ADTRAN Holdings, Inc.

Ladies and gentlemen, thank you for standing by and welcome to ADTRAN's fourth 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. During the course of the conference call, AdTrans 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 freight and logistics costs manufacturing efficiencies and other risks detailed in our annual report on form 10k for the year ended december 31st 2020 and our quarterly report on form 10q for the quarter ended october 31st 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.

Thank you, Elliot. Good morning. We appreciate you joining us for our fourth quarter 2021 earnings conference call. With me today is AdTran 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. Q4 was highlighted by record demand for our fiber broadband solutions with a diverse mix of large and small service providers across our key growth markets in the US and Europe. This demand was driven by the accelerated expansion of fiber-to-the-home networks, upgrades to in-home Wi-Fi connectivity, and the adoption of cloud-based automation tools. Some of these key highlights for the quarter included the overall revenue up 18% year-over-year. Record product revenues for our fiber access platforms were up 48% year-over-year, led by a diverse mix of regional service providers in the U.S. and Europe, along with a significant ramp in shipments to our Tier 1 access customers. Record product revenue for our residential Wi-Fi platforms were up 72% year-over-year, led by volume shipments of our latest mesh Wi-Fi 6 system. We also saw a continued addition to our SaaS customer base, which was up 48% year over year. We had another record quarter in bookings, up more than 20% quarter over quarter and more than 50% year over year. These bookings were across a broad base of customers and product segments. In the latest market share report from Del Oro and Omdia, our Q3 2021, for Q3 2021, AdTrans shipped more than twice the volume of 10 gig OLT ports in both North America and EMEA than the next two closest US-based vendors combined. This highlights our success in fiber footprint capture with next generation fiber access platforms. The success we had in the quarter was a direct result of our improved customer diversification and our approach to providing end-to-end fiber broadband solutions. On the customer side, demand by regional service providers across the U.S. and Europe remains higher than ever. However, Q4 saw a sharp increase in revenue growth from international Tier 1 operators, up 76% year-over-year. The international Tier 1 fiber operators' increasing volume deployments included two European operators and initial XGS shipments to one Tier 1 operator with properties throughout Latin America. On the portfolio side, we continue to have success in bundling our fiber access platforms, in-home service delivery platforms, and SaaS applications. Our growth in residential mesh Wi-Fi systems and SaaS customers during the quarter directly correlated to our success in fiber access platforms. And we continue to outperform the market in fiber footprint capture, and we expect to see corresponding rapid increases in the deployment of our multi-gig mesh Wi-Fi 6 systems, ONTs, and SaaS applications. While we had success in growing our business, supply chain constraints continued to limit our revenue growth potential and negatively impacted our profitability. We expect these industry-wide supply constraints to continue throughout the remainder of the year, although we expect some improvement in the second half. Despite the supply chain challenges facing our industry and many others, our long-term outlook remains very positive. The Tier 1 fiber operators in both the U.S. and EMEA remain on track, for larger scale deployments with several of them receiving volume shipments in Q4 and further growth expected in the quarters ahead. In addition, we continue with lab approval cycles of recently awarded Tier 1 fiber businesses and we maintain a healthy funnel of incremental Tier 1 opportunities where we are well positioned for success. Within the software segment of our business, we launched Mosaic One last year and Mosaic MosaicOne is a SaaS platform with promote, care, and operate applications tailored toward the needs of marketing, customer support, and operations personnel, respectively. These SaaS applications utilize AI-powered intelligence to optimize service performance across both fiber access and in-home environments, reducing operational expenses, improving network quality, and increasing customer satisfaction. As we have migrated more customers to these latest SaaS offerings, we have received tremendous positive feedback and expect this to further accelerate our growth, not only in SaaS applications, but the associated fiber access and in-home connectivity platforms as well. These portfolio enhancements are timely with the high growth opportunities for fiber broadband solutions in our core markets. And the U.S. RDoF funds continue to get released. ARPA funding at the state and local level is beginning to impact network planning and infrastructure Bill funding is still yet on the horizon. These key programs represent tens of billions of dollars in funding toward fiber-based broadband infrastructure and a rapid acceleration in subsidies versus previous years. In Europe, both incumbent operators and a wide range of all-net operators, backed by a mix of private investment and government stimulus, race to upgrade their networks to an all-fiber future while continuing their shift away from high-risk vendors. AdTran remains well positioned to benefit from this unprecedented investment cycle in fiber access. To position AdTran for further success in fiber networking solutions across the U.S. and Europe, we made a voluntary public takeover offer for ADBA Optical Networking in August 2021. ADBA is a global leader in optical transport, carrier, Ethernet, and network synchronization solutions that are an ideal complement to AdTran's portfolio. I am pleased to inform you that this offer was overwhelmingly approved by AdTrans stockholders at a special meeting of stockholders on January 6th. On January 26th, at the close of the adverse shareholder tender acceptance period, we received more than the required 60% of outstanding adverse shares of adverse stock as of the record date, enabling this transaction to move forward. We are awaiting final FDI approvals from the UK and Germany. Once these are received, we will set a closing date and begin the integration process. In summary, we continue to experience record demand for our solutions, especially in our high-growth segments of fiber access, cloud software, and residential Wi-Fi solutions. Our fiber access platforms are starting to realize the benefits of our success with Tier 1 operators and complement our rapid growing base of regional operators. Our SAS applications are being adopted across a wide range of operators following the launch of our Mosaic One platform. And finally, our residential Wi-Fi platforms are experiencing unprecedented growth given the demand for multi-gig mesh Wi-Fi 6 in the home to match the speeds enabled by 10-gig fiber access networks. With increased customer funding, record demand, a diversified customer base, a differentiated product portfolio offering, we are on track to continue growth this year. The proposed combination with AVA will further improve our competitive position and growth opportunities. With that background, Mike, will you provide some details and a review of our financials? Following Mike's remarks, we'll be happy to open it up for any questions you may have. Mike?

Thanks, Tom, and good morning to all. I'll review our fourth quarter results and provide our expectations for the first quarter of 2022. 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 webpage at investors.adtran.com. The supplemental financial schedules on our webpage also present certain revenue information by segment and by category, which I will also be discussing. ADTRAN's fourth quarter 2021 revenue came in at $154.2 million compared to $138.1 million in the prior quarter and $130.1 million in the fourth quarter of 2020. Subdividing across our operating segments, our network solutions revenue for the fourth quarter was $138.8 million versus $120.8 million reported for Q3 of 2021 and $114.1 million in Q4 of 2020. Our services and support revenue in Q4 of 2021 was $15.3 million compared to $17.3 million reported for the third quarter of 2021 and $16 million for the fourth quarter of 2020. Across our revenue categories, access and aggregation revenue for the fourth quarter of 2021 was $95 million compared to $89.2 million in the prior quarter and $79 million in quarter four of 2020. Revenue for our subscriber solutions and experience category was $52.3 million for the quarter versus $44.9 million for quarter three of 2021 and $45.4 million for quarter four of 2020. Traditional and other products revenue for the quarter was $6.8 million compared to $4 million for quarter three of 2021 and $5.8 million for quarter four of 2020. Looking at our revenues on a geographic basis, U.S. revenue for Q4 2021 was $101.6 million versus $91.9 million reported in quarter three of 2021 and $95.8 million in quarter four of 2020. Our international revenue for the quarter was $52.6 million compared to $46.2 million for quarter three of 2021 and $34.3 million in quarter four of 2020. In the fourth quarter, we had two 10% of revenue customers, both domestic distribution partners serving a large number of regional service providers with a mix of broadband access and connected home and enterprise solutions, thus reinforcing our success in both customer and portfolio diversification. Our gap gross margin for the fourth quarter was at 35.3% as compared to 34.5% in the prior quarter and 41.1% in the fourth quarter of 2020. Non-gap gross margin for the quarter was 35.4% as compared to 34.6% in the prior quarter and 41.3% in the fourth quarter of 2020. The quarter-over-quarter improvements in both GAAP and non-GAAP gross margin were attributable to higher sales volume and manufacturing efficiencies and a favorable mix of our network solutions and services and support segments, which were partially offset by increased supply chain expenses, including higher component and transportation costs. The year-over-year gross margin decreases in both GAAP and non-GAAP gross margins were attributable to increased supply chain expenses, including higher component and transportation costs and product mix, partially offset by the higher sales volumes. As previously mentioned, we continue to experience extreme constraints in the electronic component markets, impacting our gross profit during the quarter, and this is expected to remain challenging affecting product availability and our component and logistics costs. Total operating expenses on a GAAP basis were $61.7 million for quarter four of 2021 compared to $57.7 million reported in the prior quarter and $56.8 million for quarter four of 2020. The quarter-over-quarter increase was a result of market-driven higher deferred compensation expense variable compensation plans, and acquisition-related expenses, partially offset by lower non-recurring and legal expenses. The year-over-year increase in operating expenses was the result of higher acquisition-related expenses and labor and variable compensation, partially offset by lower restructuring costs and market-driven deferred comp expense. On a non-GAAP basis, our fourth quarter Operating expenses were $53.2 million compared to $50.4 million in the prior quarter and $49.5 million in quarter four of 2020. The increased quarter-over-quarter and non-GAAP operating expenses were primarily due to higher market-driven deferred compensation expense and variable compensation partially offset by decreases in legal and non-recurring expenses. The increase year-over-year in non-GAAP operating expenses was a result of market-driven deferred comp expense, variable and labor comp, engineering projects, and travel increases, partially offset by lower non-recurring and legal expenses. Operating loss on a GAAP basis for the fourth quarter of 2021 was $7.2 million, compared to an operating loss of $10.1 million in the prior quarter and an operating loss of 3.3 million reported in Q4 2020. Non-GAAP operating income for quarter four of 2021 was $1.4 million compared to a non-GAAP operating loss of 2.6 million in the prior quarter and 4.3 million non-GAAP operating income in quarter four of 2020. The quarter-over-quarter improvements in GAAP and non-GAAP operating profitability were attributable to higher sales, partially offset by incremental supply chain constraint expenses and higher operating expense. The GAAP and non-GAAP year-over-year decreases in operating profitability were the result of higher supply chain constraint-related expenses and higher operating expenses, partially offset by the increased sales volume. Other income on a GAAP basis for the fourth quarter of 2021 was $1.9 million compared to other income of $923,000 in the prior quarter and $3 million for quarter four of 2020. Our non-GAAP other income for the quarter was $2.8 million compared to non-GAAP other income of $1.4 million in Q3 of 21 and $1.7 million for quarter four of 2020. The quarter-over-quarter increases in both gap and non-gap other income were a result of higher dividend income and realized foreign currency exchange gains. The decrease in gap other income on a year-over-year basis was related to market-driven losses in our investment portfolio as compared to gains in the prior year, partially offset by higher dividend income and realized foreign currency exchange gains. The increase in non-GAAP other income on a year-over-year basis resulted from realized foreign currency exchange gains and higher dividend income. The company's tax provision for the fourth quarter of 2021 was a benefit of $1.1 million as compared to $1.3 million of expense in the prior quarter and a $6.5 million benefit in the fourth quarter of 2020. The current quarter's tax benefit was primarily driven by international losses and changes in our uncertain tax position reserves during the quarter as a result of the expiration of certain statutes of limitation. GAAP net loss for quarter four of 2021 was $4.2 million compared to 10.4 million net loss in the prior quarter and $6.1 million of net income in the fourth quarter of 2020. Non-GAAP net income for the fourth quarter of 2021 was $4.7 million as compared to an $815,000 net loss in the prior quarter and a $5.2 million net income in quarter four of 2020. For the fourth quarter, earnings per share assuming dilution on a GAAP basis was a loss of $0.09 per share as compared to $0.21 loss per share in the prior quarter and $0.13 per share earnings in the fourth quarter of 2020. Non-GAAP earnings per share, assuming dilution for the fourth quarter of 2021, was $0.10 per share compared to a $0.02 per share loss in the prior quarter and an $0.11 per share earnings in Q4 of 2020. On the balance sheet, unrestricted cash and marketable securities totaled $100.6 million at quarter end after paying $4.4 million in dividends during the quarter. For the quarter, we used $25.9 million of cash from operations, driven by higher inventories and increased DSO levels. Net trade accounts receivable was $158.7 million at the end of the quarter, resulting in a DSO of 95 days compared to 83 days for the prior quarter and 70 days at the end of the fourth quarter of 2020. The increase in DSOs quarter over quarter and year over year is mainly attributable to increased sales and the timing of shipments late in the quarter tied to supply chain constraints. Net inventories were 139.9 million at the end of the fourth quarter compared to $127.2 million in the third quarter of 21 and $125.5 million at the end of Q4 of 2020. We continue to carry a higher level of inventory in raw materials as we build up supply to minimize further disruptions given the extremely challenging electronic component market and the associated extended lead times. 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 our customer base, as well as the fluctuation in currency exchange rates in our international markets may cause material differences between our expectations and the actual results. With that in mind, we expect that our first quarter 2022 revenue will be between $100 and $158 million. After considering the projected sales mix, component availability, we expect that our first quarter gross margin on a non-GAAP basis will be in the range of 35% to 37%. Hey, Mike, can I interrupt you?