ADTRAN Holdings, Inc.

Ladies and gentlemen, thank you for standing by and welcome to ADTRAN Holdings Inc. fourth quarter 2022 preliminary 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 on the phone lines today, please press star 1 on your telephone keypad and to remove yourself from the queue, that is star 1 again. During the course of the conference call, ADTRAN representatives expect to make forward-looking statements that reflect management's best judgment based on factors currently known. However, these statements involve risk 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 cost, freight and logistic costs, manufacturing efficiencies, our ability to effectively integrate mergers and acquisitions, and other risks detailed in our annual report on Form 10-K for the year ended December 31, 2022, and our quarterly report on the Form 10-Q for the quarter ending September 30, 2022. 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 AdTrend Holdings. Sir, please go ahead.

Thank you, Lisa. Good morning, everyone. We appreciate you joining us for our fourth quarter 2022 earnings conference call. With me today is AdTrend Holdings 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. I want to start by highlighting the importance of the milestone we reported last month in our combination with Adva Optical Networking SE. The Domination and Profit and Loss Transfer Agreement, or DPLTA, was registered. This was the final administrative step in operating as one company. We can now focus our integration efforts to drive synergies and shareholder value. With that context, going forward, I will just talk about AdTrend as a single integrated company rather than a combination of two different companies. Our initial motivation for combining with Adva was due to our belief that the combination would make both companies stronger and more diversified. The key components of our combined value proposition were that we would have a more diverse and differentiated portfolio, a more diverse customer base in both customer type and region, and a stronger presence in our focused markets, especially the U.S. and Europe. to capitalize on the fiber network and growth opportunities in these regions. The results in Q4 highlight the increased product and customer diversity of the combined company. When looking at the quarter, I will provide some quarter-over-quarter growth statistics on a pro forma full quarter basis to reflect what the performance was in Q4 versus Q3 had the ADVA financials been consolidated for all of Q3. The financials that Michael review will compare Q4 quarter totals, excuse me, Q4 totals, quarter over quarter, with a partial contribution from ADVA beginning July 15, 2022, the closing date, and year over year without ADVA contribution last year. With that clarification, I'll start with optical networking solutions. This category was up 7% quarter over quarter on a full quarter basis. The growth in optical networking solutions was especially strong in Europe, driving non-U.S. optical networking revenue up 10% quarter-over-quarter on a full quarter basis and helping push overall non-U.S. revenues up 15% quarter-over-quarter on a full quarter basis. This was a record quarter for revenues in optical networking solutions for either at the standalone or as part of ADTRAN. We continue to see strong bookings demand in the quarter, and I'll note that the success in the area was positively impacted by the combined company's efforts to address past due backlog in the quarter. Revenue from access and aggregation solutions was up 7% quarter over quarter on a full quarter basis, driven by growth in fiber access platforms. This growth was held back in the quarter due to delays in operations that resulted from introducing redesigned products to address supply chain issues and delays in 6330 shipments. Overall revenue from subscriber solutions was down quarter over quarter following a record Q3 performance. Revenue outside the U.S. was 60% of overall company revenue in the quarter, driven by our strength in Europe. The success in Europe was paired with continued demand for our fiber broadband solutions with U.S. regional service providers. We had record demand for our solutions in Q4 from U.S. regional service providers. We continue to invest in innovation in all segments of the portfolio, and we are seeing broad-based demand for our solutions as a result of these investments. We can now step through some of the highlights driving this excitement in our solutions. I'll start with optical networking solutions that led our growth in the past quarter. Unlike many vendors in this space, whose success is tied to specific customer segment or regions, our solutions are deployed by a diverse mix of large service providers, regional service providers, internet content providers, government agencies, and large enterprise customers. These solutions range from multi-terabit transport systems to internally developed optical modules and infrastructure monitoring solutions. We differentiate through operational simplicity, security, and tailored solutions that are optimized for our primary use case in the metro edge and private optical networking segments. This solution diversity, customer diversity, and solution differentiation provide great balance and positions this category for sustained growth moving forward. The success was highlighted by AdTran being the fastest growing optical network vendor in Europe, according to Omdia's latest market share report. We also won the Layer 1-2-3 Networking Transformation Award in this category in the category of sustainability with our coherent 100 ZR transceiver. In our access and aggregation solutions, we formally launched the SDX 6330, our industry-leading open disaggregated fiber access platform. This product launch is one of the most anticipated in our portfolio in several years as the SDX 6330 sets new industry benchmarks in density, scalability, and power efficiency, driving broad-based demand for this platform from a diverse mix of national and regional service providers. The release of this platform is timely given the ongoing investment in next-generation fiber access networks and focus on energy-efficient network infrastructure. The XDX 6330 will begin shipping for revenue this quarter, and we expect it to be a major contributor to our overall growth this year following orders and project awards from several large-scale national operators and numerous regional operators. AdTrend is already the second-largest vendor in 110-gig fiber access platforms across the North American and EMEA regions. combined according to the latest Omnia market share reports, and this product launch is set to enhance our position in this market. In our subscriber solutions category, we have a diverse offering spanning residential business and wholesale services. On the residential side, we see continued success driven by growth in 100-gig fiber CPE and multi-gigabit mesh Wi-Fi platforms. These in-home solutions were a meaningful contributor to our revenue in Q4, and we expect demand for these solutions to remain strong as service providers connect more homes with fiber and upgrade the in-home connectivity to multi-gigabit speeds. Similar trends are happening in the enterprise and wholesale space where we see strong demand for our business class routers, virtualized edge platforms, multi-gig enterprise switches, and 10-gig carrier Ethernet termination devices. In the virtual edge cloud space, we recently closed the largest software deal in the history of our company for this segment, underscoring the growth opportunities ahead of us in this area. This subscriber solutions portfolio provides us with the most comprehensive offering in the industry to connect users to all types of fiber networks. Our solutions are complemented by comprehensive software and services portfolio that simplify the engineering deployment and ongoing operations associated with these fiber networks. On the software side, we see continued demand for our SaaS applications with over 150 service providers already adopting our latest Mosaic One offering and many more expected to begin deploying this platform this year. As we integrate our broader fiber networking portfolio under a common set of software applications, we expect to see this be an additional driver for growth in our software platforms and corresponding networking platforms. This highly differentiated portfolio sets us up well for continued success in our key growth markets. We see increasing demand from operators, especially our existing customers, in deploying our full suite of fiber networking solutions. With our much larger customer base, this significantly increases our near-term addressable market for these solutions. Long-term public and private investments remain strong for fiber networks, with many of the key funding sources including the 42.5 billion bead project in the U.S., still planned in the years ahead. Initiatives to reduce the dependency on high-risk vendors, especially in Europe, remains strong, and we expect this to be a further growth driver for opportunities in the years ahead. As a more scaled Western supplier with a highly diverse technology portfolio, we expect to benefit from these long-term tailwinds. On the supply chain side, the situation improves substantially when compared to year over year. The outlook continues to improve, and we expect this to be less of a headwind for our growth in the near future. Given these factors, we remain optimistic about our growth potential and driving shareholder value. With that background, I'll turn things over to Mike to provide a review of our financials. Following Mike's remarks, we will answer any questions you may have. Mike?

Thank you, Tom, and good day to all. I will cover our fourth quarter 2022 preliminary and unaudited results and provide our expectations for the first quarter 2023. Please note that Q4 2022 results include a full quarter consolidation of the ADVA financials, which affects year-over-year and quarter-over-quarter comparisons. Please be reminded that Q3 2022 incorporated only a partial quarter with ADVA beginning July 15, 2022. Since this is the case, I will refrain from repeating the consolidation effects when discussing the year-over-year comparisons of our results. I will be referencing non-GAAP information with reconciliations to the most directly comparable GAAP financial measures presented in our press release and also certain revenue information by segment and category which is available on our investor relations webpage at investors.adtran.com. In addition, we've uploaded an updated investor presentation to this site, which is available for download. Unless stated otherwise, all financials are presented in U.S. dollars. ADTRAN's fourth quarter 2022 revenue came in at $358.3 million, up 132% year-over-year. and up 5% quarter over quarter, within the lower half of our guidance range of $355 to $375 million. Our network solution segment accounted for 89% of revenues in Q4 2022, compared to 90% in Q4 21, and also 90% in Q3 of 2022. Our services and support segment contributed 11% of revenues in Q4 22 compared to 10% in the year ago quarter and in the previous quarter as well. Year over year and quarter over quarter revenue increases were driven by our optical networking solutions category, which comprises 40% of revenues compared to 35% in the previous quarter. Subscriber solutions and experience contribute 34% of revenues compared to 35% in the year-ago quarter and 39% in the previous quarter. Access and aggregation revenue share was 27% compared to 65% in Q4 2021 and 26% in Q3 2022. On a regional basis, for year over year, Fourth quarter domestic revenue grew by 41% and international revenue increased by 310%. International revenues make up 60% of our revenue and domestic revenue contributed 40% of Q4 2022 revenues. Customer diversity continues to be a focus with 110% of revenue customer for the company during the quarter. Q4 non-GAAP gross margin was 39.1%, improving by 3.7 percentage points year over year and one percentage point sequentially. Gross margin was positively impacted by higher software sales, product mix, and improvement in supply chain expenses with the year-over-year partially offset by unfavorable currency developments. While supply chain constraints lessen during the fourth quarter, we do anticipate challenges and remain focused on managing higher component costs, freight expenses, and expedite fees in the near term. Our non-GAAP operating expenses were $118.6 million, increasing by 123% year over year and 9% quarter over quarter, which were primarily driven by increased labor costs related to the first full quarter of expenses, partially offset by lower contract services. Operating expenses were 33% of revenue, compared to 34% of revenue in Q4 2021 and 32% of revenue in Q3 2022. We remain on track with our synergy plans and expect total savings of $52 million, which will be realized with 43% in 2023 and 57% during 2024. Non-GAAP operating profitability was $21.5 million, which translates into a non-GAAP operating margin of 6% compared to 1% in Q4 of 2021 and 6% in the previous quarter. The year-over-year improvement in operating profitability was driven by higher revenue volume at more favorable gross margins. The quarter-over-quarter remain flat with improvements in gross margins being offset by higher operating expense. Other income on a non-GAAP basis, significant increase year-over-year and quarter-over-quarter, primarily due to unrealized gains on foreign exchange forward contracts. We entered into a Euro-US dollar hedge arrangement to provide payment security of future Euro-denominated payment obligations. The company's non-GAAP tax provision for the fourth quarter of 2022 is currently expected to be an expense of $15.9 million, or 50%. The company's GAAP tax is expected to be a benefit of $57.5 million, or 255%. The difference between the GAAP and non-GAAP's tax rates primarily driven by changes in our valuation allowance as the company released the majority of its valuation allowance against its domestic deferred tax assets during the fourth quarter. Closing out our income statement results, the non-GAAP net income was $15.7 million and $9.9 million after adjusting for minority shareholder interest in ADVA. This results in diluted earnings per share attributable to the company of 12 cents per share. Following the DPLTA on January 16th, 2023 and beyond, ADTRAN will absorb all of ADBA's profits and losses. However, the net income attributable to common shareholders of ADTRAN will be reduced by the recurring cash compensation paid to the minority shareholders as part of the DPLTA agreement. This recurring annual compensation for the minority shares outstanding amounts to 59 euro cents per share. Turning to the balance sheet and cash flow statement, cash and cash equivalents total 108.6 million at quarter's end. For the quarter operating cash flow, was $812,000 mainly due to the higher inventory levels and business combination expenses. Net trade accounts receivable were $279.4 million at quarter end resulting in a DSO of 72 days compared to 82 days in the prior quarter. Net inventories were $427.5 million At the end of the fourth quarter, resulting in turns of 2.4 compared to 3.1 in the third quarter of 2022. The company continues to carry a higher level of inventory and raw materials to minimize further disruptions given the challenging electronic component market and continued extended lead times. Trade accounts payable were $237.7 million, resulting in DPO of 67 compared to 71 days in the previous quarter. Looking ahead to the first quarter of this year, 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 fluctuation in currency rates, and any potential additional required purchase accounting adjustments related to the ADVA merger may cause material differences between our expectations and the actual results. We continue to focus on the supply side, related cost challenges, and our merger integration. We see signs of normalization in the semiconductor supply chain and expect our backlog to moderate and to decrease inventories over the upcoming quarters. We will continue to focus on cost management and operational efficiency while investing in key areas to drive growth. We're confident that our strategic plans and disciplined execution will enable us to deliver strong financial performance and create value for our shareholders. With that in mind, we expect that our first quarter 2023 revenues will be between $355 million and $375 million, and we expect a non-GAAP operating margin between 5% and 6.5%. Once again, additional financial information is available at ADTRAN's Investor Relations webpage at investors.adtran.com. I'll turn it back over to Tom, and he'll take your questions.