Adtran Earnings Call Nuggets: Opportunities with AT&T and International Revenues

Adtran, Inc. (NASDAQ:ADTN) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Opportunities with AT&T

Simona Jankowski – Goldman Sachs: I just had a couple of questions. The first one pertains to the potential opportunity at AT&T (NYSE:T). Can you just give us an update of where that stands in terms of the RFP process and how you think Adtran might be positioned for that?

Thomas R. Stanton – CEO and Chairman: Yeah. So, I really – it’s difficult for me to talk about specific customers, because of their concerns and they like to make their own announcements. But I’ll talk to you in general. In general, I think we are feeling very good that we have a very good product fit. I think our relationship with AT&T has historically been very strong. We had previously announced our agreement with Ericsson as the domain supplier in order to be able to sell our products into that opportunity. They had previously been selected, so I think that was very good understanding of what the potential is from a product and feature set perspective. We think it’s a very good fit. And we’re feeling very good about it.

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Simona Jankowski – Goldman Sachs: And then the second question was pertaining more to your international business which declined quite a bit sequentially, and as you mentioned, that was largely in line with your expectations given the wind-down there at Telmex. But in the past you had talked about some other international opportunities even in the organic business. And so, can you update us on where we stand with those? And then specifically then to the BBA aspect of that, obviously, as you pointed out, the timing there was a little bit unfortunate, but now that we’ve seen Deutsche Telekom and potentially others talk about increased spending in 2013, what would you expect directionally to happen in NSN in the BBA business, and is there a final update for where those revenues shook out for 2012?

Thomas R. Stanton – CEO and Chairman: Sure, good question. So, let me start with the Latin American customer, which we mentioned was a sequential decrease. First of all, I mentioned the fact that that was project timing, and I just want to make sure that you understand where it is. This customer; because of the installation progress that we’ll have in any particular quarter and the ordering activity we’ll have in any particular quarter, will ebb and flow. We have some visibility to that because there’s a lot of project activity going on, so we can kind of see a little bit ahead of what we normally see in our normal cycle time, which is why I mentioned that we kind of expected that decline. I do not expect – for instance, I would expect we have some expectations in the Q1 which are actually a little stronger than what we saw in Q4 and I would expect that customer – will expect that customer to continue on throughout 2013 and we fully expect that activity in 2014. So I don’t want you to – when you said the ending of that project I think we are still very early on to what they want to get done and we are in a particular phase which is still going to carry on through the rest of 2013. As far as the other activities and more specifically BBA we are very much aware. I have mentioned some of the activities regarding announcements towards the tail end of last year in other areas outside of the U.S. and Deutsche Telekom, is one of those. I would say right now we are feeling very similar to the way we felt about AT&T. The BBA products have been approved into that network for some time. They have been buying our products for some time. I think we are very much aligned with their roadmap and we are feeling good. So we will just have to see how that plays out. Timing on these type of things when you are talking about large carriers is also difficult to pinpoint. There are activities outside of that particular customer that we feel good about both in Latin America and South America specifically and in Europe and those will come in. I do think we experienced a pullback which manifested itself in lower sales as well as delays in projects. We are seeing more activity now, real RFP bidding activity in Europe than we have been able to have visibility to probably ever. So here again timing the projects on large carriers is difficult but there are other carriers in Europe specifically that I think have very large plans built to kind of follow suit to what Deutsche Telekom is doing.

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Simona Jankowski – Goldman Sachs: Sure, but just so we have the correct starting point. I think when you made the acquisition, you had expected about $140 million to $180 million in revenue in the first full year. Can you just let us know if you at least came in within the low end of that or how are we tracking relative to that?

Thomas R. Stanton – CEO and Chairman: We did not come in at the low end of that. Actually we saw that pullback and I would say predominantly it was a pullback because we actually had customers, the customers that we went into the agreement with the relationships that we had planned on being able to continue to hold on to were for the most part exactly what happened. So what we did see though was a decrease in spending level versus their historic norm at most customers, but we fully expect that to return, but to answer your question directly, we didn’t meet the low end of that.

International Revenues

Michael Genovese – MKM Partners LLC.: Just to follow-up, couple of follow-ups from the last question. When we look at the international revenues for the quarter, $29 million, is it safe to assume that are we talking about, would 90% of those revenues something around there be ADTRAN Europe?

Thomas R. Stanton – CEO and Chairman: Jim, I don’t know. I really just don’t even have that.

James E. Matthews – SVP, Finance and CFO, Treasurer and Secretary: So we did see an expected sequential downtick in the acquired customer base in Q4. But I…

Thomas R. Stanton – CEO and Chairman: I feel, well in excess of 50%, I think is…

James E. Matthews – SVP, Finance and CFO, Treasurer and Secretary: Well in excess of 50% of the $29 million in total is where they came in for the quarter, but that number would be more apparent in the 10-K.

Michael Genovese – MKM Partners LLC.: So, we saw a sequential decline despite typical seasonality, do you have a view on typical seasonality in that business, do you think that it was down sequentially because this year is a worse year than normal year for CapEx, or do you think that the seasonality of that business is similar to the core ADTRAN broadband seasonality?

Thomas R. Stanton – CEO and Chairman: You’re talking about the acquired business?

Michael Genovese – MKM Partners LLC.: Yes.

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Thomas R. Stanton – CEO and Chairman: I would say, I am now a believer that there is a typical seasonal decline, I think similar to what we sometimes see here in the U.S. I think the customers in general act very similar to the larger carriers that we see here in the U.S., which is we’ll see them slowdown, sometimes you’ll see a little budget push, but it really doesn’t affect the overall trend, but I do think that coming into the – even the third quarter comparable was – we were already seeing that pullback pretty much most of the year, definitely from the second quarter on and we saw that kind of slower spending in the third quarter and I think we saw a pullback from the third quarter. I don’t think we saw a tightening in the fourth quarter over and above what we would – on a percentage basis what we would normally expect.

Michael Genovese – MKM Partners LLC.: Then finally, can we just talk about the two businesses that did well in the fourth quarter, so in terms of sequential growth obviously very strong HDSL and other legacy product sequential growth and also the Optical Access business did fairly well there. So could you just provide more color on what drove that performance?

Thomas R. Stanton – CEO and Chairman: Well, of course is a relative term. HDSL, what we did see is some increase in spending, and I’d say we saw an increase at – we had that one carrier that pulled back strong, pretty much throughout the year. We actually saw that, actually come back some, nowhere near to the rate that it had been, let’s say, a year ago, but we actually saw a rebound in that customer. In general, I’d say, HDSL did – it just did okay. I wouldn’t read too much into that. It’s kind of – I think we’re at – I don’t think that customer is going to reinvigorate and be at the levels they were historically. So, I think we are kind of bouncing around what I would tend to consider the bottom. I think we’ll still continue to tail down from here, but I think the big, big downtick which I had mentioned was 70% or something at that one customer. There’s just no possibility of that happening again.

Michael Genovese – MKM Partners LLC.: Then a real final question from me before I see the floor would be, there has been some chatter out there, just people listening one of the carriers, Verizon, talking about potential Hurricane Sandy effects. So, was there any of that in the fourth quarter on that HDSL number and also, what would be your view on the first quarter there? Do you think that that particular customer would be pulling any business than may have been expected later in the year sooner into the fourth quarter and into the first quarter?

Thomas R. Stanton – CEO and Chairman: Well, we did our best to help Verizon overcome their issues associated with the Hurricane and I think we probably – we did see a pickup there. I wouldn’t say that it was dramatic. I think that there were some emergency things that they needed to get up and running and our real impact with them is going to be over a few quarters, but I don’t think it’s going to materially move the needle. I think it’s kind of incremental to what we’re doing with Verizon, but we don’t see it substantially changing the profile of our business.

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