Ladies and gentlemen, thank you for standing by, and welcome to ADTRAN's Second Quarter 2020 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. 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 the 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. 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.

Thank you. Good morning, everyone. We appreciate you joining us for our second 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'll take your questions. To begin, I'd like to address the ongoing COVID-19 pandemic. Given our global operations, we have been carefully monitoring the COVID environment in all regions where our employees and customers reside. We continue to strive to deliver the right solution to help people stay connected through these difficult times. ADTRAN has been extremely proactive in taking significant measures to protect our employees, partners and customers, and I want to thank our employees for the diligence they're using to keep themselves and others safe. One thing that is abundantly clear thus far through the pandemic is the vital importance of high-speed broadband connectivity. And ADTRAN is committed to providing an exceptional broadband experience to help drive the global economic recovery. Whether it's working from home, school from home, enabling virtual healthcare, keeping businesses running or keeping families connected, we are doing what we can to make that experience exceptional. 2020 continues to be a pivotal year for the company. The fiber investment cycle has continued to accelerate globally aided by government actions to encourage broadband service providers to limit and/or ban the threat of high-risk vendors in their critical infrastructure. This timing aligns well with these operators' plans to transition to next-generation software-defined architectures, creating tremendous new opportunities for ADTRAN in our SDX and Mosaic Cloud platforms. Furthermore, the need for network and home virtualization to provide better connectivity, enable remote customer connections and changes and provide a better integrated experience is fueling our momentum with our Mosaic software subscription services. During the quarter, we made tremendous progress in capturing new customer opportunities with next-generation platforms, subscription software and services. We exited the first half of 2020 with very strong momentum in our fiber business with a good mix of awards in both the GPON and XGS-PON. As a result, we have been gaining market share and have jumped to the number two position to become the leading U.S.-based supplier in North America for all PON OLTs in the most recent market share reports from the industry analyst firm, Delaware. Gaining seven share points in the XGS-PON category, ADTRAN gained eight share points against our competitors in the strategic growth market. Our market share gains not only include service providers that are moving from legacy fiber access solutions to next-generation platforms where we are also continuing to see a surge of new entrants in the market, including utilities, municipalities, developers and electric co-ops in the U.S. and alternative broadband providers in Europe and Australia who have stepped up to deliver gigabit services to unserved and underserved communities. We are very pleased that we added 33 new service provider customers during the quarter, bringing our new customer count for the year to 61. These operators are now counting on ADTRAN to help them accelerate the delivery of exciting new services in the communities that they serve. We are making excellent progress at each of our Tier one operators in the U.K., EU, and North America, in which we have won major awards with our software-defined SDX fiber access platform, and we are on track to start seeing material revenue from these programs in 2021. In fact, we will soon be announcing live customer updates on some of these awards this quarter. These market share gains, new customers, and scale Tier one awards position the company for solid growth for many years to come. Given that backdrop, the financial results for the second quarter demonstrated solid execution against our plan with strong demand in most of our segments, with the domestic regional and emerging service provider market segment leading the way. From a top line perspective, revenue for the quarter was $128.7 million, with 41.5% gross margins. Network Solutions accounted for 86% of the revenue at $111.3 million. Global Services revenue contributed 17.4%. To provide some context, our 2019 revenue included a major LATAM project. Excluding this project, revenue was up 12% in Q2 on a year-over-year basis. We continue to build a strong diversified customer base from a geographic, product and market segment perspective. For the quarter, our fiber access business grew 21% over the previous period and increased 16% on a year-over-year basis and continues to be our top sales growth category. In addition to growth of our PON OLT revenue, the fiber CPE, ADTRAN revenue grew 27% quarter-over-quarter and 37% on a year-over-year basis. Our supply chain team continue to work hard in helping us deliver in Q2, managing through logistics and component availability challenges. During the quarter, we were affected by higher freight cost as available capacity in rates continued to rise. From an organizational perspective, we continue to execute and accelerate structural changes to improve our operational cost baselines to achieve the target operating model in our plan. We have achieved material reductions in operating expenses through operational control and expense management over the past five quarters, and we are on track to achieve our target expense profile on plan. Overall, it was a solid quarter. Let me now provide a little more detail around some of the products and segments. Our continuing investment in the highly successful and widely deployed Total Access 5000 Platform continues to pay great dividends. During the quarter, we deployed our XGS GPON combo card for the TA 5000 that enables service providers to cost-effectively accelerate 10-gig service delivery in new and existing markets. We have also expanded our SDX portfolio to deliver a greater capability to operators that are migrating to software-defined networks. ADTRAN continues to lead the industry in the development of open disaggregated software-defined fiber access solutions centered around our SDX product family and the Mosaic Cloud Platform. By offering our customers the flexibility to evolve their networks by adding 10-gig delivery in existing chassis or in new virtual solutions leveraging a common management platform, it enables them to accelerate service delivery while significantly lowering their costs. We are also providing service providers greater visibility, network intelligence, analytics and capabilities to deliver a more immersive connected-home experience as we continue to build out our Mosaic Cloud Services portfolio of software applications. During the quarter, we introduced new software services that are gaining strong adoption by both new and existing customers. In fact, 28 of the 33 new customers this quarter also purchased software subscription services, enabling us to surpass over 2.4 million devices under management. These software applications will work together in concert, providing an operator with an end-to-end visibility, network intelligence and automation in a unified view. The upcoming Mosaic One virtual control center enables operators to efficiently deliver a seamless customer experience to accelerate new subscription revenue streams while reducing costs through automation. In addition to the exceptional progress in our fiber access business, our next-generation fiber extension portfolio, coupled with our Mosaic Cloud Platform remains strong. A new Tier one customer in Central Europe selected ADTRAN second-generation G.fast fiber extension solution to further accelerate its delivery of high-quality, high-capacity broadband services for business and residential customers. Additionally, we announced G.fast awards from MNet in Germany and from Welcomm Net in Finland during the quarter. Outside of Europe, our international revenue performance was driven by our continued progress in Australia with fiber to the curb deployments for the national broadband network. While the pandemic has hit small and medium enterprises the hardest, our enterprise CPE business remained resilient given our long heritage in diversified sales channels. Revenue for the enterprise CPE business for the first half of 2020 was in line with the same period of the prior year. Despite the COVID-19 headwinds in this sector, we remain encouraged about our enterprise business, and we have continued to invest in refreshing our highly successful route-and-switch portfolio business, which we will be announcing later this fall. In the residential broadband market, the current work from home and online school environment provided some tailwinds. We had a strong quarter for our residential CPE portfolio, with revenue growing 29% quarter-over-quarter and 40% on a year-over-year basis. We are seeing strong demand for our residential gateways by regional service providers in North America, the alt-nets in Europe and in the TAM. From a market segment perspective, our revenue from regional service providers grew 29% in the quarter on a year-over-year basis, and revenue in the segment grew 37% for the first half of 2020 over the same period of 2019. We expect to see further uplift in our domestic, regional and emerging service provider segments going through 2021 as the $16 billion FCC RDOC auction plays out this fall and into the first half of next year. During the quarter, ADTRAN announced the most comprehensive RDOC portfolio, which is ideally tailored to support the build-out of rural broadband across a wide range of network topologies. ADTRAN was heavily cited in the FCC RDOC order as we influenced the selection criteria to ensure the program provides maximum funding for low-latency gigabit solutions to help ensure that we close the digital divide for rural America. We continue to be extremely active as we assist operators with network planning and their applications, and we are well positioned to help our operators participate in this program and expect to see awards in revenues in mid-2021, with the possibility of the program accelerating earlier in the year. Several years ago, we embarked on a mission to invest heavily in R&D to put the company in a position to lead the industry paradigm shift to the next-generation of software-defined fiber access platforms. Our success rate during this narrow window of next-generation platform selection puts the company in a strong position in the next decade and beyond, in addition to addressing the connectivity bottleneck. Our vision includes redefining the subscriber experience, and the investment is paying off as we are beginning to see strong adoption of subscription software across our customer base. These technology advancements, along with the flexibility we're building in our organization, really put us on a strong trajectory for growth. The share gains we made, Tier one awards and government focus on broadband initiatives will provide sustainable growth for the company for the years to come. And while this global pandemic has created many challenges, I continue to be extremely proud of our company's progress and strong execution. We have performed exceptionally well across all areas of the company with a strong focus on mitigating supply chain risks and helping our customers meet today's demands while enabling them to quickly transition to the network of the future. Our team remains safe and healthy as a result of our early actions, and we continue to ensure that health and well-being of our employees, customers and partners are a top priority. Our vision to enable a fully connected world where the power to communicate is available to everyone, everywhere could not be more relevant or important in our current environment. Mike will now provide an overview of the financials, and then we'll open it up for questions.

Thank you, Tom, and good morning to all. I will review our second quarter results and provide our view for the third quarter of 2020. During my report, I will be referencing both GAAP and non-GAAP results. With respect to non-GAAP financial measures that are discussed on this call that are not presented in our earnings release, reconciliations to their comparable GAAP measures are published in the supplemental financial schedule that appears on our Investor Relations web page. For non-GAAP measures discussed on this call that are presented in the earnings release, reconciliations are contained within the release. The supplemental financial schedules on our web page also present certain revenue information by segment and category and other non-GAAP reconciliations, which I will be discussing today. With that, now let's get to the numbers. ADTRAN's second quarter revenue came in at $128.7 million, compared to $114.5 million in the prior quarter and $156.4 million in the second quarter of 2019. Breaking this down across our operating segments, our Network Solutions revenue for the second quarter was $111.3 million versus $97.4 million reported in Q1 of 2020 and $139.2 million in Q2 of 2019. Our Services and Support revenue in Q2 of this year was $17.4 million, compared to $17.2 million reported for the first quarter of 2020 and also for the second quarter of 2019. Across our revenue categories, Access & Aggregation revenue for quarter two of 2020 was $82.8 million, compared to $66 million in the prior quarter and $109.4 million in quarter two of 2019. Revenue for our Subscriber Solutions & Experience category was $40.4 million for the quarter versus $42.2 million for quarter two of 2020 and $40.5 million for quarter two of 2019. Traditional & Other Products revenue for the quarter was $5.5 million compared to $6.4 million from quarter one of 2020 and $6.5 million for quarter two of 2019. Looking at our revenues geographically, domestic revenue for Q2 2020 was $84.5 million versus $79 million reported in Q1 and $75.3 million in quarter two of 2019. Our international revenue for the quarter was $44.3 million, compared to $35.5 million for quarter one of 2020 and $81.1 million in quarter two of 2019. For the second quarter, we had two 10% of revenue customers: one domestic and one international. Our GAAP gross margin for the second quarter of this year was at 41.5% as compared to 45.1% last quarter and 41.6% in the second quarter of 2019. Non-GAAP gross margin for quarter two was 41.6% as compared to 45.4% in the prior quarter and 41.4% in the second quarter of 2019. The quarter-over-quarter decrease in both GAAP and non-GAAP gross margin was driven by product and geographical mix, increases in freight-related expenses. These were partially offset by increased volume efficiencies. The change in gross margins in both GAAP and non-GAAP on a year-over-year basis was minimal, resulting from favorable product and geographical mix and lower manufacturing expenses, which were offset by lower volume and increased freight-related expense. Total operating expenses on a GAAP basis were $59.5 million for quarter two of 2020, compared to $56.5 million reported for the prior quarter and $65.7 million for quarter two of 2019. The quarter-over-quarter increase was primarily related to market-driven increases in our deferred compensation expense, contract services and restructuring expenses, partially offset by expense reductions in both R&D and SG&A as a result of our restructuring program initiated in 2019 and also reduced travel expenses. The year-over-year decreases in operating expense were a result of lower expenses in both R&D and SG&A and lower travel expenses, partially offset by market-driven increases in our deferred compensation expenses and an increase in R&D contract services. On a non-GAAP basis, our second quarter operating expenses were $52.3 million, compared to $56.7 million in the prior quarter and $61.2 million in quarter two of 2019. Both the non-GAAP quarter-over-quarter and year-over-year decreases in operating expenses were primarily the result of expense reductions and lower travel expenses. These reductions were partially offset by an increase in R&D contract services. Our operating loss on a GAAP basis for the second quarter of 2020 was $6 million, compared to an operating loss of $4.5 million in the prior quarter and an operating income of $562,000 reported in Q2 of 2019. Non-GAAP operating income for the quarter two of 2020 was $1.3 million compared to a loss of $4.6 million in Q1 of 2020 and an operating income of $3.6 million in quarter two of 2019. The higher quarter-over-quarter operating loss was driven primarily by the higher deferred comp expense, contract services and restructuring costs and partially offset by higher gross profit on increased revenue. The quarter-over-quarter non-GAAP profitability was driven by higher sales and reduced operating expenses. On a year-over-year basis, the lower operating income on both GAAP and non-GAAP basis was a result of reduced sales volumes. Other income on a GAAP basis for the second quarter of 2020 was $8.4 million, compared to a loss of $9.4 million in the prior quarter and other income of $2.8 million for quarter two of 2019. Our non-GAAP other income for the quarter just ending was $5.7 million compared to a loss of $7.5 million in Q1 of 2020 and an income of $2.4 million for quarter two of 2019. The increases in both the GAAP and non-GAAP other income as compared to quarter-over-quarter and year-over-year comparisons were primarily market-driven caused by changes in the valuation of our investment portfolio. The company's tax provision for the second quarter of 2020 was a $1.6 million expense as compared to a benefit of $4.4 million in the prior quarter and a benefit of $588,000 in the second quarter of 2019. The current quarter tax expense was primarily due to profitability in our international operations as the deferred tax benefits generated by our domestic operations continue to be offset by changes in our valuation allowance. As a reminder, the significant tax benefit realized last quarter was primarily related to the passage of the CARES Act in the U.S., partially offset with tax expense in our foreign operations as the deferred tax benefits generated by our domestic operations were offset by additional changes in the valuation allowance. The tax benefit in the second quarter of last year was the result of a provision to return adjustment that was related to the completion of the transfer pricing study, which was partially offset by tax expense related to pre-tax profitability. GAAP net income for quarter two of 2020 was $752,000 compared to a net loss of $10 million in the prior quarter and a net income of $4 million for the second quarter of 2019. Non-GAAP earnings for the second quarter of 2020 were $1.6 million as compared to a loss of $2.2 million in the prior quarter and net income of $5.9 million in the second quarter of 2019. Earnings per share, assuming dilution, on a GAAP basis was $0.02 per share as compared to a loss of $0.21 per share last quarter and earnings of $0.08 per share in the second quarter of 2019. Non-GAAP earnings per share, assuming dilution, for the second quarter of 2020 was $0.04 compared to a loss of $0.05 per share in the prior quarter and earnings of $0.12 per share in the second quarter of 2019. Turning to the balance sheet. Unrestricted cash and marketable securities at the end of the quarter totaled $136.7 million after paying $4.3 million in dividends during the quarter. For the quarter, we generated $1.7 million of cash from operations. Net trade accounts receivable was $95.3 million at quarter end, resulting in a DSO of 67 days compared to 69 days in the prior quarter and 68 days at the end of the second quarter of 2019. The variability in DSOs quarter-over-quarter and year-over-year is mainly attributable to the timing of shipments during the quarter and the customer mix. Net inventories were $106.1 million at the end of the second quarter compared to $99.5 million in Q1 of 2020 and $95.1 million at the end of Q2 in 2019. The increase in our inventories for the quarter was related to strategic inventory buffer purchases that were designed to ensure supply continuity during the pandemic. We do believe that we are positioned to maintain adequate liquidity in the current environment. Looking ahead to the next quarter, the possible effects of the ongoing COVID-19 pandemic, the ability of component supplies to align with customer demand, the book-and-ship nature of our business, the timing of revenue associated with large projects, the variability of order patterns and the customer base into which we sell as well as fluctuations in currency exchange rates may cause material differences between our expectations and the actual results. Having said that, we do expect that our third quarter 2020 revenue will be in the range of $127 million to $137 million. After considering the projected sales mix, we expect that our third quarter gross margin on a non-GAAP basis will be about 41%. We also expect non-GAAP operating expenses for the third quarter of 2020 will be in the range of $51 million to $52 million. Finally, we anticipate the consolidated tax rate for the third quarter on a non-GAAP basis will be in the high-20s percentage rate. We believe the significant factors impacting revenue and earnings realized in 2020 will be the following: continued component availability; the macro spending environment for carriers and enterprises; the ongoing effects of the COVID-19 pandemic; the variability of mix and revenue associated with project rollouts; the proportion of international revenue relative to our total revenue; professional services activity levels, both domestically and internationally; the adoption rate of our broadband access platforms; any potential changes in tax laws; currency exchange rate movements; and inventory fluctuations in our distribution channels. Once again, additional information is available at ADTRAN's Investor Relations webpage. Now I'll turn the call back over to Tom.

Thanks very much, Mike. All right. We are now ready to open up for any questions people may have. Are you there?

Our first question comes from Rod Hall from Goldman Sachs. Your line is open.

Yes, hi guys, thanks for the question. I guess, Tom, I wanted to start off with where we are in terms of demand for broadband. I know that just naturally, there's been an increase in demand. But then we've heard other vendors talk about carriers utilizing virtualized enhancements initially just to provide service to people as they all go to work from home and so on, but then maybe people haven't seen as much equipment spending as they would expect to see. So, I'm just curious whether you think you've seen the bulk of the impacts from all this. Or when do you think the bulk of equipment spending might come? And then I've got a follow-up to that.

Yes. I think there's – I'll try to segment in a way that at least the way I think about it and see if it makes sense to you. So, I think where carriers could move quickly, we've seen an increase. And probably the most pronounced increase as a segment would probably be in the Tier three space, which has done pretty well. And we've seen significant fiber shipments into that area. And I don't know if it's because of their size, they're able to move quicker or whatever, but we've definitely seen it there. The larger carriers are all – I think they move a little slower, typically. And although we've seen some I really wouldn't say I've seen the bulk of that. A lot of that is still yet to come. So, a lot of them right now – and different regions are affected differently, but the larger ones seem to be putting together infrastructure plans and starting to buy infrastructure toward a bigger upgrade, but I wouldn't say, at least from our perspective, that we've seen those larger carriers make a big move yet.

And if you were to guess, would you say they do it by the end of this year? Or do some of that fall in the next year? Do you have any feel on when some of these big carriers will delay on spending?

Yes, honestly, I think a lot of it will be next year. There are some plans right now. I mean, we are negotiating deals right now that would affect this year, but those are just the negotiations, so whether or not they actually pull the trigger this year, some of that may weather has an impact to that as well. So, whether or not they're able to actually do that, I will tell you there are discussions and kind of negotiations going on, but I would still think the majority of that is going to be next year.

Okay. And then my – the follow-up question I had for you is on the OpEx. The OpEx guide was a little bit below what we had expected. I'm just curious, are you guys taking active measures to reduce OpEx or is this just sort of the natural flow of not having less travel and things like that?

No, we've actually, I mean travel has helped us on the OpEx line. We have been moving toward a $50 million goal toward at the end of this year for the last year about the last year or so. So, it's really just on plan to what we have been targeting.

Okay. And you don't think you'll undershoot that because of the travel, if travel restrictions continue?

I wouldn't say that. Right now, our $50 million goal is our $50 million goal. And to the extent travel picks back up, then you'll see us continue to keep things to allow us to be around that goal.

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

Great, thanks. Can you give us any examples yet where you had examples or I guess we do know of a couple already, but have you seen new examples about Huawei replacement opportunities? Can you talk about what you're seeing there in terms of number of trials and where those are regionally?

Yes. So with Europe, we've seen it most pronounced in the U.K. and in Germany. We have some of the customers that I actually mentioned in my notes were actually Huawei customers that have decided to move away. There are some large deals that we talked about in the past, I think have been positively influenced by the move, like I said, most notably in Germany and the U.K., where there are plans being put in place. And in the U.K., there are government mandates now to limit, what they call, hostile vendor equipment being installed in the network. And in some cases, they're actually pulling the equipment out. So, it's all through Europe. Less so in the U.S. because there's just less of a footprint in the U.S. It's not really happening in Latin America, in any big places. You add Brazil, there's some of that, but it really isn't as widespread as it is in Europe because the dominance of those vendors was pretty strong in Europe.

Okay. Great. And when talking about the share gains in PON fiber to the home, I mean are those primarily coming in North America? Or are they in other regions as well? And then I imagine they must be you really only have two competitors. Is that right? I mean in those kind of share shifts in, say, North America, are you up against two players? Or is it a bigger group of players that have any meaningful share there?

In North America, it's fundamentally two players, one in Europe and one in the U.S. The European, of course, is a very, very large player. So yes, two cases there. And then in Europe, it's really two players, two different players. It is Huawei being one of those and then a European carrier as well the same European, excuse me, vendor as well.

So, are those that you already mentioned, are they happening in both regions?

Yes, without a doubt. Absolutely positively. The numbers I showed you say because we only have it was the numbers that came out of the most recent Deloro report and us moving up to that second place, which is still behind that European vendor, but it was a really solid move for us. I mean picking up eight points in the quarter is pretty strong.

Okay. And just two more quick ones. So, I mean you announced and talked a lot about it, the British Telecom win. It sounds like from your comments that shipments have maybe started or revenues have not started. Am I reading that right?

Shipments have not started well; let me put this, material shipments have not started. In fact, in that case, shipments have not even started at all. So that is one that we expect to be shipping sometime in 2021 and to be more pointed, we expect to ship in the first half of 2021. We are going through the lab process right now. There will be customer trials that will happen before mass deployment, but that deployment should start in the first half of next year.

Okay. Great. And then finally, do you just do you have an estimate yet? Is it meaningful yet? I mean to talk about an estimate of overall recurring revenues and then your comments on how that would trend in the future, like a percentage of your recurring revenues in your business?

We haven't really broken that out yet. So, we're in the midst of looking at it. We've launched a lot of new software products and services over the last probably five months that are starting to take fruition, but we have not broken that out. We will be looking at doing that, but probably more towards next year than this year.

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

Thank you, Tom, you gave some pretty specific on one of the, I think, Tier one wins that you referenced in your prepared remarks, the British Telecom one. Can you give us any color on the other two, the sort of the status of them and expected timing of shipment?

Sure. Yes, my color was really meant to cover all three. So, all three are on track. All three will be shipping next year. Honestly, I believe all three will be shipping in the first half of next year, but give me some leeway because they are carriers. But all three of them are going well and were either we have shipped product to all three, including software. So, we're just going through the lab process. We will have some announcements later on this quarter about customer deployments with some of those three, but let's wait for those announcements, but those will be initial, let's get it up and running and get it started, and they won't be the mass deployment piece and be fully operationalized until early next year.

Can you remind us what you said about the two that aren't British Telecom, like what you said publicly about them today?

We have announced... we announced the European market. We have not named the U.S. one.

We announced the European market. We have not named the U.S. one.

Okay. The Tier one in the U.S., I guess we haven't announced. That was for SDX, Mosaic, disaggregated, start deploying this across the entire footprint. And it's 100%. At this point, we are the only provider that is going to be doing that, and that will happen like I said, get operationalized this year. It is a customer that we've had before. And let me see, it's not a wireless carrier, so that kind of narrows it down. In Europe, a long-standing relationship with a German service provider that is moving forward with our disaggregated solution.

Got it. That's helpful. And then just on fourth quarter, I know you don't give guidance more than a quarter out, but wondering if you could comment sort of on if you think this year, you're going to see typical seasonality or maybe if some of these programs you're talking about, which might hit – might change the profile of that and I guess maybe even defining typical seasonality since, let's say, the last couple of years have been flattish, 3Q to 4Q. And historically, I think it's been a down quarter, but any thoughts at all there would be helpful.

It usually is down in the single digits, kind of like high single digits. I really don't – I don't think that these will move that needle this year materially. I think, I mean, we're trying to get through the lab as quickly as possible. There are – I had mentioned before that there are some negotiations going on for kind of to actually help some of the business get kick-started in the fourth quarter for these carriers because they're wanting to get on with it, but I think those are speculative at this point. So, I wouldn't do anything other than to say there's nothing that looks materially different in seasonality with the fact that there is still a COVID impact to everything. And sometimes, it's a positive impact. Sometimes, it's a negative impact. Biggest issue that we have today is not really demand; the biggest issue we have today is making sure that we have enough supply. So, there are some still material shortages out there. If you look at the semiconductor industry right now, lead times are ridiculous, and it's not getting any looser. So that's probably the biggest hurdle we have. I think Mike mentioned that in his comments as well. I think it's really making sure that we have the material available.

Got it. Just one more, if I could. You mentioned real strong growth in the fiber portion of your business, I guess, both quarter-over-quarter and year-over-year. Can you give us a sense of what that is as a percent of either total revenue, product revenue, whatever you wanted to slice that?

Mike, do we break that out? Let me turn that over to Mike.

We have not reported that in the past, but the fiber revenue piece is definitely growing faster than any other piece. As copper is a little more spotty, so it tends to be up and down, but over time, it's declining. And fiber is actually larger than the copper piece of our business, but we haven't actually broke it down to percentages.

Got it. Thanks very much.

I mean it's a very material piece of our business, it's bigger than copper today, and it is growing really strong. And that's before we actually start shipping any of the Tier 1 awards that we have won. So, it's not a bad place to be right now. Okay.

Your next question comes from the line of Fahad Najam with Cowen and Company. Your line is open.

Thank you for taking my question. Tom, if you look at some of your – the health of your customers. In the U.S., you have Windstream is about to emerge from bankruptcy. Frontier's further along and is restructuring. CenturyLink reported last night fairly decent financial operating results. Are you beginning to see any kind of stepped-up engagement, especially with more restructure those service lines that have been going on to restructuring. Are you seeing more engagement with them? Can you provide some outlook as to how you are thinking about your business with these providers in the U.S.?

Yes, sure. So, we had mentioned that actually Tier 2s and Tier 3s, I believe we mentioned that in my comments were actually strong in the quarter. I think we mentioned that in the press release actually last night. And so that speaks directly to what you're talking about. So, the carriers that have gone through the process are very much through that process, seem to be opening back up and have set public goals on what they want to cover. And they believe that fiber deployment and broadband is their growth path, and they're executing on that. And we're seeing a benefit from that. I would expect that just to continue on from where we are right now. In the Tier 1 space, it may be a little bit more muted, I think, as they kind of have some real needs in their planning their process right now, but the same thing is happening with at least the long-standing customers that we have there. And that's part of that whole award with the disaggregated piece, getting that through their labs so that they actually have a platform that they want to grow in the future. So, the direct answer to your question is, yes, that space has gotten better. It was abysmal last year, but it's definitely gotten better this year.

Sure. Okay. I appreciate the color. Related question is, can you walk us through your customer concentration? Can you give us a color on how much top five customers accounted for the percent of total revenue, top 10 customers as a percentage of total revenue? Just trying to get a sense on how concentrated your revenue piece is.

Well, let me – we don't really go through that detail. But I will tell you that quarter-in and quarter-out over the last year or so, what always shows up in that top five or six customers is the distribution channel to the RSPs, so to the regional carriers, the Tier 2s, the Tier 3s and the municipalities. It's really more Tier 3s and Tier 2s. So that is always in that, let's say, top six and so that piece of it and if you aggregate all of our distributors that sell into that market, they're usually in the top two or three or sometimes the largest. So, there is a big chunk of our business that has moved from kind of like the Telmexes of the world to that distribution component, which sells to hundreds of RSPs. So that portion isn't very, so that literally, the biggest portion of our business usually is a very distributed piece. The problem is, is getting one of those carriers by themselves don't mean a lot. But when you aggregate them, they're a very large piece of our business.

Can you give us a sense of how big that is? Is it like 30%, 40% of your total revenue?

Let me say, it would be over 30% of our business.

Yes.

All right. I appreciate the answers. I'll pass.

Your next question comes from the line of Tim Savageaux with Northland Capital.

Hey, good morning. I wanted to drill down on the guidance a little bit for Q3 in light of, I guess, what you just mentioned, which I think kind of the rural broadband piece of your business served by distribution at 30% plus of revenues and also looking at the fiber performance. In Q2, I think you mentioned it was up 21% sequentially. So, as you look into Q3, I mean, do you expect trends in either one of those markets, understanding they overlap, to slow a bit? Because it seems like a continuation of those trends would drive you on the stronger levels, are you seeing offsets anywhere either on the copper side or internationally?

So to answer your first question, I think that trend will continue. I will tell you that we exited the quarter with a strong backlog, and some of our trepidation has to do with just making sure that we don't have any supply chain issues that would have held us to meet that demand. Like I said, there's very strong demand in that segment of the business. As far as offsets, I don't, I will tell you that some of our carriers are a little more seasonal. So usually, the German, our strong German carriers usually slows down some in Q3. And then the other big component of that right now is, kind of, we have not quite the visibility is what Australia will do, whether it'll be up or down. That's probably the only offsets that I can think of. I think everything else is at. And Australia very well could be up, but I think everything else is up.

If I can just follow up on that. It seems like Australia will be working from home for quite some time, so maybe that will be up, but any chance you could size any potential supply impact that you might be seeing in Q3?

Every time we've gone into if we went into this quarter, it looks big and then we whittle it down. I would say the same thing is here today. I mean it's I don't know actually. I mean right now, what's happening is people give you days and then they try to beat the days, and the days they give are terrible and then they try to come in and improve on what is a difficult supply environment. And I think that's going to be the same case here. So whatever I gave you would not be correct. I would just tell you we're working through it. We've worked through it every quarter so far. And we've been able to keep all of our customers happy with what we've been able to deliver to them. And it truly is just a – there are a few vendors that are just having real capacity issues, and they're trying to keep up. We have enough capacity here to be able to manufacture plenty. That's not the issue. It's really just a matter of us making sure we can get all the components.

Okay. Your next question comes from the line of George Notter with Jefferies. Your line is open.

Hi guys, thanks a lot guys. Maybe just along those lines, how much of a gross margin impact do you think you're seeing because of the component supply chain issues this quarter, Q2 and then going forward in Q3? And then I've got another question also.

Yes. Probably the biggest impact that we saw because we really don't see prices escalating. There are some components where we had to buy, and they're more expensive. But I would say that that's not that material. I wouldn't even call it material. Where we've seen the biggest impact is on freight where we've seen our spending on freight, but our impact on freight probably, right now, we're paying about twice what we were paying a year ago on freight. And that just has to do with the number of lanes that are open and the last-minute kind of component shortages, things coming through, and that having to flat things. So, it's not what we typically like to do, but so the biggest impact is on freight. And my guess it would be we're talking about a couple of million dollars in freight in the quarter.

That's right.

Got it, a couple of million dollars incrementally this quarter.

Material for us on gross margin, right?

Yes, between 1 and 2 percentage points.

Okay. Great. And then if I – and then looking forward for Q3, I mean do you think that would be the same level? Or when do you think that might abate? Is that going to be with us for the rest of the year? What's the perception?

My guess will be it will be with us for the rest of this year. Just it just really hasn't eased up. And like I said, it's not the entire supply chain. The optics have gotten better. It's really silicon where we're seeing the biggest issue. And yes, my sense is it's just going to be that way through the rest of this year.

Got it. Okay. And then I also wanted to ask about your opportunity in Europe vis-a-vis Huawei. Yes, I heard certainly your comments about the BT project and then Deutsche Telekom. But if you look elsewhere in Europe, are you seeing opportunities also presenting themselves to displace Huawei? And obviously, you've got a big competitor in Nokia over there, which is an incumbent in a lot of those accounts, but how do you kind of see your positioning for that opportunity relative to Nokia in terms of picking up incremental business? Thanks.

I feel really good about picking up incremental business. So, in most of these carriers, and by the way, there are other Tier 1s. I mean I don't want to preannounce processes that are out there, but they're right now, the software deals that are literally going to be decided this week with a major Tier one. There's PON XGS-PON deals that are going to be mounted by major Tier 1s over the next probably three to four months. I just announced that I just mentioned we had won a Tier one account, another Tier one account in Europe, that will be announced by us we say within, I think, September or so. So, I mean the benefit that we have is most of these carriers have two vendors, and they don't want a single source. So, our ability to pick up share in relation to who is already a source within these accounts is very strong. And as you probably understand this as well as anybody, we're coming at it with a truly disaggregated kind of next-generation XGS capable system, that's being controlled, orchestrated in everything. And that's what they want, so they're going to make a choice. It's really easy for them to say, well, now is the time to do this. And it works, right? It's up and running. And so I think we have a good, we have the best competitive product out there. And at the same time, they don't want a single source. So, we're just in a really good position in Europe. It is it's a good place to be, like I said.

Got it. Okay. And then the timing on those opportunities. I guess there's a lot of factors. There are probably plenty of this. I mean, certainly, the direct product rule may have an impact on people's ability to continue to source Huawei gear that would make this, I think, skew faster. And then on the flip side, I think in a lot of those situations, you have been and historically been a supplier in a lot of those types of accounts. And so, maybe it takes longer to qualify a product, train people and so on. I mean, how do you kind of think about the yin and yang of timing?

Well, I think so what we did some time back is, we started really we put a footprint in your outside of what we normally did in Germany. And what we were trying to do is to grow recognition within the community there within the EU about our fiber expertise, right? So, we started winning a bunch of alt-net carriers. And those kind of helped us get credibility within the larger carriers. And we did have a relationship, for instance, with BT prior. Although we weren't selling them anything, they have known us and we had been through a couple of processes with them. I can't really overemphasize the importance of having DT and BT buying our next-generation disaggregated solution as being a proof point for other carriers that are trying to figure out what to do. They're the two you'd want to have. And so not only do we have small carriers, but we have two very large carriers that are moving forward and have selected our next-generation system. So, I think it's done well. Now as far as the timing, I mentioned before that what we're doing, and I just – I want to make sure I said it, trouble here to see what we've already announced, but we have a very accelerated time frame on getting these things operationalized. So, there's been no slowdown because of lack of knowledge. And in fact, the feedback that we've been getting has been very positive on where we are positioned relative to what their historical experience has been in getting these things approved. So, I don't think that is the problem.

Okay. Thanks very much.

Okay.

Your next question comes from the line of Paul Silverstein with Cowen. Your line is open.

Thanks. Mike, your explanation earlier, I apologize, but I appreciate your comment about the trade cost causing 1 to 2 percentage points of gross margin, I guess, I'm curious why what's depressing gross margins into that low-40s range? I know you said consistently that mid-40s is what original best case is. If Deutsche Telekom is going to be down in the third quarter, consistent with historical seasonality and that's always been a meaningfully lower gross margin, why wouldn't that help move gross margin up? And what's keeping gross margins depressed? And finally, on the [indiscernible], if and when these large wins kick in, do they help gross margin? As I would think if there is just aggregate solutions or because they're European, non-U.S., do they continue to depress or further suppress gross margin consistent with the historical disparity in the gross margin profile between U.S. and non-US?

I'll let Tom cover the new Tier 1 wins, but I do want to say what I've said over time is low to mid-40s as the target, not necessarily mid. So, you might be modeling the long-term target at 45%, and I'm thinking it's somewhere around 42%, 42.5% somewhere in there. So generally, that's about where we've been depending on mix. So, we continue to work to improve gross margins through our cost basis and a lot of different things, but at the same time, there's always price pressure and new wins and all the rest of that. So, we do continue to expect that we'll be in the low-to-mid. So that's what I would keep in your mind.

On the longer-term issues with respect to these new ones?

I wouldn't expect a new win. I'm not going to – I wouldn't expect the new wins to change the margin profile from where we are now. I mean, when we talk about mid-40s, that includes new wins.

Just to tie this up, with DT being down, your expectation that DT will be down in the third quarter consistent, why would that help improve gross margin? I recognize we're only talking about one quarter, but what do you offset that's pushing gross margins down?

First of all, DT itself, depending if they're buying line cards, as you are well aware, or buying chassis or buying switch modules, the margin profile of those are dramatically different, unfortunately, they're dramatically different. So, although there may be lower revenue in DT, depending on the mix of what we're shipping that quarter, it can have a negative impact on gross margins.

We're also seeing strength in CPE. So, the end points for the fiber network, and those things tend to also have a lower margin than the rest of our access in the Ag business for fiber.

We do have some cost-reduced products that are coming out later this year, but without a doubt, OLTs are a drag on margin.

Okay. I appreciate your response. Thank you.

All right. At this point, I think we're out of time. So I appreciate everybody that joined us on the conference call today. Look forward to talking to you next quarter.

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