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Executives

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

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

Analysts

Jonathan Kees - Capstone Investments, Research Division

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

Nikos Theodosopoulos - UBS Investment Bank, Research Division

Simon M. Leopold - Morgan Keegan & Company, Inc., Research Division

Ehud Gelblum - Morgan Stanley, Research Division

Richard Valera - Needham & Company, LLC, Research Division

Jim Suva - Citigroup Inc, Research Division

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

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

Michael Genovese - MKM Partners LLC, Research Division

Jeffrey T. Kvaal - Barclays Capital, Research Division

Todd K. Koffman - Raymond James & Associates, Inc., Research Division

Mark McKechnie - ThinkEquity LLC, Research Division

ADTRAN (ADTN) Q4 2011 Earnings Call January 18, 2012 10:30 AM ET

Operator

During the course of the conference call, ADTRAN representatives expect to make forward-looking statements, which reflect management's best judgment based on factors currently known. Forward-looking statements include, without limitation, statements as to the plans and terms of the transaction between Nokia Siemens Networks and ADTRAN, and ADTRAN's growth opportunities and the potential benefits of the transaction. However, these statements involve risks and uncertainties, including the successful development and market acceptance of core products, the degree of competition in the market for such products, the product and channel mix, component costs, manufacturing efficiencies, the risks that Nokia Siemens Networks and ADTRAN will not proceed with the transaction for any reason, and other risks detailed in our annual report on Form 10-K for the year ended December 31, 2010 and Form 10-Q for the quarter ended September 30, 2011. These risks and uncertainties could cause actual results to differ materially from those in the forward-looking statements, which may be made during the call.

Thomas R. Stanton

Phillis, do you have our first caller?

Operator

Your first call comes from the line of Paul Silverstein with Crédit Suisse.

Thomas R. Stanton

Phillis, let me -- we have comments, of course, that we want to make at the beginning of the call. So if we're still on, then let me start. First of all, good morning. Sorry about the confusion there, everyone. I'm Tom Stanton, and thank you for joining us for our fourth quarter 2010 (sic) [2011] conference call. With me this morning, of course, is Jim Matthews, our Senior Vice President and Chief Financial Officer.

I'd like to begin this morning by discussing our Q4 performance before we move on to our review of 2011. And I'll end with some comments on what we expect this year. As stated in our press release, ADTRAN achieved revenues of $175.3 million in the quarter, which brings the year to a record $717.2 million, an increase of 18% over 2010's total year revenues.

During the fourth quarter, as in the rest of the year, our growth was driven by our core product areas, which grew 32% over the fourth quarter last year, more than offsetting a decline in our legacy product areas. Both Carrier and Enterprise divisions benefited from these trends. Combined, our core product areas achieved $134.4 million in revenues, representing 77% of our company total.

Getting into a little more detail, our Broadband Access category achieved 49% growth over the same period last year. The Total Access 5000 platform and our Fiber-to-the-Node products both performed as expected, providing strong contributions.

This area benefited from meaningful growth with both domestic and international carriers. Our Internetworking category achieved its seventh consecutive record, with sales growing 37% over the prior year as we continue to refine our expanding domestic dealer base. This category also benefited from an increase associated with earlier service provider awards. From a product perspective, similar to recent quarters, this growth was broad-based and was positively impacted by growth in nearly all Internetworking product segments.

Optical access had a mixed performance with solid results in the Tier 2 and Tier 3 space, but this category was negatively affected by a slowdown with 2 Tier 1 wireless customers. Our 8000 Series of cell site gateways and our Optical Networking Edge products continue to move through the approval process at several Tier 2 carriers, and our Tier 1 approval with our OPTI line continued its progression as well.

HDSL revenues came in as expected, essentially flat with the third quarter of 2011. 2011 marked an excellent year for ADTRAN. Over the last 2 years, our core product areas have more than doubled, with these new areas now representing nearly 3/4 of our total company revenue, allowing ADTRAN to transition from its legacy product areas.

This growth has come from solid execution on multiple fronts. Our Carrier business was highlighted by solid progress in Tier 2 carriers, Tier 3 carriers, as we continue to introduce ADTRAN to this new market segment. Exiting 2011, this progress accelerated, and we left the year in a solid position for Broadband Stimulus projects and the potential for long-term build-out associated with the USF transition to Connect America.

Our Carrier segment also benefited from a substantial increase in revenues outside of the U.S. I know you are all familiar with our success in Mexico, but I'm proud of the fact that in 2011, we saw over 20% growth in every geographic region around the world.

Of course from a product perspective, Broadband Access led our company's growth with an impressive 65% total year growth. This segment was followed by Internetworking, which grew 36% for the year, a number consistent with the solid performance we have seen from this area over the last several years.

During this year we added over 300 new domestic dealers and increased our sales force, both of which we believe will be building blocks for the future.

For the total year, Optical Access category achieved another record revenue level by growing 25% as mobility upgrades drove demand in our carrier customer base. We continue to expect that recently introduced optical products will provide new opportunities for this category, as carriers upgrade bandwidth capabilities in both fixed and mobile networks.

The year also marked the acquisition of Bluesocket and the planned acquisition of Nokia Siemens Networks Broadband Access business. Both acquisitions have the potential to substantially enhance the long-term future of our company. Bluesocket brings market-leading technology to our portfolio, enabling us to increase our relevance and enhance our participation in a very high-growth component of the Enterprise business.

The NSN Broadband Access business, on the other hand, helps ensure our long-term success in our efforts to evolve ADTRAN into a global solutions provider. Although the outlook for our traditional customer base remains strong, it is still our belief that in the years to come, ADTRAN's growth will be influenced by our ability to expand our geographic presence and our relevance with Tier 1 carriers around the world. And although it is true we have seen some success with our current initiatives, the NSN Broadband Access business with its entrenched incumbency at large carriers outside of North America, will, without a doubt, substantially accelerate our initiatives and increase our odds for long-term success.

With the expected first year revenues of between $140 million and $180 million and operating cost profile well below its historic levels and the addition of a group of seasoned professionals with domain knowledge and relationships, we are very excited about the long-term possibilities.

For 2012, we expect the Total Access 5000 family and our Fiber-to-the-Node platforms will continue to grow across all carrier classes, driven by fiber deployments, Ethernet migration and higher-speed broadband requirements. We expect our Fiber-to-the-Node, Fiber to the Curb, GPON, Active Ethernet and Ultra Broadband Ethernet products will benefit from investment in bandwidth expansion, government and regulatory driven footprint expansion and Ethernet conversion initiatives spanning all carrier customer segments.

We also continue to expect our professional services capabilities will add incremental revenues in 2012 and beyond, as carriers seek cost-effective ways to accelerate deployments. We anticipate our continued focus on markets outside of the U.S. will add meaningful revenue growth in 2012.

We believe Internetworking will continue to maintain its current positive momentum with benefits from market share gains and new product offerings, such as our virtual wireless LAN offering.

During 2012, we believe we will continue to see the benefits of carrier optical deployments for bandwidth upgrades with acceleration in our Optical Networking Edge and cell site gateway products.

In summary, on a macro level, increasing competition, driving accelerating global broadband deployments and intensive upgrade to mobile infrastructure, channel expansion in our Enterprise segment, meaningful sales initiatives outside of the United States, government and regulatory initiatives around the world, the benefits of our planned acquisition of an NSN BBA business coupled with an innovative, diverse and expanding product portfolio lead us to be optimistic about the years ahead.

I would now like Jim Matthews to review our results for the fourth quarter 2011 and our comments on the first quarter of 2012. We will then open up the conference call for questions. Jim?

James E. Matthews

Thank you, Tom. Good morning, everyone. Revenue for the fourth quarter increased to $175.3 million compared to $165.3 million in Q4 of 2010. Broadband Access product revenues for Q4 2011 increased 49% to $74 million compared to $49.7 million for Q4 2010. This increase was primarily related to a continuing growth in deployments of our Total Access 5000 and Fiber-to-the-Node platforms.

Internetworking product revenues for Q4 2011 increased 37% to a record level of $43.1 million compared to $31.6 million for Q4 2010. Optical Access product revenues for Q4 2011 were $17.3 million compared to $20.2 million for Q4 2010.

Carrier Systems revenues for Q4 2011 increased 24% to $101.3 million compared to $81.7 million for Q4 2010. Business Networking revenues for Q4 2011 increased 30% to $45.2 million compared to $34.8 million for Q4 2010. Loop Access revenues for Q4 2011 were $28.8 million compared to $48.8 million for Q4 2010. HDSL product revenues for Q4 2011 were $26.7 million compared to $45.8 million for Q4 2010.

As a result of the above, Carrier Networks division revenues for Q4 2011 increased to $134.2 million compared to $130.3 million for Q4 2010. Enterprise Networks division revenues for Q4 2011 increased 17% to $41.1 million compared to $35 million for Q4 2010. International revenue for Q4 2011 increased 215% to a record $26.8 million compared to $85 -- I'm sorry, compared to $8.5 million for Q4 2010.

To provide the reporting of each of these categories, we have published them on our Investor Relations page at adtran.com.

Gross margin was 56.6% of revenue for Q4 of 2011 compared to 58.6% for Q4 of 2010. The lower gross margin in the quarter was largely attributable to higher services related revenue, including cabinet shipments and customer mix.

Total operating expenses were $58.1 million for the fourth quarter of 2011 compared to $58.4 million for the third quarter of 2011 and $52.1 million for the fourth quarter of 2010. The increase in operating expenses from Q4 of 2010 to Q4 of 2011 was primarily attributable to expenses related to the planned NSN broadband acquisition or access acquisition rather, amortizations in connection with the Bluesocket acquisition, Bluesocket operating expenses, increased staffing cost and Telcordia cost-related Tier 1 Optical Access opportunity.

Acquisition-related expenses, amortizations and adjustments related to Bluesocket and the planned acquisition of Nokia Siemens Networks Broadband Access business, net of tax, were $1.1 million for Q4 of 2011. Stock-based compensation expense, net of tax, was $2.4 million for Q4 of 2011 compared to $2.3 million for Q4 of 2010. All other income net of interest expense for Q4 of 2011 was $4.2 million compared to $3.9 million for Q4 of 2010.

The company's income tax provision rate was 31.3% for the fourth quarter of 2011 compared to 26.3% for the fourth quarter of 2010. The tax provision rate for the fourth quarter of 2011 included benefits from research tax credits, FIN 48 adjustments and favorable movements in state of apportionments. The tax provision rate for the fourth quarter of 2010 included benefits from recognizing research credits recorded retroactively for the entire year as a result of legislation during Q4 of 2010 to extend the research credits for 2010 and benefits from the employee stock option exercises.

Earnings per share, assuming dilution for Q4 of 2011, was $0.48 compared to $0.56 for Q4 of 2010. The inventories were $87.8 million at quarter end compared to $87.3 million at the end of Q3 of 2011. Net trade accounts receivable were $76.1 million at quarter end resulting in DSOs of 40.

Unrestricted cash and marketable securities net of debt totaled $476 million at quarter end after paying $5.7 million in dividends. Due to the book-and-ship nature of our business and the timing of near-term revenues associated with large projects, it is our policy not to give specific guidance for the quarter or for the year. However, we would like to give color to help you formulate your views on our near-term business outlook.

For the first quarter of 2012, we anticipate revenues will be in the range of flat on a sequential basis. Based on certain factors including customer mix and an increase in our services and related cabinet revenues, which we have mentioned before carry a lower gross margin but are accretive operating margins, we expect gross margins for the first quarter will be at the low end of the high 50s range percent to revenue as we saw in the fourth quarter.

We expect first quarter operating expenses will be in the range of third quarter 2011 levels plus incremental acquisition-related expenses and amortization of around $500,000 or so.

Also, as a result of delays and to extend legislation for research tax credits for the 2012 year, we anticipate our tax rate for the first quarter will increase to a rate of approximately 36%. We believe the larger factors impacting the revenue we'll realize for the first quarter of 2012 will be the following: the macro spending environment for Carriers and Enterprises; the adoption rate of our Total Access 5000 platform; professional services activity levels, both domestic and international; upgrades for mobile, broadband, infrastructure; and the timing of revenue related Broadband Stimulus projects.

Tom?

Thomas R. Stanton

Thank you, Jim. Okay, Phillis, at this point, we're ready to open it up for any questions there may be.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Nikos Theodosopoulos with UBS.

Nikos Theodosopoulos - UBS Investment Bank, Research Division

Just a couple of questions here. Maybe you guys can comment on, now that the year is done, what was -- how many customers you actually had that that were 10% customers and who they were, I mean, given the growth in international and Tier 1, Tier 2? Just trying to get a sense of how customer diversification has changed over the course of the year.

Thomas R. Stanton

Sure. That's a good question. Jim?

James E. Matthews

Sure, Nikos. Diversification has certainly, we believe, had a positive impact during the year. For the year, we see two 10% customers. And again, our policy is to comment only on those in the 10-K when we publish that.

Nikos Theodosopoulos - UBS Investment Bank, Research Division

Two 10% customers. Do you have like -- okay, so in terms of how big they were, are you going to wait for the K or can you give any color on that?

James E. Matthews

We'll wait for the K.

Nikos Theodosopoulos - UBS Investment Bank, Research Division

All right. And then on gross margin, you gave -- can you give some input as to there -- I mean, it was slightly down sequentially and I guess, as I look at the last 2 quarters, gross margin has and operating margin have both come down a little bit sequentially each quarter, and the services mix was part of the rationale behind the gross margin. But if it's accretive to operating margin, why haven't we seen the operating margin more stable? Can you give some color on that?

James E. Matthews

Sure, good question. So you may recall in Q3, we closed the transaction of Bluesocket. Okay. Now Bluesocket did bring on with its some operating expenses. We do believe that Bluesocket, at some point this year, will begin to become accretive, but that was certainly a part of the increase in OpEx and did impact our operating margins. And also, as we disclosed in the or supplemental information, we've had some acquisition-related expenses that it impacted the third and fourth quarters as well.

Nikos Theodosopoulos - UBS Investment Bank, Research Division

Okay. And then you mentioned gross margin next quarter would be low end to the high 50s. I mean, are we looking at something flattish sequentially again?

James E. Matthews

Something in that range, Nikos, is the way we think about it.

Operator

Your next question comes from the line of Mark McKechnie with ThinkEquity.

Mark McKechnie - ThinkEquity LLC, Research Division

A couple of questions related to Nokia Siemens, if you can. Still on track for an April close, I assume?

Thomas R. Stanton

Yes, we're still -- that's still what we're shooting for, yes.

Mark McKechnie - ThinkEquity LLC, Research Division

Got you. And you said some comments that I want to dig into a little bit on the call. You said that you gave the revenue range, but you talked about a dramatically lower operating expense level. Can you give us a sense how many employees or how you bring that down, I mean, and how many employees do you get from Nokia Siemens versus how many they had on close?

James E. Matthews

Well, the range that we're thinking about in the Nokia Siemens is somewhere between 300 and 400 employees that would come over. If we were to look at that business the way that it was operating, let's say, 2 years ago, which is when we really first started looking at the business, the number of employees was in excess of 1,000. So that may give you the sense of what we're talking about.

Mark McKechnie - ThinkEquity LLC, Research Division

Got you. And so do you think when you bring them on board and I guess for the June quarter, September, I know you're not giving guidance out there, but that this is going to be a profitable division on the operating level when it comes over?

Thomas R. Stanton

I think that there's a -- to be honest with you, I think it's a -- there are some that things we want to do on the cost, on the product cost front that have some stages associated with them. I think thinking about it in that kind of -- in that area is the right area to be thinking about, but I can't tell you explicitly if it will be slightly above or slightly below.

James E. Matthews

But for the year, as we said on the conference call that announced the acquisition, we do expect the first full year after the close of the acquisition will be neutral in terms of diluted EPS. So that would relate to operating income for the particular acquisition that we're talking about.

Mark McKechnie - ThinkEquity LLC, Research Division

Got you. Okay. A couple other questions, separate from Nokia Siemens. That's helpful, though. On your 2012 outlook, do you have for your core business kind of a base level model of how -- what type of growth you're planning for, for 2012?

James E. Matthews

Well, we typically don't give guidance for the year. We do expect organic growth but again, we do not give guidance for the year.

Mark McKechnie - ThinkEquity LLC, Research Division

Got you. Okay, and one question. I want get a sense for how you think about -- you had slowdown at your 2 big Tier 1 operators here in calendar '11. Of course, AT&T obviously had some -- a slowdown in spend relative to their T-Mo acquisition. What kind of signs are you seeing out of that customer relative to is there going to be a return to some sort of level of spending, a bigger picture or maybe even a catch-up? Or how you're thinking about planning your products for the transition that happened there and the resolution?

James E. Matthews

I would think that, that -- I think the general tone that we hear, and I don't want to talk specifically about any customer, but I think the general tone we hear is that in the larger customers is generally positive for this year. Having said that, we're really not going to try to plan for a significant change in the overall environment. And if that does happen, it will be kind of a positive upside to us, I think. So when we talk about upward trend on our legacy products or core product areas or -- that's really without adding any significant bump in those large Tier 1 carriers, although there is that potential.

Mark McKechnie - ThinkEquity LLC, Research Division

Got you. One last housekeeping question, then I'm done. Your tax rate going up there in December and March to 36%. What do you see for the full year? Is that a onetime event in March or is that going to be the new level?

James E. Matthews

Well, it really depends on when legislation is passed on the R&D credit. If you look back to 2010, you might recall that the legislation was actually passed for the 2010 year in the fourth quarter of 2010. So there was a retroactive impact. So whether or not that happens this year, we don't know, we truly don't know. The 36% represents our statutory tax rate, less the usual incentive credits that we get from the state of Alabama and less deductions for domestic manufacturing as well. Those are generally the amounts that make up the net rate of 36%. Now going through the year, from time-to-time we do see adjustments or benefits from FIN 48 adjustments, but those are very difficult to predict in terms of timing. And also, as we saw a little bit last year, we do see some level of benefit in terms of tax benefit from the exercise of employee stock options. And again, those are very difficult to predict as well. So we will typically have some variation in our tax rate from quarter-to-quarter. But from what we can see today, 36% is a good assumption going in for Q1.

Operator

Your next question comes from the line of Sanjiv Wadhwani with Stifel, Nicolaus.

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

A couple of questions. On the international side, obviously a nice uptick, both sequentially and year-over-year. I'm just curious, last quarter, that is third quarter, I think more than half of your revenues came on the international front outside of Telmex. Any color this quarter as to what the non-Telmex contribution was on the international side?

James E. Matthews

That's not a number that we break out, Sanjiv, but...

Thomas R. Stanton

I think we can tell you that we saw positive movement in all of the regions. So I mean, we really -- and I mentioned in my notes that we saw over 20% growth. And I would say that we actually saw that growth accelerated in all of the regions in the second half of the year versus the first half of the year. There is some sense of it, yes.

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

Okay, that's helpful. And then second question, also in the third quarter, I think you had a little bit of an inventory buildup at one customer, and I think that was supposed to be set up for one quarter issue. Just confirming that that's behind us, and they're sort of back to normal with that customer?

Thomas R. Stanton

Yes, that is behind us, and we're back to normal.

Operator

Your next question comes from the line of Rich Valera with Needham & Company.

Richard Valera - Needham & Company, LLC, Research Division

Guidance, but in the past you've talked about kind of I think a target of at least sort of double-digit organic revenue growth and certainly, I think you exceeded that in 2011. Any color you're willing to give on 2012? I know it looks like you would have been at kind of a mid-single digit year-over-year growth rate in Q4 and Q1 based on your guidance. Is there any reason we should think of perhaps an acceleration in the back half of the year as maybe some of these inventory issues are behind us?

Thomas R. Stanton

Do we -- let me answer this by talking about the normal profile and what we expect to happen this year. We normally start off kind of slower in the first quarter and accelerate in the second and third quarter, and that's been our historical trend. We fully expect to do that again this year and that has to do, not only with the seasonal aspects of the weather, it has to do with the project timing of projects that we have engagement in today. So we would expect to see that acceleration through the year and then you typically see seasonal downtick in the fourth quarter. At this point in time, we don't see any change to that historical profile.

Richard Valera - Needham & Company, LLC, Research Division

Okay, so understanding you would expect to see some maybe I'll say typical seasonality, I'm not sure if that's what you're saying. But that would imply improvements in year-over-year growth rates as well, is that a fair assumption?

Thomas R. Stanton

You mean, as we go through the year, Richard?

Richard Valera - Needham & Company, LLC, Research Division

Yes, exactly, as you work...

Thomas R. Stanton

That's the way we think about it.

Richard Valera - Needham & Company, LLC, Research Division

Right. Okay, that's helpful. Then on the Latin American business, last quarter you gave us an update on your expectations of how that the large opportunity in Mexico would sort of play out. And I think you expected some continuation into 2012. Can you give us an update on what you're expecting from that large customer in 2012?

Thomas R. Stanton

Sure. I think that the one caveat here is the variability in the ordering patterns of that customer, which can be quite large. Having said that, I think the big news for us was -- coming into this year is that we were awarded the Phase 3 portion of their build-out, which is the next movement forward. We had been working under Phase 2 now for about a year or so. And we expect that to start shipping at some point this year. So we expect to continue on with Phase 2 through this year with both some product shipments, but more and more service-related activity as we bring that network up. And then we expect to start shipping Phase 3 this year at some point from a product perspective, and then you'll see that product shipments go through this year and through next year and then the ongoing services associated with bringing up Phase 3 through next year as well.

Richard Valera - Needham & Company, LLC, Research Division

Great, that's helpful. And then on the ultra broadband product, I think you've talked about having a pretty healthy pipeline of opportunities internationally on that. Any update on what you're expecting in 2012 from that new product?

Thomas R. Stanton

We're still expecting good things. I would say the progress is still very strong. In fact, it's picking up in the -- as carriers figure out exactly where they want to use it and what the capabilities are. I would still say we're still early in that process and kind of more second half of this year than first half is what we're thinking.

Operator

Your next question comes from the line of Todd Koffman with Raymond James.

Todd K. Koffman - Raymond James & Associates, Inc., Research Division

Can I get a sense of how big the Bluesocket contribution was? I'm guessing that's in the Internetworking segment, which looked good.

James E. Matthews

That's right, Todd. This is Jim. So it came in the range of the low single-digit million dollars in terms of revenue for the fourth quarter. And it was slightly up from the third quarter.

Todd K. Koffman - Raymond James & Associates, Inc., Research Division

When you talked about expanded dealer channel, was that related to the Bluesocket product offerings?

Thomas R. Stanton

What I was talking about was not related. We did see some expansion in -- because of the Bluesocket dealer base coming onboard, but majority of that expansion was from organic activity that's been going on for multiple years. We've actually brought that number on or more now probably over the last 4 years as we continue to refine that base. And I would say from a Bluesocket perspective, maybe one of the more positive pieces is not so much that the Bluesocket dealer base comes on board, which I'm very glad they have, but the fact that we are now able to open up a lot of our dealer base to being able to sell the product, which is a real shot in the arm for the distribution of that product.

Todd K. Koffman - Raymond James & Associates, Inc., Research Division

Just one last one. In the Optical Access segment it was down pretty sharply. How much of the Optical Access business you're doing is Tier 1 versus Tier 2, Tier 3?

Thomas R. Stanton

Well, less this quarter than the previous quarter without a doubt, because that's really where we saw the downtick. If you look at the Tier 2s and Tier 3s, they actually did pretty good. But the reason downtick and probably more in one Tier 1 than the other. So in aggregate, when that number gets -- you're kind of getting a baseline right now of kind of Tier 2 and Tier 3 activity because they were the larger customer base in the space. And when it goes up from here, it's usually driven more by the Tier 1.

Operator

You're next question comes from the line of Jim Suva with Citi.

Jim Suva - Citigroup Inc, Research Division

I had 2 questions. The first is, have there been any change to the order patterns or the visibility given the removal of the pending M&A out there? I guess everybody would say specifically regarding AT&T and T-Mobile. Just kind of your view on the order patterns and visibility there. And the second question is on your operating expense. Can you give us some guidance for SG&A and R&D given the Bluesocket integration? And does that include some costs associated with M&A or excluded? Just so we know and can help model going forward.

Thomas R. Stanton

Sure, thank you. Let me cover the M&A portion with the Tier 1s. First of all, talking about a specific customer is troublesome. But in the Tier 1 space in general, we have not seen any change in behavior. I mean we're hearing the same chatter about what could happen and what may happen. I would say our contacts are more positive this year than they were coming into 2011, but no real discernible change in behavior at this point. And Jim, do you want to cover the second piece?

James E. Matthews

Sure, Tom. So Jim, on your second question in terms of the OpEx view for Q1, we related that really to our Q3 2011 levels. And if you look back, our GAAP operating line was $58.4 million. And so we're expecting that for Q1 plus, as I said on my notes, about another $500,000 as it relates to activities primarily with NSN BBA, okay. Now in terms of your comment about Bluesocket, the integration-related costs for Bluesocket are really pretty much over. But there are some amortization costs and those are detailed in our supplemental information that we disclosed with our earnings release. Does that help?

Operator

You're next question comes from the line of Simon Leopold with Morgan Keegan.

Simon M. Leopold - Morgan Keegan & Company, Inc., Research Division

I wanted to touch on a couple of things. One is just to get an update on your perspectives for the stimulus program, how you see that shaping up. What was it in the fourth quarter? How do you see it as a contributor to the first quarter? And what's your outlook from a stimulus perspective for 2012?

Thomas R. Stanton

So I think -- we started talking maybe in the third quarter or so of about it kind of being in the single digit millions and expecting it to increase incrementally from there, albeit at not a big change into the fourth quarter, and that's exactly what happened. So it actually did pick up again in the fourth quarter. We again expect to see another pickup in the first quarter. I would say probably the rate of change going into Q1 is we're interested in seeing what that is. We are hearing a lot more activity, a lot more people are getting fiber where fiber was the issue, a lot more people are getting the go-aheads on their deployments. So we're feeling that momentum pickup but -- and expect a stronger Q1. And I would expect to see that rate of change accelerate going forward into this year.

Simon M. Leopold - Morgan Keegan & Company, Inc., Research Division

And do you have kind of an expectation for the full year stimulus contribution?

Thomas R. Stanton

We've been very reluctant to give that number, only because it's -- there are so many variables associated with that including whether or not they take the money and there are, of course, still several awards, I mean, significant percentage of awards that haven't been made yet. So we haven't, other than to say would be meaningful to the company and we still would stick by that.

Simon M. Leopold - Morgan Keegan & Company, Inc., Research Division

Okay. And then shifting over to the international business. Clearly this was a great quarter, and it sounds like you're trying to tell us that it's more than just Telmex that you had, good growth across the board. I want to see if there's a metric you can give us to help us understand the breadth and sustainability of the international business, particularly in light of the pending Nokia Siemens acquisition, whether that potentially creates a pause of customers waiting to maybe make some purchases until that deal closes. So I'm just trying to get a sense of linearity of international during 2012.

Thomas R. Stanton

Well let me start with 2011, I think was actually very linear with the exception, so where we saw any swings of meaningful size with Telmex and I would say, in general, they were actually more linear than we would have expected them through the year. And we don't see a change there. It's a general positive trend, similar to the positive trend that we have been seeing in Internetworking now for some number of years. The overlap between our existing customer base including all of our global customers in the NSN BBA customer base is very, very small. So to the extent that we don't expect any delays and in many cases, we're really talking about apples and oranges as far as where whether there could be delay.

Operator

Your next question comes from the line of Jonathan Kees with Capstone Investments.

Jonathan Kees - Capstone Investments, Research Division

Just had a couple, I wanted to maybe dig down a bit more. The inventory still was pretty high relative to, I guess last quarter. Just trying to get an initial idea in terms of why that was just a more work in progress or was it more just finished goods.

Thomas R. Stanton

Jim, you want to...

James E. Matthews

Jonathan, Jim here. Inventories have gone up. Obviously, they've begun to moderate as they did between Q3 and Q4. It has increased coming through the year. A lot of that really relates to our services-related business, okay, which is, at times, can be rather inventory intensive. As we look at Q1, we're kind of expecting ending up Q1 with the same sort of levels of inventory. So that's kind of how we are looking at it at this point. We do expect as we go through 2012 that we will see improving turns on our inventory overall. But again, we are dealing with the services business now that does require us to carry more inventory.

Thomas R. Stanton

And let me add a little color, if you will, to that. So what we have done as we've gotten into the service business, things like cabinets and having them ready for shipment, buyer to orders actually coming in, become important because carriers will have large work crew sitting there waiting for you to finish your particular piece. So we actually saw a buildup of that. We saw actually an increase in shipments in the fourth quarter with that type of activity. And we are talking about the fact that we would see the ramp-up of project-related activity in Q2 and Q3 of this year, and a lot of what we're doing today is associated with that. So I do think we'll be able to get inventory down over the long term. But at this point in time with where we are with customer activity, we really just felt it was prudent to make sure that we had product on the shelf.

Jonathan Kees - Capstone Investments, Research Division

Okay, so that makes sense. Basically you've got some business that's in -- upcoming business here and you've got -- you want to have the right products inventory to them to satisfy that business, so that makes sense.

Thomas R. Stanton

Yes, that's exactly right. If you remember, we actually got hit with some expedite charges periodically through the last couple of years where we were trying to catch up. And we're really trying to get ourselves in a position to where we don't have to have that risk, not so much with the cost, I mean, that is an issue. But really whenever you're doing that, there is the chance you won't be able to ship, and that puts the customer in a very difficult situation. So we're really trying to take a different approach to that.

Jonathan Kees - Capstone Investments, Research Division

Okay, great. My other question is I just wanted to get in terms of the Ericson partnership. Is that still something that can be a driver in 2012 or is that, or is that taking more of a backseat now?

Thomas R. Stanton

Everything that has been in place remains in place with that relationship. I think the real key is kind of where the customer, the end customer for that is going to drive their network and at what speed. That's always been the most difficult piece. The Ericsson piece itself, a great company to work with and really no issues.

Operator

Your next question comes from the line of Greg Mesniaeff with Kaufman Bros.

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

Question on the Tier 2 and Tier 3 color you gave on the Carrier business, mainly that it was fairly robust relative to the Tier 1 customers. How much of that was just organic growth and how much of it was market share gains against competitors? Any color you can give on that?

Thomas R. Stanton

Yes, well, let me -- first let me give you the difficulty in that because there are many customers, especially I'm more talking about Tier 2s where we are approved with other vendors and as to whether did I ship more in that quarter than the other vendor? That's probably easier to say, but was it a market share shift or was it just the markets that now we're improved at a faster rate, the particular regions I would say. So having given you that color, we do believe we picked up market share at Tier 2s. There's no doubt that we picked up market share in the quarter at Tier 3s, because that's a segment that was fairly new to us and we had no incumbency. So trying to say what was what is difficult rather than to say we think we probably benefited from both.

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

Got you. Okay, now it's very helpful. And then one other question. As you look further out into 2012 post the NSN acquisition after it closes, what kind of sales and marketing infrastructure do you foresee for ADTRAN globally in terms of a direct sales force vis-à-vis indirect distributors? I mean, how is your current structure going to change? And what kind of implications could that have for the OpEx?

Thomas R. Stanton

I think, well first of all, the numbers that we're talking about transitioning, which is in the 300 to 400 range includes what we believe to be the required sales component for that business as well as the engineering and all of the other pieces. So our expectation, at least for a reasonable period of time, so I'll just throw out there kind of a 12-month period of time, would be that 300 to 400 range would be a range that we would be able to -- from an SG&A perspective, be able to maintain as we transition the business and as we start seeing growth come out of it. As far as the actual channel itself and the makeup of the channel is very similar to what we do for their own products which is we -- there's a mixture of partners and direct sale, as I would say, the NSN piece is probably more skewed towards direct than we are. But in general, I would still say that the makeup of the 300 to 400 would be what we would expect to take on with no really significant growth past that.

Operator

Your next question comes from the line of Jeffrey Kvaal with Barclays Capital.

Jeffrey T. Kvaal - Barclays Capital, Research Division

Could you help us a little bit with the drivers of the gross margin trajectory over the course of the next few quarters? Sounds as though you're expecting from services contracts to ramp up so that we should be careful to model the gross margins to be ticking down a little bit over the course of 2012?

James E. Matthews

Jeffrey, this is Jim. Not necessarily. And again, we're talking organically at this point. It really depends on the mix or whether or not there's any further mix shift between hardware versus services-related business, I should say, right? So the way we think about 2012 in terms of gross margin is kind of where we are now in that range. But again, whether or not we end up there is going to be based on whether or not we see any larger shifts towards servers than what we anticipate now in terms of overall mix, okay?

Jeffrey T. Kvaal - Barclays Capital, Research Division

Yes. Okay, good. Actually that's better than what we had thought. So secondly, as far as NSN goes, the inorganic piece of that, I typically think of NSN overall as having a gross and operating margin structure that is dramatically lower than where you are. To what extent or how quickly do you think you can get that up to the corporate average or in the vicinity of the corporate average, maybe is a better way to put it?

James E. Matthews

Let me start with that. I understand where your perspective is coming from and I would tell you that if I was bringing on more than 1,000 people that your perspective would be right for this business as well. So I think maybe one thing that can easily get lost is the fact that what we're bringing on is not the business as it was operating in the operating model that had traditionally benefited while it was under the NSN piece. It will take us some time to get the gross margins where we would like them to be. We absolutely will start right out of the gate moving on that. And we're thinking about roughly a 12-month period of time to get everything where we want them to be, although we -- there are some stairs and steps in both in operating level and from a gross margin level, and I would say more from a gross margin level that we'll see throughout that first 12 months. We'll see a benefit in the first 30 days and then we'll see another benefit probably 6 months into it. Does that answer your question?

Operator

Your next question comes from the line of Michael Genovese with MKM Partners.

Michael Genovese - MKM Partners LLC, Research Division

Hey, guys, I appreciate the comment about no change in order patterns, noticeable discernible changes in the Tier 1 market. Yet it does seem like an Optical Access. You obviously referenced something with lower buying from 2 Tier 1 customers there. I'm just wondering if you could give us more color about -- is that a temporary phenomenon, if you expect that to come back, more maybe about if new products are needed to sort of reaccelerate that optical backhaul business, any color would be helpful.

Thomas R. Stanton

Yes, sure, my comment was more probably in the guidance of positive bias and was there any type of rush to repurchase versus maybe just a normal uptick in activity that we would expect. I will tell you it's early the quarter, but I would -- but our feeling is that we would see things return on the optical space to a more normal levels and that the Tier 1s would be a large percentage of that return to normal levels. My other comment was really just more of are we seeing any type of dramatic uptick in ordering patterns? And I would say no.

Michael Genovese - MKM Partners LLC, Research Division

So just to clarify, obviously when you're talking about this quarter, that's the same platform that's underperformed last quarter. You're saying that in the early returns you're seeing, I think, back-up perhaps in the first quarter?

Thomas R. Stanton

Although I probably really shouldn't be commenting on the first quarter and I will tell you we are, what, 2 weeks into first quarter, but the answer to your question is yes.

Operator

Your next question comes from the line of Ehud Gelblum with Morgan Stanley.

Ehud Gelblum - Morgan Stanley, Research Division

A couple of round questions I had. I know you're not breaking out your main 10% customers. But can you give us a sense as to what the breakdown this quarter look like between all Tier 1s and Tier 2s, Tier 3s and how that rough split compared to Q3 when you've talked about it? But I just kind of hear some sort of quantitative...

Thomas R. Stanton

I mean, Jim, I'm going to leave that to you.

James E. Matthews

Well yes, I mean that's...

Ehud Gelblum - Morgan Stanley, Research Division

Maybe a growth rate of each, sequentially.

James E. Matthews

Well, we had a sequential decline in revenue overall and we talked about the call at least on the optical piece, something about being related to Tier 1.

Thomas R. Stanton

And then -- and if you look at that and if you also look at the HDSL business, which was basically flat, this should kind of give you a sense, I would think.

James E. Matthews

And also you saw a sequential decline in Broadband Access. A lot of that really relates to one sort of Tier 2 carrier who's deployed a meaningful amount of gear this year, okay? So that certainly moderated in the Q4. Does that answer your question at all?

Ehud Gelblum - Morgan Stanley, Research Division

Yes, actually very helpful. And just so I know the -- for purposes of discussion, CenturyLink is a Tier 1?

Thomas R. Stanton

They are Tier 1.

James E. Matthews

They are Tier 1.

Thomas R. Stanton

And what we have is we have multiple Tier 2s that are, as you know, have very public projects that are going on, that have very definitive timelines. And I would say that in all of those cases, they behaved exactly the way we expected them, so I think the communication was very good. But we did see a downtick at the wireless Tier 1 carriers, as I mentioned in my notes, for optical.

Ehud Gelblum - Morgan Stanley, Research Division

Okay, and that brings me to my next question. The spending on Telcordia, which I believe is also related to Optical Access and perhaps wireless, how -- can you quantify how large that was in the OpEx this quarter? Was it constant with Q3? And are we done with that spending so that it will come back down again in Q1?

James E. Matthews

I think we're done now. We don't expect a significant spend in Q1. I think we did have a spend in Q4, it may be slightly down from Q3, but we had spend in both quarters and they were -- they were things that we would manage it.

Ehud Gelblum - Morgan Stanley, Research Division

Okay, but the size of that, was that roughly -- can we get a sense as to how big that was? So we should a step function down in OpEx all else being equal, it usually isn't. But that piece will come down. Was that roughly $1 million or not?

James E. Matthews

Well yes, I hate to get that granular, Ehud, but perhaps I can come back to the sort of guide that we gave on Q1 OpEx, okay? And we tied it pretty much to our Q3 levels of $58.4 million with a $500,000 incremental add for NSN BBA activities.

Ehud Gelblum - Morgan Stanley, Research Division

In that $58.4 million?

James E. Matthews

In addition to the $58.4 million.

Thomas R. Stanton

So the $58.4 million included some integration costs, which will actually slightly increased by that $0.5 million or so that Jim is talking about. If you look at the core OpEx, we're still expecting it to be basically flat and then we're talking about an incremental add either for Bluesocket that we saw in Q3 or other incremental cost on top of that kind of flat Q3 normalized rate for the core business or for the ADTRAN business.

Ehud Gelblum - Morgan Stanley, Research Division

Okay, why wouldn't it come down from this Telcordia stuff coming off?

Thomas R. Stanton

The Telcordia stuff will come off but there are things that come in. I mean I think it was just Telcordia -- I mean I have to say -- there are just things that happened in Q1 that happen every year. And just in aggregate, that's where we think things will be.

Ehud Gelblum - Morgan Stanley, Research Division

Okay, so the Telcordia expenses were related to a deal that you have, a deployment that you have.

Thomas R. Stanton

Yes, right, with one wireless.

Ehud Gelblum - Morgan Stanley, Research Division

With wireless, and I think that played Optical Access. When do you expect that to hit the P&L, the Q2 event, maybe it's a Q3, Q4 event?

Thomas R. Stanton

We're hoping to see maybe the first pieces of that in Q1. I don't think it will not be a big piece in Q1 but of course, any time you ship the first thing of anything to a Tier 1, you're happy because that means you've gone through a lot of the gates. So the first piece of that we would expect in Q1 and see a ramp-up from there. I would tell you that it's a Tier 1 and they -- the schedules do shift. That's our current expectations.

Ehud Gelblum - Morgan Stanley, Research Division

How -- is this a 2 or 3 or 4 quarter event or do you think this is wrapping to a sustainable multi-year deployment that we hear FTTX business at Qwest had been first couple of years?

Thomas R. Stanton

We would expect it to be a multi-year type.

Ehud Gelblum - Morgan Stanley, Research Division

Okay. Can you comment a little bit about the competitive environment? I guess in the U.S., your main competitor will be Calix in the Tier 2s, Tier 3s and internationally now that you're doing so well there, I'd imagine you're running the Huawei a lot more than you were the past. Is there a price aggressiveness anywhere between either of those 2 customers and how does that play into what you're seeing?

Thomas R. Stanton

Yes, I would say there's price aggressiveness. I think in the broadband, I mean, when we really started entering the Tier 3s probably as much as the Tier 2s. I think that you saw people trying to defend their ground that they had and that led to us being aggressive in order to kind of grab some footprints and market share. And I would say it's probably more -- less of a Huawei thing than other vendors. But yes, the answer to your question is yes. We see price aggressiveness in the Broadband Access business. We have it for some time. It probably has accelerated over the last year or so as we've really started getting some traction. But it's nothing that I would eventually view as being out of control or anything or really out of the normal than we would have expected.

Ehud Gelblum - Morgan Stanley, Research Division

Okay, great. And 2 other quick questions. At what point will you know how many employees are actually getting from NSN? I believe you made offers to, I think you said close to 400. How do you know what -- how many you'll end up with?

Thomas R. Stanton

It will be towards the end of this quarter. As far as the exact timing is when the offers go out, I'm not really sure. I don't think the exact offers have actually gone out yet, although we have talked to many, many of the employees. And then there was a period of time, I think it's 30 days or so. So if you think about kind of mid-February-ish where they go out and then 30 days for a response, it's towards the end of March.

Ehud Gelblum - Morgan Stanley, Research Division

And then finally, can you give us a sense as to how large services has now become as a percent of the total or at least how much...

Thomas R. Stanton

It's still less than 10%. It actually grew in the quarter, but it's actually less than 10%.

Ehud Gelblum - Morgan Stanley, Research Division

Okay, but it was up sequentially?

Thomas R. Stanton

It was up.

Ehud Gelblum - Morgan Stanley, Research Division

Has it been up every single quarter this year?

Thomas R. Stanton

Probably. I would think so, but I'll leave it to Jim. Do you know?

James E. Matthews

Ehud, I think so. I don't have every quarter in front of me at this point, but I think so. I'm not sure though.

Thomas R. Stanton

Phillis, at this point, I think we're just about done, so this would be our last question.

Operator

Your final question comes from the line of Larry Harris with CL King.

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

Just a couple of questions here. Looking at the NSN transaction and the euro having declined, does that affect any of the economics of the transaction?

James E. Matthews

So Larry, this is Jim. So yes, a large portion of the revenue is based in euros. There are a portion of the revenues that are U.S. dollar-based but again, the larger portion is euros. In our planning and integration, we will be building in natural hedges coming from the supply chain. And also if you look at our OpEx base, it's largely euro-based as well. So we plan to have a substantial amount of natural hedges built into where that will certainly mitigate any fluctuations from quarter-to-quarter in the value of the euro.

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

Understood. And the other question is with respect to HDSL. You mentioned that was pretty flat here this quarter. Would that be your sort of expectation going into 2012?

James E. Matthews

Our expectation are to see levels somewhat consistent although there'd be some level of variation from quarter-to-quarter, but some bit of a consistency with Q3 and Q4 levels on HDSL is the way we think about it. But certainly, over the longer term, HDSL will continue to decline

Thomas R. Stanton

Thank you, everyone, for joining us on our call today, and we look forward to talking to you again in the quarter.

Operator

This concludes today's conference. You may now disconnect.

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