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ADTRAN INC (ADTN) Q1 2019 Earnings Call Transcript

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ADTRAN INC ( NASDAQ:ADTN)
Q1 2019 Earnings Call
April 18, 2019, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to ADTRAN's First Quarter 2019 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. (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 successful development and market acceptance of core products, the degree of competition in the market for such products, the product and channel mix, component costs, manufacturing efficiencies and other risks detailed in our annual report on Form 10-K for the year ended December 31, 2018. 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. In addition, ADTRAN will webcast this conference live through our website at www.adtran.com.

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 -- Chief Executive Officer

Thank you, Priscilla. Good morning, everyone. We appreciate you joining us for our first quarter 2019 conference call. And I'm joined today by 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.

We are pleased with our progress in the first quarter of 2019. We executed well toward our goals to meet our financial objectives, strengthen our customer, product and geographic diversification. Ensure seamless integration of our smart RG team and their first full quarter as part of ADTRAN and accelerate customer traction with our fiber, broadband and subscriber experience solutions.

From a top line perspective, revenue for the quarter was $143.8 million, up 19% on a year-over-year basis. Network Solutions accounted for the majority, at $125.8 million, a 19.5% increase over the same quarter in 2018. Global Services and Support revenue contributed $18 million or 12.5% of total company revenue for the quarter, this is a 15.5% year-over-year increase.

The timing of key customer infrastructure projects resulted in nearly 50% of our revenue for the quarter, coming from international markets. We finished the quarter with three 10% of revenue customers located in three different markets, LATAM, Europe and North America. Underscoring the impact ADTRAN is having as we help our customers build their best networks.

I'd like to mention a few achievements from Q1 that highlight our focus to help our customers grow revenue, further simplify network operations and accelerate service velocity. A central focus for us over the last few years has been to expand EPON portfolio and Fiber-to-the-Premise customer base.

I am pleased with our progress as our Fibre-to-the-Prem product revenue grew more than 52% year-over-year, we now have partnered with well over 300 different operators to roll out EPON to enable residential, business and mobile applications.

We continue to gain momentum in selling software applications that enable service providers to use intelligence within their network to dramatically improve their business operations. An example from Q1 is one of our regional cable operators is now utilizing Mosaic subscriber insight for monitoring and billing across a 150,000 of their broadband subscribers. This enables them to eliminate hardware based solutions with high annual maintenance costs.

We've consistently demonstrated our ongoing commitment to ensuring that broadband is available across rural America. To help further this commitment, ADTRAN introduced during the quarter a comprehensive Connect America Fund monitoring and performance test solution that enables service providers to meet and manage FCC requirements with minimal inconvenience and without raising privacy concerns. All our offering enhance data analytics to help improve their customer experience.

The end-to-end network performance test solutions enables recipients of CAF funds to meet the requirements that go into effect July 1st of 2019 as described in the FCC order. It also accommodates those service providers looking to meet alternative Connect America Costs Codel, A-CAM, requirements detailed in that same order, as well as future testing regulations that may develop -- be developed in other countries.

In addition to tremendous customer engagement at Mobile World Congress, we are proud to make three key announcements. We partnered with Telefonica to successfully demonstrate 10-gig PON in an open disaggregated architecture as part of their 5G showcase. They now plan to move forward into field trials as they embark upon and upgrade to one of the world's largest Fibre to the Premises customer [ph] subscriber basis across Spain and Latin America.

To help our customers maximize the 5G opportunity, ADTRAN also announced an extension of our fixed wireless access portfolio with the addition of new millimeter wave mesh and point-to-point -- point-to-multipoint solutions that enable rapid deployment of dense 5G networks.

We also announced a collaboration with IoT.nxt, a leading Internet of Things technology company in South Africa to help carriers and enterprises around the world, design new services and solutions by bringing various streams of IoT devices and their data together with a single easy to use platform. This collaboration with IoT.nxt is one example of the power of ADTRAN's smart OS with its software development kit framework. ADTRAN will now be able to provide both enterprise and carrier customers with smart streamlined management of IoT data that will help drive better and more informed business decisions.

Our solution has already been selected by Vodacom, a leading operator with over 55 million customers and services across 32 African countries. I'm also pleased to report that, recently we surpassed the 20 million port milestone for cumulative VDSL2 vectren port shipments.

Our traction with cable -- in the cable MSO market continues to gain momentum. During the first quarter, a Tier 1 cable operator continued to ramp their weekly subscriber count on ADTRAN's 10-gig EPON solution toward their target of a 10 time subscriber growth in 2019.

We were also pleased to be invited into the lab phase with a third Tier 1 cable operator with our 10-Gig PON solutions. We continue to see strong traction with our XGS 10-Gig PON solutions as well in a growing variety of market segments with announced wins during the quarter in Europe and North America. At our Broadband Business and Solutions summit this week, the team outlined a next round of exciting enhancements in EPON portfolio, which we'll publicly announce throughout this year.

As most of you know, at the end of last year we acquired SmartRG, an innovative company that leads the market in helping service providers better leverage their connected home opportunity, to improve and monetize the subscriber experience. I'm pleased to report that the promise we saw in its teams, solutions and technology is already having a positive impact on how our customers view this rapidly emerging opportunity. As 10-gig moves from the network planning stage to real world deployments, we see interest from and deployments by a wide range of service providers to our market leading XGS-PON solutions, especially in North America and Europe. But we are also seeing emerging opportunities in Australia, the Middle East, Africa and Latin America.

From Zune's deployments across the UK targeting 1 million homes to most networks upgrading its network to better serve rapidly growing bandwidth demands from the rural communities they serve in Virginia. Our industry leading 10-gig solution portfolio is enabling our customers to push more robust fibre services further.

In summary, we are pleased with our progress in the first quarter of 2019. Our revenue was diverse and well balanced with material contributions across LATAM, EMEA, North America and the Pacific Rim regions. Furthermore, our broad portfolio continues to gain market traction with a growing number of customers in an expanding range of market segments. This progress underscores the company's global impact as we help our customers build their best networks.

Before I turn the call over to Mike, I'd like to acknowledge and express my thanks to Bill Marks, who is retiring from ADTRAN's board of directors. Bill has served on the board since 1993 and has been a tremendous asset to the board, the company and to me. We wish Bill all the best.

And with that Mike will review the financials and we'll then be happy to answer any questions you may have. Mike?

Michael Foliano -- Chief Financial Officer

Thank you, Tom. And good morning, everyone. I'll review our first quarter results and discuss what we see for the next quarter. During my report, I will be referencing both GAAP and non-GAAP results. The differences between reported GAAP and non-GAAP include stock based compensation, acquisition related expenses and amortization, restructuring expenses, amortization of pension actuarial losses, non-cash change in fair value of equity investments for our deferred compensation plan and gain on a bargain purchase of a business.

As Tom stated, ADTRAN's first quarter revenue came in at $143.8 million, compared to $140.1 million last quarter and $120.8 million for the first quarter of last year. Breaking this down across our divisions, our Network Solutions revenue for the first quarter was $125.8 million versus $116.9 million reported for Q4 of 2018 and $105.3 million in Q1 of last year. Our global Services and Support revenue in Q1 of this year was $18 million, compared to $23.2 million reported for the fourth quarter of 2018 and $15.6 million in the first quarter of last year.

Across our revenue categories, Access and Aggregation revenue for quarter one of 2019 was $99.8 million, compared to $100.5 million last quarter and $81.7 million in quarter one of 2018. Revenue for our Subscriber Solutions and Experience category was $36.8 million for the quarter versus $31.2 million for quarter four of 2018 and $30.1 million for quarter one of last year. Traditional and Other Products revenue for the quarter was $7.3 million, compared to $8.3 million for quarter four of 2018 and $9 million for quarter one of 2018.

Looking at our revenue geographically, domestic revenue for Q1, 2019 was $72.5 million versus $74.8 million reported in quarter four of 2018 and $62.1 million in quarter one of last year. Our international revenue for quarter one of 2019 was $73.1 million, compared to $65.3 million for quarter four of 2018 and $58.7 million in quarter one of 2018. We've published the reporting of each of these categories on our Investor Relations web page at www.adtran.com.

As Tom stated in his opening remarks, we had three 10% of revenue customers during the quarter. Our GAAP gross margins for the first quarter of this year were 42.2%, compared to 39.5% last quarter and 32.9% reported in the first quarter of 2018. Non-GAAP gross margins for quarter one were 43% versus 40% in the prior quarter and 35% in the first quarter of last year. The quarter-over-quarter and year-over-year increases in our gross margin were primarily driven by our domestic product mix and increased weighting of our Network Solutions portfolio.

Total operating expenses were $66.8 million for quarter one of 2019, compared to $59.2 million reported last quarter and $66.4 million for quarter one of last year. On a non-GAAP basis, our first quarter operating expenses were $60.5 million, compared to $60.2 million last quarter and $60.9 million in quarter one of 2018. The slight non-GAAP quarter-over-quarter increase in operating expense was primarily the result of a full quarter of incremental expenses related to the SmartRG acquisition and increased marketing expenses, partially offset by reductions in organic contract services, labor, selling and insurance expenses. The non-GAAP expense year-over-year decrease is primarily attributable to decreases in labor, fringes and contractor expenses, partially offset by the addition of operating expenses from the SmartRG acquisition.

Operating income on a GAAP basis for the first quarter was a loss of $6.2 million, compared to an operating loss of $3.8 million in the prior quarter and a loss of $26.6 million reported in Q1 of last year. Non-GAAP operating income for quarter one of 2019 was $1.4 million, compared to a loss of $4.2 million in Q4 of 2018 and a loss of $18.7 million in quarter one of last year.

The quarter-over-quarter increase in non-GAAP operating income was driven by improved gross margins in our product portfolio and increased sales volumes, partially offset by a full quarter of incremental operating expenses associated with the SmartRG acquisition.

The increase in our Q1 non-GAAP operating income as compared to Q1 of 2018 operating loss is attributable primarily to higher sales volumes with higher gross margins in both our products and services portfolios domestically and internationally and lower operating expenses.

All other income for quarter one of 2019 was $7.2 million, compared to a loss of $6.8 million last quarter and an income of $11.9 million for quarter one of 2018, which included a bargain purchase gain of $11.3 million associated with the acquisition of North American EPON assets from Sumitomo Electric.

The other income in the quarter was primarily from market driven unrealized gains in our equity investment portfolios, as well as the receipt of insurance proceeds from the life insurance policy. Our non-GAAP other income for the quarter that just ended was $5.3 million, compared to a loss of $3 million last quarter, an income of $1 million for quarter one of 2018. The shifts in non-GAAP other income were primarily driven by fluctuations in our equity investment portfolios.

The company's GAAP tax provision for quarter one 2019 was $308,000 as compared to $2.1 million tax benefit in the fourth quarter of 2018 and a benefit of $3.9 million in the first quarter 2018. The shift to a tax expense in the quarter as compared to a benefit last quarter and in Q1 of 2018 was primarily driven by the return to profitability in the quarter.

GAAP net income for quarter one of this year was $770,00, compared to a loss of $8.4 million last quarter and a loss of $10.8 million for the first quarter of last year. Non-GAAP net income for the first quarter of 2019 was $4.9 million, compared to a loss of $5.8 million last quarter and a loss of $15.8 million in quarter one 2018.

Earnings per share on a GAAP basis were $0.02, compared to a loss of $0.18 per share last quarter and a loss of $0.22 per share in the first quarter of 2018. Non-GAAP earnings per share for the first quarter of this year were $0.10, compared to a loss per share of $0.12 last quarter and a loss of $0.33 per share quarter one of last year.

We've provided a reconciliation between diluted GAAP earnings per share and diluted non-GAAP earnings per share in our operating results disclosure.

Now turning to the balance sheet. Unrestricted cash and marketable securities net of debt totaled $174.7 million at quarter end, after paying $4.3 million in dividends and repurchasing 13,000 shares of common stock for $184,000 during the quarter. For the quarter, we generated $5.5 million of cash from operations.

Net trade accounts receivable were $99 million at quarter end, resulting in a DSO of 62 days, compared to 65 days last quarter and 60 days at the end of first quarter of 2018. The decrease in DSO versus last quarter is mainly attributable to the earlier timing of international shipments during the quarter and customer mix. The lower DSO in Q1 of 2018 was driven by customer specific payment terms that are no longer in effect.

Inventories were $93.6 million at the end of the first quarter, compared to $99.8 million last quarter and $120 million at the end of quarter one in 2018. Looking ahead to the next quarter, 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 the fluctuation in currency exchange rates in our international markets may cause material differences between our expectations and the actual results.

However, our current expectations are that our second quarter 2019 revenue will be in the range of $154 million to $158 million. After taking into account the potential effect of currency exchange rates and anticipated mix, we expect that our second quarter gross margins on a non-GAAP basis will be in the low 40s. We also expect non-GAAP operating expenses for the second quarter of 2019 will be up slightly over the first quarter amount.

Finally, we anticipate the consolidated tax rate for the second quarter of 2019 an a non-GAAP basis will be up sequentially in the high 20s to 30% due to increased income and restructuring charges in our European operations.

We believe the significant factors impacting revenue and earnings realized in 2019 will be the following. The macro spending environment for carriers and enterprises, currency exchange rate movements, 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 domestic and international, the timing of revenue related to Connect America Fund projects, the adoption rate of our broadband access platforms and inventory fluctuations in our distribution channels.

Additional financial information is available at ADTRAN's Investor Relations website by going to www.adtran.com and follow the Investor Relations link.

With that, now I'll turn the call back over to Tom. Tom?

Thomas R. Stanton -- Chief Executive Officer

Thank you. Mike. Priscilla, at this point we're ready to open up to any questions people may have.

Questions and Answers:

Operator

(Operator Instructions). We'll take our first question today from Rod Hall with Goldman Sachs. Your line is open.

Ashwin Kesireddy -- Goldman Sachs -- Analyst

Hi. Thank you for taking my question. This is Ashwin on behalf of Rod. I wanted to ask about visibility heading into second half of this year, particularly in Australia and LATAM. Maybe Tom, on Australia we know that there is a big Phase 2 opportunity there. Could you comment on what you are seeing there in terms of activity and your visibility? And related to LATAM, we understand that the customer there is probably a little bit more lumpy than other customers. Just wondering how you're thinking about that customer for second half of this year? And then I have a follow up.

Thomas R. Stanton -- Chief Executive Officer

Sure. So, as far as Australia, as you know, we have a large customer in that area that we're shipping (inaudible). And that business is ongoing and there are -- there is a Phase 2 of that project which we feel -- we feel very good about. So -- but there are also a couple of other opportunities within that customer that we expect to be shipping in the second half of the year as well. So we're feeling good about Australia, whether or not it will actually equate to the Q1 performance. Yeah, I would expect actually from our visibility today that we actually expect it to be up in the second half versus first half.

LATAM, same thing that we're going through a build out right now with large customer in LATAM. We have other customers in LATAM other than that one, but that one is definitely oversized compared to the rest. There is ongoing -- there is a push for vector VDSL and for 35b VDSL. They had shared with us their plans, right now we are expecting kind of solid strength through the year with that customer.

Ashwin Kesireddy -- Goldman Sachs -- Analyst

Got it. And my follow up is on US. Revenue was up nicely in the quarter. I know last year was tough. So besides easier comps, wondering if you could comment on drivers of this trend here domestically and growth expectations for the year? And kind of related to that, we know that Calix kind of had supply issues and we're wondering if you could comment on whether or not you are seeing an incremental opportunities?

Thomas R. Stanton -- Chief Executive Officer

I mean, there are always opportunities that pop up and whether or not they're driven by any particular supply issues with a competitor or not is kind of hard to specifically say. I don't see big -- I didn't see a big impact in Q1 because of those supply issue. So, I mean, I think we just had other things that were taking root and we had won some customers and as I mentioned in my call, we're in the lab with some new customers that may be beneficial to us, but I don't think they were directly supply related. We do expect the US to actually see growth in the second half -- we expect probably to be seeing more seasonal pattern of growth, right. We will see a peak in the third quarter.

Some of our customers are going through different processes, but our communications with that particular customer are strong and they still have plans to continue to grow and we're in a good position with them. As you know, our largest customer in the US are traditionally largest customer in the US, typically starts off a little slow and then you see them incrementally increase through the year and that's exactly what we expect this year.

Ashwin Kesireddy -- Goldman Sachs -- Analyst

Okay. Thanks a lot.

Thomas R. Stanton -- Chief Executive Officer

I want to add one other piece, which is the MSO piece, that our cable piece is actually doing very well right now.

Ashwin Kesireddy -- Goldman Sachs -- Analyst

Got it. Awesome. Thank you.

Thomas R. Stanton -- Chief Executive Officer

Okay.

Operator

Thank you. We'll take our next question today from Paul Silverstein with Cowen. Your line is open.

Paul Silverstein -- Cowen and Company -- Analyst

Hey, guys. I apologize if you all have already said this. But Tom, I know their is sensitivity on a customer by customer basis, but is there any insight you can share with us on the big customer in the US. That project that's been on the come for a while, but it seems like it hasn't driven -- hasn't gone to the meaningful growth stage yet? And again, I apologize if you've already spoken about it.

Thomas R. Stanton -- Chief Executive Officer

No. Well, I have -- I guess -- give me a little more -- which technology are you talking about?

Paul Silverstein -- Cowen and Company -- Analyst

Talking about the GFAST built out (inaudible).

Thomas R. Stanton -- Chief Executive Officer

It's -- No, no material change there. There are other places now where, of course, GFAST is taking hold, both in Australia and in Europe. And we -- we have new renewed interest and actually forecast for Latin America, but the specific customer you're talking about, not a material change.

Paul Silverstein -- Cowen and Company -- Analyst

Can I ask you a broader question? What are you most excited about over the next six and 12 months in terms of driving revenue growth? You've got a number of big projects that offer -- that have offer for some time, the prospect of significant incremental growth. I know there's always a timing issue with these big customers, but when you look at those projects, what are you most excited about? What are you most confident in terms of material drivers over the next six to 12 months?

Thomas R. Stanton -- Chief Executive Officer

Exciting and confidence are two different things, right.

Paul Silverstein -- Cowen and Company -- Analyst

You answer both (Multiple Speakers).

Thomas R. Stanton -- Chief Executive Officer

Usually the most exiting are the ones you are most nervous about, but -- so, I'm very happy with what we've been able to accomplish in Australia. And I think we're positioned well to actually grow, not only in the base of customers -- excuse me, the base of product that we're shipping there today, but I think we're well positioned to grow in other areas. I feel good about Australia over not just -- over the long term, not just -- not just what we're going to do necessarily this year.

I feel the same way about Latin America, that customer -- the big customer there has been kind of closed up for a period of time and they have very clear and strong plans to increase their broadband. So I feel good about the opportunity there. I'm not saying that we've got everything inked down, because it's a large customer with a lot of plans, but we're very well positioned there and I think right now we're doing a good job.

And then the European carriers that I talked about on the last call. I've mentioned, one of them I think today on my notes, but there are -- there's a ton of activity going on in Europe right now. Mainly centered around XGS-PON. And so if I think about the long-term prospects there, where we're positioned today, where our technology is with our disaggregated solution, where our -- where we are positioned from a geopolitical perspective, I feel very good about that. And those are probably the things that to me feel like the hardest things that will most move the needle.

Paul Silverstein -- Cowen and Company -- Analyst

So one last question from me. With respect to the customer historically that's been your largest in the US. Any change in visibility as there are plans over the course of this year, the better or worse?

Thomas R. Stanton -- Chief Executive Officer

Not a lot. I mean, they are continued, I talked about them working forward with a trial and doing some increase in vectoring which we saw last year, we are actually doing some completion of that this year and then going through the evaluation phase. I do think that the PON business there is actually doing well and it should grow. We expect that customer to grow throughout the year, but no real change. There hasn't been a fee change in their mindset at this point in time.

Paul Silverstein -- Cowen and Company -- Analyst

Would you -- do you think they're up this year over last year?

Thomas R. Stanton -- Chief Executive Officer

I would think so. I mean, but we'll see how it plays out. I mean, in a lot of that our business with them is multifold. One is, we have vectoring, the others is, we have CAF. The third is, we are doing a growing services business with them. So we're not only doing installation services for our own product, but we're doing installation services across the board from a turf footprint. And we have recently just won some new business on the services side that will actually start shipping in the second half. So, I'm not expecting huge growth out of that, but I think it will do well. I think when I mentioned in prior quarters that we tend to hit the bottom of that, we can hit the floor there and we expect it to grow from there. I still feel -- I feel good about that.

Paul Silverstein -- Cowen and Company -- Analyst

All right. I appreciate it. Thank you, I will pass it on.

Thomas R. Stanton -- Chief Executive Officer

Sure.

Operator

Thank you. We'll take our next question today from Michael Genovese with MKM Partners. Your line is open.

Michael Genovese -- `MKM Partners -- Analyst

Hey, thanks very much. First question, this 10% customer in Latin America, it sounds like it's a customer in a country that would be in NAFTA. I just want to verify? And ask have they ever been a 10% customer before or is this the first time ever?

Thomas R. Stanton -- Chief Executive Officer

Yes and yes.

Michael Genovese -- `MKM Partners -- Analyst

So they have been before in the past?

Thomas R. Stanton -- Chief Executive Officer

Yeah. It's been a long time.

Michael Genovese -- `MKM Partners -- Analyst

Okay, great. And then I want to ask about the gross margins. I mean, I see -- I want to ask about how you improve them so much sequentially when your US business was pretty strong. I mean -- sorry, the international business was pretty strong. I see that there was a mix where services were not as strong as they were last quarter, so that probably helped. But I'm still impressed with the gross margins considering how well you did internationally. So, could you speak more about how you did that?

Thomas R. Stanton -- Chief Executive Officer

Yeah. I think there's two things. One is product mix. So, there are certain products regardless of their international or domestic that actually just sell at a higher gross margin than other products. So mix helped us this quarter and then the other is actually just efficiency gains. I think, the -- our factories across the world when we saw an uptick in that volume and as you could -- although inventories came down, we're expecting a fairly solid second quarter as well. So I think we saw some improvements in efficiency gains that really helped. Mike, I can't think of anything else...

Michael Foliano -- Chief Financial Officer

Those are the two big things.

Michael Genovese -- `MKM Partners -- Analyst

Okay, great. Would you -- looking your access and aggregation business, do you have a rough idea. Can you give us a rough idea of where things stand between fibre and copper today in percentage wise?

Michael Foliano -- Chief Financial Officer

Actually, I don't have that number in front of me. That does vary a lot. I will tell you probably [ph] that in Q1. I would say we had a strong -- we shipped quite a bit of vectoring in Q1. So my guess would be that, it was material -- although we had a very good PON quarter as well and I talked about the growth in our PON shipments. Those PON shipments are not only PON's to our traditional carrier customer base, but are also PON shipments to our MSO base. But I would say in Q1 definitely just because of the materiality of the vectoring shipments that we had, both in GFAST and in super-vectoring those were stronger.

Michael Genovese -- `MKM Partners -- Analyst

But we smoothed it out beyond just a quarter and kind of looked on an annual basis, so it doesn't sound like one is much bigger than the other, is it a sort of 50-50?

Thomas R. Stanton -- Chief Executive Officer

It is so project oriented. So I would say, if you looked at over the year, you're probably correct, that you'll see more commonality or numbers that are closer to equality there, but on a -- so -- and the reason I'm saying that is, if you think about the customer base. So if you look at our biggest European customer, they're super-vectoring today, then they're moving to GFAST, then they're moving to fiber. And they have very well stated plans on that. So we have a strong quarter there with that customer, you're going to see higher vectoring shipments.

Latin America does a little of both, without a doubt the biggest piece that they're doing with us today is in the vectoring front. So as that project happens that's going to drive forward more for the copper piece. What is driving the PON piece today is predominantly the US, but I had previously talked about the XGS push and that will happen, that will be -- the counter to that is, we expect the MSO PON business to continue to grow. So it really just -- it really does depend on a kind of project by project basis on where customers are in their network evolution.

Michael Genovese -- `MKM Partners -- Analyst

Got it. That's helpful. Last question for me. You previous -- I think you previously talked about cable MSO could be 20% of revenues this year? Is that a correct target? Has anything there changed?

Thomas R. Stanton -- Chief Executive Officer

Nothing has changed in our cable forecast. I don't recall the 20%, but nothing has changed in our outlook on cable.

Michael Genovese -- `MKM Partners -- Analyst

Great. Thank you very much.

Thomas R. Stanton -- Chief Executive Officer

Okay.

Operator

And we'll move next to Rich Valera with Needham. Your line is open.

Rich Valera -- Needham -- Analyst

Thank you, Tom. I'm not sure if you've given an update on your large historically European customer, but it sounds like they were strong this quarter. But can you give a sense of how you see them for the balance of the year?

Thomas R. Stanton -- Chief Executive Officer

Yeah. Actually, it's going to be a little different this year, we're expecting more strength in the second half of the year than in the first half. The first quarter was not a bad quarter. Second quarter we kind of seemed to be kind of in-line ish with the first quarter and then we'll actually see a little pickup in the third. Fourth is still kind of far out there, but I think I answered your question.

Rich Valera -- Needham -- Analyst

Yeah. So just, you've mentioned, I guess, at least a couple of customers that or engagements you expect to be up in the second half versus first. So I'm just wondering if you'd be willing to say anything about seasonality relative to the Q2 levels. It sounds like, you're not expecting that traditional kind of fall off in 3Q from your European customers. So maybe would at least be looking at more like flattish sequentially from Q2?

Thomas R. Stanton -- Chief Executive Officer

Yeah. From the European customer, you're correct. We at this point in time and we typically don't give guidance that far out, but at this point in time we're seeing probably an uptick in our European customer. We typically see in the US an uptick as well. So those two will be the biggest drivers. The two that we don't know yet about, where the seasonal patterns will be, because they're under specific kind of project related build outs and it has to do with how fast they can install are [ph] Australia and Latin America. And I think that's just going to be related to how quickly they can get things in.

In both of those cases, there's a demand and there's -- and they have stated to us with different levels of specificity what they would like to do in the second half. And in the third quarter specifically, but whether or not they hit the third quarter or fourth quarter, where that mix is at, I don't know.

Rich Valera -- Needham -- Analyst

Got it. That's helpful. I was wondering if your are willing to say how much SmartRG contributed in the first quarter relative to your initial expectations. I think, which were $7 million to $8 million, I believe?

Thomas R. Stanton -- Chief Executive Officer

Yeah. They were in the sixish. So in that -- we have specific rationale or specific reasons for that, some of that had to do with just the integration of us getting things bolted together. So they were in the sixish, but we expect them to return back this quarter.

Rich Valera -- Needham -- Analyst

Got it. And then with respect to the OpEx. I think -- I don't know the exact wording, but it sounds like you expect that to be up some sequentially. And I was just trying to get any sense of magnitude there, are we talking sort of a couple of million dollars or $1 million or $2 million? Any granularity you'd be willing to give on the OpEx quarter-over-quarter will be helpful.

Michael Foliano -- Chief Financial Officer

Yeah. The language is -- was kind of meant to say $1 million or twoish.

Rich Valera -- Needham -- Analyst

Got it. That's helpful. And then the tax rate, that kind of high 20% to 30% tax rate is that -- do we think that's the right tax rate for the balance of the year or is that going to bounce around, do you think?

Thomas R. Stanton -- Chief Executive Officer

That'll bounce around and it will probably -- hopefully go down. I mean, there are some things in that tax rate that hurt us. I don't know if we stated it especially, but we did -- we did in Q1 incur some restructuring charges in our European operation. We closed down one of the locations in Europe. For us -- because in Europe it takes a long time for that to happen. So that's been an ongoing process and we will see some of those restructuring charges in the second quarter as well. And in fact, that'll actually pick up in the second quarter a little on a GAAP basis, which negatively hurts our non-GAAP. But those will be predominantly done through -- second quarter should be the biggest. We expect them to be basically immaterial going forward. So hopefully, you'll see that tax rate go down.

Rich Valera -- Needham -- Analyst

Got it. Okay. Thank you, gentlemen. Appreciate it.

Operator

We'll move now to George Notter with Jefferies. Your line is open.

George Notter -- Jefferies -- Analyst

Hi, guys. Thanks very much. I guess, I wanted to just get a sense for what the organic revenue growth rate would look like right now? I heard what you said certainly about SmartRG in the quarter, but Sumitomo EPON deal that you did in the year ago quarter, I think also is an impact here. But can you give us a sense for what the organic growth rate might look like ex those acquisitions right now?

Thomas R. Stanton -- Chief Executive Officer

Honestly, I don't -- our SRG is an easy one. I think on a percentage basis, I don't think you're going to see a big change specifically, because of Sumitomo. But I really just don't have that number. I don't have the ex Sumitomo number in front of me. I can -- and I'm kind of looking at (inaudible). I don't think there is a big impact in the organic growth rate because of that. But (inaudible) I just don't have that broken out in front of me, George.

George Notter -- Jefferies -- Analyst

Okay, no worries. And then, obviously, news over this past quarter around Windstream with the bankruptcy filing, it was interesting in that -- those guys, I think, were kind of gearing up to deploy more infrastructure on the broadband side. But can you talk about how you saw that business changing with the filing and then what you expect going forward? That's it. Thanks.

Thomas R. Stanton -- Chief Executive Officer

Interesting is one word for it. Nerve wracking would be another word for it. But we feel we're in a good position, we've reached agreement with them, any kind of offset to revenue that we would have had because of that agreement, it actually incurred in Q1, so we don't expect any change going forward. There is still a strong desire at least from our perspective and our conversations with them for them to roll out broadband, they can see the true impact of what it's doing to their subscriber net adds and what it's doing to attrition of their customer base or lowering attrition of their customer base. So -- but that is so fluid right now. We're not baking a lot into that in our going forward forecast. We're hopeful that, that it comes to fruition, but I think that it's still a kind of -- it's still a little cloudy.

And the one thing I'm sure of is, there's a desire, right? So it's just a matter of how their capital structure works out and what they're able to put toward actually moving the network forward and so just stabilizing their operations.

George Notter -- Jefferies -- Analyst

Got it. That's helpful. Thank you.

Thomas R. Stanton -- Chief Executive Officer

Okay.

Operator

And we'll take our next question from Bill Dezellem with Tieton Capital. Your line is open.

William Dezellem -- Tieton Capital -- Analyst

Thank you. I have a couple of different questions. First one is, last quarter you referenced the large number of RFPs that were out there are anticipated to be released. Would you update on that process in any of those that you have any further clarity on? And then secondarily, how many customers this year are you expecting, where you will see a $20 million revenue increase or more?

Thomas R. Stanton -- Chief Executive Officer

About the second question, that's a tough question. It is -- first of all I will be giving -- that's forecasting pretty far out there. Needless to say, there are customers that are driving the revenue to that level, but I would also say that, in general the core business itself has seen some growth and we expect that to happen. So I don't think the number is -- it's probably handfullish or maybe a little less. What's happening in -- some of that has to do with timing, so when we talked about the European opportunity, all of those are -- all of the ones that I talked about are absolutely still in play. All of them have moved forward to one degree another, we have received RFPs from two or three of the set that I had talked about and are in different levels of response. I even talked about one that we actually did showcase with them, of course, and we're moving to field trial with one. In my notes. So -- and all of those are very large opportunities, they would be in the $20 million incremental bucket, but when you're talking about this year versus next year, I think it's tougher to actually quantify.

William Dezellem -- Tieton Capital -- Analyst

Great. Thank you.

Thomas R. Stanton -- Chief Executive Officer

Okay. All right. With that, I think we're at the end of our question. So, I appreciate everybody joining us for the call and we look forward to having a good call with you in the next quarter.

Operator

This does conclude today's program. Thank you for your participation. You may disconnect at anytime.

Duration: 48 minutes

Call participants:

Thomas R. Stanton -- Chief Executive Officer

Michael Foliano -- Chief Financial Officer

Ashwin Kesireddy -- Goldman Sachs -- Analyst

Paul Silverstein -- Cowen and Company -- Analyst

Michael Genovese -- `MKM Partners -- Analyst

Rich Valera -- Needham -- Analyst

George Notter -- Jefferies -- Analyst

William Dezellem -- Tieton Capital -- Analyst

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