ADTRAN Holdings, Inc.

Ladies and gentlemen, thank you for standing by and welcome to ADTRAN's first quarter 2022 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. If you would like to ask a question, please press star one on your telephone keypad. 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 unknown. 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 markets or such products, the products and channel mix, component costs, freight and logistic costs, manufacturing efficiencies, and other risks detailed in our annual report on Form 10-K for the year ended December 31st, 2021, and our quarterly report on Form 10-Q for the quarter ended March 31st, 2022. These risks and uncertainties could cause actual 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 Atran. Sir, please go ahead.

Thank you, Hannah. Good morning, everyone. We appreciate you joining us for our first quarter 2022 earnings conference call. With me today is AdTrans 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. Q1 continued our trend of record demand for our fiber broadband solutions with a diverse mix of service providers across our key growth markets in the U.S. and Europe. This demand continues to be driven by the massive build-up of fiber broadband networks paired with the deployment of mesh Wi-Fi solutions in the home and the adoption of cloud-based network automation tools. Some of the key highlights for the quarter included the following. Overall revenue was up 21% year over year. Fiber access platforms revenue was up 61% year-over-year, led by a diverse mix of regional service providers in the US and Europe, and included the expected ramp in shipments to Tier 1 customers. Our residential Wi-Fi platforms were up 64% year-over-year, led by volume shipments of our latest mesh Wi-Fi 6 systems. Continued rapid growth in our SaaS customer base, up 31% year-over-year, with a growing backlog of customers following the launch of our MOSAIC-1 platform. In the latest market share reports from Del Oro and Omeda for Q4 of 2021, AdTrans shipped more 10-gig OLT ports in both North America and EMEA than the next two closest U.S.-based vendors combined. This highlights our continued success in fiber footprint capture with our 10-gig fiber access platforms. We secured an additional tier one European service provider award with our SDX fiber access platform, bringing the total to six tier one fiber customers in the EMEA region. Lastly, we had three 10% customers for the quarter, a U.S. distribution partner that serves hundreds of regional broadband service providers across the U.S., a tier one European service provider, and a Tier 1 U.S. service provider, highlighting our continued success in geographic and customer diversification. The success in the quarter was driven by the continually increasing demand for our fiber access solutions across a broad base of regional service providers in the U.S. and Europe, along with a ramping business with our Tier 1 customers. Service providers are increasingly selecting AdTrans due to our full range of fiber access platforms and mesh Wi-Fi platforms and SaaS applications. In turn, this is driving sustained revenue growth in these strategic segments as we continued our rapid pace of fiber footprint capture. From a portfolio perspective, our investments in fiber access, connected home, and software solutions continue to pay off. Our fiber access platform revenue has grown over 140% in the past two years and now dominates our business. This success has been driven by our investment in 10 gig access technology, and our market leadership in open disaggregated fiber access platforms. Our success in fiber access has driven a sharp increase in pull-through revenue for fiber CPE and mesh Wi-Fi platforms, up 31% year-over-year, and SaaS applications up 32% year-over-year. We expect to see even higher growth rates in these areas in the quarters ahead as more service providers adopt our 10-gig fiber CPE mesh Wi-Fi 6 platforms and our Mosaic 1 SaaS platform. We successfully grew our business in these strategic market segments despite the supply chain constraints that continue to limit our revenue growth potential and negatively impacted our profitability during the quarter. We expect these constraints to continue. To reduce the impact of these supply chain issues on our profitability in the future quarters, we continue to drive cost optimizations, portfolio consolidation, and material purchases. Despite industry-wide supply chain challenges, our outlook remains positive. We continue to have broad-based success in fiber footprint capture with a broad mix of customers across the U.S. and EMEA. Our Tier 1 fiber customer business continues to ramp with existing customers on track for large-scale deployments and another Tier 1 European Operator Award during the quarter. We also have a strong funnel of additional high-scale opportunities. Tier 2 and regional service providers continued their strong performance. These customers have high adoption rates of our complete portfolio of fiber access, connected home, and cloud software solutions, driving synergistic growth across these product segments. With a very strong outlook for our multi-gig mesh Wi-Fi 6 platforms, a robust funnel of fiber access opportunities, and a healthy backlog of SaaS customers, we expect these customer segments to remain in high growth mode for the quarters ahead. Our portfolio enhancements and customer diversification success comes at a time when we continue to see a strong environment for funding the deployment of fiber broadband networks. In the U.S., the $42.5 billion in broadband infrastructure spending that is part of the Infrastructure Investment and Jobs Act will lead to significant future opportunities. Meanwhile, tens of billions in funds have begun to be released for RDOF and ARPA. This funding is helping to drive generationally significant investment cycle that we are seeing in broadband spending here in the US. In Europe, similar increases in spending are occurring as high-growth countries like the UK and Germany increase their funding to drive the deployment of more efficient, sustainable, and scalable all-fiber networks. While these operators shift to next-generation fiber networks, they continue to shift away from high-risk vendors. ADTRAN is very well positioned to benefit from these transitions given our market leading fiber access portfolio and a strong and growing presence in Europe. Speaking of that presence, I want to update you on the business combination with ADVA. We remain on track. We are working diligently with German officials to obtain FDI approval, foreign direct investment approval, which is the last milestone we must reach before closing. The process is progressing as expected with close expected in Our optimism continues to grow around the portfolio synergies offered by this strategic combination of two leaders in fiber networking. Both companies are seeing record demand for their complementary portfolios, and we expect this to further accelerate through our proposed combination. In summary, despite continuing supply chain constraints, we are making great progress. With increased customer funding, record demand, a diversified customer base, and a differentiated product portfolio. We are on track for added growth this year. With that background, Mike will provide you with some details and a review of our financials. Following Mike's remarks, I will be happy to open up to any questions you may have. Mike?

Thank you, Tom, and good morning to all. I'll cover our first quarter of 2022 results and provide our expectations for the second quarter. I'll be referencing both GAAP and non-GAAP results with reconciliations presented in our press release and the supplemental financial schedules on our investor relations page 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. AdTrans first quarter 2022 revenue came in at $154.5 million, slightly up from the prior quarter, driven by higher sales in both our access and aggregation and subscriber solutions and experience portfolio categories. First quarter revenue increased 21% year over year, with increases in all segments and categories. On a regional basis, domestic revenue grew by 15% and international revenue grew by 35% year over year. For the first quarter of 2022, as reflected in the supplemental schedules, we had a slight quarter over quarter decrease in both our GAAP and non-GAAP gross margin, which is the result of customer and product mix as we continue to experience abnormally high supply chain and logistics costs. The year-over-year gross margin decreases in both GAAP and non-GAAP gross margin were primarily attributable to increased supply chain expenses, partially offset by higher sales volume and increased manufacturing absorption. While we remain focused on gross margin improvement and are actively managing higher component costs, freight expenses, and expedite fees related to the supply chain constraints, we do anticipate continued challenges. To provide context on our first quarter's operating expenses, we decreased spending in our GAAP and non-GAAP quarter-over-quarter and GAAP year-over-year expenses, while the non-GAAP year-over-year increased. The GAAP quarter-over-quarter decrease was the result of lower market-driven deferred compensation expense, acquisition-related expenses, and engineering project expenses, partially offset by higher labor fringe benefits and legal expenses. The decrease quarter-over-quarter in non-GAAP operating expenses was primarily due to market-driven lower deferred compensation and lower engineering project expenses, partially offset by increases in labor, fringe benefits, legal and marketing expense. The year-over-year decrease in operating expenses was a result of lower market driven deferred compensation expenses, partially offset by higher acquisition related expenses, variable labor compensation, marketing and travel expenses. The year-over-year increase in non-GAAP operating expenses was driven by higher labor, marketing, travel, and insurance expenses. Shifting to operating profitability, the quarter-over-quarter and year-over-year improvements in GAAP operating profitability were mainly attributable to lower operating expenses with higher sales volume, also contributing to the year-over-year improvement. The non-GAAP quarter-over-quarter improvement in operating profitability was driven by slightly higher sales volume and lower operating expenses. The non-GAAP year-over-year decrease in operating profitability was the result of higher cost of goods sold due to supply chain constraints. Other income decreased on a GAAP and non-GAAP basis, both quarter-over-quarter and year-over-year. The quarter-over-quarter decreases were a result of lower dividend income market-driven losses in our investments and realized foreign currency exchange fluctuations. The decreases in GAAP and non-GAAP other expenses on a year-over-year basis were mainly related to market-driven losses in our investment portfolio as compared to gains in the prior year and realized foreign currency exchange fluctuations. The company's tax provision for the first quarter of 2022 was a benefit of $2.4 million, primarily driven by the change in our annual estimated rate due to the requirement to capitalize R&D expense in the U.S. beginning in 2022 and its effect on our valuation allowance. Closing out our income statement results, the first quarter of 2022's GAAP net loss was $1.1 million, with a loss of two cents per share, assuming dilution. Non-GAAP net income was $9.9 million with 20 cents non-GAAP earnings per share, assuming dilution. On the balance sheet, unrestricted cash and marketable securities totaled $96 million at quarter end after paying $4.4 million in dividends during the quarter. For the quarter, we generated $4.9 million in cash from operations. Net trade accounts receivable was $150.1 million at quarter end resulting in DSOs of 87 days compared to 95 days in the prior quarter and 73 days at the end of the first quarter of 2021. Net inventories were $171.1 million at the end of the first quarter compared to $139.9 million in the fourth quarter of 2021 and 122.9 million at the end of Q1 2021. We continue to carry a higher level of inventory in raw materials as we work to minimize supply disruptions given the extremely challenging electronic component market and the associated extended lead times. Looking ahead to 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 international markets may cause material differences between our expectations and the actual results. Keeping that in mind, we expect that our second quarter 2022 revenue will be between $165 and $175 million. After considering the projected sales mix and component availability, we expect that our second quarter gross margin on a non-GAAP basis will be in the range of 35% to 37%, still lower than normal due to higher expediting and freight costs. We also expect non-GAAP operating expenses for the second quarter of 2022 will be between $55 and $56 million. And finally, we anticipate the consolidated tax rate for 2022 on a non-GAAP basis will be in the high teens to low 20s percentage rate. We believe the significant factors impacting revenue and earnings realized in 2022 will be component availability and costs, the macro spending environment for carriers and enterprises, 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, the adoption rate of our broadband access platforms, potential changes in corporate tax laws, currency exchange rate movements, and inventory fluctuations in our distribution channels. Once again, the additional financial information is available on ADTRN's investor relations webpage at investors.adtrn.com. Now I'll turn it back over to Tom and we'll take your questions.