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Powering Today’s Networks

Powering Today’s Networks. Jim Matthews Senior Vice President, Finance Chief Financial Officer. Emerging Opportunities. Next-generation architectures now a necessity Must counter competitive threat from cable Capex on the rise: Projected to increase 5% to $61 billion in 2005

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Powering Today’s Networks

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  1. Powering Today’s Networks Jim MatthewsSenior Vice President, FinanceChief Financial Officer

  2. Emerging Opportunities • Next-generation architectures now a necessity • Must counter competitive threat from cable • Capex on the rise: Projected to increase 5% to $61 billion in 2005 • Favorable regulatory environment easing investment concerns • Technologies now mature enough to deploy • Softswitch, VDSL2, ADSL2+, GPON • VoIP driving investment in enterprise sector

  3. Next-Generation Architectures • Build out of access network to deliver premium services (VoIP, IPTV) • Migration to IP-based applications and services • Evolution to higher-speed business services • Expansion of wireless communications

  4. Favorable Regulatory Environment • FCC policies encouraging investment in broadband access technologies • Removing barriers to investment • Relaxing unbundling requirements • Sunsetting UNE-P • Encouraging real competition in residential broadband access • Encouraging VoIP and related facilities investment • Encouraging alternative facilities • Cable, Broadband Wireless Access, and Broadband over Power Lines • ILECs investing to meet competition

  5. The Carrier Response SBC Communications to Rapidly Accelerate Fiber Network Deployment in Wake of Positive FCC Broadband Rulings October 14, 2004 Verizon FiOS TV Will Offer a New Customer Experience April 18, 2005 BellSouth Initiates Technical Trial of Microsoft TV IPTV Edition January 6, 2005 Verizon Offers Most Dynamic Communications Tools for Fastest-Growing Business Segment April 27, 2005 BellSouth is First Provider to Deliver End-to-End Quality of Service for Enterprise Virtual Private Networks March 31, 2005 Qwest Launches Expanded Nationwide VoIP Service for Businesses December 8, 2004 SBC Communications to Detail Plans for New IP-Based Advanced Television, Data and Voice Network November 11, 2004

  6. ADTN: Uniquely Positioned • Strategic product position • Deeply entrenched in carrier infrastructure • Entrepreneurial engineering philosophy • World-class supply chain operations • Demonstrated financial competence ADTRAN is number two in certain key markets, second only to Cisco and Alcatel.

  7. Strategic Product Position • The right place at the right time • Essential technologies for increasing access network bandwidth • DSL, SONET/SDH • Essential technologies for migrating access networks to IP/Ethernet • Essential technologies for migrating enterprise networks to VoIP • Heavily invested in development of highly competitive, lowest cost solutions

  8. Broadband Access Strategic Product Position • Aggressive competition for high-speed business- and consumer-class DSL subscribers • Critical revenue source for carriers • Customer retention, customer growth • Ethernet in the first mile • Widely deployed, established LAN technology migrating into access network • Data-centric business networks demanding 50-80 Mbps Ethernet pipes • Extremely versatile broadband deployment platforms • ADTN DSLAM equipped with SHDSL or ADSL • ADTN Metro Ethernet extension (Ethernet Over Copper) • ADTN Integrated Access Devices (IADs)

  9. Fiber to the Node Strategic Product Position • Deep fiber strategy to increase residential bandwidth to 15-40 Mbps • Network model • Fiber from the Central Office to the node or neighborhood • Copper from the node to the customer premises • ADSL2+, VDSL2 • ADTN DSLAM solution • Brings access node closer to subscriber • Facilitates multiple channels of video,voice, and data • Currently ADSL2+ capable (up to 24 Mbps) • Currently IP-enabled and fiber-fed

  10. Optical Access Strategic Product Position • Fiber-rich access environment • More than 8 DS1s or 10 Mbps Ethernet delivered on fiber • New market: SONET/SDH-based Customer Located Equipment • Upgrading networks to handle data-centric traffic loads • Next-generation requires combined TDM and Ethernet functionality • Cost-efficient ADTN solutions designed specifically for the access portion of the network • Extremely versatile platform • Wireless connectivity, Ethernet to large business, DS1/DS3 to small and medium business, metro and access transport applications, Digital Cross Connect (DCS) • Now OC-12 and Ethernet over SONET enabled

  11. Wireless Access Strategic Product Position • Traffic explosion • Voice usage now averaging 711 minutes per month • Data revenue now represents 8% of ARPU • 12,170 new cell sites added in 2004 • Increasing fiber and copper lines to tower • Opportunity for ADTN SONET multiplexers and HDSL platforms • Upgrading network for data services (3G/EVDO/HSDPA) • Requires OC-3 (new) to DS1 (legacy) connectivity • Opportunity for ADTN SONET and M13 multiplexers • Increasing microwave bandwidth per site • New demand for combined TDM/Ethernet transport • Opportunity for ADTN broadband radios • Improving bandwidth efficiency • Opportunity for newly introduced ADTN wireless backhaul solutions

  12. IP Access Strategic Product Position • Unified VoIP networks present compelling business case for most companies • Requires changes in network architecture • IP phones and PBXs, IP servers, voice-enabled switches and routers, IP-enabled DSLAMs and IADs, PoE-enabled switches • Challenge: Maintain quality of voice as it passes over data networks (QoS) • Challenge: Power IP phones and Wireless Access Points (WAPs) • Opportunity for ADTN integrated switch/routers, PoE switches, IP IADs, IP DSLAMs, T3/T1 routers, and VPN appliances

  13. IP Access Strategic Product Position • Extensive portfolio of IP-based, enterprise-class networking equipment • Essential component of enterprise networks • Multi-tier reseller channel (5,000+ VARs) • Essential component of bundled service offerings • AOS investment • Improves margin on products • Improves time to market • IP technologies transferable to global markets

  14. Strategic Product Position

  15. Deeply Entrenched in Carrier Infrastructure • ADTRAN solutions widely deployed in carrier networks • DSLAMs in top eight domestic carriers • SONET mux in five of top eight domestic carriers • HDSL in top eight domestic carriers • Extensive knowledge of carrier operations • Strategically aligned with current and future services roadmaps • Service level improvement tools and initiatives • Long-standing relationships in key accounts • Established contractual relationships • Able to navigate approval cycles and processes • Recipient of numerous quality and cost management awards

  16. ADTN Customer View Carrier Wireless Global Enterprise Distribution

  17. Entrepreneurial Engineering • Nimble, adaptive design and engineering operations • Vertically integrated design process • Internally developed intellectual property • Control over design and manufacturing issues • Greater control over product costs • Enter market with improved technology at price point below established market • Continually re-engineer successive generations to improve margin • Drive for market share leadership

  18. World-Class Supply Chain • Two largest international contract manufacturers • Diversified sourcing • Supplemental in-house production • Enables quick response to customer issues • Certified to ISO 9001:2000, TL 9000 Release 3.0, and ISO 14001 international standards for quality and environmental management across design, manufacturing, and service operations

  19. Demonstrated Financial Competence • Only company this size (<$500 million) in position to excel in these markets • Consistently strong results over past four years despite unprecedented industry downturn • 17 years of uninterrupted profitability • Long-term growth strategy • Consistent investment in R&D • Proven performance in key markets • Transitioning into larger markets

  20. Revenue In 2004, revenue increased 14.6% to $454.5 million. ($ millions)

  21. Earnings Per Share Earnings per share increased 22% from $0.76 in 2003 to $0.93 in 2004. * *Excludes investment impairment charges

  22. Gross Margin Gross margin reached a record 57.4% in 2004, up from 56.0% in 2003 and up from 50.6% in 2002.

  23. Unrestricted Cash & Marketable Securities Cash position remains strong after $25 million in dividend payouts and $81 million in stock repurchases in 2004. Net of Debt($ millions)

  24. Q3 2005 Results 2005 Revenue ($ millions) 2005 Earnings Per Share • Revenue: $149.2 million • Earnings per share: $0.42 • Gross margin: 59.9% • Unrestricted cash & marketable securities: $345 million, net of $24.1 million in stock repurchases and $18.9 million in dividend payments year-to-date

  25. ADTN: Uniquely Positioned • Strategic product position • Deeply entrenched in carrier infrastructure • Entrepreneurial engineering philosophy • World-class supply chain operations • Demonstrated financial competence ADTRAN is number two in certain key markets, second only to Cisco and Alcatel.

  26. Powering Today’s Networks Jim Matthewsjim.matthews@adtran.com

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