ADTRAN Holdings, Inc.

Ladies and gentlemen, thank you for standing by and welcome to EdTrans second quarter earnings release conference call. All lines have been placed on mute to prevent ED background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question at that time, please press star then the number 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 known. However, these statements include risks and uncertainties, including the continued spread and extent of the impact of COVID-19 global pandemic. 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 10-K for the year ending December 31, 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 my pleasure to turn the call over to Tom Statton, Chief Executive Officer of AdTran. Sir, please go ahead.

Thank you, Amitris. Good morning, everyone. We appreciate you joining us for our second quarter 2021 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 any questions that you may have. We continue the momentum that we've seen over the past year with another strong quarter in Q2. Although total revenue in the quarter was materially constrained by supply chain constraints, we grew revenue 11% year-over-year and increased non-GAAP EPS by 12 cents year-over-year to 16 cents per share. Our success continues to be led by strong demand for our fiber-based broadband solutions across regional service providers in the U.S. and Europe, driving 66% year-over-year growth in our fiber access platforms. Reinforcing the growth phase we are in, we increased our product bookings by 43% year-over-year. The success that we have had in the quarter was against a backdrop of growing investments in fiber access connectivity. In the U.S. market, there is a bipartisan support for a proposed infrastructure bill that includes $65 billion in funding for high-speed broadband connectivity. In addition to this federal funding, there are increasing commitments from state-level funding to improve broadband connectivity to underserved households. Similar initiatives are moving forward in the UK and the EU to provide universal coverage for high-speed broadband. A recent article cited pledges of over $30 billion to be spent in building out fiber access infrastructure in the UK alone over the next five years. As for the market activity, We continue to increase vendor selection initiatives and our key growth areas of 10-gig fiber access and cloud-managed Wi-Fi 6 as operators look to modernize their networks, diversify their supply base, and transition away from high-risk vendors. Given our strong presence in key growth markets, particularly in the U.S. and Europe, we remain well-positioned to take advantage of this major investment cycle that is still in the early growth phases. Taking a closer look at our key investments in fiber access and software, you will see several highlights that reinforce our optimistic view of our positioning in these markets. We added 33 service provider customers in Q2, and as of the end of Q2, we have over 100 of our fiber-to-the-prem customers deploying our latest 10-gig fiber solutions just in the last past year. This has been one of the most successful product launches in our company history. On the software side, our customer base for SaaS applications increased 57% year-over-year, while revenue increased 46% year-over-year. We also secured our first Tier 1 service provider, deploying our managed Wi-Fi SaaS offering. The SaaS segment of our business is poised for substantial growth as we scale the number of subscribers under multi-year SaaS agreements. As we look at the Q2 financials, Revenue for the quarter was $143.2 million with 43.8% gross margin. Network Solutions accounted for 88% of total revenue at $125.4, while Global Services contributed $17.8 million. We had 10 3% customers during the quarter, two distribution partners, and one European Tier 1 service provider. As noted in previous quarters, these distribution partners serve hundreds of regional service providers in the US market with a mix of broadband access connected home, and enterprise solutions. This continues to reinforce the success we are having in both customer and portfolio diversification. Much like the past few quarters, the growth that we saw in Q2 was led by our success with regional broadband operators in both the US and Europe. In the US market, revenue from tier three operators was up a combined 51% year over year. while European regional operators will up a combined 91% year-over-year. For the previously announced Tier 1 fiber access projects, we remain on track and have lab exit from one of these and expect exit for the other two in the near future. Two of these have already begun to place orders with us for deliveries later on this year and next year. In addition to these previously announced awards, we've achieved lab certification from our latest fiber access platform with a tier one MSO on our contract negotiation with multiple tier one fiber operators. Inventory levels remain higher than normal due to the increased lead times resulting from the global chip shortage and COVID related logistics issues. We continue to see component lead times being extended and becoming more unpredictable. We expect that this will continue into next year and we are taking the necessary steps to mitigate these challenges to the best of our ability. But supply chain issue constraints do present risk to revenue and gross margins over the near term. From an organizational perspective, we continue to maintain a disciplined approach to operational expenses. As we secure additional Tier 1 customer wins, we expect to see targeted increases in those operating expenses. Looking ahead, we expect to continue to see growth in our core areas of fiber access platforms, in-home service delivery platforms, and software. For fiber access platforms, we are gearing up for a ramp in Tier 1 business in the upcoming quarters in addition to the continued growth we are seeing in fiber deployment from regional service providers. For in-home service delivery platforms, Bookings for our cloud-managed gateways are at an all-time high, and we are working through supply chain constraints to fulfill the demand. On the software side, our enhanced SaaS platform, Mosaic One, with a set of tools, we have increased and enhanced our SaaS platform with a set of tools to automate and improve marketing operations and customer care for broadband service providers. Continuing our investment in these high-growth segments, of our portfolio, coupled with the success we are having in new customer adoption, has us well positioned for additional success throughout the year and will enable us to continue to meet our customer and portfolio diversification objectives. Finally, I want to thank all of our employees for their continued flexibility and resilience as we navigate the challenges of COVID-19. Their ability to continue to execute while being faced with these ongoing challenges has allowed us to continually meet the needs of our customers. With that background, Mike will now provide a review of our financials, and following his remarks, we will open the call up for questions.

Mike? Thanks, Tom, and good morning to all. I'll review our second quarter results and provide our expectations for the third quarter of 2021. 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 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 second quarter 2021 revenue came in at $143.2 million compared to 127.5 million in the prior quarter and 128.7 million for the second quarter of 2020. Subdividing this across our operating segments, our network solutions revenue for the second quarter was $125.4 million versus 113.8 million reported for Q1 of 2021 and 111.3 million in Q2 of 2020. Our services and support revenue in Q2 was $17.8 million compared to $13.7 million reported for the first quarter of 2021 and $17.4 million in the second quarter of 2020. Across our revenue categories, access and aggregation revenue for the second quarter of 2021 was $91 million compared to $69.1 million in the prior quarter and $82.8 million in quarter two of 2020. Revenue for our subscriber solutions and experience category was $47.8 million for the quarter versus $54.6 million in quarter one of 2021 and $40.4 million for quarter two of 2020. Traditional and other products revenue for the quarter was $4.5 million compared to $3.9 in Q1 and $5.5 million for quarter two of 2020. Looking at our revenues geographically, US revenue for Q2 2021 was $94.7 million versus $86.5 million reported in Q1 and $84.5 million in Q2 of 2020. Our international revenue for Q2 of 2021 was $48.6 million compared to $41 million for the prior quarter and 44.3 million in quarter two of 2020. In the second quarter, we had three 10% of revenue customers, two were domestic, and one was international. Our gap gross margin for the second quarter was at 43.8% as compared to 42% in the prior quarter and 41.5% in the second quarter of 2020. Non-GAAP gross margin for the quarter was 43.8%, which compares to 42.1% in the prior quarter and 41.6% in the second quarter of 2020. The quarter-over-quarter and year-over-year improvement in both GAAP and non-GAAP gross margins were attributable to international product and customer mix, as well as improvement in our services gross margins. During the quarter, we continued to experience extreme constraints in the electronic component market, which worsened during Q2. We expect this to continue to tighten further during Q3 and for the remainder of the year, potentially affecting product availability and component and logistics costs. Total operating expenses on a GAAP basis were $58.7 million for Q2 2021, compared to $54.9 million reported in the prior quarter and $59.5 million for Q2 of 2020. The quarter-over-quarter increase was a result of market-driven increases in our deferred compensation plans and higher professional services costs. The year-over-year decrease in operating expenses was the result of lower market-driven gains in our deferred comp plans, reduced restructuring charges, and reduced legal-related expenses, partially offset by higher professional services costs. On a non-GAAP basis, our second quarter operating expenses were $52.7 million compared to $51.4 million in the prior quarter and $52.3 million in Q2 of 2020. The increased quarter-over-quarter and year-over-year in non-GAAP operating expenses were primarily due to increases in contract services costs partially offset by decreases in legal expenses. Operating income on a gap basis for the second quarter of 2021 was $3.9 million compared to an operating loss of $1.3 million in the prior quarter and a loss of $6 million reported in Q2 of 2020. Non-GAAP operating income for quarter two of 2021 was $10.1 million compared to $2.4 million in the prior quarter and $1.3 million in Q2 of 2020. The quarter-over-quarter improvement in profitability on a GAAP basis was attributable to increased sales volume and a more favorable gross margin mix, partially offset by higher operating expenses. The year-over-year increase in GAAP operating profitability was driven by increased sales volume, stronger gross margins, and lower operating expenses. The non-GAAP quarter-over-quarter and year-over-year increases in operating income were driven by increased sales volume and improving gross margins. Other income on a GAAP basis for the second quarter of 2021 was $2.3 million, compared to other income of $3.3 million in the prior quarter, and $8.4 million for Q2 of 2020. Our non-GAAP other income for the quarter was $1.1 million compared to non-GAAP other income of $3.3 million in Q1 of 2021 and $5.7 million for Q2 of 2020. The quarter-over-quarter decreases in both the GAAP and non-GAAP other income were related to realized foreign currency exchange fluctuations offset by favorable market-driven fair value changes in our investment portfolio. The decreases in both the GAAP and non-GAAP other income on a year-over-year basis were related to lower gains in the market-driven fair value of our investment portfolio offset by lower realized foreign currency exchange losses. The company's tax provision for the second quarter of 2021 was an expense of $1.1 million. as compared to $1 million in the prior quarter and $1.6 million in the second quarter of 2020. The current quarter's tax expense was primarily driven from profits in our international operations, as the deferred tax expense generated by our domestic operations continued to be offset by additional changes in the valuation allowance. Gap net income for quarter two of 2021 was $5.1 million, compared to $900,000 in the prior quarter and $800,000 for the second quarter of 2020. Non-GAAP net income for the second quarter was $8.1 million as compared to $6.3 million in the prior quarter and $1.6 million in quarter two of 2020. For the quarter that just ended, earnings per share assuming dilution on a GAAP basis were $0.10 per share as compared to $0.02 per share in both the prior quarter and in the second quarter of 2020. Non-GAAP earnings per share assuming dilution for the second quarter of 2021 was $0.16 compared to $0.13 per share in the prior quarter and $0.03 per share in Q2 of 2020. On the balance sheet, unrestricted cash and marketable securities totals $128.2 million at quarter end after paying $4.4 million in dividends during the quarter. For the quarter, we generated $7.5 million of cash from operations. Net trade accounts receivable was $122.7 million at quarter end, resulting in DSOs of 78 days compared to 73 days in the prior quarter, and 67 days at the end of the second quarter of 2020. The variability in DSOs quarter over quarter and year over year is mainly attributable to timing of shipments during the quarter, customer mix of those orders, and sales volumes. Net inventories were $119 million at the end of the second quarter compared to $122.9 million in the first quarter of this year and $106.1 million at the end of second quarter 2020. While our inventories were down quarter over quarter, we continue to carry higher inventory levels in preparation for new product ramp ups and strategic buffer inventory purchases that are designed to assist us with supply continuity in the currently 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 order patterns from which the customer base and to 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. With that in mind, we expect our third quarter 2021 revenue will be in the range of $138 to $158 million. Note that this wider than usual range better reflects both the strength we're seeing in demand and the current issues with the component supply. After considering the projected sales mix, We expect that our third 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 third quarter of 2021 will be between $53 and $54 million. And finally, we anticipate the consolidated tax rate for the third quarter on a non-GAAP basis will be at a low to mid-20s percentage rate We believe the significant factors impacting revenue and earnings realized in 2021 will be component availability and costs, 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 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 investors.adtran.com. Now I'll turn it back over to Tom, and we will take your questions.