ADTRAN (ADTN)

Q3 2011 Earnings Call

October 12, 2011 10:30 am ET

Executives

Thomas R. Stanton - Chairman of the Board and Chief Executive Officer

James E. Matthews - Chief Financial Officer, Principal Accounting Officer, Senior Vice President of Finance, Treasurer, Secretary and Executive Director

Analysts

Blair King - Avondale Partners, LLC, Research Division

Simona Jankowski - Goldman Sachs Group Inc., Research Division

Jonathan Kees - Capstone Investments, Research Division

Greg Mesniaeff - Kaufman Bros., L.P., Research Division

Nikos Theodosopoulos - UBS Investment Bank, Research Division

William Dezellem - Tieton Capital Management

Ehud Gelblum - Morgan Stanley, Research Division

Richard Valera - Needham & Company, LLC, Research Division

Victor W. Chiu - Morgan Keegan & Company, Inc., Research Division

Jim Suva - Citigroup Inc, Research Division

Sanjiv Wadhwani - Stifel, Nicolaus & Co., Inc., Research Division

Lawrence M. Harris - CL King & Associates, Inc.

Jeffrey T. Kvaal - Barclays Capital, Research Division

Michael Genovese - MKM Partners LLC, Research Division

Barry McCarver - Stephens Inc., Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to ADTRAN's Third Quarter 2011 Earnings Release. [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 new products, the degree of competition in the market for such products, the product and channel mix, component costs, manufacturing efficiencies and other risks detailed in our annual report on Form 10-K for the year ended December 31, 2010, and Form 10-Q for the quarter ended June 30, 2011. These risks and uncertainties could cause actual results to differ materially from those in the forward-looking statements, which will be made during today's call. Thank you. I will now turn the call over to Tom Stanton, Chief Executive Officer of ADTRAN. Please go ahead, sir.

Thomas R. Stanton

Thank you, Charnay. Good morning, everyone. Thank you for joining us for our third quarter 2011 conference call. With me this morning is Jim Matthews, Senior Vice President and Chief Financial Officer.

I would like to begin this morning by discussing our third quarter performance, along with some comments on what we expect for the fourth quarter. As stated in our press release, ADTRAN set its sixth all-time consecutive revenue record. This performance was driven by our 3 main product areas, which, combined, grew 63% over the same period last year.

Our company continued to benefit from increasing demand for higher speed services in both business and residential markets and the continued migration towards IP services. This, coupled with a continuing fiber buildout for mobile infrastructure upgrades, and an increase in demand for our products outside the U.S. enabled the company to achieve $192.2 million in revenues for the quarter, an 18% increase over the same period last year.

Looking at our business on a product line basis. Broadband Access achieved its seventh consecutive revenue record quarter by growing an impressive 93% over the same period last year to $87 million. A meaningful portion of this growth occurred in Tier 2 and Tier 3 markets and highlights the excellent performance of our sales and engineering teams working in these areas. Over the last 2 years, our employees and partners have done a phenomenal job of introducing ADTRAN to this new market segment and redefining our broader capabilities to our established Tier 2 customers. During the third quarter alone, we received awards from over 20 Tier 3 customers for the Total Access 5000 platform. Looking forward, we believe our momentum in this space will continue to grow, for both broadband stimulus recipients and all others in this area.

Broadband Access also performed well with large carriers domestically, as we saw substantial growth in both the Total Access 5000 and Fiber-to-the-Node product areas. Broadband Access also performed well outside of the U.S., with solid growth in the Total Access 5000 area and, as expected, substantial growth in Fiber-to-the-Node over the same period last year. Finally, although off to a slow start, we saw a modest increase in shipments in Q3 for Broadband Stimulus, and we expect to see another modest increase in Q4 with meaningful pickup beginning in 2012.

Moving on to Internetworking. This category achieved its sixth consecutive record revenue quarter, growing an impressive 44% over the prior year. As in recent quarters, we saw growth across all our distribution channels, including various carrier segments and our growing dealer base, where we have continued to increase focus on reseller development.

During the quarter, we saw particular strength in routers, EFM and our IP gateway product areas. Also during the quarter, we completed our acquisition of Bluesocket, a leading innovator of virtual wireless LAN solutions. We believe the combination of ADTRAN's Enterprise solutions and Bluesocket's virtual wireless LAN solutions substantially increases our addressable market and allows us to leverage the strength of our channels across multiple markets.

Optical Access grew 20% over the prior year, achieving a record revenue level and saw a growth across large and small carriers. This record was a direct result of our market position as carriers continue to invest in mobile backhaul infrastructure upgrades. I think it's also important to note that in the third quarter, we began trial activities with our new optical network edge systems and our 8000 family of Ethernet sell-side gateway products. Moving forward, we see new areas of opportunity as we continue to position our current product offerings and aggressively pursue development efforts to address the rising needs in what will prove to be a very long-term growth market.

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