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REFINITIV STREETEVENTS
       EDITED TRANSCRIPT
       ADTN.OQ - Q4 2020 ADTRAN Inc Earnings Call

       EVENT DATE/TIME: FEBRUARY 04, 2021 / 3:30PM GMT

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©2021 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written
consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

FEBRUARY 04, 2021 / 3:30PM, ADTN.OQ - Q4 2020 ADTRAN Inc Earnings Call

CORPORATE PARTICIPANTS
Michael K. Foliano ADTRAN, Inc. - Senior VP of Finance, CFO & Corporate Secretary
Thomas R. Stanton ADTRAN, Inc. - Chairman & CEO

CONFERENCE CALL PARTICIPANTS
Bala Raghav Reddy Goldman Sachs Group, Inc., Research Division - Research Analyst
George Charles Notter Jefferies LLC, Research Division - MD & Equity Research Analyst
Paul Jonas Silverstein Cowen and Company, LLC, Research Division - MD & Senior Research Analyst
Richard Frank Valera Needham & Company, LLC, Research Division - Senior Analyst
William J. Dezellem Tieton Capital Management, LLC - President, CIO & Chief Compliance Officer

PRESENTATION
Operator
Ladies and gentlemen, thank you for standing by, and welcome to ADTRAN's Fourth Quarter 2020 Earnings Release Conference Call. (Operator
Instructions). Please be advised, today's conference is being recorded. (Operator Instructions)

During the course of the conference call, ADTRAN representatives expect to make forward-looking statements, which reflect management's best
judgment based on factors currently known. However, these statements involve risks and uncertainties, including the continued spread and extent
of the impact of the COVID-19 global pandemic, the ability of component supplies to align with customer demand, the successful development
and market acceptance of our products, competition in the market for such products, the product and channel mix, component costs, manufacturing
efficiencies and other risks detailed in our annual report on Form 10-K for the year ended December 31, 2019, and our quarterly report on Form
10-Q for the quarter ended September 30, 2020. 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.

It is now my pleasure to turn the call over to Tom Stanton, Chief Executive Officer of ADTRAN. Sir, please go ahead.

Thomas R. Stanton - ADTRAN, Inc. - Chairman & CEO
Thank you, Chris. Good morning, everyone. We appreciate you joining us for our fourth quarter 2020 conference call. With me today is ADTRAN's
CFO, Mike Foliano. Following my opening remarks, Mike will review the quarterly financial performance in detail, and then we will take any questions
that you may have.

COVID-19 continues to impact our day-to-day lives and the way that we do business and highlight the importance of the work we do, enabling
operators to provide high-speed broadband connectivity for consumers and businesses. I am proud of our employees' perseverance throughout
these difficult times and want to start by saying thank you to all of our team.

Moving to the quarterly performance. The results for the fourth quarter demonstrated solid execution against our plan. This included broad-based
demand across our customer segments with a strong contribution from regional and emerging service providers. We continue to make great
progress with the Tier 1 fiber access projects that we announced earlier last year, while still growing and diversifying our customer base across a
variety of market segments.

From a top line perspective, revenue for the quarter was $130.1 million with 41.1% gross margin. Network Solutions accounted for 88% of that
total revenue at $114.1 million, while global services contributed $16 million.

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FEBRUARY 04, 2021 / 3:30PM, ADTN.OQ - Q4 2020 ADTRAN Inc Earnings Call

During the quarter, we had 4 10% customers, one of the highest numbers we have ever reported. Each of these customers' percentage of total
revenue was in the low double digits, pointing to the success of our diversification efforts. Of these, there was 1 service provider customer and 3
distribution partners. These distribution partners serve hundreds of regional service providers in the U.S. market with a mix of broadband access
and connected home and enterprise solutions, further reinforcing our success that we are having with both customer and portfolio diversification.

New customer acquisition remains strong. We added 35 new service provider customers during the quarter, bringing the total to 134 for the year.

Our fiber access portfolio has led the way in terms of both new customer acquisition and revenue growth. We expect this to continue as our fiber
access solutions and software platforms are adopted by customers around the world who are upgrading their networks due to favorable government,
regulatory, technology and competitive factors. Similar to Q3, the growth that we saw during the quarter was led by our continued success in the
Tier 2 and regional broadband operator market in the U.S., which was up 85% year-over-year. We are seeing increasing demand for our fiber access,
connected home and cloud services offerings. Our fiber access and aggregation business grew 98% year-over-year and home service delivery
platforms were up 68% year-over-year and cloud services increased 46% year-over-year.

We are seeing similar trends in Europe where favorable regulatory and funding environments are driving the build of fiber access networks. We
posted revenue growth of 54% year-over-year in the EMEA market segment. This increase was driven by investment in 10-gig fiber access networks
with European altnet providers.

In the Tier 1 customer segment, as mentioned earlier, we are making great progress with all 3 announced wins, including 2 European and 1 U.S.-based
customer. Two of the 3 have already achieved a significant milestone of first-customer connections, and we expect lab exit for all 3 around the
middle of the year. In addition, we are actively involved in several other Tier 1 decision processes around the world, some of which we expect to
reach decision points around the middle of this year.

COVID-19 related logistics issues and global chip shortages continue to impact lead times and inventory levels, and our operations teams continue
to take proactive steps to mitigate logistics and component availability challenges to meet our customer needs. However, lead times do remain
extended on some key components. And as a result of our efforts to address these needs, we have maintained elevated inventory levels and
incurred increased freight costs due to decreased capacity associated with higher transportation rates and expedite fees.

From an organizational perspective, we continue to maintain a disciplined approach to operational expenses. The structural changes that we have
implemented over the last year continue to improve our operational efficiency. In the past 18 months, we have reduced our non-GAAP quarterly
operating expenses by almost $12 million or 19% through disciplined expense management. These changes have allowed us to reach investment
levels that align with our target operating model moving forward.

On the product side, we continue to invest in end-to-end broadband solutions that make it easy for broadband operators to deploy and operate
fiber-based broadband access networks. In the customer connectivity segment, we expanded our in-home service delivery platforms with our new
SDG series of cloud-managed mesh WiFi 6 gateways. These platforms deliver gigabit speeds wirelessly throughout the home or business. They are
complemented by an intuitive mobile app and cloud-based software suite that simplify deployment and management of WiFi mesh, IoT, advanced
security and parenteral control services. These platforms will enhance our ability to capitalize on the increased investment we are seeing in the
connected home segment.

In fiber access, we have established ourselves as one of the fastest-growing vendors through the widespread adoption of our 10-gig fiber access
platforms. Whether you're a regional operator looking for an easy-to-deploy system with integrated access and transport or a large Tier 1 broadband
operator seeking the leading open disaggregated fiber access platform available, ADTRAN has solutions that are an ideal match for these customers'
needs.

On the software side, we enhanced our cloud software suite with the launch of Mosaic One, a SaaS offering that combines network and subscriber
analytics with AI-driven algorithms to optimize end-to-end network performance while providing actionable insight for operations and marketing
teams. Highlighting our growth in cloud services, we secured our largest SaaS contract to date with an award that covers hundreds of thousands
of customers over a multiyear period.

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The consumer demand and government support for fiber-based broadband services are at an all-time high. One notable program, of course, is
the FCC's rural digital opportunity fund, or RDOF. And in December, the FCC announced 180 winning bids in the RDOF Phase 1 auction. These
winning bidders are expected to receive a total of $9.2 billion of funding over a 10-year period to build out broadband service to over 5 million
homes. Over 85% of these homes will be served with gigabit broadband speeds. ADTRAN's portfolio is a great match to these service tier and
customer segments.

In Europe and around the globe, many global operators are significantly increasing their fiber investment, while also looking to diversify the vendors
in their supply chain. As an established global vendor with a leading fiber access portfolio and global R&D presence, including Europe, ADTRAN
continues -- stands out as a reliable option for future broadband deployments.

The shift to gigabit-enabled fiber access networks will also drive further demand for gigabit-capable, cloud-managed wireless mesh connectivity
in the home or business, providing material additional growth opportunities for ADTRAN as an end-to-end broadband solution provider.

I mentioned earlier in 2020 that ADTRAN's fiber business had eclipsed our copper business for the first time in our history. In Q4 of 2020, fiber-related
solutions represented over 70% of our business.

Overall, we achieved some key milestones in 2020, and we have a lot of positive momentum in the growth segments of our portfolio, driving a
diversified customer base in our target markets. The progress that we had in 2020 has us well positioned for additional success in 2021.

Mike will now provide a review of our financials. Following these remarks, I will be happy to answer any questions you may have. Mike?

Michael K. Foliano - ADTRAN, Inc. - Senior VP of Finance, CFO & Corporate Secretary
Thanks, Tom, and good morning to all. I will review our fourth quarter 2020 results, and I'll also provide our view on the first quarter of 2021. During
my report, I will be referencing both GAAP and non-GAAP results with reconciliations presented in our press release and supplemental financial
schedules on our Investor Relations web page at www.adtran.com/investor. The supplemental financial schedules on our web page also present
certain revenue information by segment and category, which I will be discussing today.

As Tom stated, our fourth quarter revenue came in at $130.1 million compared to $133.1 million in the prior quarter and $115.8 million for the
fourth quarter of 2019. Breaking this down across our operating segments, our Network Solutions revenue for the fourth quarter was $114.1 million
versus $115.2 million reported for Q3 of 2020 and $96.2 million in Q4 of 2019. Our Services & Support revenue in Q4 was $16 million compared to
$17.9 million reported for the third quarter of 2020 and $19.6 million for the fourth quarter of 2019. Across our revenue categories, access and
aggregation revenue for the fourth quarter of 2020 was $79 million compared to $85.4 million in the prior quarter and $74.6 million in quarter 4
of 2019. Revenue for our subscriber solutions and experience category was $45.4 million for the quarter versus $43.1 million for quarter 3 of 2020
and $33.2 million for quarter 4 of 2019. Traditional and other products revenue for the quarter was $5.8 million compared to $4.6 million in Q3 of
2020 and $8 million for quarter 4 of 2019.

Looking at our revenues geographically, domestic U.S. revenue for Q4 2020 was $95.8 million versus $92.8 million reported in quarter 3 of 2020
and $69.9 million in quarter 4 of 2019. Our international revenue for the quarter was $34.3 million compared to $40.3 million for quarter 3 of 2020
and $45.9 million in quarter 4 of 2019.

In the fourth quarter, we had 4 10% of revenue customers. Our GAAP gross margin for the fourth quarter was 41.1% as compared to 44.3% in the
prior quarter and 40.8% in the fourth quarter of 2019. Non-GAAP gross margin for the quarter was 41.3% as compared to 44.5% in the prior quarter
and 41.2% in the fourth quarter of 2019. The quarter-over-quarter decrease in both GAAP and non-GAAP gross margins were driven by product,
services and customer mix and lower volume and lower manufacturing absorption. The increases in both GAAP and non-GAAP gross margin on a
year-over-year basis were driven by increases in volume as well as product, services, customer and geographical mix changes.

During the quarter, we did experience extended component lead times, which we expect to continue into 2021, potentially affecting component
availability and component and logistics costs. Total operating expenses on a GAAP basis were $56.8 million for quarter 4 of 2020 compared to

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FEBRUARY 04, 2021 / 3:30PM, ADTN.OQ - Q4 2020 ADTRAN Inc Earnings Call

$54.4 million reported in the prior quarter and $61.3 million for Q4 of 2019. The quarter-over-quarter increase was primarily related to market-driven
increases in our deferred compensation expense, restructuring-related costs in both R&D and SG&A and contract services partially offset by a
decrease in labor expense as a result of our restructuring program, which was initiated in 2019. The year-over-year decreases in operating expenses
were a result of lower labor expenses in both R&D and SG&A as a result of our restructuring program and lower travel-related expenses partially
offset by increases in contract services costs, restructuring expenses and market-driven increases in our deferred comp expense.

On a non-GAAP basis, our fourth quarter operating expenses were $49.5 million compared to $49.4 million in the prior quarter and $56.8 million
in the fourth quarter of 2019. The slight increase quarter-over-quarter in non-GAAP operating expenses was primarily due to increases in contract
services offset by a decrease in labor expenses. The non-GAAP year-over-year decrease in operating expenses was primarily the result of our expense
reduction efforts and lower travel expenses year-over-year partially offset by an increase in contract services.

Operating loss on a GAAP basis for the fourth quarter of 2020 was $3.3 million compared to an operating income of $4.5 million in the prior quarter
and an operating loss of $14.1 million reported in Q4 of 2019. Non-GAAP operating income for quarter 4 of 2020 was $4.3 million compared to $9.9
million in the prior quarter and an operating loss of $9 million in quarter 4 of 2019.

The quarter-over-quarter GAAP decrease in profitability was attributable to lower sales volume, less favorable gross margin mix and higher operating
expenses driven by restructuring and market-driven deferred compensation expenses. The year-over-year decrease in GAAP operating loss was
driven by higher sales with favorable gross margin mix and reduced operating expenses. The non-GAAP quarter-over-quarter decrease in profitability
was mainly driven by lower sales volume and less favorable gross margin mix. The non-GAAP year-over-year operating income improvement was
related to higher sales volume, higher gross margin mix and reduced operating expenses.

Other income on a GAAP basis for the fourth quarter of 2020 was $3 million compared to other income of $1.5 million in the prior quarter and other
income of $3.2 million for quarter 4 of 2019. Our non-GAAP other income for the quarter was $1.7 million compared to a non-GAAP other income
of $876,000 in Q3 of 2020 and $2.9 million for quarter 4 of 2019.

The increases in both the GAAP and non-GAAP other income as compared to the prior quarter were primarily market-driven, caused by increases
in the fair value of our investment portfolio and lower realized foreign currency exchange losses. The decrease in GAAP and non-GAAP other income
on a year-over-year basis was primarily driven by higher realized foreign currency exchange losses and lower gains in our investment portfolio.
The company's tax provision for the fourth quarter of 2020 was a benefit of $6.5 million as compared to a $562,000 expense in the prior quarter
and a $768,000 expense in the fourth quarter of 2019. The current quarter benefit was primarily the result of finalizing our 2019 net operating loss
carryback claims related to the 2020 CARES Act and a shift in profitability across tax jurisdictions.

The tax expense for the fourth quarter of 2019 was a result of our international operations as the deferred tax benefits generated in that quarter
by our domestic operations were offset by additional changes in the valuation allowance that was previously established in the third quarter of
2019.

GAAP net income for quarter 4 of 2020 was $6.1 million compared to $5.5 million in the prior quarter and a net loss of $11.6 million in the fourth
quarter of 2019. Non-GAAP net income for the fourth quarter of 2020 was $5.2 million as compared to $7.9 million in the prior quarter and a net
loss of $2.5 million in quarter 4 of 2019.

Earnings per share, assuming dilution on a GAAP basis, was $0.13 as compared to $0.11 per share in the prior quarter and a loss of $0.24 per share
in the fourth quarter of 2019. Non-GAAP earnings per share, assuming dilution for the fourth quarter of 2020 was $0.11 per share compared to
$0.16 per share in the prior quarter and a loss of $0.05 per share in the fourth quarter of 2019.

Turning to the balance sheet. Unrestricted cash and marketable securities totaled $118 million at quarter end after paying $4.3 million in dividends
during the quarter. For the quarter, we used $11.2 million of cash from operations. Net trade accounts receivable was $98.8 million at the end of
the quarter, resulting in a DSO of 70 days compared to 69 days in the prior quarter and 72 days at the end of the fourth quarter of 2019. The variability
in DSOs quarter-over-quarter and year-over-year is mainly attributable to the timing of shipments.

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Net inventories were $118.7 million at the end of the fourth quarter compared to $120.3 million in Q3 of 2020 and $98.3 million at the end of Q4
of 2019. While our inventories were down slightly quarter-over-quarter, we continue to carry higher inventory levels in preparation for new product
ramp-ups and strategic inventory buffer purchases which have been made to ensure supply continuity throughout the pandemic. We believe that
we are positioned to maintain adequate liquidity in the current environment.

Looking ahead to the next quarter, the possible effects of the ongoing pandemic, the availability of component supplies to align with our customer
demand, the book and ship nature of our business, potential supply chain expediting costs and other component and logistics cost variations, the
timing of revenue associated with large products, the variability of order patterns into the customer base in which we sell as well as fluctuations
in currency exchange rates in our international markets may cause material differences between our expectations and actual results.

Having said all that, we expect that our first quarter 2021 revenue will be in the range of $122 million to $130 million. After considering the projected
sales mix, we expect that our first quarter gross margin on a non-GAAP basis will be in the range of 40% to 42%. We also expect that non-GAAP
operating expenses for the first quarter of 2021 will be about $50 million. And finally, we anticipate the consolidated tax rate for the first quarter
on a non-GAAP basis will be in the low 20s percentage rate.

We believe that the significant factors impacting revenue and earnings realized in 2021 will be component availability and costs, macro spending
environment for carriers and enterprises, the ongoing effects of the COVID-19 pandemic, the variability of mix and revenue associated with our
project rollouts, the proportion of international revenue relative to our total professional services activity levels both domestic and internationally,
the adoption rate of our broadband access platforms, potential changes in corporate tax laws, currency exchange rate movements and inventory
fluctuations in our distribution channels.

Once again, the financial information is available at ADTRAN's Investor Relations web page at www.adtran.com/investor.

Now I'll turn the call back over to Tom for questions.

Thomas R. Stanton - ADTRAN, Inc. - Chairman & CEO
Okay. Thanks, Mike. Chris, at this point, we're ready to open up to any questions people may have.

QUESTIONS AND ANSWERS
Operator
(Operator Instructions). The first question comes from Rod Hall of Goldman Sachs.

Bala Raghav Reddy - Goldman Sachs Group, Inc., Research Division - Research Analyst
This is Bala Reddy on for Rod. (inaudible) You mentioned different factors that go into it, like supply constraints, macro environment, what are you
baking in? Any further color would be helpful. And then I have a follow-up.

Thomas R. Stanton - ADTRAN, Inc. - Chairman & CEO
Can you repeat that? You were cutting out a little bit there.

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Bala Raghav Reddy - Goldman Sachs Group, Inc., Research Division - Research Analyst
I was talking about the -- could you talk about the supply constraint situation that you are factoring in the guidance?

Thomas R. Stanton - ADTRAN, Inc. - Chairman & CEO
Oh, the supply chain situation? Yes. So I mean we've seen tightness throughout the year, but it's definitely, at least on the silicon side, continued
to increase. I think everybody or a lot of people are aware of the lead time extensions by some of the silicon vendors.

And there have been -- when you're having to go and buy chips from pretty much any outlet you can get and you sometimes see expedite charges
on those, we have factored that into our guidance for the next quarter. The reality is that we don't know exactly what that will be until we actually
get those chips, whatever chip it may be, in-house. But we have tried to factor that into our guidance. Did I answer your question?

Bala Raghav Reddy - Goldman Sachs Group, Inc., Research Division - Research Analyst
Could you help us maybe quantify it a little bit? It does, but could you help us quantify it like how much are you putting on the table -- off the table
right now because of the supply situation?

Thomas R. Stanton - ADTRAN, Inc. - Chairman & CEO
That level of detail, to be honest with you, is not at hand right here, but it's not everything. It is predominantly on the chip side by far. And certain
chips are worse than others. So I don't have an exact number. I can just tell you that when we rolled up our margin forecast that we did try to take
into account.

And we look at that -- we look at that, as Mike had mentioned, gross margin forecast is fairly detailed and that we look at it on a SKU level. So certain
SKUs are impacted by that and certain ones aren't, but I don't think we have a total number on that.

Bala Raghav Reddy - Goldman Sachs Group, Inc., Research Division - Research Analyst
Okay. Fair enough. I guess one more question. Could you expand on this RDOF opportunity? I believe last quarter, you talked about how some of
the providers were still figuring what the path was going to be. Maybe you had a few more conversations with them. And then could you expand
on the opportunity? I believe you mentioned second half, but it's going to be gradual?

Thomas R. Stanton - ADTRAN, Inc. - Chairman & CEO
I do think it'll -- some carriers will kick off as quickly as possible. Others will wait because there is some time period that you don't have to build
everything right off of the bat. The quiet period is now over. And so we're able to have 2with dialogue a lot of the customers.

I think we are happy as of now with kind of how things turned out. A lot of those customers are longstanding customers with ADTRAN. And some
of the bigger ones are definitely longstanding customers with ADTRAN. We also -- although there are WISPs involved that have won a significant
amount of that award, some of those WISPs, if you actually get into the details, are actually going to be building out fiber, which is good for us.
And then even where they are doing something different, let's say, like fixed wireless, which is typically at lower rates, right, so there's still connectivity
opportunities for us with those WISPs. So I would say we're feeling pretty good about how the auction itself turned down at this point.

Operator
Your next question comes from George Notter of Jefferies.

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George Charles Notter - Jefferies LLC, Research Division - MD & Equity Research Analyst
I guess as I look into the quarter, my impression is that your largest North American customer was slow again as they have been, I think, in prior
Q4s. And it sounded like you're really able to backfill for that softness with the Tier 2 and Tier 3 operators in the U.S. And is that the right picture
that we should be thinking about here?

And then I'd also like to know what the mix of your Tier 2 and Tier 3 operators is at this point. I think in the past, you said it was about 1/3 of the
business, but it seems like that must be quite a bit bigger now. Any sense of that would be great.

Thomas R. Stanton - ADTRAN, Inc. - Chairman & CEO
Yes. I think we said last time -- Mike, what did we say last time on the call? Well, first of all, it's the fastest-growing segment we have, but I think it
was -- you remember what percentage we got?

Michael K. Foliano - ADTRAN, Inc. - Senior VP of Finance, CFO & Corporate Secretary
I think we have said in the past that, in general, it's been roughly 1/3 of each. But we've had so much growth in the Tier 3 segment that it's at least
twice the 1/3, right? It's growing fast.

Thomas R. Stanton - ADTRAN, Inc. - Chairman & CEO
So it's over 50%. And like Mike said, it may actually from quarter to -- it's been growing fast. So at this point in time, it's closer to 60% than 50%.

And as far as the Tier 1 customer in the U.S., you're exactly right. That customer did fall off in the Q4. The U.S. business was still up, which tells you
that even -- we typically see a seasonal decline in Q4. So the rest of the U.S. business was pretty strong.

There's also another piece that's kind of hidden a little bit. I shouldn't say hidden, but not readily apparent, which is we do have another large
customer in Australia that was down. And for the most part, the altnet carriers in Europe were able to make up for that. So we had 2 areas of strength
that we were glad to see happening.

George Charles Notter - Jefferies LLC, Research Division - MD & Equity Research Analyst
Got it. And then CenturyLink, I think, has been the biggest customer historically. Any sense for what CenturyLink accounted for in the year as a
percentage of sales? Or should we just wait for the 10-K filing?

Thomas R. Stanton - ADTRAN, Inc. - Chairman & CEO
Yes. I literally don't have that in front of me. But they were stronger in the first half and kind of dwindled down a little in the second half, and then
the fourth quarter was not a great quarter. So I really don't know. I don't know that, George. I guess you have to wait.

Operator
Your next question comes from Richard Valera of Needham & Company.

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Richard Frank Valera - Needham & Company, LLC, Research Division - Senior Analyst
Wanted to follow up on the component tightness you're seeing. At this point, do you think that would impede your ability to ramp in the second
half? I mean you noted making good progress with a number of Tier 1s, so presumably some ramp there. What's your confidence you'll be able to
get the components to enact that ramp?

Thomas R. Stanton - ADTRAN, Inc. - Chairman & CEO
Where we have some predictability, and believe it or not, there's actually more predictability in infrastructure builds like that, I think we're good.
We have been placing orders out for a long period of time. This newest change in lead time is relatively new, but the orders that we had already
placed under the old late time regimen is still in place. So I don't have a lot of worry about that.

Where we kind of hurt you the most, honestly, is the more unpredictable piece is like take rates on ONTs and RGs and things like that, where you
could -- that business has just been going fantastic for us, and we've been able to keep up the -- being able to buy those pieces, those parts because
the variability can be 30%, 40% quarter-to-quarter and you have different SKUs and everything. So that's probably a little bit more problematic. So
far, we're doing okay, but it's just -- it's going to get tougher.

Richard Frank Valera - Needham & Company, LLC, Research Division - Senior Analyst
Yes. No, understood. And relatedly, I know you guys don't give multi-quarter guidance. But with these ongoing components issues, should we
think of gross margins as sort of being relatively flattish over the next few quarters at sort of the level you've guided for Q1? Just wondering if
there's any kind of broad color you could give on your thoughts on gross margin.

Thomas R. Stanton - ADTRAN, Inc. - Chairman & CEO
Yes. That's probably the safest bet right now. We were expecting gross margins actually to expand this year. And at this point, because we just
don't know how bad third quarter, fourth quarter will be as far as trying to find parts. So that's probably a safe way to look at it.

Richard Frank Valera - Needham & Company, LLC, Research Division - Senior Analyst
Got it. And then, Tom, could you expand on the outstanding RFPs that you're bidding on? You mentioned that you might see some of them actually
be awarded as early as midyear. Can you give us a little color on what that pipeline looks like?

Thomas R. Stanton - ADTRAN, Inc. - Chairman & CEO
Yes. The number of RFPs out there is probably material RFPs. I don't know, somewhere between 6 and 8s. Two of them, we expect to close. And I
will tell you, we don't control that, but current expectation is for 2 of them to close before the half. Both of those are global carriers with headquarters
based in Europe.

Richard Frank Valera - Needham & Company, LLC, Research Division - Senior Analyst
Got it. That's helpful. And then finally, just on international, I mean, you noted that Australia was weak. But overall, that business, the international
was down pretty meaningfully year-over-year and quarter-over-quarter. Anything else in international that was going on?

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Thomas R. Stanton - ADTRAN, Inc. - Chairman & CEO
Well, our German carrier is typically a little bit of a wildcard. They came in about where we expected. So I mean the biggest decline, it was a material
decline in Australia. Having said that, that is a lumpy customer. There are times where they come in and we sell a lot. And there are times where
we don't. We have just started shipping actually this quarter, a new award for them, which will continue to ramp through this year. Having -- but
it will still be lumpy. It will still be lumpy.

I mean the key to us is to grow that Tier 3, Tier 2 altnet carrier segment, which is hundreds of customers to a point to where any of those materials
-- those larger Tier 1s won't have such a material impact.

Operator
(Operator Instructions). The next question comes from Paul Silverstein of Cowen.

Paul Jonas Silverstein - Cowen and Company, LLC, Research Division - MD & Senior Research Analyst
Tom, as the Tier 2s and 3s, assuming that their growth continues to outstrip the growth of your Tier 1s so that they become a larger percentage of
revenue as they did this quarter, does that change -- all the things being equal, does that have an impact on your margin structure one way or the
other?

Thomas R. Stanton - ADTRAN, Inc. - Chairman & CEO
Yes. Yes. Yes. That's a good assumption, yes. Yes, it would -- that is a -- I mean that's a good market for us.

Paul Jonas Silverstein - Cowen and Company, LLC, Research Division - MD & Senior Research Analyst
Based on your current visibility, looking at your order book, your pipeline, I assume you expect that class of customers to continue to outstrip in
terms of growth relative to overall growth relative to your Tier 1s?

Thomas R. Stanton - ADTRAN, Inc. - Chairman & CEO
I think this year, in totality, yes. I think next year, because we'll be in full bore with 3 Tier 1s buying fiber access equipment, I think next year will be
more difficult for -- to keep up, but I don't know. RDOF may have an impact on that as well.

Paul Jonas Silverstein - Cowen and Company, LLC, Research Division - MD & Senior Research Analyst
That begs the question, given that, that shift should have a positive impact and you're pointing out this year, what's the offset that keeps -- I
recognize you all have been very transparent in saying that gross margin for the foreseeable future. And I think you all quantified over the next 2
years, feel free to correct me if I'm wrong, that we should expect a meaningful change from the low-40s where it's been for quite some time.

But given that shift, that, that should have a positive impact and it sounds like you're not expecting any uplift or any meaningful uplift in gross
margin this year, what's the offset that's counteracting the benefit you should get from that customer mix shift?

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FEBRUARY 04, 2021 / 3:30PM, ADTN.OQ - Q4 2020 ADTRAN Inc Earnings Call

Thomas R. Stanton - ADTRAN, Inc. - Chairman & CEO
Well, there are 2 things. We don't expect the supply chain to get better. And I will tell you, we're paying expedite fees now. We paid them in Q4.
And we paid, at least from a historic perspective, very high logistics charges versus our typical. We don't expect that to get materially better this
year. So in fact, we expect pressure to increase. So that's point number one.

Point number two, what we have tried to forecast in is some additional wins. So although -- what you're talking about, is gross margin better in
the smaller carrier segment? Yes. Do I expect that growth to eclipse the growth in the, let's say, larger carrier segment this year? Yes. But having
said that, we also still have some Tier 1 projects that are just going to be getting kicked off that will have a margin impact as we get them up and
running. So that will also be a negative.

Paul Jonas Silverstein - Cowen and Company, LLC, Research Division - MD & Senior Research Analyst
Got it. Appreciate that. And Tom, I trust you're indicating that (inaudible) which have been around for a while for you and for others for the better
part of the past year. You're telling us that they're actually higher this past quarter and you expect it to stay at that elevated levels relative to previous
quarters? Or is that not the case?

Thomas R. Stanton - ADTRAN, Inc. - Chairman & CEO
Yes. Let me be a little more granular on that. So if I look at expedite fees for last quarter versus previous quarters on logistics and chip supply, it
was a little higher. I expect it to get tighter this year.

Paul Jonas Silverstein - Cowen and Company, LLC, Research Division - MD & Senior Research Analyst
All right. But -- so it sounds like perhaps the bigger issue is you're hoping, expecting rollouts from the new Tier 1 awards. And as you pointed out,
in the initial stage of those rollouts, the margins are especially -- again relative to over time.

Thomas R. Stanton - ADTRAN, Inc. - Chairman & CEO
Yes, yes, right. Once you get up and running and you got some scale and volume and things, yes.

Paul Jonas Silverstein - Cowen and Company, LLC, Research Division - MD & Senior Research Analyst
All right. And I apologize because I'm asking to repeat yourself. But relative to your previous comments, you said there's 6 to 8 RFPs in terms of
pipeline of additional opportunities. And did I hear you that, sure, those Tier 1s that you expect to be awarded in the first half of this year?

Thomas R. Stanton - ADTRAN, Inc. - Chairman & CEO
No, no, no. So yes. So 2 of those are Tier 1s, but probably -- if I look at the number of RFPs that are out there or opportunities, it's way bigger than
6 or 8. So if I look at material, like large customers, it's in the realm of 6 to 8 that we're working on right now. But I will tell you there's probably 100
smaller carriers that we're working on. I mean we captured, what, 34, I think, carriers just last quarter. So at any point in time, there are hundreds
that we're working on.

Paul Jonas Silverstein - Cowen and Company, LLC, Research Division - MD & Senior Research Analyst
Understood. I appreciate the clarification. And the 6 to 8 you referenced, are all of those non-U.S.?

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FEBRUARY 04, 2021 / 3:30PM, ADTN.OQ - Q4 2020 ADTRAN Inc Earnings Call

Thomas R. Stanton - ADTRAN, Inc. - Chairman & CEO
Most of them.

Paul Jonas Silverstein - Cowen and Company, LLC, Research Division - MD & Senior Research Analyst
And I -- do you think that's tied specifically to Huawei getting cut back? Or is it more than that?

Thomas R. Stanton - ADTRAN, Inc. - Chairman & CEO
I think it's 3 things. I think it's -- well, I think it's really 4 things. So I think it's Huawei. I think it's 10 gig. I think it's disaggregation. And I think it's
COVID.

Operator
Your next question comes from Bill Dezellem of Tieton Capital.

William J. Dezellem - Tieton Capital Management, LLC - President, CIO & Chief Compliance Officer
Tom, I'd actually like to follow up on your last comment. Why do you believe that COVID is playing a role there?

Thomas R. Stanton - ADTRAN, Inc. - Chairman & CEO
I think broadband became more important. And some countries -- like I just had a conversation late last night with a customer. Some countries
found themselves a little flatfooted. And for whatever reason, around the same time, fiber was gaining in importance. And I think people that have
kind of okay broadband plans have been having to relook at those plans and refresh those plans and make sure that they're going to keep up in
the future pandemic or wherever the world may turn.

So I think the highlight, the visibility that it put on carriers but just, if not more importantly, on governments and relooking at their infrastructure
has absolutely added fuel to this.

William J. Dezellem - Tieton Capital Management, LLC - President, CIO & Chief Compliance Officer
Makes a lot of sense. And then you referenced the substantial growth in your Tier 2 and Tier 3, and yet you had 4 10% customers. Can you tell us
how that can happen? It almost seems like mathematically, that's a really small needle to thread.

Thomas R. Stanton - ADTRAN, Inc. - Chairman & CEO
Yes. I tried to highlight this in my notes, but I don't think it came out clear. So we have 4 10% customers. We typically have 2 or 3. Those are typically
Tier 1 carriers, very rarely are they not Tier 1 carriers. Sometimes a Tier 2 may come in, but they're typically direct sales to carriers.

Three of our 4 this quarter were actually distribution partners that sold to Tier 3s. So those customers are actually -- those 3 are actually selling to
hundreds of carriers, and they're typically in the Tier 3 segment.

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FEBRUARY 04, 2021 / 3:30PM, ADTN.OQ - Q4 2020 ADTRAN Inc Earnings Call

Okay. All right. At this point, I see no more questions in the queue. So I appreciate you for joining us, and we look forward to talking to you this
time next quarter.

Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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