ADTRAN, inc (ADTN) Q3 2021 Earnings Call Transcript

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ADTRAN, inc (ADTN)
Q3 2021 Earnings Call
Nov 2, 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 Third Quarter 2021 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 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 cost, freight and logistics cost, manufacturing efficiencies and other risks detailed in our annual report on Form 10-K for the year ended December 31, 2020, and our quarterly report on Form 10-Q for the quarter ended June 30, 2021. 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 -- Chairman and Chief Executive Officer

Thank you, Mel. Good morning. We appreciate you joining us for our third quarter 2021 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. The results for the quarter were mixed. From a demand and long term outlook perspective, the results were very positive, with record quarter bookings for any quarter in our history and the addition of two new Tier one fiber operator customers in the EMEA region. And since our last call, we have picked out the other third. However, near term growth was constrained and profitability for the quarter was negatively impacted due to the unprecedented supply chain challenges facing our industry. While we do expect macroeconomic constraints to persist through 2022, our current outlook shows some improvement during the first half of next year. Taking a closer look at the demand for our solutions, bookings were up 43% year over year, with a book to bill ratio of 1.43 for the quarter. Our record bookings were well balanced across the growth segments of our portfolio, as well as across our growth regions, especially in the U.S. and Europe. This growth included a sharp increase in bookings for our Tier one fiber access customers as we are now transitioning these customers from field trial evaluation phase to scale deployments. The three new Tier one operators in EMEA are just the latest example of an increasing pipeline of new customer growth opportunities for us. We now have five Tier one operators in the region with two previously announced Tier one moving into scale deployments and the others preparing for deployment in 2022. The success in the region is not limited to the Tier 1s. If you look at the U.K., for example, we have won dozens of alt-net customers, representing more than half of the alt-net fiber operators in that country.

Our incredibly high win rate in EMEA, both at Tier one and regional operating levels provide us with an optimistic outlook for the future as more operators continue to diversify away from high risk vendors. We are also experiencing great success in the U.S. market. Looking at our Tier one customers in the region, one is placing orders for scale deployments next year, while the other one is exiting lab phase and planning for larger field deployments. And the regional operator segment, our fastest growing segment, we continue to see the same positive trends that we have experienced for more than a year, with operators continuing to select us to deploy end to end broadband solutions, spanning fiber access, cloud software and the connected home. Taking a closer look at what is driving this high success rate, there are two leading factors. Number one, we have incredibly talented and experienced people equipped with the necessary infrastructure to succeed in the regions in which we are growing. Second, we have invested heavily over the past five years in our next-generation fiber access, cloud software and connected home solutions. These investments are starting to payoff in terms of differentiating our end to end solutions from our competitors. Modern fiber access networks are driven by intelligent software solutions that optimize the performance of the fiber access, in-home networks and simplified network operations, while improving the subscriber experience and increasing business.

We have invested in these software solutions ranging from service orchestration to AI-driven service optimization applications, and those investments are now resulting in key customer wins. Our subscriber base for SaaS applications has increased 61% year over year, and we expect this to be a key contributor to our growth and continued success moving forward. The success in our fiber access platform and SaaS applications is also driving increasing demand for our in home service delivery platforms as more operators look to deploy end to end solutions. We have a record backlog of our latest cloud managed mesh WiFi gateway, and we expect the revenue for this segment of our portfolio to significantly increase in the current quarter and sustain that growth throughout next year as operators upgrade their in-home WiFi experience to match the multi-gigabit service delivery enabled by our fiber connectivity to those homes. In addition to a great win rate and differentiated portfolio, the market segments in which we compete continue to experience a surge in investment. In the U.S. market, RDOF funding is just getting started and funds from ARPA are being allocated toward broadband at higher levels and much faster than many had anticipated. In Europe, we continue to see increased investments from our mix of private and public funding as many countries look to close the gap in fiber connectivity and diversify away from high-risk vendors in their supplier base. This funding paired with our new customer acquisition helped us drive a 51% year over year increase in revenue from our international regional service providers. On the operation side, inventory levels remain higher than normal due to the increased lead times resulting from the global chip shortage and COVID-19 related logistics issues. Taking a closer look at that inventory mix, we reduced our finished goods inventory from the previous quarter, while increasing our raw materials inventory to minimize further disruptions to our supply chain. Looking ahead, we believe the supply chain challenges we experienced are peaking, and we will begin to improve, and will begin to improve for us in 2022. Therefore, we expect the impact on our results to be temporary. We are taking the necessary steps to mitigate these challenges, but supply chain constraints do present risk to revenue gross margins in the near and midterm. In summary, we are experiencing record demand for our solutions, especially in high-growth segments of our portfolio, while we continue to make great progress in new customer acquisition. Recently launched product offerings within the growth segments of our portfolio will further drive the consistent increase in demand that we have been seeing over a year, over the last year across our entire portfolio. As supply picks up in the current quarter and moving forward, we expect to be able to fulfill this demand and meaningfully accelerate top line growth. Our long-term strategy and positive outlook for the business remains unchanged. With that background, Mike will now provide a detailed review of our financials. Following his remarks, I'll be happy to answer any questions you may have. Mike?

Michael K. Foliano -- Senior Vice President of Finance, Chief Financial Officer and Corporate Secretary

Thank you, Tom. Good morning to all. I will review our third quarter results and provide our expectations for the fourth quarter of 2021. I will be referencing both GAAP and non-GAAP results for reconciliations presented in our press release and supplemental financial schedules on our Investor Relations webpage at investors.adtran.com. The supplemental financial schedules on our webpage also present certain revenue information by segment and category, which I will be discussing today. ADTRAN's third quarter 2021 revenue came in at $138.1 million compared to $143.2 million in the prior quarter and $133.1 million for the third quarter of 2020. Subdividing this across our operating segments, our network solutions revenue for the third quarter was $120.8 million versus $125.4 million reported for Q2 of 2021 and $115.2 million in Q3 of 2020. Our services and support revenue in Q3 of this year was $17.3 million compared to $17.8 million reported for the second quarter of 2021 and $17.9 million for the third quarter of 2020.

Across our revenue categories, access and aggregation revenue for the third quarter of 2021 was $89.2 million compared to $91 million in the prior quarter and $85.4 million in quarter three of 2020. Revenue for our subscriber solutions and experience category was $44.9 million for the quarter versus $47.8 million for quarter two of 2021 and $43.1 million for quarter three of 2020. Traditional and other products revenue for the quarter was $4 million compared to $4.5 million for quarter two of 2021 and $4.6 million for quarter three of 2020. Looking at our revenues geographically, U.S. revenue for Q3 was $91.9 million versus $94.7 million reported in quarter two of 2021 and $92.8 million in quarter three of 2020.

Our international revenue for Q3 of 2021 was $46.2 million compared to $48.6 million for quarter two of '21 and $40.3 million in quarter three of 2020. In the third quarter, we had two 10% of revenue customers, one domestic and one international. The domestic customer was a distribution partner serving a mix of regional service providers in our connected home, enterprise and broadband access solutions, reinforcing both our success in customer and portfolio diversification. Our GAAP gross margin for the third quarter was at 34.5% as compared to 43.8% in the prior quarter and 44.3% in the third quarter of 2020. Non-GAAP gross margin for the quarter was 34.6% as compared to 43.8% in the prior quarter and 44.5% in the third quarter of 2020. The quarter over quarter and year over year gross margin decrease in both GAAP and non-GAAP gross margins were attributable to increased supply chain expenses, including higher component costs and increased freight expenses and product mix, partially offset by stronger gross margin mix in our services and support segment. As previously mentioned, we continue to experience extreme constraints in the electronic component market, which worsened during the quarter and is expected to remain tight for the balance of this year and well into 2022, potentially affecting product availability and component and logistics costs.

Total operating expenses on a GAAP basis were $57.7 million for Q3 of 2021 compared to $58.7 million reported in the prior quarter and $54.4 million for quarter three of 2020. The quarter over quarter decrease was a result of lower labor and benefits costs, partially offset by higher acquisition related expenses. The year over year increase in operating expenses was a result of acquisition related expenses and contract services, partially offset by lower restructuring costs and market driven changes in our deferred compensation plans. On a non-GAAP basis, our third quarter operating expenses were $50.4 million compared to $52.7 million in the prior quarter and $49.4 million in quarter three of 2020. The decrease quarter over quarter was attributable to lower employee benefits expense and variable compensation. The increase in non-GAAP operating expenses year over year was primarily an increase in contract services and trade show expenses reduced by lower variable compensation. Operating loss on a GAAP basis for the third quarter of 2021 was $10.1 million compared to an operating income of $3.9 million in the prior quarter and an income of $4.5 million reported in Q3 of 2020. Non-GAAP operating loss for Q3 of 2021 was $2.6 million compared to non-GAAP operating income of $10.1 million in the prior quarter and $9.9 million in quarter three of 2020.

The quarter over quarter decline in both GAAP and non-GAAP profitability was attributable to incremental supply chain constraint expenses and lower sales volume, partially offset by reduced operating expenses. The year over year decrease in GAAP and non-GAAP operating profitability was driven by incremental supply chain constraint-related expenses and to a lesser extent, higher operating expenses. Other income on a GAAP basis for the third quarter of 2021 was $923,000 compared to other income of $2.3 million in the prior quarter and $1.5 million for Q3 of 2020. Our non-GAAP other income for the quarter was $1.4 million compared to non-GAAP other income of $1.1 million in Q2 2021 and $900,000 for quarter three of 2020. The quarter over quarter and year over year fluctuations in GAAP other income were related to unfavorable market-driven fluctuations in our investment portfolio, partially offset by realized gains on foreign currency exchange. The year over year increases in non-GAAP other income were related to favorable market-driven fair value changes in our investment portfolio. The company's tax provision for the third quarter of 2021 was an expense of $1.3 million as compared to $1.1 million in the prior quarter and $0.6 million in the third quarter of 2020. The current quarter's tax expense was primarily driven from profits in our international operations as the deferred tax benefit generated by our domestic operations continue to be offset by additional changes in the valuation allowance. GAAP net loss for Q3 of 2021 was $10.4 million compared to $5.1 million net income last quarter and $5.5 million in the third quarter of 2020. Non-GAAP net loss for the third quarter of 2021 was $815,000 as compared to $8.1 million in the prior quarter and $7.9 million in quarter three of 2020. For the third quarter, earnings per share, assuming dilution on a GAAP basis, was a loss of $0.21 per share compared to $0.10 per share in the prior quarter and $0.11 per share earnings in the third quarter of 2020. Non-GAAP earnings per share, assuming dilution for the third quarter of 2021, was a loss of $0.02 per share compared to $0.16 earnings in the prior quarter and $0.16 as well in Q3 of 2020.

On the balance sheet, unrestricted cash and marketable securities totaled $134.9 million at quarter end after paying $4.4 million in dividends during the quarter. For the quarter, we generated $10.7 million of cash from operations. Net trade accounts receivable was $124.1 million at quarter end, resulting in a DSO of 83 days compared to 78 days in the prior quarter and 69 days at the end of the third quarter of 2020. The increase in DSOs quarter over quarter and year over year is mainly attributable to the timing of shipments late in the quarter given our supply chain constraints. Net inventories were at $127.2 million at the end of the third quarter compared to $119 million in the second quarter of this year and $120.3 million at the end of Q3 2020. We continue to carry a higher level of inventory and raw materials as we build up supply to minimize further disruptions given the extremely challenging electronic component market. Looking ahead to the next quarter, the continuing effects of the COVID-19 pandemic, the ability of component supplies to align with customer demand, the book and ship nature of our business, the timing of revenue associated with large projects, the variability of ordering patterns from 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. Keeping that in mind, we expect our fourth quarter 2021 revenue will be between $136 million and $146 million. After considering the projected sales mix and higher than normal component expediting and freight costs, we expect that our fourth quarter gross margin on a non-GAAP basis will be in the mid-30s. We also expect non-GAAP operating expenses for the fourth quarter will be between $52 million and $53 million. And finally, we anticipate the consolidated tax rate for the fourth quarter of 2021 on a non-GAAP basis will be in the low to mid-20%s rate. We believe the significant factors impacting revenue and earnings realized in 2021 will be component availabilities and costs, a macro spending environment for carriers, the ongoing effect of COVID-19, the variability of mix and revenue associated with project rollouts, the proportion of international revenue relative to our total revenue, professional services activity levels, both domestically and internationally; the adoption rate of our broadband access platforms; currency exchange rate movements and inventory fluctuations in our distribution channels. Once again, additional financial information is available at ADTRAN's Investor Relations webpage at investors.adtran.com. Now I'll turn it back over to Tom, and we'll take your questions.

Thomas R. Stanton -- Chairman and Chief Executive Officer

Thanks, Mike. Now I guess at this point, we're ready to open up for any questions people may have.

Questions and Answers:

Operator

[Operator Instructions] We have the first question comes from the line of Rod Hall of Goldman Sachs.

Rod Hall -- Goldman Sachs -- Analyst

This is Bala on for Rod. Tom, you commented last month on the pricing, that your ability to pass on pricing to customers depends on competition. Could you maybe expand a little bit more on what you're currently thinking on what percentage of your products that you maybe plan on passing on this higher cost in form of higher pricing?

Thomas R. Stanton -- Chairman and Chief Executive Officer

Yes, sure. So there's pricing that is very much related to shipment dates and requirements or inventory builds or whatever that a customer may have. So they're typically expedite fees that we're paying or particular freight charges that we're having to incur because those are relatively straightforward to pass on. I think the customer understands that. And we're able to work with them. And I think we'll be able to see some improvement there in our ability to raise those prices according to what those fees are. And that's very much across the board. There's not a lot of pushback on that because I think we can easily show what that impact is. Then there are price increases that are more just increases from the supplies themselves or from the components themselves. And those are ones that we are starting to pass through. And I think you'll see as to where it's fairly broad-based, but it's something that's going to roll out over time.

Rod Hall -- Goldman Sachs -- Analyst

Got you. And these would be semiconductor components, etc., there?

Thomas R. Stanton -- Chairman and Chief Executive Officer

Majority, yes, majority of the semiconductor. I think every vendor in the space has seen that. We're not going to lose our competitive advantage that we have. So, but there are areas where we have a significant competitive advantage today that you'll see us try to, you'll see us raise prices and then there are other areas where it may be a little bit tighter where you'll see less of an increase or no increase. That's just going to be variable. But like I said, that will roll off over time. That's not an immediate thing. I think the immediate things that we're seeing and we're seeing as much as you ever see a positive reacceptance on them understanding where we are in trying to get supplies to them on an expedited basis.

Rod Hall -- Goldman Sachs -- Analyst

Makes sense. And I assume it also depends on the current backlog because I assume the backlog that you already have would be based on maybe older pricing rather than the higher prices that you might want to have in the future?

Thomas R. Stanton -- Chairman and Chief Executive Officer

That's true. But expedite fees and freight are something that would go on into existing backlog as well.

Rod Hall -- Goldman Sachs -- Analyst

Sounds good. And as you think about next year, I know you don't generally talk about yearly guidance anyway. And given the situation right on it will be even more tougher, but as I just think about demand and supply here, given really strong bookings growth and the book to bill, etc., so you still got clearly lots of backlog here. And so I assume that revenue ramp through the year depends really on the supply. So I just wanted to understand like how you're thinking about improving supply going through the year? I think I picked up some commentary in the call today in your opening comments that you are starting to...

Thomas R. Stanton -- Chairman and Chief Executive Officer

Yes.

Rod Hall -- Goldman Sachs -- Analyst

See maybe some bit of supply already?

Thomas R. Stanton -- Chairman and Chief Executive Officer

Yes. So the problem is, of course, you can break the supply chain constraints into multiple segments. One is freight. I think, in general, people expect freight, and we are no different, expect freight to improve as we go into next year. And that is some of the bottleneck that we're seeing definitely saw that in third quarter and it impacted us in the third quarter. And I think freight charges will also go down associated with that increase in capacity. Then you have kind of, let's call it the large semiconductor, kind of the systems on a chip or kind of higher-end semiconductor, where we have been ordering to those extended lead times for some time now. And as we get closer to those extended lead times coming into our normal supply chain fold, that will improve. And we're already starting to see that impact. So those kind of the ones that people are having problems with throughout this year, we expect to get better as we go into next year. And then you have these kind of smaller semiconductor pieces that are kind of, I tend to call it glue logic, but just smaller pieces. That is going to be problematic. It is problematic today. They'll continue to be problematic for, as we go into next year. But on a whole, I would expect things to get better. I don't expect it to be overnight and my kind of internal gauge is just that as we'll start seeing that kind of improvement in the second quarter. We're already starting to see improvement in those larger semiconductor pieces now, but kind of all of these pieces, if you're missing one piece, so you can't ship anything. So all of these pieces will continue to improve, and we really kind of see it kind of clearing up a little bit toward the second quarter of next year.

Rod Hall -- Goldman Sachs -- Analyst

Got it. One more follow-up, if I may. Last few quarters, last couple of years, we've seen increase in business with smaller traditional operators. Now that Tier 1s coming back in with lots of wins, given the revenue mix will change I assume, and my question is really how would the margin structure change with these larger Tier one projects coming back and...

Thomas R. Stanton -- Chairman and Chief Executive Officer

In some cases, it will change. In some cases, it won't change that much. In general, so kind of let's say pre-environment, pre-supply chain environment that we're dealing with right now, our model has been mid 40s and that included the mix of small carriers and large carriers, and that really hasn't changed. So we don't expect a huge shift because of that. Sometimes you'll see some shift at the very beginning, depending on if they're buying a bunch of chassis versus line cards, and there is a difference in margin on those. But at the same time, we have a much stronger software mix going into a lot of these customers. So that may mitigate that. So kind of the mid 40s normal environment is what we're still looking at.

Operator

Going to the next question, we have the line of Michael Genovese of WestPark Capital.

Michael Genovese -- WestPark Capital -- Analyst

So looks like you're guiding to gross margin sequentially, maybe slightly up, slightly up. Could you talk, do you have visibility beyond the quarter of when we could get back into the 40s and let alone the mid 40s?

Thomas R. Stanton -- Chairman and Chief Executive Officer

It's what we don't know. So if you look at our internal models, I'll just be kind of very open here, our internal models are anywhere from kind of mid 30s, mid to low 30s to 40 for this quarter, right? And we ended up at the mid 30s because that was the best, that's kind of the most, that's kind of an even look at the way we see the profile ending up. The reality is we won't know until we get toward the end of the quarter because expedite fees are typically not asked until the shipment is right upon you and same thing with freight. So we do think right now freight is a little bit better than it was last quarter, which would help us, but it's hard to say. Going into Q1, freight will be better. So I would expect some improvement there. As to whether or not it gets us to the low 40s, it's just too early for us to [Indecipherable] see.

Michael Genovese -- WestPark Capital -- Analyst

Okay. Sticking on the topic of visibility, I know you don't give guidance typically beyond one quarter or really ever. But did you think about at all about the possibility of giving an annual revenue guide given the strength of demand, and obviously, the supply chain adds a little bit of cloudiness, but what, any thoughts on the full year? I know you don't normally like to talk about that, but I just thought I would ask.

Thomas R. Stanton -- Chairman and Chief Executive Officer

Yes. I mean, [Indecipherable] the supply chain is a little cloudiness is probably underselling that a little bit because it's a lot of cloudiness. From a bookings perspective, we're expecting a really strong year next year. I mean, I just talked about some of the Tier 1s. And all of these Tier 1s, as you know, they are, they tend to sometimes by themselves be able to move the numbers. So we will bring around four or five Tier 1s next year, if not more. And all of them really started to contribute. Some of them are starting to contribute actually now and will continue on starting Q1. Others will come on toward the half of next year. And I'm sure some will come on in third and fourth quarter. So all of those are going to be, and there's not a lot of detractors, right? If I look at the U.S. business in the Tier three space, if I look at the alt-net business in Europe, if I look at our enterprise business, if I look at all of these different components, including getting down into the RGs that, and the growth that we're seeing there, I don't see a whole lot of downside. I just see a lot of incremental revenue piece coming online. But I think supply chain is going to be our biggest challenge. It's just, and it's one that actually clears out.

Michael Genovese -- WestPark Capital -- Analyst

Okay. Great. And then final topic for me. I want to ask about your SaaS business. Just want to make sure I understand the business model. And just confirm that this is where the service providers are paying you per month, I would assume, for a certain number of subscribers for certain services they're delivering. Is that, do I have that correctly? And then, I'm just wondering, just ballpark, I'm sure we're probably at a small number of subscribers right now. I would assume, I don't know, under one million or something if we're counting up, but any clarity on just this business model would help?

Thomas R. Stanton -- Chairman and Chief Executive Officer

Yes. So I believe in aggregate, so first of all, what you said is correct. Our SaaS business is very much a pay as you grow and pay as you go. So as customers come online, then, and they bring their customers online, then the revenue will start growing and that is although maybe build on a quarterly fee or sometimes even a yearly fee, there is a monthly fee that it's actually accumulated off of. And yes, it's fantastic growth in a number of carriers and the whole key of getting customers connected. So a lot of these customers that we're selling, both here in the U.S. and Europe, are participating in that SaaS model. And as they start building their network side, you'll see incremental revenue growth from there.

Michael Genovese -- WestPark Capital -- Analyst

I see you don't want to comment on the number of subscribers ballpark, like what kind of order of magnitude we're at?

Thomas R. Stanton -- Chairman and Chief Executive Officer

Yes. So we are, the number of customers that we have signed up that are...

Michael Genovese -- WestPark Capital -- Analyst

So when you say, when you think about that metric, you're talking about service provider customers, you're not talking about the number of their subscribers, is that correct?

Thomas R. Stanton -- Chairman and Chief Executive Officer

Right. Service provider customers, but the number, but they will not start including in our revenue base until they sign, until their customer gets brought onto service. So if you look at like even a new Tier one, where we're selling them XGS. As they start loading their network, that's where we start seeing the revenue, right? And if I look at the number of subscribers that they have committed to today, it's in the millions. But they have not rolled out yet.

Operator

Next question we have the line of Bill Dezellem with Tieton Capital.

Bill Dezellem -- Tieton Capital -- Analyst

Great. May I follow up on that last question to begin with, with the millions of subscribers, what's the time frame that is attached to that commitment?

Thomas R. Stanton -- Chairman and Chief Executive Officer

It's typically, so I'm trying to think of, some of them are worded differently, but let's say a three year time frame. Well, it depends on just how they load them. If they have signed up for them and as they load their customer base. But we typically tend to think of these contracts in a three year time of time frame.

Bill Dezellem -- Tieton Capital -- Analyst

Great. And then circling back to pricing, what's the timing at which you think you can have component prices incorporated, component price increases incorporated into your pricing?

Thomas R. Stanton -- Chairman and Chief Executive Officer

I mentioned expedite and freight charges are relatively straightforward. We'll be doing that this quarter. You'll see that the price increases that we'll be able to pass on to our customers will happen in the first half of next year.

Bill Dezellem -- Tieton Capital -- Analyst

And then lastly, relative to the new Tier one win since the last call that we had, what can you share about that customer?

Thomas R. Stanton -- Chairman and Chief Executive Officer

It's Tier 1s in Israel. I don't think that's pretty specific.

Bill Dezellem -- Tieton Capital -- Analyst

How about magnitude, size relative to some of the others? And when do you anticipate that they will be ramping?

Thomas R. Stanton -- Chairman and Chief Executive Officer

Yes. Yes. They'll be ramping. They have a fairly aggressive plan. So probably earlier next year. Probably for the half is what I would, best way to characterize that. They are not, we had some that are trying to cover 20 million and 30 million homes in a short period of time. Those are very big customers. Then we kind of have a tier below that. Some of those are multinationals that will cover tens of millions. And then we have some that are covering four million to six million and then you kind of go down. My guess would be they would be kind of in that second or third tier.

Operator

We have the next question comes from the line of Paul Silverstein of Cowen.

Paul Silverstein -- Cowen -- Analyst

First off, you were about to give the number of service provider customers that are committed to SaaS before Mike interrupted, if we could give that number, that would be great. I guess [Indecipherable].

Thomas R. Stanton -- Chairman and Chief Executive Officer

No, I wasn't going to give the number of service providers that have committed to SaaS. I was going to, he asked me, I think, number of users or something, but I don't know if I have the exact number of service providers. I'm sure it's hundreds, but you included the three.

Paul Silverstein -- Cowen -- Analyst

That's good enough. All right. Sorry, Mike., [Indecipherable]. How much software revenues do you all have approved?

Thomas R. Stanton -- Chairman and Chief Executive Officer

I think the general range is $5 million to $50 million, pretty much as you ever broken it out.

Paul Silverstein -- Cowen -- Analyst

$5 million to $50 million?

Thomas R. Stanton -- Chairman and Chief Executive Officer

Yes, closer to $5 million and $50 million at this point.

Paul Silverstein -- Cowen -- Analyst

I have a question to you. So you and Mike, for a long time have been referencing a low to mid 40s gross margin model. And I understand the ADVA deal is going to put another, it will add to the, I guess, ceiling in terms of where gross margins could go, given the limitations in optical in general in that specifically. But assuming, as you've articulated, that the model is going to shift more and more to software over time, why should that have a meaning beneficial impact, other things being equal, to your gross margin profile, and thereby your overall profitability? What am I missing?

Thomas R. Stanton -- Chairman and Chief Executive Officer

Okay. So let me touch on your first comment on that. We don't believe that the ADVA deal will be dilutive to gross margins. If you look at them on where their product is positioned today, on what we will be able to do with them in the Tier three and Tier two market here in the U.S., we don't believe will be dilutive. We also believe that with our orchestration product, which is Mosaic-based that pulling their products under the orchestration umbrella that we are going to relatively quickly be able to fold out what help us both on gross margin. So I don't think the first comment is correct.

Paul Silverstein -- Cowen -- Analyst

Well, Mike, I'm sorry, to just to be clear, I didn't say dilutive, I said that,

Thomas R. Stanton -- Chairman and Chief Executive Officer

Okay.

Paul Silverstein -- Cowen -- Analyst

Ceiling or adds to the ceiling. You referenced a low to mid 40s model, they're low to mid 40s gross margin company. They always have been. It's never been better than that.

Thomas R. Stanton -- Chairman and Chief Executive Officer

Yes. [Indecipherable].

Paul Silverstein -- Cowen -- Analyst

[Indecipherable].

Thomas R. Stanton -- Chairman and Chief Executive Officer

Yes. So yes, the base will be larger. So I will agree with that. But I do think that the potential there, with a combination of what we'll be able to do as a solution before this mid mile and access problem will be ultimately healthy to gross margins. Your comment is when will that start? It contributes today. Every quarter, our software revenue base continues to be the growth in momentum on a pure dollar basis, sometimes it's actually depending on billings for the existing base. It can be fairly meaningful. But it's just a matter of getting these things [Indecipherable]. If you look at the number of carriers that we have in Europe that are just now ramping up, most, if not all of those, have some software component to them, either in the orchestration, which is still on a per element basis or sometimes all the way to the in-home service delivery work I mentioned before, we signed up Tier 1s for that as well. So, and of course, the more software they buy from you, the better off you are, but it will continue to drive gross margins up.

Paul Silverstein -- Cowen -- Analyst

And just so we're clear and we also understand, the gross margin, the software that you're selling, the monetization of that software, is that coming at 60% or 80% or 90% gross margin? What is the average gross margin? Or does it vary depending upon what type of software you sell?

Thomas R. Stanton -- Chairman and Chief Executive Officer

The gross margin itself is pretty consistently in that 60% to 80% range.

Paul Silverstein -- Cowen -- Analyst

All right. So the more you sell it's up. So again, if I go back to, and I appreciate historically, you all have been very sober and talking about low to mid-40s. But why, given that the model is shifting, is it sort that you don't look, you don't want to discuss that point to the future? I'm trying to understand why you might never reference a higher margin model in terms of the long-term potential given the shift you're starting to drive the software?

Thomas R. Stanton -- Chairman and Chief Executive Officer

It's probably whether or not we're just getting outside of the comfort zone of our visibility. So if I look at next year, I mean, you as well as anybody knows the number and the scope of the Tier is that we have already put under contract, right, most of those are starting, I shouldn't say a lot of those are starting, most of those are starting kind of in a greenfield environment where they're going to go about fiber, where they have a little that fiber for. There are some where there's a replacement element to it. So you'll have a gross margin contribution of the software and the hardware at the same time. The majority are not like that. So I want to be shipping a lot of hardware next year, right? And then that software comes on as they add customers. So it's all about their customer acquisition rates, it's going to ultimately drive that software revenue. But I'm going to be swamped with a lot of infrastructure next year.

Michael K. Foliano -- Senior Vice President of Finance, Chief Financial Officer and Corporate Secretary

And Paul, remember, I used to say, low to mid 40s. And then we, looking at software and other factors in the business, we said, yes, we see the mid 40s. Probably a year ago was when we made that change. So it has moved a little bit. I know you're looking for more, but I think that's where we believe it is at this point.

Thomas R. Stanton -- Chairman and Chief Executive Officer

And if you look at the hardware shipments that we're planning and, I mean, these are carriers that are planning, just two are close to 50 million homes passed in a matter of what, three or four years that they're trying to get to. So it's a significant amount of hardware. And that's not bad growth. That is great business, by the way, right? I mean it's not, but the software piece has to catch up as we add subscribers.

Paul Silverstein -- Cowen -- Analyst

Right. Mike, I think the last several quarters, you've shared with us your Tier three or at least your Tier two and three, I'm not sure you delineated it what the growth, year over year growth rate. I don't think I heard you say this call. Can you get that number?

Thomas R. Stanton -- Chairman and Chief Executive Officer

I think Tier three, the problem as we were supply constrained predominantly in that area. And even with that, I think our revenue growth was mid teens.

Paul Silverstein -- Cowen -- Analyst

And Tom, can your remind, that seems compared prior to supply constraints or previous...

Thomas R. Stanton -- Chairman and Chief Executive Officer

It has been consistently, I would tell you, bookings there were strong again. It has been consistently in the kind of mid 30s to 40s. But I want to make sure you understand...

Paul Silverstein -- Cowen -- Analyst

That's [Indecipherable] or that's...

Thomas R. Stanton -- Chairman and Chief Executive Officer

Yes, that's U.S. that's U.S. And that was just a what could we ship on, I promise you, I could have made that a 60% number if I had supplies.

Paul Silverstein -- Cowen -- Analyst

All right. In terms of positive, I just want to make sure that that's just Tier 3s or that Tier 2s and 3s collectively?

Thomas R. Stanton -- Chairman and Chief Executive Officer

I think that was probably just Tier three, Mike, if I remember the number?

Michael K. Foliano -- Senior Vice President of Finance, Chief Financial Officer and Corporate Secretary

That's right.

Thomas R. Stanton -- Chairman and Chief Executive Officer

Yes. And Tier 2s, we're probably right around the same area. I mean we have a big customer that, here, again, we've got supply constraints on that. So we're really just trying to make sure we keep, yes, I mentioned this I think on the last call, we're trying to make sure that we don't lose any relationships in this current environment.

Paul Silverstein -- Cowen -- Analyst

Tom, so the Tier three were mid teens growth. Was that could have been 60%? Do that relate to the mid teens or that...

Thomas R. Stanton -- Chairman and Chief Executive Officer

No, that mid-teens could have been 60%, yes.

Paul Silverstein -- Cowen -- Analyst

And you said it's Tier two about the same and Tier 2s grew around, in mid-teens, but could have been 60% growth but for supply constraints?

Thomas R. Stanton -- Chairman and Chief Executive Officer

Yes, I don't know about the 60% in Tier 2s, because I know the Tier three is just the backlog is. So when we say Tier 2s, we typically think about a couple of carriers here in the U.S., maybe three. But I know would have, it would have been stronger than it was. And I will tell you, the Tier 3s have been outgrowing the Tier 2s now for over a year. I mean, the Tier 3s tend to be in the low-ish to mid 30s. The Tier, excuse me, the Tier 2s are low-ish to mid 30s, Tier 3s have been in the high 30s to 40s.

Paul Silverstein -- Cowen -- Analyst

And can you remind us together with the, or even better separately with Tier two as a percentage of revenue what Tier 2s are as a percentage of revenue at this point?

Thomas R. Stanton -- Chairman and Chief Executive Officer

We've been saying, I think, over 60%, and that's still true.

Paul Silverstein -- Cowen -- Analyst

Together, collectively?

Thomas R. Stanton -- Chairman and Chief Executive Officer

Together, majority of that is the Tier 3s.

Paul Silverstein -- Cowen -- Analyst

So Tier 3s are over 30% of total revenue, Tier 2s being the balance of the 60%?

Thomas R. Stanton -- Chairman and Chief Executive Officer

Tier three is probably over 50% of revenue. And Tier 2s, Paul, they're a little lumpy. It's a very small set, right? So it's, they can come in and buy a lot. We have a boatload on backlog right now for them, and it's a matter of their shipping it. But Tier three is the biggest component of that.

Paul Silverstein -- Cowen -- Analyst

All right. I've got one last question from there. Just looking further out. But given the very tight labor supply along with need for tightness in fiber, perhaps a little different than other components. How many, have an impact on their service [Indecipherable] deployment plans in terms of the ability to buy from that set or any of the transfer back to a deployment and how that could ripple through and push back, ultimately, the last piece in terms of deployment royalties and eventually on ONCs down the road, are you seeing any of that?

Thomas R. Stanton -- Chairman and Chief Executive Officer

I haven't seen any of that. I have not, no, I haven't heard of anybody changing their plans based off labor or fiber constraints. Yes, all of our calls are pretty much when can you give me the equipment.

Paul Silverstein -- Cowen -- Analyst

All right. Just related to that, given the increased uncertainty around adoption of the infrastructure plan by Congress, has that, I know this is all very much in flux. But have you seen any impact on service providers' deployment plans related to that with anybody banking on that, those funds coming in and they're not discussing delays?

Thomas R. Stanton -- Chairman and Chief Executive Officer

No. No, we're starting to see actually RDOF shipments. We got orders for RDOF shipments in the fourth quarter. So all that is pretty much locked in, or shouldn't say locked in, all that's starting. I haven't, none of the carriers that we're talking to at this point that I'm aware of have based their current plans on infrastructure, some infrastructure funding I think from our perspective, that's just icing on the cake.

Operator

[Operator Instructions] We have the next question comes from the line of Tim Savageaux from Northland Capital.

Tim Savageaux -- Northland Capital -- Analyst

And one question, it will be if I have the energy left and assuming you do. It really has to do with your kind of a merger partner here at, along a couple of lines, which is, one, in different product focus and supply chain, we're able to navigate some of these challenges pretty well in terms of their results. And I guess the first question is, as you see the two companies coming together and maybe even now does that increase scale or potential for increased scale influence your supply flexibility in any way on the one hand? And do you expect the combined companies to be able to kind of benefit from that scale and supply expertise in a way that might be impactful actually in calendar 2022? I'll leave it there and follow up very briefly.

Thomas R. Stanton -- Chairman and Chief Executive Officer

Yes. Sure. So the answer is yes. The impetus for the deal is not necessarily just scale. I think scale in this type of environment is important. And there would be the flexibility, just the reach out that we've had from our vendor base based on the two companies coming together has told me that it's important to them as well. So I do think it's going to help us. We have, what, $52 million or so of synergies that are related to that. A lot of that is in the supply chain. And I think that's just the tip of the iceberg what we'll be able to get. But in a constrained environment like this, the size of the customer and the way that they're dealing with you will change the bigger you are. So yes, I think that's a very positive thing. But let me just add a little bit. The rationale for this is we're in the midst of a broadband boom, right? So you've never seen this type of activity. Even setting aside stimulus dollars, never seen this kind of activity, both in Europe and in the U.S. And in Europe, it's compounded by the fact that they have eastern vendors that they have to pull out of their network. So the broadband boom has been fantastic. Good or bad COVID has definitely highlighted the need for broadband. Now there are stimulus dollars both in Europe. I think in Europe, there's, we've calculated $60-something billion of stimulus going into build broadband. Here in the U.S., it's over $100 billion, which is not, never seen money like this, and it's just started. So our belief is broadband is multifaceted. One is the access piece, getting fiber to the home. Another piece is the in-home experience and getting RGs and ONTs and all those things that you need in order to make this work within the home. Another is, once you get this to that point, you have to backhaul this network. Almost every customer we talk to about this deal has talked about how the rationale makes sense for them because as soon as they put in and start building up these 20 million or 30 million homes passed, they have to upgrade their mid-mile and metro network in order to be able to get that type of speed change. So to us, it's one broadband push. And that's why it makes sense. And if you look at the opening door that happened, that's happening in Europe today because of the eastern vendors, there's no better time like now to come up with a complete solution that is software managed for this entire problem.

Tim Savageaux -- Northland Capital -- Analyst

And that was going to be my follow-up which is on the commercial, the kind of market facing side when thinking about the deal and you guys kind of continue your sweep across Europe. Obviously, that's we're at this headquarter, historic areas strength and you guys share some customers. Are you, at this point, beginning to see any opportunities here emerge as a result of the planned transaction? Does it become easier to kind of get things to the goal line with that in mind? Or any other kind of indications of market-facing synergies from the deal, and that's it for me.

Thomas R. Stanton -- Chairman and Chief Executive Officer

Yes. It's been more anecdotal, unfortunately, than direct because it's been through conversations that I've had with customers about the deal. And I can honestly tell you, every customer I've talked to has been very positive. In Europe that they see us being able to come together and offer a real alternative to the other European vendor there. They really want two strong alternatives to the eastern vendors that they've been using and kind of historically have been using. And they see this combination coming together, not just from a technology base, which is relatively straightforward when you think about this orchestration and what our SDX system is all about, but they also see it just from a strength place. So it's been positive across the board, have not had a single negative comment. So thanks so much for the question, Tim. With that, I see, I think we're out of questions. So I appreciate everybody joining us for the call, and we look forward to talking to you next quarter.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Thomas R. Stanton -- Chairman and Chief Executive Officer

Michael K. Foliano -- Senior Vice President of Finance, Chief Financial Officer and Corporate Secretary

Rod Hall -- Goldman Sachs -- Analyst

Michael Genovese -- WestPark Capital -- Analyst

Bill Dezellem -- Tieton Capital -- Analyst

Paul Silverstein -- Cowen -- Analyst

Tim Savageaux -- Northland Capital -- Analyst

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