Tellabs Inc. Q1 2010 Earnings Call Transcript

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 |  About: Tellabs, Inc. (TLAB)
by: SA Transcripts

Tellabs Inc. (NASDAQ:TLAB)

Q1 2010 Earnings Call

April 27, 2010 8:30 AM ET

Executives

Thomas Scottino – Investor Relations

Rob Pullen – Chief Executive Officer

Tim Wiggins – Executive Vice President and CFO

Analysts

Jim Suva – Citigroup

Vivek Arya – Banc of America/Merrill Lynch

Ehud Gelblum – Morgan Stanley

Nikos Theodosopoulos – UBS

Rod Hall – JP Morgan

Michael Genovese – Soleil - Elevate Research, Inc.

Jeff Kvaal – Barclays Capital

George Notter – Jefferies & Co.

Simon Leopold – Morgan, Keegan & Company, Inc.

Chandan Sarkar – Auriga U.S.A

Larry Harris – C.L. King & Associates, Inc.

Todd Koffman – Raymond James

Operator

Good morning. And welcome to the Tellabs Investor Relations Call. I would like to turn the conference over to your host, Mr. Thomas Scottino. Sir you may begin.

Thomas Scottino

Thank you, Tamika, and good morning, everyone. With me today are Tellabs' CEO, Rob Pullen; and our Executive Vice President and CFO, Tim Wiggins. If you haven't seen the news release we issued this morning, you can access it at our tellabs.com website.

Before we begin, I’d like to remind you that presentation contains forward-looking statements about future results, performance or achievements, financial and otherwise. These statements reflect management's current expectations, estimates and assumptions. Forward-looking statements are not guarantees of future performance, and involve risks, uncertainties and other factors that may cause Tellabs' actual results, performance or achievements to be materially different. A discussion of the factors that may affect future results is contained in Tellabs' most recent SEC filings.

The forward-looking statements made in this presentation are being made as of the time and date of its live presentation. If the presentation is reviewed after the time and date of its live presentation, it may not contain current or accurate information. Tellabs disclaims any obligation to update or revise any forward-looking statements, based on new information, future events, or otherwise.

This presentation may also include some non-GAAP financial measures. Reconciliation between non-GAAP and GAAP financial measures can be found at our tellabs.com website and in our SEC filings.

Thank you. With that, I’ll turn the call over to Rob.

Rob Pullen

Thanks Tom. Good morning, everyone. Tellabs is helping customers succeed with the mobile internet. We achieved our goal of profitable revenue growth in the first quarter, including record revenue from our growth products.

Our first quarter 2010 revenue increased to $380 million, up 5% from the year ago quarter. Our growth product continue to gain traction, a record of 57% of our first quarter 2010 revenue came from our growth products and services. That's up from 39% in the first quarter of 2009.

Also positively, data revenue more than doubled year-over-year to $131 million, that put us at the high-end of our revenue and our gross margin guidance. We saw strong customer demand for mobile solutions. Revenue for all three data products Tellabs 8600, 8800, and 9100, increased both year-over-year and sequentially. It was a positive sign.

Our first quarter cash flow enabled us to invest 18% of revenue into -- back into research and development, to pay our first cash dividend in February and add cash to our balance sheet.

In 2010 about 85% of our R&D investment is going into our growth products that was around 50% in 2007. We continue to improve Tellabs profitability and generate cash. GAAP gross profit margins improved to 50.7% from 44.2% a year ago. That was marking Tellabs highest gross profit margins in the last 22 quarters, that since third quarter of 2004.

GAAP operating earnings were $36 million, up from $9 million a year ago. GAAP net earnings were at $46 million, up from $7 million a year ago.

We delivered GAAP EPS of $0.12 that was up from $0.02 a year ago. We generated $63 million in cash from operations in the first quarter of 2010. And we added $42 million in cash to our balance sheet in the Q1. We now hold $1.15 billion in cash, cash equivalence and liquid financial instruments and of course, we have no debt.

Our strategy to innovate in growth markets such as mobile internet is working well. We are adding new customers around the world due to our growth products. We received great customer feedback on our mobile internet solutions during Mobile World Congress and CTIA.

I was at Mobile World Congress for example and we met with the Chief Technology Officer of a Tier 1 service provider. He found the value proposition of the SmartCore 9100 platform so compelling, in our meeting he turned to the head of purchasing and asked that the orders that they were about to place for competitors mobile packet core equipment be put on hold so they can trial our solution. The trial is now in process and is doing well.

During the quarter, 23 new customers placed orders for the Tellabs 8600 and 8800, primarily for Tellabs mobile backhaul solution, and this was done all over the world.

In our new mobile packet core, we added two new customers. We also expanded our Clearwire business into Clearwire Spain. We now have seven customers for the Tellabs SmartCore 9100 platform, up from five last quarter.

We continue to work with customers and now increased number of trials to 18 both WiMAX and introduced 3G version of our SmartCore product and now both in WiMAX and 3G trials around the world.

We bought WiChorus for its industry leading mobile packet core platform and now we’re extending it beyond WiMAX into 3G and LTE. We also recognized revenue in the fist first from four new Tellabs 7100 customers both in North America and Latin America.

In the first quarter, we received Tellabs Government Systems received JTE certification or Joint Interoperability Test Command certification for access solutions and optical networking solutions. We now can offer Tellabs optical land and optical transport with 40 gigabit to the United States government including the Department of Defense.

In general, we had a strong first quarter, Tim, going to share with you in a moment positive guidance for the second quarter. Tellabs strategy is working. We continue to grow profitably by helping customers succeed in the mobile internet.

With my brief comments been over, I’ll pass it over to Tim, and then we’ll come back and we’ll answer your questions.

Tim Wiggins

Thanks Rob, and good morning, everyone. In addition to all the normal year-over-year comparisons, a complete reconciliation of GAAP and non-GAAP financial measures this morning’s news release contain some comparisons of quarterly financial information on a sequential and non-GAAP basis.

We provide this information in instances where we think it's a helpful edition to the year-over-year data. Looking at Q1, we saw sequential growth in data and cross connect revenue driven by strong demand in North America.

Revenue from our growth portfolio increased to account for 57% of total revenue. Revenue from single family ONTs declined on a sequential basis as anticipated.

Operating expenses less restructuring and intangible asset amortization were flat with the first quarter of 2009 and gross margin operating income and net income were up nicely both sequentially and year-over-year.

Let's get to the specifics. Total revenue for the first quarter of 2010 amounted to $380 million. While that is down 2% from $389 million in the fourth quarter of 2009, the seasonal decline from 4Q to 1Q is one of the lowest we’ve seen in recent years.

On a year-over-year basis, total revenue was up 5%, compared with the first quarter of 2009, and above the guidance range we gave you in January. On a sequential quarterly basis, flat overall broadband segment revenue was offset by lower revenue in the transport and services segments.

Looking a little deeper into the broadband segment sequential growth in data revenue was offset by lower access in managed access revenue. Within transport, increased revenue from digital cross-connect systems offset lower revenue from optical transport systems on a sequential basis.

GAAP net income for the first quarter of 2010 amounted to $46 million or $0.12 a share. On a sequential basis that compares with $62 million or $0.16 a share in the fourth quarter of 2009.

On a year-over-year basis, that's up from $6.5 million or $0.02 a share in the first quarter of 2009. On a non-GAAP basis, net income excluding pre-tax charges for special items, was $45 million or $0.11 per diluted share in the first quarter of 2010. If you’re wondering why our non-GAAP net income is less than our GAAP net income, it's due to some tax benefits that impact only GAAP expenses as I’ll explain more fully when we talk about taxes.

Okay, if you take $45 million in non-GAAP net income and subtract $5.6 million or $0.01 a share for equity based comp, that's to be consistent with the way first call compiles and reports estimates for Tellabs, the result is $0.10 in non-GAAP EPS for the first quarter of 2009.

On a geographic basis revenue from customers in North America grew to account for 72% of total revenue in the first quarter up from 66% in the prior quarter.

Let's take a look at the segment data for the first quarter. Broadband segment revenue for the first quarter of 2010 was $191 million consistent with the prior quarter. On a sequential basis, growth in data product revenue offset decline in access and managed access revenue. Data product was $130.9 million in the first quarter of 2010, up 108%, from $63 million in the first quarter of 2009.

Revenue from both the Tellabs 8600 managed edge system and the Tellabs 8800 multiservice router series increased in the year-over-year period, as we are participating in large network builds around the world.

The year-over-year increase in data revenue was driven by strong demand in North America. In addition, we recognized revenue from the Tellabs 9100 SmartCore platform for a second consecutive quarter since acquiring the platform in December of 2009.

Turning to managed access category, revenue in the first quarter of 2010 came in at $30 million, compared with $45 million in the prior quarter. Revenue from both the Tellabs 8100, 6300 systems declined on a sequential basis as customers continue to migrate to data products.

Access revenue was $30 million in the first quarter, compared with $56 million in the prior quarter driven primarily by anticipated sequential decline in sales of single family ONTs. Taking all that into account broadband segment profit for the first quarter of 2010 was $61 million, up 37.2%, compared with $44 million in the fourth quarter of last year.

Segment profit increased primarily as higher level of revenue from data products offset lower revenue from managed access and access products.

In the transport segment, revenue of $128 million in the first quarter of 2010, compared with $133 million in the prior quarter. Increased revenue from cross-connect systems offset a decline in revenue from optical transport systems.

Transport segment profit driven primarily by shift from lower margin optical transport products, the higher margin cross-connect systems was $45.3 million in the first quarter, up from $44.5 million in the prior quarter.

Services segment revenue was $61 million in Q1, compared with $65 million in the prior quarter. Services segment profit amounted to $20 million, compared with $23 million in the fourth quarter of 2009.

On a portfolio basis, growth from growth products and that includes the Tellabs 6300, 7100, 86, 8800 data products, professional services, and recently acquired Tellabs 9100 SmartCore platform grew sequentially in the first quarter to account for 57% of total revenue, compared with 48% in the fourth quarter of 2009.

On a gross margin basis, non-GAAP gross margin for the first quarter of 2010 was better than anticipated at 50.9%. That's up 5.4 percentage points from 45.5 in the fourth quarter of last year.

Gross margin is dependant on product and customer mix. The mix shift this quarter was attributed primarily to two factors. A little more than 4 points of improvement was related to the higher level of revenue from data products and about 0.5 of improvement was related to the higher level of revenue from digital cross-connect systems. In addition, the impact of lower ONT revenue on corporate gross margin was offset by lower managed access revenue.

Turning to operating expenses, total operating expenses on a non-GAAP basis came in at $134 million, compared with $128 million in the fourth quarter of 2009. On a non-GAAP basis the increase in operating expenses was driven primarily by the inclusion of a full quarter of expenses for our recent WiChorus acquisition and higher incentive composition.

In the first quarter of 2010, non-GAAP R&D expenses came in at $67 million or slightly less than 18% of revenue. SG&A expenses for the quarter were $67 million.

Other income amounted to $7 million in the quarter, compared with $4 million in the prior quarter as we realized gains on the sales of marketable securities. Our tax provision on non-GAAP pre-tax income for the quarter was $21 million for an effective rate of 32%.

Back to the difference between our GAAP and non-GAAP tax rate. In our non-GAAP tax rate, we exclude unusual or infrequent adjustments that do not reflect what we view as our normalized forward looking long-term rate.

In the current quarter, we recorded the following tax benefits in our GAAP provision but not in our non-GAAP tax expense. $13 million for the reversal of tax accruals, no longer required due to an expiration of statute of limitations and $4 million for benefits from the recognition of net operating loss carry-forward that were previously offset by evaluation allowance. Looking ahead, we expect our effective non-GAAP tax rate for 2010 to be 32%.

Turning to the balance sheet now, during the quarter we generated $63 million in positive cash flow from operations CapEx came in at $4 million for the quarter. DSO was 64 days from 61 in the prior quarter. And inventory turns were 5.6 times versus 5.9 at the end of the fourth quarter of last year.

At the end of the first quarter 2010, inventory in terms of dollars was $129 million, compared with $128 million at the end of the prior quarter. During the quarter we purchased 112,000 shares of our stock, at a cost of about $793,000.

We also returned almost $8 million to shareholders via our first quarter dividend. The actual number of shares outstanding at quarters end was about 800, I'm sorry, $385 million. Headcount at the end of the quarter stood at approximately 3,250 and book-to-bill for the quarter was solidly above one.

Turning to the outlook for the second quarter of this year, based on orders in Q1 backlog and given the overall market conditions, we are guiding for second quarter revenue to grow sequentially in a range between 10% and 12%. We expect gross margin in the second quarter to be similar to the first quarter level, plus or minus a point or two depending again on product mix.

And while we previously guided for full year 2010 gross margins to be in the mid-40s range. We now anticipate improvement to the high 40s range, depending again on product and customer mix. We expect non-GAAP OpEx for the second quarter to be up in dollars in the low $140 million range, but down as a percent of revenue.

In addition, we expect the effective expensing equity based compensation in the second quarter will be about $7 million, split between operating expense and cost of goods sold.

So to recap, we made good progress in the first quarter. We saw solid year-over-year revenue growth with less than typical sequential seasonal decline and we’re guiding for sequential revenue growth.

Our expectations for full year gross margin performance are higher than they were in January. And while operating expenses are increasing in real dollars we’ll keep them to a lower percentage of revenue.

At this point, I’d like to open the floor to your questions. Tamika, we’re ready for the first question.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Jim Suva.

Jim Suva – Citigroup

Thank you, and congratulations gentlemen. A quick question, when we look at your margin guidance, can you help us understand a little bit about the mix assumptions that you have going forward to get to your full year guidance that you've given now of high 40%.

And specifically, what I'm getting at is, do you believe the gross margins of the products can go higher or kind of sustain at these levels, how should we think about those two different segments? Thank you.

Tim Wiggins

Good morning, Jim. It's Tim. Thank you for your comments. Let me give you a couple of thoughts on the margin. You know, certainly our Q2 margin is where we have the best insight and we’re guiding for flat performance.

We do, inside that expect to see some growth in our access product which tend to have margins below our corporate averages. We see some of the ONTs returning to a more normal level. We also expect to see continued growth in our data product. So, kind of the, those two moving pieces tend to wash and at this point, we’re expecting around flat margins.

You know, as we look out into the balance of the year, we see the same kind of thing that we saw when we gave you guidance earlier that, we’re seeing early in the year robust sales of our cross-connects and data products. Our level of visibility in the balance of the year is not quite as clear. So I think at this point we wanted to up that vision.

We are seeing good solid margins here. They are above where we expected them to be. We’re certainly hopeful we can continue there but I think a note of caution is in order and that's what we are trying to do with that guidance.

Jim Suva – Citigroup

Great. Thank you, and congratulations once again.

Tim Wiggins

Thanks, Jim.

Operator

Your next question comes from the line of Tal Liani.

Vivek Arya – Banc of America/Merrill Lynch

Thanks. Good morning. It's Vivek on Tal's behalf. My question is on, again, on going back to the gross margin trend especially in the second half. I know, Tim, you observed that typically the mix is slightly different, I believe cross-connect demand usually stronger than the first half, not as much in the second half. And I believe some of the optical wins could also give upside in the second half. So how should we look at the gross margin trajectory going in the second half of the year?

Tim Wiggins

Vivek, I think you got the right issues, potentially last cross-connect's higher optical sales, likely higher access sales tend to put some downward pressure on our margins in the back half.

Rob Pullen

But as Tim alluded to, Vivek, we have had stronger cross-connect sales in 1Q versus 4Q and it all depended on mix. We don't have great visibility in the second half of the year but what we do have visibility to, we’re trying to share with you. That's why we guided, in the strong margin performance in the first quarter flat to plus or minus a point or two sequentially. And as Tim expressly stated, we upped our previous yearly guidance to in the high 40s.

Vivek Arya – Banc of America/Merrill Lynch

All right. Two other quick ones on broadband data products, clearly a lot of strength. Can you give us some color around what the WiChorus contribution was in Q1?

Rob Pullen

We’re not breaking that out for competitive purposes. But it was modest, Vivek. It was more of initial revenue recognition. And we had more shipments than we actually recognized revenue and we likely have deferred revenue recognition towards the second half of the year.

Tim Wiggins

I think probably more importantly is the excitement that the product has generated with our customers. And internally, we see not only the ability to tap into the WiMax market but also you notice some announcements around new capabilities in GGSN, deep packet inspection.

We’re really excited about where this positions us with customers. So, I think as Rob said the revenue was modest early on. But we’re very excited about the portfolio and what we can do to help our customers with their issues.

Vivek Arya – Banc of America/Merrill Lynch

Got it. And just lastly, on your 8600, 8800 products, I understand wireless backhaul is probably big demand driver, but Rob maybe could you give us some color around in which regions are you seeing the most growth and who are you taking share from, which other competitors? Thank you.

Rob Pullen

Well, first of all, you’re right, we had a strong 8600, 8800 performance. And it was for at least two high level applications, Vivek and others. It was one mobile backhaul and two enterprise business services. Both those products are used in both the applications.

Next, we saw a stronger demand for both of them both in North America, as Tim said, as well as Europe the middle and the Middle East. We saw some softness in Asia-Pac and Latin America and South Africa. But we did see an uptick in both the Europe and Middle East and strong North American demand.

Vivek Arya – Banc of America/Merrill Lynch

And competitive aspects?

Rob Pullen

Well, it's the usual suspects. It's all the big guys out there.

Vivek Arya – Banc of America/Merrill Lynch

I understand. Thanks and good luck.

Rob Pullen

Sure. Thank you.

Tim Wiggins

Thank you.

Operator

And your next question comes from the line of Ehud Gelblum.

Tim Wiggins

Ehud, are you there?

Operator

Your line is open.

Ehud Gelblum – Morgan Stanley

Yeah. Can you hear me?

Rob Pullen

We can hear you now.

Tim Wiggins

Now we can, Ehud.

Rob Pullen

Now we can, Ehud.

Ehud Gelblum – Morgan Stanley

Perfect. Thanks. I appreciate it. Okay. A couple of quick questions. First of all, on the transport profit, again you mentioned that transport was down slightly. I think about $5 million from Q4 to Q1. And that profit was relatively flat, obviously on the mix shift from 7100 to 5500 this quarter.

Tim Wiggins

Yeah.

Ehud Gelblum – Morgan Stanley

Given -- you didn't actually say how much the mix shift was i.e. like what the percent of the revenue was transport of 7100 versus 5500. But sounds from the comments, that it was a significant mix shift. I would have therefore have expected the profit to have actually gone up a lot more.

Given that, does that mean that the delta between the 7100 gross margin and 5500 gross margin has come in a little bit and has narrowed a lot because that was, given the numbers that I would expected for those two -- I would expected a much stronger uptick in profit from the mix of the weight of the 7100. I'm wondering if 7100 is actually much higher and much closer to [6300] gross margins at this point than I would have thought. Am I doing the calculations wrong?

Tim Wiggins

No. It's a perceptive question, Ehud. What we saw was a -- what I hope was a temporary decline in our 7100 margin in the quarter, the margin is highly correlated to mix and both in terms of shipments. So when we ship new shipments with a lot of optical components early on, the margin tends to be lower. When we are shipping more transponders, the margin tends to be higher. So we have a mix shift that impacted the margin but on a sequential basis, we did see increase in our cross-connect business and a decline in the 7100.

Rob Pullen

But it was not significant as you allude to, Ehud.

Ehud Gelblum – Morgan Stanley

Okay. But without the numbers it's hard to follow that. Okay. Can I just follow the line of thinking, what was the thing that drove the 7100 down, was it more seasonal or was there just some pauses in particular customer spending?

Tim Wiggins

Well, I think, it’s, we still have a relatively small number of large customers and a growing number of smaller customers, so it's really just a function of, where we are in those product life cycles. We do expect to see growth as the year progresses.

Rob Pullen

And as I mentioned, we did add four new customers in both North America and Latin America in the quarter.

Ehud Gelblum – Morgan Stanley

I assume that those were added, but not recognized yet and those come later in the year?

Rob Pullen

No. Actually at least two of them were recognized and it should be, excuse me, I take that back, all four were recognized, but the larger demand should be towards the second half of the year.

Ehud Gelblum – Morgan Stanley

Okay. So all four then were actually in the run rate right now?

Rob Pullen

Yes.

Ehud Gelblum – Morgan Stanley

The last question is, Rob, you actually mentioned that you met with a customer at Mobile World Congress, explained to them your WiChorus story and they put on hold their decision on a competitors GGSN.

What was it that made them do that? What is the differentiating factor? How do you sell this versus the other GGSNs that are out there, given that most of them aside from (inaudible) and Cisco, come from a bay station vendor? So how do you differentiate it, what are -- in that particular case, what was the main feature that you think got that carrier, take a look at you?

Rob Pullen

Well, first of all, I only gave you one anecdotal story. I met with close to a hundred customers over that duration. It was a great show for us. But to go to your question, first of all, if you think about it, the biggest expense in a wireless network is for all the bay stations. And normally the packet core is bundled with the bay stations.

But in effort to reduce the biggest expense, having an independent packet core that interoperates with all the RAN vendors has a lot of value towards reducing net cell prices in the radio equipment itself.

So our first proposition is, we are an independent packet core vendor, not tied to any RAN. We'll interoperate with all your RAN vendors and help you drive down the biggest expense in your network. That’s the most compelling business reason.

Then when you look at our overall throughput, the -- all the internet demand of smartphones and tablets and so on, is having a big impact on the capacity of these packet core products.

And so, we have anywhere from six to eight times the overall capacity of some of the best-in-class competitors. We have over four times the packet data protocol throughput. We have some of the best deep packet inspection without degrading performance of the system. And our network management system with all of its analytics is, customers are saying it's some of the best in the industry.

Then when you couple that with Tellabs' expectations for high quality and reliability in our service and responsiveness, the customer was compelled based on that story to say, hey look, let's stop the orders that we have for this other competitor and let's go test Tellabs.

Ehud Gelblum – Morgan Stanley

Great. Thank you.

Operator

Your next question come from the line of Nikos Theodosopoulos.

Nikos Theodosopoulos – UBS

Hello. Can you hear me?

Rob Pullen

Yeah, sir. We can, Nikos.

Nikos Theodosopoulos – UBS

Okay. Just quick housekeeping question then a more detailed question, 10% customers, the normal two, anything changed this quarter?

Rob Pullen

No. We had the normal two. So we had two 10% customers, Nikos. But we improved our overall backhaul customer list, 240, so that was positive as well.

Nikos Theodosopoulos – UBS

Okay. All right. So that kind of goes in to my second question, can you within the broadband data business. Can you talk about how diversified or concentrated the revenue streams are and how you see that playing out over the next several quarters? Does it become more diversified or concentrated?

And as a second part to that question, the 18 mobile core trials and seven customers, how many of them right now, if you look at the group are 3G versus WiMAX? Thank you.

Rob Pullen

Well, so, first of all, Nikos, the concentration is a mix between 8800 and 8600 and we expect it to stay that way throughout the rest of the year. Remember, we have packet and our optical business as well. So, we would expect that to be better in the second half versus the first half.

Next as to the questions, the existing seven customers that are paying customers are all WiMAX right now. And of the 18 trials, we have 11 that are around WiMAX and seven that are GGSN 3G.

Nikos Theodosopoulos – UBS

Okay. I'm sorry. Let me clarify my prior question. What I meant to say was, the customer diversification on the broadband data product, revenue. Do you see it becoming less or more concentrated, because clearly I think North America is driving it? Just trying to get a sense of how broad and broader will that become over time?

Rob Pullen

You’re right, we had strong demand from North America but also in Europe. And Nikos, I mentioned 23 new customers placed orders for both the 8600 or 8800 products in the quarter. And so that's promoting much more diversification than we here to for had.

Nikos Theodosopoulos – UBS

Okay. Great. So it's just not one big U.S. customer driving this business, its broad based?

Rob Pullen

It's more broad base. But like I, we already shared with you, we did see stronger demand in North America than any other region. North America, we see as thawing out sooner.

Nikos Theodosopoulos – UBS

Okay. Great. Thank you.

Operator

Your next question comes from the line of Rod Hall.

Rod Hall – JP Morgan

Yeah. Hi, guys. Thanks for that. Just a quick question on the regional split of your revenues. If I think if I have done the numbers right, you had an absolute drop in X U.S. revenues. But you are talking about better revenues in Europe. And I wonder if you could just, and I talked to us about the, can you confirm that European revenues were in absolute terms better than they were last quarter?

And could you also talk about, how you see the run way for the revenue outside of the U.S., obviously, the proportion increased in the U.S. this quarter. Next several quarters, do you guys think there is potential for absolute revenue growth in these other regions? Is that what you expect and maybe if you could quantify that in terms of proportion of revenues from North America versus outside of North America that would be helpful?

Tim Wiggins

Okay. So let me give you a couple of numbers, Rod. If you look back at the Q1 of 2009, our North American revenues were $247 million and our international was $114 or $115 call it.

I’m going to give you December numbers, $255 for North America in December quarter and $134 for international, and Q1 was $275 and $105. So back to your question. So we saw absolutely increases in North American revenue for both periods year-on-year and sequentially. We saw increase, I'm sorry, we saw decreases in international revenue in both periods.

And that's a function of strong activity we’re seeing in North America right now and slower uptick in some of the areas we've historically been strong in. As we look for the balance of the year, I would expect to see that as a percent -- by the end of the year that our international business will pick up as we see strength there both in terms of growth of the individual segment revenues, but also as a percent of the overall total.

So we’re hoping to see continued strength in North America for the balance of the year but a strengthening in our international business as well. So I think by the end of the year expect these percentages to moderate somewhat.

Rod Hall – JP Morgan

And if you, in terms of products internationally, is it mainly the 8600, 8800 or are you seeing any interest in the 9100 products outside the North American region?

Rob Pullen

Yeah. It's all of the above including the 7100. It's 88, 8600, 9100, 7100, all of our growth products have demand outside of North America.

Rod Hall – JP Morgan

Okay, guys. Thanks a lot.

Tim Wiggins

You're welcome.

Operator

Your next question comes from the line of Michael Genovese.

Michael Genovese – Soleil - Elevate Research, Inc.

Great. Thanks a lot, and congratulations on the quarter. So you got new customers coming on for the 8800, success in the business services market, as well as backhaul market.

We've seen the last couple of years -- the last few years, where as we already talked about the second half of the year for backhaul has been weaker than the first half of the year. When you look at the 5500 and the 88 and 8600, how confident are you in growth in the second half of the year? Or how worried are you about kind of typical seasonality rearing its head again in 2010?

Rob Pullen

Well, first of all, we had our first year-over-year and first quarter comparison growth in the past two years. So that's a positive sign.

Second, we don't have great visibility in the second half of the year. What we do have good visibility -- decent visibility, not perfect is in the second quarter. And we're guiding up 10% to 12% which is our best guidance growth we've had in a couple of years quarter-over-quarter. We hope that this demand will continue, although macroeconomic events seem to be positive but we aren't giving yearly guidance for that reason.

Michael Genovese – Soleil - Elevate Research, Inc.

Okay. And then with a 5500, it's obviously not included in your growth portfolio. But can you talk about sort of the evolution of that product? How much of the 5500 going into networks today, is just pure T1 and how much is actually -- can actually do Ethernet over fiber backhaul?

Is there an argument to be made for putting at least some of the 5500 into the growth portfolio? And do you think a year from now, two years from now, three years from now, we’ll still be talking about the 5500 as a key component of the backhaul?

Rob Pullen

Well, that's a refreshing question I haven't heard in a decade, it is the 5500 in the growth portfolio? So let me answer your question this way. We did see actually sequential growth of 5500 revenue, which is positive.

It's driven dominantly by T1 demand whether that T1 is driven by enterprise, which is still out there today or mobile backhaul to get capacity out to a cell site.

Next, I wouldn't consider the 5500 in growth mode. Let me take a step back. You also asked Ethernet. There is a bunch of frame relay Ethernet, voice, video circuits that go over the Titan 5500 today, but they’re all encapsulated in a T1 equivalent that can manifest itself as a T1. It could be a DS3 interface. It could be optical carrier 3, 12 or 48 interfaces, which are all the interfaces on a Titan 5500.

I would not however put the 5500 in a growth mode or in the growth product category. We continue to invest to support the product, keep it relevant from a density and cost perspective. But I would -- the 5500 over its life cycle in a macro view, is in it's decline. I believe it will have a long tail and furthermore, I do believe, we’ll be talking about it in a couple of years as well but not as a growth product.

Michael Genovese – Soleil - Elevate Research, Inc.

Right. And then my last question, relative to the both the access and the managed access segments. I mean, they’re both at pretty low levels right now about $30 million. If you could speak about them separately, in terms of, what's more likely in each of those divisions for them to go to zero or for them to go to 60, if you could talk about access and managed access separately, that would be great? Thanks.

Tim Wiggins

Yeah. Let me touch on a couple drivers, let's talk about the access business where we have a great installed base or embedded base of products. But we also have an exciting platform that we think solves a lot of carrier issues.

So we certainly seen a decline in the business, as we refocused away from some of the big accounts and big contracts that we had. But we still continue to see a lot of interest in our portfolio and we’re excited about areas like the federal government and some of the other recent wins that we had there.

In the access, we’re also affected by the ONT -- the single family ONTs, which relate to a major North American carrier's rollout of fiber-to-the-home. We've seen relatively low sales. In fact, those sales come down significantly over the last two quarters. We expect that business to bounce back up and do expect to see a significant increase in this access revenue, as we go towards the end of the year.

In the managed access side, which really is made up of our 6300 and 8100, there’s kind of good news, bad news story there. The 8100 has had a long life, much like the 5500 and is really loved by our customers, both for its simplicity and the network manager.

What we are seeing is as those customers begin to migrate away from the product over toward our IP-based solutions in the 86 and 8800, the 6300 is also being impacted. I would expect that business to be, to continue somewhere in the area that it's in today.

So, short answer, we expect growth in the access business. We expect the managed access to be generally in this ballpark plus or minus depending on customer wins.

Rob Pullen

You know, I’d also add to give you a little bit more insight, for the managed access, which should be in decline over the life cycle, as Tim alluded to. It also is represented as lumpy. We are working on some big projects right now. If they hit that will even show a spike. We don't have perfect clarity whether it will hit but we could see some lumpiness in that overtime.

And my last point about the overall access business. Tim, I agree with everything, Tim said, but we should get some tailwinds to the access business due to the broadband stimulus as well.

Michael Genovese – Soleil - Elevate Research, Inc.

Right. Thanks a lot for that color was very helpful.

Rob Pullen

By the way, I mentioned to all of you over the past year and a half for two years, I expect this money to trickle out slowly. It's even under achieved my expectations. But I do expect it to be a tailwind for the industry.

Operator

Your next question comes from the line of Jeff Kvaal.

Jeff Kvaal – Barclays Capital

Yes. Thanks very much. Two questions. The first is on WiChorus, could you tell us a little bit about the deployment of WiChorus, is that primarily in WiMAX or is there some LTE wins, or 3G or how does the mix of the seven break down?

Rob Pullen

Yeah. I had mentioned this earlier maybe I wasn't clear. First of all, all the recognized revenue and any revenue that we’ve achieved so far is through WiMAX customers. That was our first release. When we bought this platform, we thought it was the best architecture from a hardware, software and management system perspective. But we always knew that we were going to evolve it into 3G and LTE.

Next, I had mentioned that, of roughly 18 field trials we have now, 11 are WiMAX and seven of them are 3G. So let's call the WiMAX 4G and seven of them are 3G GGSN trials.

We just released that software recently here and we’re now working on the LTE [TNS] gateway software to be released towards the second half of this year. And so all of our revenue is WiMAX, all of the trials are mix between 4G WiMAX and 3G, GGSN 11 and 7 respectively and we’re aspiring to get into LTE trials towards the second half of the year, when we release the software.

Jeff Kvaal – Barclays Capital

Okay. Thanks, Rob. So then, secondarily, on the gross margin, to the extent that I know visibility is a little bit clouded through the second half, but on other hand, the guidance implies a pretty big step down.

So I'm wondering if the gross margins are able to hold in in the second half, would that incremental gross margin dollars drop through to the bottom line or will there be higher OpEx associated with that, if you were going to?

Tim Wiggins

Yeah. Good question. Two things I wanted to cover, one is that our OpEx costs are not completely fixed, there is some variable components. So as we see higher revenues, higher margins than we originally thought and higher profitability, there is some variable piece around incentive compensation.

The second area is that, we are really excited about what we see in the market today in the mobile backhaul and the challenges that our customers face a relative to smartphones. And we decided to spend additional R&D to try and capture that. We think we got a good position in the marketplace and want to leverage that.

So as I mentioned at tend of my comments, expect us -- expect to see our costs up as a in absolute dollars, but we’re driving management below, keep the percentage lower than it is today as we go forward.

So two areas where we see some non-variable or non-linear costs, one is in incentive and the other one we want to accelerate some R&D investments to take advantage of these market opportunities.

Rob Pullen

And I would also add in agreement with everything Tim said, Jeff, but I’d also add, remember we’re feeling more bullish abut overall margin for the year. We’re moved it from the low to mid-40s to the high 40s plus or minus a point or two.

Jeff Kvaal – Barclays Capital

Yeah. Absolutely. And I guess then, Tim, maybe an appropriate way to think about the margins, would be to have it up to the balance of the year but then, I'm sorry, the OpEx would be up in absolute dollars for the balance of the year. But as a percentage of sales, you both would like to have it tick lower steadily?

Tim Wiggins

Exactly.

Jeff Kvaal – Barclays Capital

Okay. Okay. Okay. Thanks very much.

Tim Wiggins

You're welcome.

Operator

Your next question comes from the line of George Notter.

George Notter – Jefferies & Co.

Hi. Thanks very much. I wanted to ask about the dynamic, in terms of the product mix shift here, 57% of sales from new products, although it sounds like the 7100 was down sequentially.

And what can we expect, in terms of that mix going forward? Was there anything unusual about the strength in Q1 that drove that mix in new products higher or can we expect that to kind of stay in the current range or up as we proceed through the balance of the year? What is the thought there?

Rob Pullen

Well, first of all, George, the 7100 was only down modestly sequentially from 4Q to 1Q. But as we said, it was down. Next, I would expect this percent from growth products to maintain or hopefully improve throughout the remainder of the year.

George Notter - Jefferies & Co.

Got it. and then, again, just thinking about the profitability as we go through this mix shift, I mean, you've got products like the 8100 and 6300 tailing off, as you said earlier, getting cannibalized by the 8600, 8800.

Can you give us a sense for the delta in terms of gross margin across those products or at least at a minimum rank order them in terms of the gross margin impact as you go through that mix shift?

Tim Wiggins

Well, certainly it's a function of individual customers. But we've said I think frequently that and just give you a recap that 5500 has margins better than corporate average, 7100 in ONTs are below corporate average. The managed access business, 8100 is above, 6300 tends to be at or above 86 and 88, again, we are seeing at or above corporate margins. Now corporate margin is moving around. So, you have to keep a close eye on that.

Rob Pullen

It's come a long way from the low 30s a couple of years ago.

Tim Wiggins

Exactly. And then of course, we disclose the professional services margins and that run around the low to mid-30s. But it certainly has the pro services business has way less intensity around R&D spend.

Rob Pullen

And the only thing I think you left out, Tim, was the 9,000 is above corporate average margin so far as well.

Tim Wiggins

Yeah.

George Notter – Jefferies & Co.

Great. Okay. So no big changes there. Thanks very much. Appreciate it.

Tim Wiggins

You're welcome.

Operator

Your next question comes from the line of Simon Leopold.

Simon Leopold – Morgan, Keegan & Company, Inc.

Thank you. I wanted to get a couple of quick clarifications in and then a question. In terms of the guidance for the operating expenses, the low 140 range, is that comparable on a pro forma basis to the $134.4 this quarter?

Tim Wiggins

Yes.

Simon Leopold – Morgan, Keegan & Company, Inc.

Okay. Just wanted to make sure. And then in the past, you've talked about the 9000 series products contributing roughly $25 million in 2010. Just want to see if you’re still maintaining the view or if you changed it, how it's changed?

Tim Wiggins

Yeah. Well, what we said was that our valuation was based on an individual plan from them hitting those numbers. We’re hopeful that we can do significantly better than that. The rev rec is a little less, those are shipments by the way and the rev rec is a little less certain, it depends on future contracts that we don't have today. But we're still excited about the prospects and I think the numbers that Rob talked to you about, in terms of trials, so, is very encouraging to us.

Simon Leopold – Morgan, Keegan & Company, Inc.

Great. And then more of a thematic question. You had alluded to some other activities beyond just backhaul. You talked about enterprise Ethernet as a driver for 8600, 8800 sales.

If you could give us a sense of where you are in that cycle maybe more specifically, roughly what percentage of the data product sales are coming from that application as opposed to backhaul. And maybe kind of big picture it, of what you see over longer term trends looking out beyond this year perhaps?

Rob Pullen

Okay. Simon, so, first of all, the lion's share of the revenue is from the mobile backhaul application and to a lesser extent the enterprise services delivery. I don't have a breakout of the mix though. So I don't want to tell you the wrong information, but, so I’ll have to do it qualitatively.

Next, we see enterprise sales through service providers starting to fall out and pick up slightly. And we’re using, I would say in this order, 8800, 7100 and 8600 as the business services delivery vehicle, 8800 probably being the most aggressive then 7100, then 8600.

And it's both layer two and layer three VPN's, virtual private network applications. But even in the 7100, we have -- we sell both -- we have helped the service provider sell both wave link services, CPU to CPU interconnect using ESCON, FICON fiber channel through our 7100 and Ethernet, gigabit Ethernet services over wave lengths of light. So that's a product we are helping or that we use to help service providers sell to enterprises as well.

Simon Leopold – Morgan, Keegan & Company, Inc.

Okay. Great. Thank you very much.

Rob Pullen

Sure.

Operator

Your next question comes from the line of Chandan Sarkar

Chandan Sarkar – Auriga U.S.A

Hi. Good morning. I'm just wondering, Rob, if you could comment on the fact that both you and Adtran have put up such good numbers in March and this is despite the fact that both AT&T and Verizon came in significantly light on their CapEx spend for the quarter? Is this just a case where you have the right products or is there some other explanation?

Rob Pullen

We’re just lucky, Chandan. No, it’s, we have the right products at the right time for the right application. And we’re investing 18% as a percent of sales back in R&D. We’ve been fortunate through the downturn to have a strong balance sheet. And I can't comment for Tom and Adtran, but I do think that we're both running the corporations efficiently.

Chandan Sarkar – Auriga U.S.A

And just as a sort of a follow-up, in the past you gave a 40% number for percentage of revenues tied to wireless. I’m wondering if you could give a comparable number for the quarter just reported?

Rob Pullen

You know, we throw those numbers out, Chandan and they were good educated guesses. We didn't come with that number this time, but I'm sure it would probably be higher. It's hard to track that number.

You know, you’ve got -- you have wireline carriers delivering wholesale mobile backhaul applications using our 7100 Ethernet for example. And they don't always report to us what specific port is doing what application. So it's hard data to track. We were just giving you estimates.

Chandan Sarkar – Auriga U.S.A

Would you say that it’s more than half, though, Rob?

Rob Pullen

I think that’s probably a good guess, Chandan.

Chandan Sarkar – Auriga U.S.A

Okay. Thank you.

Rob Pullen

Sure.

Operator

Your next question comes from the line of Larry Harris.

Larry Harris – C.L. King & Associates, Inc.

Yeah. Thank you, and congratulations on the results for the quarter. I recognize that you haven't given third quarter guidance. And I think if I'm reading it correctly, is probably less revenue visibility for a second half than say for the second quarter.

But, if, I guess, if I look at some of the historical trends, the third quarter tends to be a little less than a second quarter maybe fewer sales in Europe, maybe higher access sales. Do you think we would see the same sort of trends present in the third quarter, any thoughts you might have?

Rob Pullen

Well, first of all, your whole front preface was correct. I mean, let me reiterate that our second half has less visibility than the second quarter, that's just a fact.

Next, in my earlier days here, we saw strong seasonality, i.e. a dip in the third quarter a decade ago. That same seasonality is it not as strong as it once was before and usually we're helped out with access during the summer months. And so, again, we just -- we haven't given guidance for the year because it's still spotty out there with detailed information.

Larry Harris – C.L. King & Associates, Inc.

Okay. Thank you.

Tim Wiggins

Thank you, Larry.

Operator

And your next question comes from the line of Todd Koffman.

Todd Koffman – Raymond James

Thank you. One last question on the access segment, in the March quarter it was $30 million and you said the OTN business was down significantly. Of the $30 million in the March quarter, what is the bulk of the product revenue in access in the quarter, is that a legacy loop carrier type products?

Rob Pullen

First of all, we haven't broke it out specifically by product, but what I can share with you is both upgrades to the embedded base and new system sales of fiber to the x were higher than ONT sales.

And it's dominantly driven by, the wireline carriers are -- have a trend of losing second lines and maybe even first voice lines. And most of them are trying to upgrade their high speed internet service to higher capacity, 25 meg service and above. And so we’re seeing demand for both new systems as well as growth on the embedded base.

Todd Koffman – Raymond James

Thank you.

Rob Pullen

Yeah.

Operator

And at this time, there are no further questions. Are there any closing remarks?

Rob Pullen

Thank you everyone. Good questions. We’re pleased with our progress. We’re happy with the quarter and looking forward to a positive second quarter. We continue to focus on the mobile internet and help our customers. So thank you very much and we’ll talk to you soon.

Operator

Thank you for participating in today's conference call. You may now disconnect.

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