FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

ADTRAN, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ADTN)") else Response.Write("(NASDAQ: ADTN)") end if %>
901 Explorer Boulevard
Huntsville, AL 35806-2807
(205) 971-8000
http://www.adtran.com

UNION CITY, CA (February 6, 1997)/FOOLWIRE/ --- Adtran released fourth quarter and year-end results on January 14th. Over the year they had a growth rate of 38%. The year was a little different in that this was the first time in a couple of years that their telco sales growth rate has exceeded the CPE. They had a 43% year-over-year growth in telco shipments. That was fueled by both the low voltage HDSL product that they started shipping in the third quarter and also the strong improvement in the ISDN shipments. On the CPE side of the house, the revenue there grew 37%. Where normally that would be higher than the telco growth, as they go into 1997 they look forward to revenue growth in the CPE being also fueled by a significant number of CPE products that were introduced in the second half of 1996. They expect the CPE growth rate to come back up and exceed the telco growth rate. For the year, telco revenue was $150 million and CPE was $68 million. For the quarter, telco revenue was $42.7 million and CPE was $18.7 million.

SALES BY PRODUCT. By product, for the year, the DES frame relay revenue was $76.6 million, ISDN revenue was $83.4 million, HDSL T1 revenue was $88.5 million. In the fourth quarter, DES frame relay revenue was $19.2 million, ISDN was $22.9 million, and HDSL T1 was $27.3 million. Of the ISDN sales, the terminal adapter revenue as a percent of total ISDN sales is quite small in that they introduced the Express line of terminal adaptors late in the third quarter that has started to generate a significant amount of interest. However, it is all boxed into ramp, the percentage is not very significant yet.

DES VS. FRAME RELAY. They look at the totals and see that the revenue in the 64 kilobit access product line that they sell to telcos is starting to grow, where it had been flat for a year and a half to two years. It is obvious to them that this growth is a result of the frame relay applications for their products, but since identical product, and the telcos don't know when they order that product from Adtran whether they are going to use it in a DES or a frame relay, is shipped they don't have the access to that information.

HDSL T1. The domestic T1 market is quite a surprise to them in that historically the studies and the research has shown that market is growing at a 35% growth rate. For companies that publish their HDSL T1 shipments, however, over this year it looks like the true growth rate of that market is twice what it has been historically. On top of that, this much higher growth rate seems to continue. Some of it is increased market share of HDSL installations taking market share away from the older analog repeater-type of T1 installation at the telcos. However, it is surprising there to note that, although Adtran is taking marketshare certainly from the older technology, the suppliers of that technology continue to report that they are experiencing growth also, although at lower levels. So that total T1 market just looks to be extremely strong and they don't see much of a change on an ongoing basis in the momentum of the growth, it just keeps going.

CONSUMER ELECTRONICS AWARD. They are very pleased with the award they received at the Consumer Electronics Show. They have never had a significant place in the consumer electronics area and for that show to award their Express series of ISDN terminal adaptors as an Innovation Product winner is a very significant award for them. Going forward, they think that the consumer-related ISDN sales are never going to become a major portion of the business at Adtran, simply because the basic nature of their products and the market is really a business investment rather than a consumer-related investment. In 5 years that is probably going to change, but it is the way Adtran looks at the landscape in that product area today.

INTERNATIONAL SALES GROW. One thing they are extremely proud about in 1996 was the improvement in international sales. They have been working very hard over the last 3 years to bring the international sales level up and during the year they improved from 6% to 7.4% of total revenue from international. To have that improvement required international to almost double. On a long-term basis they still believe that 30% international shipments is an achievable number and that, although the percentage growth rate has only improved 1.5% this year, if they continue to double their revenue base as they have been doing, they ought to get to their goal in the foreseeable future. On a regional basis, they do much better at least so far in their shipments of all their international products to the Far East. The Pacific Rim countries are obviously in a very high growth environment, plus Adtran finds there is a much easier environment selling into the Pacific Rim than selling into Europe. However, European sales are improving and they are going forward with increased efforts to break into the European Common market. They think their E-1 product line and the ISDN are pretty close to being equal as far as their international shipments and are major contributors to their international growth. The one product area that is not very strong in the international arena is the 64 kilobit access, either DES or frame relay. The main reason there is that in all the developed countries, there are local suppliers and it is very difficult to break into the 64 kilobit access.

INVENTORY MANAGEMENT. Once again during the quarter their continued program of reducing inventories and improving turns continued. They ship to the telco environment on a just-in-time basis, normally with lead times of 24-48 hours. This year they installed software that has helped them tremendously in managing inventory and logistics of the quickturn shipping process. Overall, they expect to see inventory turns continue at something approximating the level they saw this year with maybe some improvement. As to the makeup of inventory, they don't know of anything abnormal in that makeup. It is pretty normal in terms of the mix between the various product lines and various components. Also, percentages of raw parts, work-in-progress, and finished goods are in good shape.

MARGINS AND TAXES. The pre-tax margin rates for the year were excellent. Their pre-tax for the total year was 25.4%, slightly above the 24-25% business model. That was offset during the year somewhat by a higher tax rate than anticipated. They think the tax rate for 1997 will probably be reduced 1-2% from 1996. The major benefit of that will be a further expansion of the benefits they receive from the Alabama Economic Development Program which results in a reduction in the Alabama tax rate. This increased benefit is calculated on an average of expenditures for capital equipment during the period. Looking into next year, the tax incentive they get from that program should increase significantly.

SEASONALITY. From a quarter-to-quarter basis, Adtran's business certainly seems seasonal, but they can't ever figure out a pattern because from year to year the relative strength of quarters to each other tend to randomly change. The main reason: in their telco business there are domestically at least 8 major telcos (the RBOCs plus GTE). Each one of these customers normally buy from Adtran in pretty sizeable lots. In many products they will have one shipment per month that is triggered when they start to get low on inventory from last month's shipment. It is therefore very easy for them to have two shipments in a quarter and in the next quarter have four. Every now and then, Adtran sees random ups and downs that, over any extended period of time, really doesn't reflect the true nature of growth of their company. Over an extended period of time, looking back, you can say that the first quarter of each year for all of those companies might be considered the slowest. Obviously that would be due to weather.

TOTAL REACH TEST UNITS SHIP. Adtran is shipping the Total Reach test units, the first product that would go into the telcos. They seem to be performing quite well and they don't see any significant problems or changes that are coming back from the field. The production shift will allow them to reduce the line voltage they are currently supplying down to levels that can move the product from a test environment over to a full deployment status. They are looking at the first units with the lower voltage applications towards the end of this quarter or probably in the second quarter. The response they are getting and the excitement at the telcos is continuing. Also in the Total Reach area, they are getting very close to bringing the DES frame relay product which will have about the same characteristics of the telco where they will now allow the RBOCs to go from 4 wires down to a standard 2 and also double the distance that product will go.

NO IMPACT FROM RBOC MERGERS. As far as any potential impact from the pending RBOC mergers, the equipment Adtran sells to the telcos is driven by their customer demands, not by capital spending budgets. So Adtran's revenues are not affected by any capital spending budget changes.

ISDN MARKET. The company was asked to comment on what they see as the future outlook of the ISDN market. They said that they are not fortune-tellers, but they have some opinions. They think ISDN is going to be a very high growth market for a long period of time. It is the one service that is here that is available now, especially on a switched basis, that will give a very low error rate data path on the switched network at either 64K or 128K. The nice thing about it is that it is not a technology of the future, it is a technology of the present that has taken a significant period of time to develop the infrastructure for, but that time has passed and now the service is available. The area they think is going to be the most significant over the next 18-month timeframe is the advantages in cost and installation that the Total Reach program is going to give the service providers. No longer will they have to bear the extreme expense of the installation cost of repeaters. As the volume shipments of the Total Reach ISDN product increase, they believe it will accelerate the growth of ISDN, especially with regard to the pent-up demand that has been generated due to the obvious reluctance of service providers to install ISDN to customers in excess of 15,000 feet. Adtran is very positive, as they have been for the past couple years, on the outlook for ISDN service.

ADSL MARKET. The company was asked about ADSL. They responded that they are not a current ADSL player. They are investigating, in a very significant manner, the technology involved and the markets involved to determine the approach they think they should take over the long term to ensure that when and if they enter the ADSL market, that they do so in a manner to make money rather than headlines. The company said that if you look at the current trials that are going on, there are quite a few of them and that the numbers involved are quite small. There is a very significant infrastructure consideration and it is a whole lot more than simply generating a high-speed modem for the local loop. When you get into the much higher speeds, it requires significant differences in infrastructure. You look at the timeframe it took to be able to get true ISDN service up and it is a 10-12 year process. They are not saying it will be that long with ADSL, they are saying that they absolutely do not believe they will have volume in the 1-2 year time frame that some people believe is going to occur. They think it will be a longer time frame before the volumes can get to significance. The IDSL is a private-oriented type of service based on ISDN technology. It has a place, especially as it relates to accessing the Internet. At this point in time the percentages of ISDN actually being used to access the Internet is a very small percentage. They think there is a place for the IDSL type products that are being announced, but they do not see it at this point as being a high percentage application for the service. For ISDN right now, LAN-to-LAN interconnect is probably the largest single business application. There is a lot of Internet access type of things, but one of the areas they look at as a business area that others might classify as a consumer-type area is the access by the professional to the corporate LAN or the corporate computer.

OPERATING EXPENSES. The company was asked about an increase in operating expenses. They responded that a good bit of what we are seeing are moves that Adtran has announced over the past few months to strengthen the sales organization. The headcount has grown some with the growth in business but the ratios remain very much within acceptable bounds. They are committed to continuing the R&D expenses. They want to have a business model that will support that. They don't believe there is any significant special factor they would comment on. They did comment in their release that they felt good about the moves they have made to strengthen their organization and they believe that really began to show itself in the fourth quarter. They also said that operating costs were in line with expectations and they think that is the case. They were pretty much in line with what they expected and they believe it just reflects growth in their organization and strengthening the infrastructure. One comment also there is that, on a year-to-year basis, the overhead expense on a percentage basis declined slightly.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.