Ladies and gentlemen, thank you for standing by, and welcome to ADTRAN’s Fourth Quarter 2020 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] Please be advised today’s conference is being recorded.

[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 on Form 10-K for the year ended December 31, 2019, and our quarterly report on Form 10-Q for the quarter ended September 30, 2020.

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 Tom Stanton, Chief Executive Officer of ADTRAN. Sir, please go ahead..

Thank you, Chris. Good morning, everyone. We appreciate you joining us for our fourth 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’ll take any questions that you may have.

COVID-19 continues to impact our day-to-day lives and the way that we do business. It is highlighted the importance of the work we do enabling operators to provide high speed broadband connectivity for consumers and businesses.

I am proud of our employees perseverance throughout these difficult times and want to start by saying thank you to all of our team. Moving to the quarterly performance, the results for the fourth quarter demonstrated solid execution against our plan.

This included broad-based demand across our customer segments with a strong contribution from regional and emerging service providers. We continue to make great progress with the Tier 1 fiber access projects that we announced earlier last year, while still growing and diversifying our customer base across a variety of market segments.

From a top line perspective, revenue for the quarter was $130.1 million with 41.1% gross margin. Network solutions accounted for 88% of that total revenue at $114.1 million, while Global Services contributed to $16 million. During the quarter, we had four 10% customers, one of the highest numbers we have ever reported.

Each of these customers percentage of total revenue was in the low-double digits, pointing to the success of our diversification efforts. Of these, there was one service provider customer, and three distribution partners. These distribution partners serve hundreds of regional service providers in the U.S.

market with a mix of broadband access and connected home and enterprise solutions further reinforcing our success that we are having with both customer and portfolio diversification. New customer acquisition remains strong. We added 35 new service provider customers during the quarter bringing the total to 134 for the year.

Our fiber access portfolio has led the way in terms of both new customer acquisition and revenue growth. We expect this to continue as our fiber access solutions and software platforms are adopted by customers around the world who are upgrading their networks due to favorable government, regulatory, technology and competitive factors.

Similar to Q3, the growth that we saw during the quarter was led by our continued success in the Tier 2 and regional broadband operator market in the U.S., which was up 85% year-over-year. We are seeing increasing demand for our fiber access, connected home and cloud services offerings.

Our fiber access and aggregation business grew 98% year-over-year, in-home service delivery platforms are up 68% year-over-year and cloud services increased 46% year-over-year. We are seeing similar trends in Europe were favorable regulatory and funding environments are driving the build of fiber access networks.

We posted revenue growth of 54% year-over-year in the EMEA market segment. This increase was driven by investment in 10-gig fiber access networks with European Avnet providers. And the Tier 1 customer segment, as mentioned earlier, we are making great progress with all three announced wins including two European and one U.S.-based customer.

Two of the three have already achieved a significant milestone of first customer connections. And we expect lab exit for all three around the middle of the year. In addition, we are actively involved in several other Tier 1 decision processes around the world. Some of which we expect to reach decision points around the middle of this year.

COVID-19 related logistics issues and global chips are just continue to impact lead times and inventory levels and our operations teams continues to take proactive steps to mitigate logistics and component availability challenges to meet our customer needs. However, lead times do remain extended on some key components.

And as a result of our efforts to address these needs, we have maintained elevated inventory levels and incurred increased freight costs due to decreased capacity associated with higher transportation rates and expedite fees. From an organizational perspective, we continue to maintain a disciplined approach to operational expenses.

The structural changes that we have implemented over the last year continue to improve our operational efficiency. In the past 18 months, we have reduced our non-GAAP quarterly operating expenses by almost $12 million or 19% through disciplined expense management.

These changes have allowed us to reach investment levels that aligns with our target operating model moving forward. On the product side, we continue to invest in end-to-end broadband solutions that make it easy for broadband operators to deploy and operate fiber-based broadband access networks.

And the customer connectivity segment, we expanded our in-home service delivery platforms with our new SDG series of cloud managed mesh Wi-Fi 6 gateways. These platforms deliver gigabit speeds wirelessly throughout the home or business.

They are complimented by an intuitive mobile app and cloud-based software suite that simplified deployment and management of Wi-Fi mesh, IoT, advanced security and parental control services. These platforms will enhance our ability to capitalize on the increased investment we are seeing in the connected home segment.

And fiber access, we have established ourselves as one of the fastest growing vendors through the widespread adoption of our 10-gig fiber access platforms.

Whether you’re a regional operator looking for an easy to deploy system with integrated access and transport, our large Tier 1 broadband operating, seeking the leading open disaggregated fiber access platform available ADTRAN has solutions that are an ideal match for these customer’s needs.

On the software side, we enhanced our cloud software suite with the launch of Mosaic One, a SaaS offering that combines network and subscriber analytics with AI driven algorithms to optimize end-to-end network performance while providing actionable insight for operations and marketing teams.

Highlighting our growth in cloud service, we secured our largest SaaS contract to-date with an award that covers hundreds of thousands of customers over a multi-year period. The consumer demand and government support for fiber-based broadband services are at an all time high.

One notable program of course is the FCC’s Rural Digital Opportunity Fund or RDOF and in December, the FCC announced 180 winning bids in RDOF Phase 1 auction. These winning bidders are expected to receive a total of $9.2 billion of funding over 10-year period to build out broadband service to over 5 million homes.

Over 85% of these homes will be served with gigabit broadband speeds. ADTRAN’s portfolio is a great match to the service to your and customer segments. In Europe and around the globe, many global operators are significantly increasing their fiber investment while also looking to diversify the vendors and their supply chain.

As an established global vendor with a leading fiber access portfolio and global R&D presence, including Europe, ADTRAN continue to stands out as a reliable option for future broadband deployments.

The shift to gigabit enabled fiber access networks will also drive further demand for gigabit capable cloud managed wireless mesh connectivity in the home or business providing material additional growth opportunities for ADTRAN as end-to-end broadband solution provider.

I mentioned earlier in 2020 that ADTRAN’s fiber business had eclipsed our copper business for the first time in our history. In Q4 of 2020 fiber related solutions represented over 70% of our business. Overall, we achieved some key milestones in 2020.

We have a lot of positive momentum and the growth segments of our portfolio driving a diversified customer base in our target markets. The progress that we had in 2020 has as well-positioned for additional success in 2021. Mike will now provide a review of our financials. Following his remarks, I will be happy to answer any questions you may have.

Mike?.

Thanks, Tom, and good morning to all. I will review our fourth quarter 2020 results and also provide our view on the first quarter of 2021.

During my report, I will be referencing both GAAP and non-GAAP results with reconciliations presented in our press release and supplemental financial schedules on our investor relations webpage at www.adtran.com/investor.

The supplemental financial schedules on our webpage also present certain revenue information by segment and category, which I will be discussing today. As Tom stated, our fourth quarter revenue came in at $130.1 million, compared to $133.1 million in the prior quarter and $115.8 million for the fourth quarter of 2019.

Breaking this down across our operating segments, our network solutions revenue for the fourth quarter was $114.1 million versus $115.2 million reported for Q3 of 2020 and $96.2 million in Q4 of 2019.

Our services and support revenue in Q4 was $16 million, compared to $17.9 million reported for the third quarter of 2020 and $19.6 million for the fourth quarter of 2019.

Across our revenue categories, access and aggregation revenue for the fourth quarter of 2020 was $79 million, compared to $85.4 million in the prior quarter and $74.6 million in quarter four of 2019.

Revenue for our Subscriber Solutions & Experience category was $45.4 million for the quarter versus $43.1 million for quarter three of 2020 and $33.2 million for quarter four of 2019. Traditional & Other Products revenue for the quarter was $5.8 million, compared to $4.6 million in Q3 of 2020 and $8 million for quarter four of 2019.

Looking at our revenue geographically, domestic U.S. revenue for Q4 2020 was $95.8 million versus $92.8 million reported in quarter three of 2020 and $69.9 million in quarter four of 2019. Our international revenue for the quarter was $34.3 million, compared to $40.3 million for quarter three of 2020 and $45.9 million in quarter four of 2019.

In the fourth quarter, we had four, 10% of revenue customers. Our GAAP gross margin for the fourth quarter was 41.1% as compared to 44.3% in the prior quarter and 40.8% in the fourth quarter of 2019. Non-GAAP gross margin for quarter was 41.3% as compared to 44.5% in the prior quarter and 41.2% in the fourth quarter of 2019.

The quarter-over-quarter decrease in both GAAP and non-GAAP gross margins were driven by product services and customer mix and lower volume and lower manufacturing absorption.

The increases in both GAAP and non-GAAP gross margin on a year-over-year basis were driven by increases in volume as well as product, services, customer and geographical mix changes.

During the quarter, we did experience extended component lead times which we expect to continue into 2021, potentially affecting component availability in component and logistics costs.

Total operating expenses on a GAAP basis were $56.8 million for quarter four of 2020 compared to $54.4 million reported in the prior quarter and $61.3 million for Q4 of 2019.

The quarter-over-quarter increase was primarily related to market driven increases in our differed compensation expense, restructuring related cost in both R&D and SG&A and contract services partially offset by a decrease in labor expense as a result of our restructuring program which was initiated in 2019.

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

On a non-GAAP basis, our fourth quarter operating expenses were $49.5 million compared to $49.4 million in the prior quarter and $56.8 million in the fourth quarter of 2019. The slight increase quarter-over-quarter in non-GAAP operating expenses was primarily due to increases in contract services, offset by a decrease in labor expenses.

The non-GAAP year-over-year decrease in operating expenses was primarily the result of our expense reduction efforts and lower travel expenses year-over-year, partially offset by an increase in contract services.

Operating loss on a GAAP basis for the fourth quarter of 2020 was $3.3 million compared to an operating income of $4.5 million in the prior quarter and an operating loss of $14.1 million reported in Q4 of 2019.

Non-GAAP operating income for quarter four of 2020 was $4.3 million compared to $9.9 million in the prior quarter and an operating loss of $9 million in quarter four of 2019.

The quarter-over-quarter GAAP decrease in profitability was attributable to lower sales volume, less favorable gross margin mix and higher operating expenses driven by restructuring and market-driven deferred compensation expenses.

The year-over-year decrease in GAAP operating loss was driven by higher sales with favorable gross margin mix and reduced operating expenses. The non-GAAP quarter-over-quarter decrease in profitability was mainly driven by lower sales volume and less favorable gross margin mix.

The non-GAAP year-over-year operating income improvement was related to higher sales volume, higher gross margin mix and reduced operating expenses. Other income on a GAAP basis for the fourth quarter of 2020 was $3 million compared to other income of $1.5 million in the prior quarter and other income of $3.2 million for quarter four of 2019.

Our non-GAAP other income for the quarter was $1.7 million compared to a non-GAAP other income of $876,000 in Q3 of 2020 and $2.9 million for quarter four of 2019.

The increases in both the GAAP and non-GAAP other income as compared to the prior quarter or primarily market-driven, caused by increases in the fair value of our investment portfolio and lower realized foreign currency exchange losses.

The decrease in GAAP and non-GAAP other income on a year-over-year basis was primarily driven by higher realized foreign currency exchange losses and lower gains in our investment portfolio.

The company’s tax provision for the fourth quarter of 2020 was a benefit of $6.5 million as compared to a $562,000 expense in the prior quarter and a $768,000 expense in the fourth quarter of 2019.

The current quarter benefit was primarily the result of finalizing our 2019 net operating loss carryback claims related to the 2020 CARES Act and a shift in profitability across tax jurisdictions.

The tax expense for the fourth quarter of 2019 was a result of our international operations as the deferred tax benefits generated in that quarter by our domestic operations were offset by additional changes in the valuation allowance that was previously established in the third quarter of 2019.

GAAP net income for quarter four of 2020 was $6.1 million compared to $5.5 million in the prior quarter and a net loss of $11.6 million in the fourth quarter of 2019. Non-GAAP net income for the fourth quarter of 2020 was $5.2 million as compared to $7.9 million in the prior quarter and a net loss of $2.5 million in quarter four of 2019.

Earnings per share assuming dilution on a GAAP basis was $0.13 as compared to $0.11 per share in the prior quarter and a loss of $0.24 per share in the fourth quarter of 2019.

Non-GAAP earnings per share assuming dilution for the fourth quarter of 2020 was $0.11 per share compared to $0.16 per share in the prior quarter and a loss of $0.5 per share in the fourth quarter of 2019. Turning to the balance sheet.

Unrestricted cash and marketable securities totaled $118 million at quarter end after paying $4.3 million in dividends during the quarter. For the quarter, we used $11.2 million of cash from operations.

Net trade accounts receivable was $98.8 million at the end of the quarter, resulting in a DSO of 70 days compared to 69 days in the prior quarter and 72 days at the end of the fourth quarter of 2019. The variability in DSO’s quarter-over-quarter and year-over-year is mainly attributable to the timing of shipments.

Net inventories were $118.7 million at the end of the fourth quarter compared to $120.3 million in Q3 of 2020 and $98.3 million at the end of Q4 of 2019.

While our inventories were down slightly quarter-over-quarter, we continued to carry a higher inventory levels in preparation for new product ramp ups and strategic inventory buffer purchases, which have been made to ensure supply continuity throughout 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 pandemic, the availability of component supplies, to align with our customer demand, the book and ship nature of our business, potential supply chain expediting costs and other component and logistics cost variations, the timing of revenue associated with large products, the variability of order patterns into the customer base in which we sell as well as fluctuations in currency exchange rates in our international markets may cause material differences between our expectations and actual results.

Having said all that, we expect that our first quarter 2021 revenue will be in the range of $122 million to $130 million. After considering the projected sales mix, we expect that our first quarter gross margin on a non-GAAP basis will be in the range of 40% to 42%.

We also expect that non-GAAP operating expenses for the first quarter 2021 will be about $50 million. And finally, we anticipate the consolidated tax rate for the first quarter on a non-GAAP basis will be in the low-20s percentage rate.

We believe that the significant factors impacting revenue and earnings realized in 2021 will be component availability and costs, macro spending environment for carriers and enterprises, the ongoing effects of the COVID-19 pandemic, the variability of mix and revenue associated with our project roll-outs, the proportion of international revenue relative to our total professional services activity levels, both domestic and internationally, the adoption rate of our broadband access platforms, potential changes in corporate tax laws, currency exchange rate movements, and inventory fluctuations in our distribution channels.

Once again, the financial information is available at ADTRAN’s Investor Relations webpage at www.adtran.com/investor. Now, I’ll turn the call back over to Tom for questions..

Okay. Thanks, Mike. Chris, at this point, we’re ready to open up to any questions people may have..

Thank you. [Operator Instructions] The first question comes from Rod Hall of Goldman Sachs. Your line is open..

Thank you for taking my question. This is Bala Reddy on for Rod. [Indiscernible] you mentioned different factors, like growing space like supply constraints, macroenvironment or what have you making in any further color would be helpful. And I have a follow-up. Thanks..

Can you repeat that? You were cutting out a little bit there..

I was talking about that, could you talk a little supply constraint situation that you are passing [indiscernible].

The supply chain situation. Yes. So, I mean we’ve seen tightness throughout the year, but it’s definitely at least on the silicon side continue to increase. I think everybody where a lot of people are aware of the lead time extensions by some of the silicon vendors.

And there have been – when you’re having to go and buy chips from pretty much any outlets you can get and use sometimes the expedite charges on those. We have factored that into our guidance for the next quarter.

The reality is that we don’t know exactly what that will be until we actually get those chips, whatever chip it may be in-house but we have tried to factor that into our guidance.

Does that answer your question?.

Could you help us maybe quantify it into this, if it does by task – could you help us quantify it? How much are you putting on the table off the table, because supply chain situation...

That level of detail to be honest with you is not at hand right here, but it’s not everything. It is predominantly on the chip side by far. And certain chips are worse than others. So I don’t have an exact number. I can just tell you that when we rolled up our margin forecast that we did want to try to take into account, and we can look at that.

We look at that and Mike had mentioned gross margin forecast is fairly detailed and that we look at it on a SKU level. So certain SKUs are impacted by it and certain ones aren’t, but I don’t think we have a total number on that..

Okay. Fair enough. I got one more question. Could you expand on this audit off opportunity? I believe last quarter, you talked about how some of the providers, we’re still figuring out what the past going to be.

Maybe you had a few more conversations with them, and then could you expand on the opportunity? I believe you mentioned second half, like, it’s going to be gradual..

I do think it’ll – some carriers will kick off as quickly as possible. Others will wait, because there was some time period that you don’t have to build everything right off of the bat. The quiet period is now over. And so we’re able to have dialogue with a lot of the customers. I think we are happy as of now with kind of how things turned out.

A lot of those customers are long-standing customers with ADTRAN and some of the bigger ones are definitely longstanding customers with ADTRAN.

We also – although there are wisps involved that have one significant amount of that award, some of those whips, if you actually get into the details are actually going to be building out fiber, which is good for us. And then even where they are doing something different, unless they like fixed wireless, which is typically at lower rates, right.

So there’s still connectivity opportunities for us with those wisps. So I would say, we’re feeling pretty good about how the option itself turned out at this point..

Okay. Thanks..

Okay. Right. Thank you very much..

Your next question comes from George Notter of Jefferies. Your line is open..

Hi, guys. Thanks very much. I guess, as I look into the quarter, my impression is that your largest North American customer was slow again, is they have been, I think, in prior Q4. And it sounded like you were really able to backfill for that softness with Tier 2 and Tier 3 operators in the U.S.

And is that the right picture that we should be thinking about here? And then I’d also like to know what the mix of your Tier 2 and Tier 3 operators is at this point, I think in the past you said it was about a third of the business, but it seems like that must quite a bit bigger now. Any sense of that would be great. Thanks..

Yes, I think we said last time, Mike, what did we say last time on the call?.

Well, first of all, it’s the fastest growing segment we have, but I think it was – do you remember, what percentage we got?.

I think we have said in the past that in general, it’s been roughly a third of each, but if we’ve had so much growth in the Tier 3 segment than it is at least twice the thirds, right. So that’s growing fast..

So it’s over 50%. And like I said, may actually from quarter to – it’s been growing fast. So at this point in time, closer to 60 than 50. And as far as the Tier 1 customer and there you asked you’re exactly right. That customer did fall off in the Q4, the U.S. business was still up, which tells you that even we typically see seasonal decline in Q4.

So the rest of the U.S. business was pretty strong. There’s also another piece that’s kind of hidden a little bit. I shouldn’t say hidden, but not readily apparent, which is – we do have another large customer in Australia that was down. And for the most part, the Avnet carriers in Europe were able to make up for that.

So we had two areas of strength that we were glad to see happening..

Got it. And then CenturyLink, I think, has been the biggest customer historically.

Any sense for what CenturyLink accounted for in the year as a percentage of sales? Or should we just wait for the 10-K filing?.

Yes. I literally don’t have that in front of me, but they were stronger in the first half and kind of dwindled down a little in the second half and then fourth quarter was not a great quarter. So I really don’t know. I don’t know that George, if you – I guess you’d have to wait..

Okay. Okay. Super. Hey, thanks very much guys..

Okay..

Your next question comes from Rich Valera of Needham & Company. Your line is open..

Thank you. Wanted to follow-up on the component tightness you’re seeing. At this point, do you think that would impede your ability to ramp in the second half? I mean, you noted making good progress with the number of Tier 1. So presumably some ramp there. What’s your confidence. You’ll be able to get the components to enact that ramp..

Where we have some predictability and believe it or not, there’s actually more predictability and infrastructure builds like that. I think we’ll – I think we’re good. We have been placing orders out for a long period of time.

This newest change in lead time is relatively new, but the orders that we’d already placed on the old late time regimen is still in place.

So I don’t have a lot of worry about that, where we’re kind of hurts you the most honestly is the more unpredictable piece is like take rates on ONTs and RGs and things like that, where you could – that business has just been going fantastic for us, and we’ve been able to keep up – being able to buy those pieces, those parts, because the variability can be 30%, 40% quarter-to-quarter and you have different SKUs and everything.

So that’s probably a little bit more problematic. So far we’re doing okay, but it’s just – it’s going to get tougher..

Yes, understood.

And relatedly, I know you guys don’t give multi quarter guidance, but with these ongoing component issues, should we think of gross margins as sort of being relatively flattish over the next few quarters at sort of the level you’ve guided for Q1? Just wondering if there’s any kind of broad color you could give on your thoughts on gross margin..

Yes. That’s probably the safest bet right now. We were expecting gross margin is actually to expand this year. And at this point, because we just don’t know how bad third quarter, fourth quarter will be as far as trying to find parts. So that’s probably a safe way to look at it..

Got it. And then Tom, could you expand on the RFP – the outstanding RFPs that you’re bidding on? You mentioned that you might see some of them actually be awarded as early as mid-year.

Can you give us a little color on what that pipeline looks like?.

Yes. The number of RFP that there is probably material RFPs is, somewhere between six and eight, two of them we expect to close. And I will tell you, we don’t control that. But current expectations for two of them to close before the half both of those are European – both of those are global carriers was headquarters based in Europe..

Got it. That’s helpful. And then finally, just on international, I mean you noted that Australia was weak, but overall that business international was down pretty meaningfully year-over-year and quarter-over-quarter.

Anything else in international that was going on?.

Well, our German carrier is typically a little bit of a wildcard. They came in about where we expected. So I mean the biggest decline it was – its material decline in Australia. Having said that, that is a lumpy customer. There are times where they come in and we sell a lot and there are times where we don’t.

We have just started shipping actually this quarter a new award for them, which will continue to ramp through this year. Having – but it will still be lumpy. It’ll still be lumpy.

I mean the toll key to us is to grow that Tier 3, Tier 2, Avnet carrier segment, which is hundreds of customers to a point to where any of those materials those larger Tier 1s won’t have such a material impact..

Right, understood. Okay. Thanks for taking my questions..

Thank you..

[Operator Instructions] The next question comes from Paul Silverstein of Cowen. Your line is open..

Thanks, guys. Appreciate taking the questions. Tom, as the Tier 2s and 3s, assuming that their growth continues to outstrip the growth of your Tier 1, so that they become a larger percentage of grabbing around they did this quarter.

Does that change all the things bagel? Does that have an impact on your margin structure one way or the other?.

Yes, yes..

I assume for the better..

That’s a good assumption, yes. Yes, it would – that is a I mean that that’s a good market for us..

Based on your current visibility, looking at your order book, your pipeline, I assume you expect that class of customers to continue to outstrip in terms of growth, relative to overall growth relative to your Tier 1s..

I think this year in totality, yes. I think next year, because we’ll be in full bore with three Tier 1s buying fiber access equipment. I think next year will be more difficult or to keep up, but I don’t know, hard off may have an impact on that as well..

That makes the question, given that that shift should have a positive impact and you’re pointing out this year, what’s the offset that keeps – I recognize you all have been very transparent and saying that gross margin for the foreseeable future.

And I think you all quantified over the next two years, feel free to correct me if I’m wrong, that we should expect a meaning change from the low 40s where it’s been for quite some time. But given that shift, that should have a positive impact and it sounds like you’re not expecting any uplifts or any meaningful uplifting gross margin this year.

What’s the offset that’s counteracting the benefit you should get from that customer mixture?.

Well, there are two things. We don’t expect the supply chain to get better. And I will tell you where you’re paying expedite fees now, we pay them in Q4. And we paid at least from a historic perspective, very high logistics charges versus our typical. We don’t expect that to get materially better this year. So in fact, we expect pressure to increase.

So that’s point number one. Point number two, where we have tried to forecast in is some additional wins, so although, what you’re talking about is gross margin better in a smaller carrier segment, yes. Do I expect that growth to eclipse the growth in the, let’s say larger carrier segment this year, yes.

But having said that, we also still have some Tier 1 projects that are just going to be getting kicked off that will have a margin impact as we get them up and running. So that will also be a negative..

Got it. I appreciate that. Tom, I trust you’re indicating that this would accuse, which have been around for a while for you and for others for the better part of the past year, you’re telling us that they’re actually a higher this past quarter, you’re expected to stay at that elevated level relative to previous quarters.

Was that not the case?.

Yes. Let me be a little more granular on that. So if I look at expedite fees for last quarter versus previous quarters on logistics and chip supply, it was a little higher. I expect it to get tighter this year..

All right. But so it sounds like perhaps the bigger issue is you’re hoping, expecting rollouts from the new Tier 1 awards. And as you pointed out in the initial stage of those rollouts, the margins are especially relative to over time..

Yes, right. Once we get up and running and you got some scale and volume and things, yes..

All right. And I apologize, because I’m asking you to repeat yourself, but relative to your previous comments, you said there’s six to eight RFPs in terms of pipeline of additional opportunities. And so I hear you that two those are Tier 1s that you expect to be awarded in the first half of this year..

No, no, no. So yes, so two of those are Tier 1s, but I probably – if I look at the number of RFPs that are out there or opportunities, it’s way bigger than six or eight. So if I look at material like large customers, it’s in the realm of six to eight that we’re working on right now.

But I will tell you there’s probably 100 smaller carriers that we’re working on. I mean we captured what 34, I think carriers just last quarter. So at any point in time, there are hundreds that we’re working on..

Understood. I appreciate the clarification. The six to eight, you referenced are all of those non-U.S..

Most of them..

It is – do you think that’s tied specifically to why we’re getting cut back or is it more than that?.

I think it’s three things. I think it’s – well, I think it’s really four things, so I think its Huawei, I think its 10-gig, I think its disaggregation, and I think its COVID..

I appreciate the response. I’ll pass it along. Thanks, Tom..

Okay. All right..

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

Thank you, Tom. I’d actually like to follow-up on your last comment.

Why do you believe that COVID is playing a role there?.

I think broadband became more important and some countries, like I’ve said a conversation late last night with the customer. Some countries found themselves a little flat-footed and for whatever reason around the same time fiber was gaining an importance.

And I think people that have kind of okay, broadband plans have been – having to relook at those plans and refresh those plans and make sure that they’re going to keep up in a future pandemic for wherever the world may turn.

So I think the highlight that the visibility that it put on carriers, but just if not more importantly on governments and relooking at their infrastructure has absolutely added fuel to this..

Makes a lot of sense. Thank you for the clarification. And then you referenced this substantial growth in your Tier 2 and Tier 3. And yet you had four, 10% customers, can you tell us how that can happen? It almost seems like mathematically that’s a really a small needle to thread..

Yes. I try to highlight this in my notes, but I don’t think it came out clear. So we have four 10% customers. We typically have two or three. Those are typically Tier 1 carriers. Very rarely are they not Tier 1 carriers, sometimes a Tier 2 may come in, but they’re typically direct sales the carriers.

Three of our four this quarter, we’re actually distribution partners that sold to Tier 3. So those customers are actually – those three are actually selling to hundreds of carriers and they’re typically in this Tier 3 segment.

Does that make sense, Bill?.

It makes the perfect sense. Thank you for the clarification. And I didn’t even think of that as a possibility. Thank you..

Yes, okay. All right. At this point, I see no more questions in the queue. So I appreciate you for joining us and we look forward to talking to you this time next quarter..

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect..