Adtran Inc (ADTN) Q4 2020 Earnings Call Transcript

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Adtran Inc (ADTN)
Q4 2020 Earnings Call
Feb 4, 2021, 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 Fourth Quarter 2020 Earnings Release Conference Call. [Operator Instructions]. During the course of the conference call, ADTRAN representatives expect to make forward-looking statements, which reflect management's best judgment based on factors currently known.

However, these statements involve risks and uncertainties, including the continued spread and extent of the impact of the COVID-19 global pandemic, the ability of component supplies to align with customer demand, the successful development and market acceptance of our products, competition in the market for such products, the product and channel mix, component costs, manufacturing efficiencies and other risks detailed in our annual report on Form 10-K for the year ended December 31, 2019, and our quarterly report on Form 10-Q for the quarter ended September 30, 2020. These risks and uncertainties could cause actual results to differ materially from those in the forward-looking statements, which may be made during the call.

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

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

Thank you, Chris. Good morning, everyone. We appreciate you joining us for our fourth quarter 2020 conference call. With me today is ADTRAN's CFO, Mike Foliano. Following my opening remarks, Mike will review the quarterly financial performance in detail, and then we will take any questions that you may have. COVID-19 continues to impact our day-to-day lives and the way that we do business and highlight the importance of the work we do, enabling operators to provide high-speed broadband connectivity for consumers and businesses. I am proud of our employees' perseverance throughout these difficult times and want to start by saying thank you to all of our team.

Moving to the quarterly performance. The results for the fourth quarter demonstrated solid execution against our plan. This included broad-based demand across our customer segments with a strong contribution from regional and emerging service providers. We continue to make great progress with the Tier one fiber access projects that we announced earlier last year, while still growing and diversifying our customer base across a variety of market segments. From a top line perspective, revenue for the quarter was $130.1 million with 41.1% gross margin. Network Solutions accounted for 88% of that total revenue at $114.1 million, while global services contributed $16 million.

During the quarter, we had four 10% customers, one of the highest numbers we have ever reported. Each of these customers' percentage of total revenue was in the low double digits, pointing to the success of our diversification efforts. Of these, there was one service provider customer and three distribution partners. These distribution partners serve hundreds of regional service providers in the U.S. market with a mix of broadband access and connected home and enterprise solutions, further reinforcing our success that we are having with both customer and portfolio diversification. New customer acquisition remains strong. We added 35 new service provider customers during the quarter, bringing the total to 134 for the year.

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

Our fiber access and aggregation business grew 98% year-over-year and home service delivery platforms were up 68% year-over-year and cloud services increased 46% year-over-year. We are seeing similar trends in Europe where favorable regulatory and funding environments are driving the build of fiber access networks. We posted revenue growth of 54% year-over-year in the EMEA market segment. This increase was driven by investment in 10-gig fiber access networks with European altnet providers. In the Tier one customer segment, as mentioned earlier, we are making great progress with all three announced wins, including two European and one U.S.-based customer.

Two of the three have already achieved a significant milestone of first-customer connections, and we expect lab exit for all three around the middle of the year. In addition, we are actively involved in several other Tier one decision processes around the world, some of which we expect to reach decision points around the middle of this year. COVID-19 related logistics issues and global chip shortages continue to impact lead times and inventory levels, and our operations teams continue to take proactive steps to mitigate logistics and component availability challenges to meet our customer needs.

However, lead times do remain extended on some key components. And as a result of our efforts to address these needs, we have maintained elevated inventory levels and incurred increased freight costs due to decreased capacity associated with higher transportation rates and expedite fees. From an organizational perspective, we continue to maintain a disciplined approach to operational expenses. The structural changes that we have implemented over the last year continue to improve our operational efficiency. In the past 18 months, we have reduced our non-GAAP quarterly operating expenses by almost $12 million or 19% through disciplined expense management.

These changes have allowed us to reach investment levels that align with our target operating model moving forward. On the product side, we continue to invest in end-to-end broadband solutions that make it easy for broadband operators to deploy and operate fiber-based broadband access networks. In the customer connectivity segment, we expanded our in-home service delivery platforms with our new SDG series of cloud-managed mesh WiFi six gateways. These platforms deliver gigabit speeds wirelessly throughout the home or business. They are complemented by an intuitive mobile app and cloud-based software suite that simplify deployment and management of WiFi mesh, IoT, advanced security and parenteral control services.

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

On the software side, we enhanced our cloud software suite with the launch of Mosaic One, a SaaS offering that combines network and subscriber analytics with AI-driven algorithms to optimize end-to-end network performance while providing actionable insight for operations and marketing teams. Highlighting our growth in cloud services, we secured our largest SaaS contract to date with an award that covers hundreds of thousands of customers over a multiyear period. The consumer demand and government support for fiber-based broadband services are at an all-time high. One notable program, of course, is the FCC's rural digital opportunity fund, or RDOF.

And in December, the FCC announced 180 winning bids in the RDOF Phase one auction. These winning bidders are expected to receive a total of $9.2 billion of funding over a 10-year period to build out broadband service to over five million homes. Over 85% of these homes will be served with gigabit broadband speeds. ADTRAN's portfolio is a great match to these service tier and customer segments. In Europe and around the globe, many global operators are significantly increasing their fiber investment, while also looking to diversify the vendors in their supply chain.

As an established global vendor with a leading fiber access portfolio and global R&D presence, including Europe, ADTRAN continues -- stands out as a reliable option for future broadband deployments. The shift to gigabit-enabled fiber access networks will also drive further demand for gigabit-capable, cloud-managed wireless mesh connectivity in the home or business, providing material additional growth opportunities for ADTRAN as an end-to-end broadband solution provider.

I mentioned earlier in 2020 that ADTRAN's fiber business had eclipsed our copper business for the first time in our history. In Q4 of 2020, fiber-related solutions represented over 70% of our business. Overall, we achieved some key milestones in 2020, and we have a lot of positive momentum in the growth segments of our portfolio, driving a diversified customer base in our target markets. The progress that we had in 2020 has us well positioned for additional success in 2021.

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

Michael Foliano -- Senior Vice President and Chief Financial Officer

Thanks, Tom, and good morning to all. I will review our fourth quarter 2020 results, and I'll also provide our view on the first quarter of 2021. During my report, I will be referencing both GAAP and non-GAAP results with reconciliations presented in our press release and supplemental financial schedules on our Investor Relations web page at www.adtran.com/investor. The supplemental financial schedules on our web page also present certain revenue information by segment and category, which I will be discussing today. As Tom stated, our fourth quarter revenue came in at $130.1 million compared to $133.1 million in the prior quarter and $115.8 million for the fourth quarter of 2019.

Breaking this down across our operating segments, our Network Solutions revenue for the fourth quarter was $114.1 million versus $115.2 million reported for Q3 of 2020 and $96.2 million in Q4 of 2019. Our Services & Support revenue in Q4 was $16 million compared to $17.9 million reported for the third quarter of 2020 and $19.6 million for the fourth quarter of 2019. Across our revenue categories, access and aggregation revenue for the fourth quarter of 2020 was $79 million compared to $85.4 million in the prior quarter and $74.6 million in quarter four of 2019. Revenue for our subscriber solutions and experience category was $45.4 million for the quarter versus $43.1 million for quarter three of 2020 and $33.2 million for quarter four of 2019.

Traditional and other products revenue for the quarter was $5.8 million compared to $4.6 million in Q3 of 2020 and $8 million for quarter four of 2019. Looking at our revenues geographically, domestic U.S. revenue for Q4 2020 was $95.8 million versus $92.8 million reported in quarter three of 2020 and $69.9 million in quarter four of 2019. Our international revenue for the quarter was $34.3 million compared to $40.3 million for quarter three of 2020 and $45.9 million in quarter four of 2019. In the fourth quarter, we had four 10% of revenue customers. Our GAAP gross margin for the fourth quarter was 41.1% as compared to 44.3% in the prior quarter and 40.8% in the fourth quarter of 2019.

Non-GAAP gross margin for the quarter was 41.3% as compared to 44.5% in the prior quarter and 41.2% in the fourth quarter of 2019. The quarter-over-quarter decrease in both GAAP and non-GAAP gross margins were driven by product, services and customer mix and lower volume and lower manufacturing absorption. The increases in both GAAP and non-GAAP gross margin on a year-over-year basis were driven by increases in volume as well as product, services, customer and geographical mix changes. During the quarter, we did experience extended component lead times, which we expect to continue into 2021, potentially affecting component availability and component and logistics costs.

Total operating expenses on a GAAP basis were $56.8 million for quarter four of 2020 compared to $54.4 million reported in the prior quarter and $61.3 million for Q4 of 2019. The quarter-over-quarter increase was primarily related to market-driven increases in our deferred compensation expense, restructuring-related costs in both R&D and SG&A and contract services partially offset by a decrease in labor expense as a result of our restructuring program, which was initiated in 2019. The year-over-year decreases in operating expenses were a result of lower labor expenses in both R&D and SG&A as a result of our restructuring program and lower travel-related expenses partially offset by increases in contract services costs, restructuring expenses and market-driven increases in our deferred comp expense.

On a non-GAAP basis, our fourth quarter operating expenses were $49.5 million compared to $49.4 million in the prior quarter and $56.8 million in the fourth quarter of 2019. The slight increase quarter-over-quarter in non-GAAP operating expenses was primarily due to increases in contract services offset by a decrease in labor expenses. The non-GAAP year-over-year decrease in operating expenses was primarily the result of our expense reduction efforts and lower travel expenses year-over-year partially offset by an increase in contract services. Operating loss on a GAAP basis for the fourth quarter of 2020 was $3.3 million compared to an operating income of $4.5 million in the prior quarter and an operating loss of $14.1 million reported in Q4 of 2019.

Non-GAAP operating income for quarter four of 2020 was $4.3 million compared to $9.9 million in the prior quarter and an operating loss of $9 million in quarter four of 2019. The quarter-over-quarter GAAP decrease in profitability was attributable to lower sales volume, less favorable gross margin mix and higher operating expenses driven by restructuring and market-driven deferred compensation expenses. The year-over-year decrease in GAAP operating loss was driven by higher sales with favorable gross margin mix and reduced operating expenses. The non-GAAP quarter-over-quarter decrease in profitability was mainly driven by lower sales volume and less favorable gross margin mix. The non-GAAP year-over-year operating income improvement was related to higher sales volume, higher gross margin mix and reduced operating expenses.

Other income on a GAAP basis for the fourth quarter of 2020 was $3 million compared to other income of $1.5 million in the prior quarter and other income of $3.2 million for quarter four of 2019. Our non-GAAP other income for the quarter was $1.7 million compared to a non-GAAP other income of $876,000 in Q3 of 2020 and $2.9 million for quarter four of 2019. The increases in both the GAAP and non-GAAP other income as compared to the prior quarter were primarily market-driven, caused by increases in the fair value of our investment portfolio and lower realized foreign currency exchange losses.

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

The tax expense for the fourth quarter of 2019 was a result of our international operations as the deferred tax benefits generated in that quarter by our domestic operations were offset by additional changes in the valuation allowance that was previously established in the third quarter of 2019. GAAP net income for quarter four of 2020 was $6.1 million compared to $5.5 million in the prior quarter and a net loss of $11.6 million in the fourth quarter of 2019. Non-GAAP net income for the fourth quarter of 2020 was $5.2 million as compared to $7.9 million in the prior quarter and a net loss of $2.5 million in quarter four of 2019.

Earnings per share, assuming dilution on a GAAP basis, was $0.13 as compared to $0.11 per share in the prior quarter and a loss of $0.24 per share in the fourth quarter of 2019. Non-GAAP earnings per share, assuming dilution for the fourth quarter of 2020 was $0.11 per share compared to $0.16 per share in the prior quarter and a loss of $0.05 per share in the fourth quarter of 2019. Turning to the balance sheet. Unrestricted cash and marketable securities totaled $118 million at quarter end after paying $4.3 million in dividends during the quarter. For the quarter, we used $11.2 million of cash from operations. Net trade accounts receivable was $98.8 million at the end of the quarter, resulting in a DSO of 70 days compared to 69 days in the prior quarter and 72 days at the end of the fourth quarter of 2019.

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

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

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

We believe that the significant factors impacting revenue and earnings realized in 2021 will be component availability and costs, macro spending environment for carriers and enterprises, the ongoing effects of the COVID-19 pandemic, the variability of mix and revenue associated with our project rollouts, the proportion of international revenue relative to our total professional services activity levels both domestic and internationally, the adoption rate of our broadband access platforms, potential changes in corporate tax laws, currency exchange rate movements and inventory fluctuations in our distribution channels. Once again, the financial information is available at ADTRAN's Investor Relations web page at www.adtran.com/investor.

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

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

Okay. Thanks, Mike. Chris, at this point, we're ready to open up to any questions people may have.

Questions and Answers:

Operator

[Operator Instructions]. The first question comes from Rod Hall of Goldman Sachs. Your line is open.

Bala Reddy -- Goldman Sachs -- Analyst

Hi, Tom. I can make it quick. This is Bala Reddy on for Rod. [Indecipherable] You mentioned different factors that go into it, like supply constraints, macro environment, what are you baking in? Any further color would be helpful. And then I have a follow-up. Thanks.

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

Can you repeat that? You were cutting out a little bit there.

Bala Reddy -- Goldman Sachs -- Analyst

I was talking about the -- could you talk about the supply constraint situation that you are factoring in the guidance?

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

Oh, the supply chain situation? Yes. So I mean we've seen tightness throughout the year, but it's definitely, at least on the silicon side, continued to increase. I think everybody or a lot of people are aware of the lead time extensions by some of the silicon vendors. And there have been -- when you're having to go and buy chips from pretty much any outlet you can get and you sometimes see expedite charges on those, we have factored that into our guidance for the next quarter. The reality is that we don't know exactly what that will be until we actually get those chips, whatever chip it may be, in-house. But we have tried to factor that into our guidance. Did I answer your question?

Bala Reddy -- Goldman Sachs -- Analyst

Could you help us maybe quantify it a little bit? It does, but could you help us quantify it like how much are you putting on the table -- off the table right now because of the supply situation?

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

That level of detail, to be honest with you, is not at hand right here, but it's not everything. It is predominantly on the chip side by far. And certain chips are worse than others. So I don't have an exact number. I can just tell you that when we rolled up our margin forecast that we did try to take into account. And we look at that -- we look at that, as Mike had mentioned, gross margin forecast is fairly detailed and that we look at it on a SKU level. So certain SKUs are impacted by that and certain ones aren't, but I don't think we have a total number on that.

Bala Reddy -- Goldman Sachs -- Analyst

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

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

I do think it'll -- some carriers will kick off as quickly as possible. Others will wait because there is some time period that you don't have to build everything right off of the bat. The quiet period is now over. And so we're able to have dialogue with a lot of the customers. I think we are happy as of now with kind of how things turned out. A lot of those customers are long standing customers with ADTRAN. And some of the bigger ones are definitely long standing customers with ADTRAN.

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

Bala Reddy -- Goldman Sachs -- Analyst

Okay. Bye.

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

Okay. Bye. Thank you very much.

Operator

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

George Notter -- Jefferies -- Analyst

Hi, guys. Thanks very much. I guess as I look into the quarter, my impression is that your largest North American customer was slow again as they have been, I think, in prior Q4s. And it sounded like you're really able to backfill for that softness with the Tier two and Tier three operators in the U.S. And is that the right picture that we should be thinking about here? And then I'd also like to know what the mix of your Tier two and Tier three operators is at this point. I think in the past, you said it was about 1/3 of the business, but it seems like that must be quite a bit bigger now. Any sense of that would be great. Thanks.

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

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

Michael Foliano -- Senior Vice President and Chief Financial Officer

I think we have said in the past that, in general, it's been roughly 1/3 of each. But we've had so much growth in the Tier three segment that it's at least twice the 1/3, right? It's growing fast.

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

So it's over 50%. And like Mike said, it may actually from quarter to -- it's been growing fast. So at this point in time, it's closer to 60% than 50%. And as far as the Tier one customer in the U.S., you're exactly right. That customer did fall off in the Q4. The U.S. business was still up, which tells you that even -- we typically see a seasonal decline in Q4. So the rest of the U.S. business was pretty strong. There's also another piece that's kind of hidden a little bit. I shouldn't say hidden, but not readily apparent, which is we do have another large customer in Australia that was down. And for the most part, the altnet carriers in Europe were able to make up for that. So we had two areas of strength that we were glad to see happening.

George Notter -- Jefferies -- Analyst

Got it. And then CenturyLink, I think, has been the biggest customer historically. Any sense for what CenturyLink accounted for in the year as a percentage of sales? Or should we just wait for the 10-K filing?

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

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

George Notter -- Jefferies -- Analyst

Great. Okay. Super. Hey, thanks very much, guys.

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

Okay.

Operator

Your next question comes from Richard Valera of Needham & Company. Your line is open.

Richard Valera -- Needham & Company -- Analyst

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

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

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

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

Richard Valera -- Needham & Company -- Analyst

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

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

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

Richard Valera -- Needham & Company -- Analyst

Got it. And then, Tom, could you expand on the outstanding RFPs that you're bidding on? You mentioned that you might see some of them actually be awarded as early as midyear. Can you give us a little color on what that pipeline looks like?

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

Yes. The number of RFPs out there is probably material RFPs. I don't know, somewhere between six and 8s. Two of them, we expect to close. And I will tell you, we don't control that, but current expectation is for two of them to close before the half. Both of those are global carriers with headquarters based in Europe.

Richard Valera -- Needham & Company -- Analyst

Got it. That's helpful. And then finally, just on international, I mean, you noted that Australia was weak. But overall, that business, the international was down pretty meaningfully year-over-year and quarter-over-quarter. Anything else in international that was going on?

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

Now, well, our German carrier is typically a little bit of a wildcard. They came in about where we expected. So I mean the biggest decline, it was a material decline in Australia. Having said that, that is a lumpy customer. There are times where they come in and we sell a lot. And there are times where we don't. We have just started shipping actually this quarter, a new award for them, which will continue to ramp through this year. Having -- but it will still be lumpy. It will still be lumpy. I mean the key to us is to grow that Tier three, Tier two altnet carrier segment, which is hundreds of customers to a point to where any of those materials -- those larger Tier 1s won't have such a material impact.

Richard Valera -- Needham & Company -- Analyst

Right. Understood. Okay. Thanks for taking my questions.

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

All right. Thank you.

Operator

[Operator Instructions]. The next question comes from Paul Silverstein of Cowen. Your line is open.

Paul Silverstein -- Cowen -- Analyst

Thanks, guys. I appreciate taking the questions. Tom, as the Tier 2s and 3s, assuming that their growth continues to outstrip the growth of your Tier 1s so that they become a larger percentage of revenue as they did this quarter, does that change -- all the things being equal, does that have an impact on your margin structure one way or the other?

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

Yes. Yes. Yes. That's a good assumption, yes. Yes, it would -- that is a -- I mean that's a good market for us.

Paul Silverstein -- Cowen -- Analyst

Based on your current visibility, looking at your order book, your pipeline, I assume you expect that class of customers to continue to outstrip in terms of growth relative to overall growth relative to your Tier 1s?

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

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

Paul Silverstein -- Cowen -- Analyst

That begs the question, given that, that shift should have a positive impact and you're pointing out this year, what's the offset that keeps -- I recognize you all have been very transparent in saying that gross margin for the foreseeable future. And I think you all quantified over the next two years, feel free to correct me if I'm wrong, that we should expect a meaningful change from the low-40s where it's been for quite some time. But given that shift, that, that should have a positive impact and it sounds like you're not expecting any uplift or any meaningful uplift in gross margin this year, what's the offset that's counteracting the benefit you should get from that customer mix shift?

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

Well, there are two things. We don't expect the supply chain to get better. And I will tell you, we're paying expedite fees now. We paid them in Q4. And we paid, at least from a historic perspective, very high logistics charges versus our typical. We don't expect that to get materially better this year. So in fact, we expect pressure to increase. So that's point number one. Point number two, what we have tried to forecast in is some additional wins. So although -- what you're talking about, is gross margin better in the smaller carrier segment? Yes. Do I expect that growth to eclipse the growth in the, let's say, larger carrier segment this year? Yes.

But having said that, we also still have some Tier one projects that are just going to be getting kicked off that will have a margin impact as we get them up and running. So that will also be a negative.

Paul Silverstein -- Cowen -- Analyst

Got it. Appreciate that. And Tom, I trust you're indicating that there is, which have been around for a while for you and for others for the better part of the past year. You're telling us that they're actually higher this past quarter and you expect it to stay at that elevated levels relative to previous quarters? Or is that not the case?

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

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

Paul Silverstein -- Cowen -- Analyst

All right. But -- so it sounds like perhaps the bigger issue is you're hoping, expecting rollouts from the new Tier one awards. And as you pointed out, in the initial stage of those rollouts, the margins are especially -- again relative to over time.

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

Yes, yes, right. Once you get up and running and you got some scale and volume and things, yes.

Paul Silverstein -- Cowen -- Analyst

All right. And I apologize because I'm asking to repeat yourself. But relative to your previous comments, you said there's six to eight RFPs in terms of pipeline of additional opportunities. And did I hear you that, sure, those Tier 1s that you expect to be awarded in the first half of this year?

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

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

Paul Silverstein -- Cowen -- Analyst

Understood. I appreciate the clarification. And the six to eight you referenced, are all of those non-U.S.?

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

Most of them.

Paul Silverstein -- Cowen -- Analyst

And I -- do you think that's tied specifically to Huawei getting cut back? Or is it more than that?

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

I think it's three things. I think it's -- well, I think it's really four things. So I think it's Huawei. I think it's 10 gig. I think it's disaggregation. And I think it's COVID.

Paul Silverstein -- Cowen -- Analyst

All right. I appreciate the responsible counselling. Thanks, Tom.

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

Okay. All right.

Operator

Your next question comes from Bill Dezellem of Tieton Capital. Your line is open.

Bill Dezellem -- Tieton Capital -- Analyst

Thank you. Tom, I'd actually like to follow up on your last comment. Why do you believe that COVID is playing a role there?

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

I think broadband became more important. And some countries -- like I just had a conversation late last night with a customer. Some countries found themselves a little flatfooted. And for whatever reason, around the same time, fiber was gaining in importance. And I think people that have kind of OK broadband plans have been having to relook at those plans and refresh those plans and make sure that they're going to keep up in the future pandemic or wherever the world may turn. So I think the highlight, the visibility that it put on carriers but just, if not more importantly, on governments and relooking at their infrastructure has absolutely added fuel to this.

Bill Dezellem -- Tieton Capital -- Analyst

Makes a lot of sense. Thank you for the clarification. And then you referenced the substantial growth in your Tier two and Tier three and yet you had four 10% customers. Can you tell us how that can happen? It almost seems like mathematically, that's a really small needle to thread.

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

Yes. I tried to highlight this in my notes, but I don't think it came out clear. So we have four 10% customers. We typically have two or three. Those are typically Tier one carriers, very rarely are they not Tier one carriers. Sometimes a Tier two may come in, but they're typically direct sales to carriers. Three of our four this quarter were actually distribution partners that sold to Tier 3s. So those customers are actually -- those three are actually selling to hundreds of carriers, and they're typically in the Tier three segment. Is that makes sense to you?

Bill Dezellem -- Tieton Capital -- Analyst

It makes perfect sense. Thank you for the clarification, and I didn't even think of that as a possibility. Thank you.

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

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

Operator

[Operator Closing Remarks]

Duration: 44 minutes

Call participants:

Thomas R. Stanton -- Chief Executive Officer and Chairman of the Board

Michael Foliano -- Senior Vice President and Chief Financial Officer

Bala Reddy -- Goldman Sachs -- Analyst

George Notter -- Jefferies -- Analyst

Richard Valera -- Needham & Company -- Analyst

Paul Silverstein -- Cowen -- Analyst

Bill Dezellem -- Tieton Capital -- Analyst

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