ADTRAN Holdings, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to ADTRAN's first quarter 2020 earnings release conference call. All lines have been placed on mute to prevent any background noise, and after the speaker's remarks, there will be a question and answer period. If you'd like to ask a question at this time, please press star 1 on your telephone keypad. If you'd like to remove yourself from the queue, please press the pound key. If you need operator assistance, please press star 0. 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 successful development and market acceptance of our products, competition in the market for such products, the products 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. These risks and uncertainties could cause actual results to differ materially from those in the forward-looking statements which may be made during this call. It is now my pleasure to turn the call over to Tom Stanton, Chief Executive Officer of ADTRAN. Sir, please go ahead.

Thank you, James. Good morning, everyone. We appreciate you joining us for our first quarter 2020 conference call. With me today is ADTRAN CFO Mike Foliano. Following my opening remarks, Mike will review the quarterly financial performance in detail, and then we will take your questions. Before getting into the results, I'd like to say a few things about the unprecedented times associated with the COVID-19 virus. First, from the entire ADTRAN family, We want to send our sympathy and best wishes to all of those affected and impacted by the virus. Our hearts go out to you. Given the current reality, I cannot begin to tell you how proud I am of the ADTRAN team and how they have rallied to continue to provide critical products and support to address the needs of our customers and consumers. With the safety of our employees, customers, and communities in mind, we were proactive in our business continuity planning. This included successfully moving the majority of our employees to a work-at-home environment, implementing on-site employee safety measures, and advanced procurement of components to ensure supply of our customers that are delivering critical broadband services to consumers. We have also been very active in supporting communities trying to deliver emergency broadband connectivity to support education and other critical services. At no time in history has the need to connect people over broadband been more important and our team has done a fantastic job stepping up to help our customers in these extraordinary times. This far, 2020 has proven to be a transformative year for us as the long-term investments we have made in fiber access solutions are starting to pay off. We are having success in the regional service provider and emerging service provider segments, which include rural operators, municipal operators, utilities and electric co-op broadband providers in the U.S. as well as with alternative network providers in the UK and Europe. I'm also pleased to let you know that we had several major awards from Tier 1 service providers in the US and Europe this quarter. We have continued to invest in our widely deployed Total Access 5000 platform to provide industry-leading capacity, features, and capabilities for GPON and XGS-PON services. In addition, Atran has led the industry with the development of an open, disaggregated, software-defined fiber access solution centered around our SDX product family and our Mosaic Cloud platform. Both of these platforms put the company in a strong position to provide the best solutions to enable broadband service providers of all size, topologies, and geographies to deliver more services faster while significantly lowering their cost. We were pleased with the revenue contribution and sustained fiber access momentum from our domestic regional service provider and emerging service provider market sector, which reported a revenue increase of 73% on a year-over-year basis. In addition, we have seen an increased focus from governments spurring investment in broadband infrastructure and expect, given the lessons recently learned, this focus will intensify. The U.S. recently implemented the $2 trillion CARES Act, which includes incremental funding for the USDA ReConnect program and is preparing to distribute the first phase of the $20.4 billion FCC Rural Digital Opportunity Fund in 2021. ADTRAN has also been highly active in driving and influencing these investments. We believe that our solutions are exceptionally well positioned to enable operators to secure funding and help them plan, engineer, and deploy gigabit services to enable communities of all sizes to be connected. The drive for fiber deployment and Gig Plus services continue to build additional momentum in Europe and other parts of the world. I am also excited to share the progress we're making with Tier 1 operators in the U.S. and Europe. We have recently won three major long-term awards with Tier 1 operators, with all three selecting the SDX Portfolio and Mosaic Cloud Platform. Last week, we announced that Deutsche Telekom has selected AdTrans SDX OLT solutions for deployment as part of its Access 4.0 network. It will also be deployed in its existing fiber-to-the-home architectures along with Mosaic Cloud Platform. As mentioned in the announcement, the goal of DT's Access 4.0 program is to create an open, programmable, and scalable fiber access architecture to cost-effectively and rapidly deliver gigabit services to meet the increasing demand of DT's residential, wholesale, and business customers. Further, during the quarter, we received an additional SDX-OLT and Mosaic Cloud Platform award by a Tier 1 operator here in the U.S. That product is currently in the lab and is currently expected to start deployment in the first half of next year. Once operationalized, the operator's intent is to use the SDX and Mosaic to deliver XGS services across their entire footprint. Finally, we recently signed a contract with another large tier one European operator for the SDX and Mosaic cloud platform after being selected in their competitive RFP process. This is a brand new customer to AdTran, and our current expectation is for shipments to begin in the first half of next year. In addition to these awards, We also announced last week a strategic joint development agreement with Orange, one of the world's leading telecommunication operators, as part of its access renewal and evolution strategy. Winning these transformative long tier one awards will have a significant impact on our company in the future. They solidify our market position and validate our vision of virtual open network architecture of the future. Given that backdrop, The first quarter came largely as anticipated with strong demand overall and robust performance in our domestic, regional, and emerging service provider market segments. From a top-line perspective, revenue for the quarter was $114.5 million with 45.1% gross margins. Network solutions accounted for 85% of the revenue at $97.4 million. Global services revenue contributed $17.2 million. Our fiber business grew 13% over the previous quarter and increased 26% on a year-over-year basis as pond fiber access and fiber CPE solutions continue to be our top sales growth categories as we gain market traction. We continue to see strong demand for fiber broadband and fiber extension opportunities in the regions we serve. We maintain our belief that we are at the beginning of a significant investment cycle for fiber deployment, driven by technology advancement, Regulatory Influence, and Vendor Disruption. In addition to our domestic emerging provider momentum, we are continuing to win new fiber access projects with all NAP providers in the UK and the rest of Europe. We are also progressing new opportunities in emerging international markets as well. From an organizational perspective, we continue to implement structural changes to improve our operational costs, achieving a 15% year-over-year decrease in OPEX, strengthening growth margins, and providing greater flexibility to focus and deliver more in our key growth areas. In the face of this global pandemic and other market challenges, I'm happy with the way the team has responded and performed. We implemented our COVID-19 response team and our business continuity plan well ahead of the CDC guidance and government actions. This enabled us to be proactive protecting our employees, customers and communities and ensured that our supply chain production and support was elevated to provide outstanding service to our customers and communities that they serve. We do have concerns as there are still material near-term uncertainty due to the pandemic. Fortunately, we believe we are in a good position to weather the changing environment for a number of reasons. First, AdTrain has a strong balance sheet with the available liquidity to weather even the most extreme stress test. Our service provider customers are among the most resilient in this pandemic, given their focus on building and supporting critical infrastructure. Short-term demand for residential broadband remains strong and the future is bright as this pandemic has shined a light on the positive gaps between fixed broadband access and wireless network. I am encouraged by our recent wins and how this positions us from other operators seeking to find their next generation platform. I am also encouraged by the growing number of emerging municipalities and utility broadband service providers that are selecting ADDRAN to help them transform their communities. Mike will now provide an overview of the financials, and following his remarks, we will open the call up for any questions you may have. Mike?

Thank you, Tom, and good morning to everyone. I will review our first quarter results and provide our view for the second quarter of 2020. During my report, I will be referencing both GAAP and non-GAAP results. both respect to non-GAAP financial measures that are discussed on this call but are not presented in our earnings release, reconciliations to their comparable GAAP measures are published in a supplemental financial schedule that appears on our investor relations webpage at www.adtran.com. For non-GAAP measures discussed on this call that are presented in the earnings release, reconciliations are contained in the release. The supplemental financial schedules on our webpage also present certain revenue information by segment and category and other non-GAAP reconciliations, which I will be discussing today. As Tom stated, ADTRAN's first quarter revenue came in at $114.5 million compared to $115.8 million in the prior quarter and $143.8 million for the first quarter of 2019. Breaking this down across our operating segments, our network solutions revenue for the first quarter was $97.4 million versus $96.2 million reported for Q4 of 2019 and $125.8 million in Q1 of 2019. Our services and support revenue in Q1 of this year was $17.2 million compared to $19.6 million reported for the fourth quarter of 2019 and $18 million in the first quarter of 2019. Across our revenue categories, access and aggregation revenue for quarter one of 2020 was $66 million compared to $74.6 million in the prior quarter and $99.8 million in quarter one of 2019. Revenue for our subscriber solutions and experience category was $42.2 million for the quarter versus $33.2 million for quarter four of 2019 and $36.8 million for quarter one of 2019. Traditional and other products revenue for the quarter was $6.4 million compared to $8 million for quarter four of 2019 and $7.3 million for quarter one of 2019. Looking at our revenues geographically, domestic revenue for Q1 2020 was $79 million versus $69.9 million reported in quarter four of 2019 and $72.5 million in quarter one of 2019. Our international revenue for quarter one of 2020 was $35.5 million compared to $45.9 million for quarter four of 2019 and $71.3 million in quarter one of 2019. For the first quarter, we had three 10% of revenue customers two of which were domestic and one international. Our gap gross margin for the first quarter of this year was 45.1% as compared to 40.8% last quarter and 42.2% in the first quarter of 2019. Non-gap gross margin for quarter one was 45.4% as compared to 41.2% in the prior quarter and 43% in the first quarter of 2019. The quarter-over-quarter and year-over-year increases in both GAAP and non-GAAP gross margins were driven by our product and geographical mix as well as our operational efficiencies and restructuring savings partially offset by an increase in freight-related expenses. Total operating expenses on a GAAP basis were $56.5 million for quarter one of 2020 compared to $61.3 million reported in the prior quarter and $66.8 million for quarter one of 2019. Both the quarter-over-quarter and year-over-year decreases in operating expenses were a result of market-driven decreases in our deferred compensation expenses lower salary and restructuring related expenses in both SG&A and R&D, partially offset in the quarter by increases in our IT expenses. On a non-GAAP basis, our first quarter operating expenses were $56.7 million compared to $56.8 million in the prior quarter and $60.5 million in quarter one of 2019. The non-GAAP quarter-over-quarter decrease in operating expense was primarily the result of broad expense controls and salary-related expense reductions as a result of our restructuring program initiated in 2019. These reductions were offset by higher variable fringe benefit expenses and an increase in our IT-related contract services. The non-GAAP year-over-year expense decrease was primarily attributable to reductions in salary expenses partially offset by an increase in contract services. Our operating loss on a GAAP basis for the first quarter of 2020 was $4.9 million compared to an operating loss of $14.1 million in the prior quarter and an operating loss of $6.2 reported in Q1 of 2019. Non-GAAP operating loss for Q1 of 2020 was $4.6 million compared to a loss of $9 million in Q4 of 2019 and an operating income of $1.4 million in Q1 of 2019. Both the GAAP and non-GAAP quarter-over-quarter and year-over-year improvements were attributable to higher gross margins due to product and services mix on lower sales volumes and an operating expense reductions. Other income on a GAAP basis for the first quarter of 2020 was a loss of $9.4 million compared to income of $3.2 million in the prior quarter and $7.2 million of income in quarter one of 2019. Our non-GAAP other income for the quarter that just ended was a loss of $7.5 million compared to income of $2.9 million in quarter four of 2019 and an income of $5.3 million for quarter one of 2019. The decreases this quarter in both GAAP and non-GAAP other income as compared to both quarter over quarter and year over year were primarily market-driven losses in our investment portfolio. The company's tax provision for the first quarter of 2020 was a benefit of $4.4 million as compared to an expense of $800,000 in the prior quarter and an expense of $300,000 in the first quarter of 2019. The current quarter tax benefit was primarily related to the passage of the CARES Act in the U.S., partially offset with tax expense in our foreign operations as the deferred tax benefits generated in the current quarter by our domestic operations were offset by additional changes in the valuation allowance previously established during the third quarter of 2019. Gap net income for quarter one of 2020 was a loss of $10 million compared to a loss of $11.6 million in the prior quarter and a net income of $800,000 for the first quarter of 2019. Non-GAAP earnings for the first quarter of 2020 was a loss of $2.2 million as compared to a loss of $2.5 million in the prior quarter and a net income of $4.9 million in quarter one of 2019. Earnings per share assuming dilution on a GAAP basis was a loss of 21 cents per share as compared to a loss of 24 cents per share last quarter and earnings of 2 cents per share in the first quarter of 2019. Non-GAAP loss per share, assuming dilution in the first quarter of 2020, was 5 cents, consistent with the prior quarter and comparing to earnings of 10 cents per share in quarter one of 2019. Turning to the balance sheet, unrestricted cash and marketable securities totaled $136.6 million at quarter end, After repaying our taxable revenue bond debt of $24.6 million in January and paying $4.3 million in dividends during the quarter. For the quarter, we used $24,000 of cash for operations. Net trade accounts receivable was $86.5 million at quarter end, resulting in a DSO of 69 days. compared to 72 days in the prior quarter and 62 days at the end of the first quarter of 2019. The variability in DSOs quarter over quarter and year over year is mainly attributable to the timing of shipments during the quarter and customer mix. Net inventories were $99.5 million at the end of the first quarter compared to 98.3 million in Q4 of 2019 and $93.6 million at the end of Q1 2019. We believe that we are positioned to maintain adequate liquidity in the current environment. Looking ahead to the next quarter, considering the possible effects of the ongoing COVID-19 pandemic, 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 fluctuations in currency exchange rates in our international markets, may cause material differences between our expectations and the actual results. We expect that our second quarter 2020 revenue will be in the range of $123 million to $133 million. After considering the projected sales mix, we expect that our second quarter gross margin on a non-GAAP basis will be about 41%. We also expect non-GAAP operating expenses for the second quarter of 2020 to be in the range of $53 to $54 million. Finally, we anticipate the consolidated tax rate for the second quarter of 2020 on a non-GAAP basis will be in the high 20s percentage rate. We believe the significant factors impacting revenue and earnings realized in 2020 will be the following. The macro spending environment for carriers and enterprises, the ongoing effects of the COVID-19 pandemic, 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, potential changes in tax laws, 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 www.adtran.com. Now I'll turn the call back over to Tom.