60%, maybe they could keep up with that rate of growth. I assume for planning purposes, you modeled some slowing in that Tier 3 growth rate despite RDOF ramping up and some other positive drivers.

Just to begin with, and can we assume that, from an international standpoint, you expect international revenues to grow faster than domestic, next year?.

Good. Good. That is a really good question that I don’t have an answer for you today. So the thing about the Tier 3s is not just, let me just say, off carriers, because it’s broader than traditional Tier 3 carriers. But the thing about these carriers is, the growth rate through the year has been increasing. And I don’t see a change in next year.

So you are going to have two quarters of growth before these – the – really, we have one mammoth Tier 1 in Europe that is going to start – that’s going to be all incremental and will that eclipse it? Now there are other activities going on.

There’s process going on in Australia, carriers like, Orange, we announced an award with Vodafone, all of these Telefónica, which is, of course, not just in Europe but in Brazil. All of those have got processes that are in place are – where they’re coming towards a decision, but those will carry.

So those are really – and if you think they don’t get awarded until next year, they’re a year away from that. So the real mammoth, new incremental piece is a new customer for us that’s deploying the XGS next year. And it will just be starting around the half.

So I could absolutely envision next year where, the Tier 3’s actually eclipse it on a pure growth dollar basis. But I don’t know that for a fact, we will have to get into the year and really see. RDOF will start around the turn of the second half. But really for it to be material, it’s going to take some time.

So that will just be – I don’t see that as a huge kind of wave of things coming in the second half of next year. I think it just starts and starts to ramp up from there. Yes. These old carriers are – they keep the momentum they have right now until U.S. could be stronger. Okay. So thank you very much for joining us today.

I appreciate your interest, and we look forward to the call on a next quarter..

This concludes today’s conference call. You may now disconnect..