ADTRAN Holdings, Inc.

Ladies and gentlemen, thank you for standing by and welcome to ADTRAN's first quarter 2021 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. To ask a question during the session, you'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. During the course of the conference calls, AdTrend 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 costs manufacturing efficiencies and other risks detailed in our annual report on form 10k for the year ending december 31st 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 Stam, Chief Executive Officer of AdTrans. Please go ahead.

Thank you, Christine. Good morning, everyone. We appreciate you joining us for our first quarter 2021 conference call. With me today is AdTrans CFO, Mike Fogliano. Following my opening remarks, Mike will review the quarterly financial performance in detail, and then we will take any questions that you may have. We had a strong first quarter, and we expect this to be an exciting year for AdTrans. we grew revenue 11% year over year, increased non-GAAP EPS by 18 cents year over year, and recorded the highest product bookings for any quarter in our history. This success was primarily driven by the demand for our fiber-based broadband solutions, continuing the positive momentum from the second half of last year. If we look at the market, there are several key indicators that provide a positive outlook for our business. On the consumer side, we continue to see increased demand for fiber-based broadband access paired with premium cloud-managed Wi-Fi in the home. From a funding perspective, governments are prioritizing high-speed broadband connectivity to all residents more than ever. In the U.S., President Biden has proposed $100 billion for future-proof broadband as part of an eight-year infrastructure plan. He referred to high-speed broadband as the new electricity that's a necessity for all Americans. The UK government has also pledged $7 billion in funding for gigabit-capable broadband for hard-to-reach areas. Similar, multibillion-dollar investments are being committed in the EU to accelerate high-speed broadband connectivity across its member countries. In addition to government spending, we continue to see increased investment from private equity, municipalities, utilities, and others to fund the build-up of fiber access networks for high-speed broadband and future 5G connectivity. From a technology standpoint, refresh cycles around 10-gig fiber access, mesh Wi-Fi 6, and cloud-based services are driving increased investment in our growth products. Finally, supply chain diversification and vendor risk mitigation initiatives are also accelerating vendor selection programs across our target customer base. With our strong presence in key growth markets, including the U.S. and Europe, along with our trusted vendor status and differentiated portfolio, we are well positioned to take advantage of the major investment cycles that we see ahead of us. Taking a closer look at our key growth areas of fiber access, in-home service, delivery platforms, and software, you will see several highlights that reinforce our success in these areas. In fiber access, Del Oro's Q4 2020 market share report noted AdTran as the fastest-growing PON OLT vendor in both North America and EMEA in terms of year-over-year market share gains. For our in-home service delivery platforms, Q1 was the record revenue quarter with growth being led by cloud-managed mesh Wi-Fi gateways. On the software side, our growth was led by our cloud-based SaaS offerings, where we have grown our customer base by 66% in the past year. As we look at the Q1 financials, revenue for the quarter was $127.5 million with 42% gross margins. Network solutions accounted for 89% of total revenue at $113.8 million, while global services contributed $13.7 million. During the quarter, we had two 10% customers, both distribution partners. These distribution partners serve hundreds of Tier 2s and regional service providers in the U.S. with a mix of broadband access, connected home, and enterprise solutions. This reinforces the success we are having with both customer and portfolio diversification. We continue to make good progress towards our customer acquisition and diversification efforts in Q1 with an addition of 26 new service provider customers. We expect to continue to grow our customer base as our 10-gig fiber access solutions, connected home solutions, and software platforms are adopted by customers that are upgrading their networks due to favorable government, regulatory, and technology factors. Much like the second half of 2020, the growth that we saw in Q1 was led by our success with regional broadband operators in both the U.S. and Europe. revenue from regional broadband operators was up a combined 48% year-over-year, while European regional operators were up a combined 70% year-over-year. We continue to see increasing demand for our fiber access, connected home, and cloud-based offerings. Our fiber access and aggregation business grew 51% year-over-year, In-home service delivery platforms were up 94% year-over-year, and SAS offerings increased 32% year-over-year. The growth in these areas more than offset the decline in our traditional copper access business. For the previously announced Tier 1 fiber access projects, we continue to make great progress and expect to exit the lab for each of these around the middle of the year. In addition to these previously announced awards, we are still on track with several Tier 1 projects globally, And we are also experiencing growth in tier one MSO customers with our 10 gig fiber access portfolio as they begin to transition to more full fiber network deployments. Inventory levels remain higher than normal due to the increased lead times from the global chip shortage and COVID-19 related logistics issues. We continue to see lead times extend and expect that this will continue for some time into the future. We are taking the necessary steps to mitigate these challenges to the best of our ability, but the supply chain constraints do present risk in the near-term or mid-term. From an organizational perspective, we continue to maintain a disciplined approach to our operational expenses. The structural changes that we implemented over the past year continue to improve our operational efficiency. We have reduced our non-GAAP quarterly operating expenses by 9% year-over through disciplined expense management. As we secure additional Tier 1 wins, we do expect to see a slight increase in R&D expenses. On the product side, we introduced several key advantages during the quarter. In our fiber access platforms, we announced several new products that will simplify the deployment of fiber-based gigabit services in low-density areas for RDOF recipients. For in-home service delivery platforms, we have begun to ramp deployments of our cloud-managed mesh Wi-Fi 6 gateways. As mentioned previously, Q1 was a record revenue quarter for our in-home service delivery platforms, especially in mesh Wi-Fi, and we have very strong order bookings going forward for this growth area. On the software side, we have two primary areas of growth. In the SaaS category, we are seeing increased demand for our cloud-based tools that proactively optimize end-to-end performance for broadband access and in-home networks while providing actionable insight to the operations and marketing teams. As noted earlier, we grew our customer base for SaaS offerings by 66% year-over-year. SaaS projects are typically pay-as-you-grow multi-year programs that will continue to increase over time. In addition to our SaaS solutions, we also offer leading-edge access domain orchestration software that simplifies the programmability of open multi-vendor networks. We have seen an increase in customer additions, including multi-vendor integrations, in this category as service providers modernize their IT and OSS processes. In our enterprise gateway portfolio, we very recently launched our low-end IoT gateways. We have a growing backlog of demand for these products that simplify the connectivity of large-scale IoT sensor networks to cloud-based IoT cores. These IoT gateways are the latest additions to our updated enterprise portfolio that consist of fiber access routers, business class Ethernet switches, business Wi-Fi, all to support the next generation of industrial automation applications. Continued investment in our portfolio, coupled with the success we are having in our growth products, has us well positioned for additional success throughout the year. This will also enable us to continue to meet our customer and portfolio diversification objectives. On the Q1 call last year, we first spoke of COVID-19 and its impact on our company. I want to say I'm extremely proud of how our employees continue to weather this storm. They have remained flexible and resilient throughout this difficult time, and I want to thank them. With that background, Mike will now provide a review of our financials. Following his remarks, I will be happy to answer any questions that you may have.

Mike? Thank you, Tom, and good morning to all. I'll review our first quarter 2021 results and provide our expectations for the second quarter. During my report, I'll be referencing both GAAP and non-GAAP results with reconciliations presented in our press release and supplemental financial schedules on our investor relations webpage at www.adtran.com slash investor. The supplemental financial schedules on our webpage also present certain revenue information by segment and category and which I'll be discussing today. AdTrans first quarter 2021 revenue came in at $127.5 million compared to 130.1 in the prior quarter and 114.5 in the first quarter of 2020. Subdividing this across our operating segments, our network solutions revenue for the first quarter was $113.8 million versus $114.1 million reported for Q4 of 2020 and $97.4 million in Q1 of 2020. Our services and support revenue in Q1 of this year was $13.7 million compared to $16 million reported in the fourth quarter of 2020 and $17.2 million in the first quarter of 2020. Across our revenue categories, access and aggregation revenue for the first quarter of 2021 was $69.1 million compared to $79 million in the prior quarter and $66 million in Q1 of 2020. Revenue for our subscriber solutions and experience category was $54.6 million for the quarter versus $45.4 million for quarter four of 2021. and 42.2 million for quarter one of 2020. Traditional and other products revenue for the quarter was $3.9 million compared to 5.8 for quarter four of 2020 and 6.4 million for quarter one of 2020. Looking at our revenues geographically, domestic revenue for Q1 2021 was $86.5 million versus $95.8 million reported in quarter four of 2020 and $79 million in quarter one of 2020. Our international revenue for quarter one of 2021 was $41 million compared to $34.3 million in Q4 of 2020 and $35.5 million in the first quarter of 2020. As Tom stated in the first quarter, we had two 10% of revenue customers. Both of these were domestic. Our GAAP gross margin for the first quarter of this year was at 42% as compared to 41.1% in the prior quarter and 45.1% in the first quarter of 2020. Non-GAAP gross margin for the quarter was 42.1% as compared to 41.3% in the prior quarter and 45.4% in the first quarter of 2020. The quarter-over-quarter improvement in both GAAP and non-GAAP gross margins were driven by product and customer mix in both our products and services segments. The year-over-year decreases in both GAAP and non-GAAP gross margins were attributable to both domestic and international product mix, partially offset by higher volume manufacturing efficiencies. During the quarter, we experienced extended component lead times, which we expect to continue, potentially affecting component availability and also component and logistics costs. Total operating expenses on a GAAP basis were $54.9 million for the quarter, compared to $56.8 million reported in the prior quarter and $56.5 million for quarter one of 2020. The quarter-over-quarter decrease was driven by reduced restructuring expenses, market-driven decreases in our deferred compensation expense, and lower legal expenses. partially offset by increases in employee benefit expenses in both R&D and SG&A and higher R&D project-related expenses. The year-over-year decrease in operating expenses was a result of lower labor expenses in both R&D and SG&A and lower travel and marketing-related expenses, partially offset by market-driven increases in our deferred compensation expense and contract services costs. On a non-GAAP basis, our first quarter operating expense was $51.4 million compared to $49.5 million in the prior quarter and $56.7 million in quarter one of 2020. The increase in quarter-over-quarter non-GAAP operating expenses is primarily due to increases in employee benefit expenses in both R&D and SG&A and higher R&D project-related expenses partially offset by decreases in legal expense and other planned SG&A expense reductions. The year-over-year decrease in non-GAAP operating expenses was the result of lower labor expenses in both R&D and SG&A and lower travel and marketing-related expenses, partially offset by increases in contract services costs. Operating loss on a GAAP basis for the first quarter of 2021 was $1.3 million, compared to an operating loss of 3.3 million in the prior quarter and an operating loss of 4.9 million reported in Q1 of 2020. Non-GAAP operating income for quarter one of 2021 was $2.4 million compared to 4.3 million in the prior quarter and an operating loss of 4.6 million in quarter one of 2020. The quarter-over-quarter gap improvement in profitability was attributable to a more favorable gross margin mix and reduced operating expenses. The year-over-year decrease in gap operating expenses was driven by higher sales and reduced operating expenses. The non-gap quarter-over-quarter decrease in profitability was driven by higher operating expenses and reduced sales volume which partially offset by improving gross margins. The non-GAAP year-over-year operating income improvement was related to higher sales volume and reduced operating expenses. Other income on a GAAP basis for the first quarter of 2021 was $3.3 million, compared to other income of $3 million in the prior quarter and a loss of $9.4 million for quarter one of 2020. Our non-GAAP other income for the quarter was 3.3 million compared to non-GAAP other income of 1.7 million in Q4 of 2020 and a non-GAAP loss of 7.5 million in quarter one of 2020. The quarter over quarter increases in both the GAAP and non-GAAP other income were related to higher realized foreign currency exchange gains, partially offset by reduced returns in our investment portfolio. The increases in both the GAAP and non-GAAP other income on a year-over-year basis were related to increases in the market-driven fair value of our investment portfolio, and to a lesser extent, higher realized foreign currency exchange gains. The company's tax provision for the first quarter of 2021 was an expense of $1 million. as compared to a $6.5 million tax benefit in the prior quarter and a $4.4 million benefit in the first quarter of 2020. The current quarter's expense is primarily driven by tax expense from our international operations as the deferred tax benefits generated by our domestic operations continue to be offset by additional changes in the valuation allowance. The tax benefits in the first and fourth quarter of 2020 were primarily due to the passage of the CARES Act in the first quarter and finalization of those calculations as part of finalizing our filing and related 2019 net operating loss carryback claims, as well as in a shift across our profitability jurisdictions. GAAP net income for quarter one of 2020 was $900,000. compared to 6.1 million in the prior quarter and a net loss of 10 million for the first quarter of 2020. Non-cap net income for the first quarter of 2021 was $6.3 million as compared to 5.2 million in the prior quarter and a net loss of 2.2 million in quarter one of 2020. Earnings per share assuming dilution on a GAAP basis were two cents per share as compared to 13 cents per share in the prior quarter and a loss of 21 cents per share in the first quarter of 2020. Non-GAAP EPS assuming dilution for the first quarter of 2021 was 13 cents compared to 11 cents per share in the prior quarter and a loss of 5 cents per share in quarter one of 2020. On the balance sheet, unrestricted cash and marketable securities totaled $123.2 million a quarter in, after paying $4.4 million in dividends for the quarter. During the quarter, we generated $10.7 million in cash from operations. Net trade accounts receivable was $103.2 million at quarter end, resulting in DSOs of 73 days compared to 70 days in the prior quarter and 69 days at the end of the first quarter of 2020. The variability in DSOs quarter over quarter and year over year mainly attributable to the timing of shipments during the quarter, customer mix, and sales volumes. Net inventories were $122.9 million at the end of the first quarter as compared to $125.5 million at year-end 2020 and $99.5 million at the end of Q1 2020. While inventories were down slightly quarter over quarter, we continued to carry higher inventory levels in preparation for new product ramp-ups and strategic inventory buffer purchases designed to aid in supply continuity. 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 fluctuations 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 that our second quarter 2021 revenue will be in the range of $136 to $146 million. After considering the projected sales mix, we expect that our second quarter gross margin on a non-GAAP basis will be in the range of 41 to 43%. We also expect non-GAAP operating expenses for the second quarter of 2021 will be about $52 to $53 million. And finally, we anticipate the consolidated tax rate for the second quarter of 2021 on a non-GAAP basis will be in the low to mid-20s percentage rate. We believe the significant factors impacting revenue and earnings realized in 2021 will be component availability, 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, 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, additional financial information is available at ADTRAN's Investor Relations webpage at ADTRAN.com slash investor. Now I'll turn it back over to Tom.