Q3 2020 ADTRAN Inc Earnings Call
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During the course of the conference call ADTRAN Representatives expect to make forward looking statements, which reflect managements 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 disability outcome.
Potent supplies to align with customer demand.
The successful development end 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 the year ended December 30, Onest 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 and good morning, everyone. We appreciate you joining us for our third quarter 2020 conference call.
With me today is Ed Trent CFO, Mike Foliano. Following my opening remarks, Mike will review the quarterly financial performance in detail and then we'll take any questions. If you may have.
I'd like to begin by expressing our concern 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 and the face 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 emergency service providers, leading the way.
We were also making great progress with tier one 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 with 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 serve a regional broadband service provider market.
We added 38, new service provider customers during the quarter, bringing the total to 99 for the first three quarters of 2020.
These new customers range from global tier one operators to electric co ops cooperatives municipalities cable MSL 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.
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 really solid performance for our U.S tier two customers, who ate up 18% year over year as they started to emerge from restructuring and there again investing in their network expansion.
In Europe, our revenue from emerging all Nick providers was up 76% year over year and 20% quarter over quarter.
And highlighting our highlighting our growth in that region.
For the third quarter, our fiber access and aggregation business grew 34% over the previous period increased 66% on a year over year basis.
This continues to be our top sales category.
Within fiber access our partner royalty 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 we'll continue to step up our market share position in this key segment.
We also saw strong revenue contribution from our us regional broadband service providers growing 37% over the previous period and 58% over the previous year.
As a broad based growth about across both direct and distribution channels.
From a supply chain perspective lead times remained extended on some key components in vendors, but our operations team took several proactive steps to mitigate logistics and component availability challenges to meet our customers needs.
And 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 loyalty, we are growing our residential gateway business.
Residential gateway.
Gateway revenue grew 22% quarter over quarter, and a strong 64% year over year as we increase the number of LT customers also buying our rgs by 17% year to date.
In addition to R&D attach rates, we have also focused on increasing attach rates for Mosaiq software subscription services as we migrate customers to our mosaic suite in our upcoming Mosaiq, one virtual control center.
On October 29th yet to see began its 904 auctions for $16 billion of art off broadband subsidy.
There are 386 qualified bidders that represent over 700 operators.
Whereas the connect America fund was targeted to the large price price cap carriers, providing a first right of refusal the artist subsidies provided an opportunity to rule local exchange carriers and community broadband providers, such as rural electric co ops to receive 10 years of funding.
We expect to see Arda funding to begin to positively impact our revenue beginning in the mid 2021 timeframe.
In Europe and around the world the strategic importance of Fiveg 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 for participating in these network builds.
As a result, airtran 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 risk risen to these challenges in our 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 we start to begin more to be more fully recognized next year.
We have much to be excited about including a 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 and our Stx solutions as tier one operators begin their transition to the network as a feature and the promise of art off awards and begin.
Being able to help regional service providers utilities and municipalities provide gigabit services to the community that they serve.
I am proud of our company and our employees for the SEC success, we have seen thus far this year.
We look forward to a strong finish to 2020 and have a drought bright outlook as we look ahead into 2021.
Mike will now provide an overview 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 as well.
In our view from 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 that are not presented in our earnings release reconciliations to their comparable GAAP measures are published in the supplemental financial schedule that appears on our Investor Relations Web page at Www Dot had trended dot 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 Adtrans 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 was $115.2 million versus $111.3 million reported for Q2 of 2020 and $94 million in Q3 of 2019.
Our services and 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 and aggregation revenues for quarter three of 2020 was $85.4 million compare.
Compared to $82.8 million in the prior quarter.
And $65.1 million in quarter three of 2019.
Revenue for our subscribers solutions and 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.
Traditional and other products revenue for the quarter was $4.6 million compared to 5.5 million for quarter, two of 2020 and $6.5 million per quarter three from 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 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.
2019.
For the third quarter, we had 210% 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.
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.
Were driven by increases in volume as well as product mix.
Which were partially offset by higher freight related charges and expedite premium.
Total operating expenses on a GAAP basis were $54.4 million for quarter three of 2020 coming.
Compared to $59.5 million 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 SDMA 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 SGN anyway.
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.
Compared to $52.3 million in the prior quarter.
And $59.4 million in quarter, three or 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.
It was $4.5 million.
Compared to an operating loss of $6 million in the 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.
Compared to an operating income of $1.3 million in.
In Q2 of 2020.
In 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 was favorable gross margin mix and reduced operating expenses.
Other income on a GAAP basis for the third quarter of 2020.
It 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 $900000.
Compared to other income of $5.7 million in Q2 2020.
Other income of $2.7 million for.
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 in the valuation of our investment portfolio.
The company's tax provision for the third quarter of 2020, but.
<unk> was $600000.
On the expense as compared to an expense of $1.6 million in the prior quarter.
And 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 operations 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 $800000 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 11 cents per share.
As compared to 2.2 cents per share last quarter and a loss of 96 cents per share in the third quarter of 2019.
Non-GAAP earnings per share assuming dilution for the third quarter was 16 cents compared to an income of four cents per share in the prior quarter.
And a loss of six cents per share in.
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 DSL of 69 days compared.
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.
And customer mix.
Net inventories ended the quarter at $120.3 million.
Compared to $186.1 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.
May 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 through.
The timing of revenue associated with large projects design.
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.
We expect that our fourth quarter gross margin on a non-GAAP basis will.
We 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 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 are.
Ongoing effects of the COVID-19 pandemic.
The variability of mix in revenue associated with project Rollouts since.
The proportion of international relevant 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 movement.
And inventory fluctuations in our distribution channels.
Once again additional financial information is available at AD trends Investor Relations Web page at Www Adtrans Dot com.
Now I'll turn the call back over to Tom.
Thank you Mike.
I mean at this point, we're ready to open up for any questions people may have.
This time, if you'd like to ask a question over the phone lines. Please press Star then one on your telephone keypad, we'll pause for a moment to composites Monday roster.
Your first question comes from line of Rich Valera of Needham and company. Your line is open.
Thank you good morning.
Tom You mentioned that you sounded like you mentioned you got a new tier one in Q3 and when you talk about your new customer just wanted to clarify is that the case and if it is can you say anything about that win.
Yeah.
I didn't actually say that in my notes that in reality, we did.
Announces a new tier one at the end of September.
Right.
Which was for fiber extensions.
And we did pick up another tier one customer was in the quarter, where they expanded their.
Their programs with us to include.
The different variation on the technology that we had been previously awarded so there has been but I did mention in my notes.
Got it Thats helpful. And then I think you also mentioned that you've made good progress with your previously announced tier ones and I guess this would include among others BT Openreach may be on the unnamed us tier one is there any update you can give us on those in terms of.
Risks 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 our different stages.
Of lab work.
We actually have received some peos from the new customer, but thats associated with.
Initial.
The initial lab.
Hi, Ken.
Kind of some of the software work that we're doing for them. So we actually own so that actually booked and shipped in the quarter.
But all three of my going well so when we expect.
Material revenue contributions from them to really started in the first half towards the tail end of the first half of next year.
Got it.
Okay and then.
Question on art off.
Talked about it being kind of a mid 21 revenue opportunity I think some of your competitors.
Yes, and maybe it's more of a 2022.
Any further.
Clarification on your thoughts on timing is that sort of a threeq you 21 or 14 any any thoughts on that yet.
And I guess I guess here again this is the difference.
When does it it's one of those things that's going to start to be able to start slower.
You have so many participants some of you have plans completely worked out some of them don't have plans share. If at all has been just focusing on the bidding process.
So.
I think you'll start seeing it in that around the half and then you'll start seeing a ramp up from there.
Got it Thats helpful. Just one more Mike on modeling question on Opex levels.
If we are looking into next year I know you don't give guidance out there, but if we're trying to think about what an opex number looks like it's kind of a normalized TMB level any any thoughts on how much that may be add back into the model as as peony get back to you.
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 wouldnt try to model any increase I think like a lot of companies everybody's rethinking the home you need going forward. So.
Thank you for 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'll cede 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 about an 80 authorized.
Just to start off could you could you give us some color on what you're seeing in terms of broadband demand and that could hit in the U.S. and maybe take to handicap that caught the tail line could see.
And then also how you're thinking about the customer's ability on the moment constant akcea.
[music].
Yes, a lot of activity in that.
I have touched on the growth rates in the tier three space a lot of activity in the tier threes.
[music].
In which as units just separate from what's going on with hard off so.
A lot of network upgrades, we rolled out our combo card, which is the 10 gig solution good pickup on the combo card.
And so just a lot of activity and I think a lot of it has got to do which is end user demand.
Based on the environment that we're in and people understanding the importance of good connectivity.
Same thing in the tier twos, I think the tier twos.
Finally, getting past whatever financial issues that may have had and some of them have started executing one of them explicitly have started executing on expansion plans.
And I don't see that stopping.
And I think the other one actually is kind of woken up and getting better.
And that includes not just those with some of the MSR sales as well so.
I don't see a near term and in fact I see people planning.
Farther out than.
And kind of trigger.
Figuring out how they're going to readjust to what may be a different work environment.
And a lot of areas than what they had going into this pandemic and I don't think its all pandemic driven either I mean, the the activity is going on in the tier twos has been part of their stated plan. It just got put off the tier threes had been heating up for some period of time, even prior to that I mean, we had solid growth in that space last year as well.
And then the tier ones.
We really in the US were in the cable MSO space and where it was a large carriers and one of the large carriers here in the telco space in relation to Poland.
And I would say the activity there is.
I would say we've seen good activity I wouldn't call it mid.
On Earth, shattering I would say its solid.
And there is 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.
The real pickup there will probably be a European this time next year, maybe a little bit earlier than that.
Does that answer your question.
It does it does Exxon and just one quick follow up on the gross margin I know you mentioned that will adopt volumes and product mix, maybe can you expand into the keybanc equity volumes were 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 it we're settling PON one of the things if you step back and look at what our business is known.
We've really made the transition from copper to fiber.
And some of the fiber components overselling, specifically when you're talking about a little pieces, but 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.
We are driving gross margin difference.
Makes sense. Thank you.
Okay.
Your next question comes from the line of Paul Silverstein of Cowen Your line is open.
So im just a clarification first before my question. So the response to the previous question.
Obviously are or a truck non Europe's lower margin view us as a general proposition, but on the product right.
Rob I apologize the service margins are for him so its.
More favorable for your fiber based through us Billboard.
But the decision making in terms of the product mix influencing both.
Gross margin profile, what is the key difference there.
Although I would say on the I would say what's happening in the fiber space because we're selling.
The mix towards old LTL is much higher.
Got it no was broadly people see more footprint.
Exactly right.
Got it so that that's the key driver of the product.
That's probably I don't have them list as that's that's that's definitely in the top three.
Art, we might have a really strong.
My part go ahead, Mark Courseware ask you every quarter.
The long term margin profile you, obviously does have a very good mark in quarter three.
Driven by both volume and referral two years guidance that for your traditional guidance in the low fortys for.
December quarter.
Has there been any change in your view about longer term are you still looking at a low fortys gross margin profile longer term or with the benefit of volume.
We ship to enroll two years can that be better than that and then I'll go one follow up question.
Yes, I think ours, I always say low to mid somewhere right in that range and you see variability in here in memory in Q1, we were pretty hot.
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 a quarter is a little bit hard to to task, but I believe that that 41 to 42 guidance is probably what the mix will turn out to be for the quarter.
I don't know.
I think the variability also the thing to maybe think about Poland, yes.
We don't have.
We don't know exactly what tier threes will do next year, but tier threes are strong that typically helps us because it's 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 longer term guidance is there is a real potential for material international revenue Upticking next year, and whether or not the tier threes here in the us were going to keep pace with that.
That is kind of the thing that we just have to look and see that theres no doubt that the pressure.
Some of the pressure has been alleviated.
In places like Europe, because of the delay.
The stance on on.
Are you on some of the vendors there, but there's still a hangover effect on all of that and the stronger the effect that businesses, you'll tend to see a weakness in the gross margin.
Through comps of the stimulus moves Celtic you made good progress in two or three what percentage of total revenue or two through today.
We.
We really don't break that out I'll tell you, it's very those materials over the pik notes over $50 million.
But.
We don't break that out.
One quick final question Burberry I notes for predicting the future, but assuming you defer revenues you're expecting form.
From these new tier one wins.
How much you'll have any visibility as to what the margin profile in total not ask you for instance, with the customer but on the true ones would that be consistent with current margin structure would it be dilutive would it be accrued any sense.
So I'm going to talk to 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.
All right I appreciate all possible. Thank you.
Right and Thats the mix I'm talking about how much does that pilot that gets better over time, how much of that pile in versus where it was going on with the us market and tier threes.
Thank you Jim.
All right.
Your next question comes from the line of Bill Dezellem of Titan Capital Your life. Your line is open.
Thank you a couple of different questions first of all the the Q.
Tier one so when the Q1 and the one with the 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 it to a bigger comment and.
And then the second question is is can you talk through just the European country shut downs that are happening once again here in the last few days and what implications if any that has for you.
Sure Mike Let me start with the first one of course is in it.
About the first half ramp that I was talking about was really around the previous Stx awards the three customers.
We've talked about.
And really I'm talking about in totality there are some different dates.
On all of those but growth will start seeing as a combination the sourcing material revenue around the half of next year.
As far as the new ones.
One is going to be fairly quick but asus.
As far as seeing any revenue.
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.
It works.
The other one is very specific and Mike I don't recall the date on that I think its third quarters of next year.
Right and that one is David.
That's a well known customer to us.
They have very specific plans with very specific revenue targets associated with it.
The current Data's third quarter of next year I will tell you that these things tend to slip a little bit but.
So that is what I was talking about before was really the fiber fees as far as the shutdown of the concerns other than.
It really hasn't.
We've been operating in a relatively shutdown environment any waste from an end user demand and really no difference.
And we haven't seen any near term changes.
In in in the way that they are operating where it really affects us is.
When you're trying.
Trying to meet with customers and and really with the lab activity, we have going on around the world right now that tends to impact that.
[music].
So far we've been able to maneuver around that I'm not aware of any material delay because of.
The quarantine situation that we're in and I don't expect as I think, especially our bigger customers or even our smaller customers not to think about going on in Europe.
As.
To develop an environment, where we can talk to their counterparts in the lab work through issues in many cases get into the systems themselves remotely.
And operate the way we need to operate so im not even everyone saw you hear about a week delay here or there.
In but that's that's not that frequent.
And in deployment.
Is not impacted by a stay at home orders, yes, yes, no change in that and even in.
Europe, what we were seeing as far as.
Infrastructure in especially with the New awards were talking about really material infrastructure builds to begin with because it 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. Thank you if I may throw in one more question Latin America, but.
What are you seeing with your important customers down there.
So they are in the Caribbean, we're actually doing well we have some.
Strong.
I don't want to over played at this point, we have some activity going on in.
In places like Brazil.
Where theyre also of course, the honestly as you know the SPX may be known SPX.
It is kind of the.
Architecture people want to go to and.
So there are large carriers, there's not a large carrier that is looking at and migration towards ex GSK 10 gig and if you're going to do that you're going to do that with a virtual assistant Lucky stx. 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 is no material change at this point.
Great. Thank you for the time.
Okay.
Your next question comes from line of the Hot runner shy of MKM partners. Your line is open.
Hello.
Sorry, I was on mute.
I apologize if you've already addressed this but.
Are you seeing any significant pull in orders.
From your customers.
No no.
[music].
We we did at the beginning of the Pandemics. 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.
Yeah, we do on particular for us 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 trying to nail down a forecast with them.
And and try to get them to reach further out, but that's really not the norm.
Okay Thats helpful.
If I look forward to next year.
With all these.
And one last thing how should we be thinking about your customer concentration is most of the goodwill and are going to come from question.
Yeah. So.
We are adding tier one customers as well so the good news is that there will be more tier ones to kind of spread.
The fluctuations around.
Around within.
But having said that we're also adding more tier one so you've got the.
That issue.
We are adding tier threes and I use tier three that we're really talking about.
Alternate carriers of all different types were heading municipalities.
On a very fast clip.
I mean, we usually have an internal announcement here something that goes out and.
And we have the weekly update here and there's always a municipality thats being added.
We're adding tier threes to traditional tier three carriers at a very quick clip I think I mentioned before 30.
30, something on customers large percent of those where these alternate type carriers. So so it from that perspective in the end by the way I mentioned, our we had a distribution partner was actually a tough.
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 care that municipal space tier three space.
So and and utilities, so that base is growing.
So now when we get into this time next year.
It'll still be kind of early in the cycle of some of these wins will begin to this time next year. It's really how are those tier ones comparing to the growth rate within the tier threes I have no doubt will be more diverse.
But we're adding tier ones that.
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 attach rates on our CP gear and our Rgs and our some of our new fly Fi solutions is really going well, which we hope to add in that that product diversity as well.
It is something we are focused on.
That's really helpful. Thanks for the color on that.
You know I think one last question for me is more topical.
A big picture view, I think ATP recently announced that they're going to stop selling the copper based DSL.
Service.
It seems like the secular shift towards fiber is ongoing and it should be.
You know with all the major tier ones around the world just migrating towards fiber can.
Can you talk a little bit about your competitive positioning in many baked in and with fiber is it similar to copper MCU joint BDC or is that actually better.
And then we'd like to think that.
I would love talking about one of the hangover that we had gone through and we've had.
Couple of program really one big program that kind of that was copper base that died and then.
Which caused us 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 where you really seeing fiber eclipse copper within our revenue.
And so to us that's a big milestone.
And it really because there was a lot of work to make that happen.
So.
Happy with.
The shift was in the company in.
And if you look at the R&D spend the R&D spend is predominantly fiber base and has been for some time, so im prominent glad to be able to see the revenue kind of.
Liquidity is that we've been doing internally here competitively right now we're in a very good position.
We have.
We launched new flexibility and new capabilities in their total access 5000 plus.
Platform product, which has been in the market for a long period of time, we've upgraded the switching capability and we are the only well I should say the only one effort of the people are working on one but we are shipping come to become a card which is the x. Gs 10 gig and Tuniu standard two and a half years 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 talked about the FCX, there's just nothing else out there completely disaggregate. It is next generation system that people have been talking about for five or six years, it's actually now out in the market weve actually shifted to paying customers. It is what has been selected by pretty much every tier one that we have one in relation to upon and we think.
Is there is 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've put into it.
Thats going to appreciate it thank you.
Thank you.
Your next question comes from line of since the vote of Northland Capital Management. Your line is open.
Good morning, Adam.
Got 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 see if I can believe it.
Finally, we're calculating EPS.
Fiber equipping copper a mere accessed it also got.
That would seem to be well, what comment where you're talking about.
I was talking about the Sdx I was talking about whether or not they were doing okay, but they're just aggregated solution.
Okay I see.
Little competitive intensity, there, but that.
Does success, there is an industry wide trend toward copper going on so.
Thanks for clarifying that fiber was larger this quarter I wanted to follow back up on the tier three comment.
That's 50 million, that's a quarterly number.
Gary is for the size of the tier three but okay. So.
Well, that's interesting and larger than fit like I said, we don't give out here.
Okay, Yeah, and now that would make it your your largest segment. If you look at kind of international us tier three tier two tier one by some just conceptually.
And you're 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.
Our U.S tier warranty reserve.
Other parts of the business that are domestic based and im guessing that may be a function of the copper programs that you referenced sprint.
Yes is that about right and what does it take to kind of will it take that the new deal coming in to kind of stabilize rig that grower or how you're looking at that part of your business.
Yes, I don't think its tier ones I think I think if I think in tier twos and tier threes on a year over year.
Basis, we've done 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.
So the the whole that you're talking about and the North American market is telmex not need it's not the U.S. carrier base and that was very much a copper based.
Vectors.
The ASO solution that they're rolling out.
I think I just answered your question.
Yeah, and part and.
Last one for me is on.
As you think about your potential international growth.
Next year.
To see should the tier threes continue to grow 60.
60%, maybe that could keep up with that rate of growth I assume.
For planning purposes, we are too.
Your model some slowing in that tier three growth rate. Despite your art off ramping up with some other positive drivers.
Just just to begin with and can we assume that.
From an international standpoint.
You expect international revenues to grow faster than domestic next year.
That is a really.
Good question I.
I don't have an answer for you today so it felt.
The thing about the tier threes is not just let.
Let me just say AOS carriers, because it's broader than tradition.
Traditional tier three carriers, but the thing about these these carriers is the growth rate through the year has been increasing.
And I don't see a change in next year, so youre going to have two quarters of growth before these.
The.
Really we have one mamet's tier one in <unk> and Europe.
He's going to start thats going to be incremental and more that eclipse that now there are there are other activities going on there.
The process going on in Australia.
Carriers like.
Or in June we announced an award with.
Vodafone all week Telefonica.
Which is of course, not just in Europe, but in Brazil. All of those have got processes that are in place or.
Or where they are coming towards a decision on but those will carry so those are really if you think they don't get awarded until next year the year away from that so the real mammoth new incremental pieces.
A new customer for us thats deploying the Stx next year and it will just be starting around the half so I could absolutely envision next year, where.
The tier threes actually eclipse that on a pure growth dollar basis.
For that but I don't know that I don't know that for a fact.
We'll have to get into the year and really see art off we'll start around the turn of the second half but it.
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 next year I think it just starts the starts to ramp up from there.
Carrying sort of material back with some health care the.
Results carriers or are they keep the momentum they have right now than the other.
Us 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 the next quarter.
This concludes today's conference call you may now disconnect.
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Hello.
Yes.
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Okay.