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spk07: Ladies and gentlemen, thank you for standing by and welcome to ADTRAN Holdings Incorporated fourth quarter 2023 earnings release conference call. All lines have been placed on mute to prevent any background noise. And after the speaker's remarks, there'll be a question and answer period. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. And if you would like to withdraw that question, again, press star one. 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 risks and uncertainties, including the risks detailed in our earnings release, our annual report on Form 10-K, and our filings with the SEC. 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. We undertake no obligation to update any statements to reflect the events that occur after this call. During the course of today's call, we will refer to certain non-GAAP financial measures, reconciliations of non-GAAP to GAAP measures, and certain additional information are also included in our investment presentation and our earnings release. The investor presentation found on AdTran Investor Relations website has been updated and is available for download. It is now my pleasure to turn the call over to Tom Stanton, Chief Executive Officer of AdTran Holdings. Sir, please go ahead.
spk00: Thank you, Krista. Good morning, everyone. We appreciate you joining us for our fourth quarter 2023 earnings conference call. With me today is AdTrend Holdings CFO Uli Daufer. Following my opening remarks, Uli will review the quarterly financials performance in detail, and then we'll take any questions you may have. Our fourth quarter revenue came in as expected with operating profitability on the upper end of our guidance range, helped by lower operating expenses and improving gross margins. Revenue, of course, continued to be impacted by macroeconomic factors and elevated inventory levels. Given the environment, we continue to focus on managing our operational expenses and reducing our inventory levels. Taking a closer look at the results in the fourth quarter, 62% of our revenues came from outside of the U.S., which is similar to the geographical revenue mix in the first three quarters of the year. On product mix, subscriber solutions was up quarter over quarter due to an improving inventory situation with both RGs, residential gateways, and ONTs. The access and aggregation solution category was down quarter over quarter due to timing of orders with a couple of our larger customers. Optical networking solutions continue to be impacted by inventory reduction initiatives with large customers. Coming into 2024, we remain focused on two strategic initiatives, the investment in fiber-based broadband networks in the US and the high-risk vendor replacements centered in Europe. These two initiatives have driven us to broaden our presence and strategic relevance in Europe and substantially increase our product portfolio breadth for customers here in the U.S. And while 2023 presented headwinds to equipment suppliers, operators continue to invest in the deployment of fiber networks across most regions of the world. According to the Fiber Broadband Association, fiber broadband deployments in the U.S. set a record in 2023, passing 9 million homes, up 13% year-over-year from the previous year's record of 8.3 million homes passed. These results brought the total homes the US passed to 77.9 million. Even with this impressive growth number, though, nearly half of the US homes are still not passed with fiber. Similar trends are happening in Europe. In the UK, full fiber coverage increased by 4.6 million premises in 2023, according to Ofcom, now covering 17.1 million premises. As more homes are connected with fiber-based broadband, enabling multi-gigabit speeds per household, upgrades to in-home connectivity solutions and middle-mile transport are following. These investments underscore the importance of fiber as a critical infrastructure in the modern digital economy and reinforce the continued push by service providers to connect more customers with fiber and upgrade the capacity of their networks. With several large broadband stimulus programs still ahead of us in the US and Europe, including the $42.5 billion in funding from Bede in the US that is still on track to begin allocations later this year. We still have an optimistic outlook on the growth for fiber networks over the next few years. For the US market opportunity, we see real differentiation in being able to provide a complete fiber networking portfolio that spans from optical core to the customer premise and is paired with software applications that simplify and lower the cost to deploy and operate. The value of our offering was reinforced by The 15 additional fiber-to-the-home operators we added during the quarter, increasing the total for the year to 66 fiber-to-the-home operators. These operators are primarily from the U.S. regional service provider segment. In addition to providing fiber access platforms to these customers, we are having increasing success in bundling software and in-home platforms for this customer segment. We added 50 new Mosaic One customers this past quarter, and more than 225 in the past year. Our current total is approximately 380 independent operators. A lot of the interest in our SaaS applications is driven by IntelliFi, our latest cloud-managed Wi-Fi offering that is supported by our latest generation of Wi-Fi 6, Wi-Fi 6e, and Wi-Fi 7 platforms in our SDG series. The enhancements that we have made to our SDG series along with the launch of IntelliFi helped to drive strong growth with our residential gateways in this past quarter. To complete our fiber networking offering in the US, we have our packet optical portfolio. As we have educated our customers on our full portfolio solutions, including our latest FSP 3000 solutions, tailored towards the need of regional service providers, we have been able to secure dozens of new packet optical wins over the past six months that were from customers that had traditionally been broadband-only customers for AdTrend. We see this packet optical segment as offering meaningful upside for the U.S. market. And as I mentioned, it is a key component of our strategy to offer broader fiber networking portfolio solutions to our customers. In addition to our portfolio offering, I want to highlight the value that our U.S. customers see in a U.S.-based vendor that not only has R&D support and services teams in-country, but also has a long history of manufacturing solutions at volume in-country. When looking at the Build America, Buy America requirements that are part of the BEAD program, we are already well positioned to address these needs with minimal changes to our supply chain. Considering the breadth of our fiber networking portfolio and the full suite of onshore capabilities, you can see why the value proposition is unique in the industry and why we are excited about the ongoing investment cycle in fiber networks for the U.S. market. I mentioned there was a second key initiative for us, and that is a high-risk vendor replacement opportunity that is centered out of Europe. Given the current geopolitical environment, we see the high-risk vendor replacement as gaining momentum and is really a question of timing of the phase-out in Europe, rather than a question of whether it will happen or won't happen. Similar to our situation in the U.S., we now have a very strong regional presence in Europe, including a broad support staff and regional R&D resources. We have also greatly enhanced our local supply chain capabilities with the recent opening of our tariff factory in Germany, which was supported by significant backing from the state government in the region. The power of our new combined portfolio is most notably highlighted by our recent win in Europe of a Tier 1 carrier who selected AdTrend specifically for its combined portfolio for meeting the challenges of a new service rollout they are planning later this year. We continue to make progress with multiple Tier 1s in Europe that have previously selected AdTrend. Q4 marked the beginning of volume shipments to our largest customer in Germany of the 6330, our flagship product, and our largest customer in the UK continues to pass millions of homes per year with fiber utilizing our platform. And with another carrier in Northern Europe, we have begun fiber access deployments in three countries while being qualified for four. We are in the lab for certification with yet another large multinational Tier 1 operator that we were selected for for large-scale deployments a couple of quarters ago. On the optical transport side, we continue to progress our Tier 1 opportunities in Europe with one of our recent new customer wins set to begin deployment late this year. We are also investing in significant upgrades to our line systems, pluggable transceivers, MUX bonders, and software platforms to stay on the leading edge of innovation in the metro optical and enterprise optical segments. One example of our optical innovation is our pioneering effort to introduce coherent transceiver technology at the edge of the network with our 100 ZR pluggable. We have successfully completed customer trials with our 100 ZR coherent plugable optic, and we will ramp production of these modules this year. The 100 ZR lowers the cost by up to 50% or more to provide 100 gigabit backhaul over DWDM to fiber access nodes, a key need as service providers continue to deploy higher volumes, multi-gigabit residential access services, while also delivering higher speed services for enterprise and 5G site connectivity. These edge-optimized optical solutions reinforce the portfolio synergies between our packet optical and fiber access solution sets, and they drive more value to our customers adopting these combined solutions under a common suite of software tools. In summary, we continue to focus on capturing fiber footprint with our upgraded fiber access and optical transport platforms while driving the adoption of our latest subscriber platforms, software solutions, and high-value services. While we remain confident in our long-term outlook, we continue to see cautious spending from our service provider customers, driving us to take more cautious approach with our forecast and operating model. As a result, we will continue our focus on becoming a leader, more efficient, and more profitable company with our best-in-class fiber networking portfolio. With that, I will turn things over to Uli to provide a review of our financial results, and following Uli's remarks, we'll open it up for questions. Uli?
spk06: Thank you, Tom, and hello, everybody. I will cover our Q4 2023 preliminary results and provide our expectations for the first quarter of 2024. 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.adtrend.com. In addition, we have updated the investor presentation to this site, which is available for download. Unless stated otherwise, all financials are presented in US dollars. Q4 2023 revenue came in at midpoint of our guidance at 225.5 million, was down 37% year-over-year, and down 17% quarter-over-quarter. Our network solutions segment accounted for 80% of revenues in Q4 2023 compared to 88.6% in Q4 2022 and 83.9% in Q3 2023. Our services and support segment contributed 20% of revenues in Q4 2023 compared to 11.4% in the year-ago quarter and 16.1% in the previous quarter. Access and aggregation contributed at 28.5% of revenue and was down 32.9% compared to the year-ago quarter and down 32.1% compared to the previous quarter. Our optical networking solution category contributed 38.2% of revenues and was down 39.5% year-over-year and 26% quarter-over-quarter. Subscriber Solutions was down 37.5% year-over-year, but grew 22.3% quarter-over-quarter and contributed 33.4% of revenues. As Tom mentioned earlier, we continue to face a decline in service provider spending driven by macroeconomic challenges and ongoing inventory adjustments. International revenue made up 62% and domestic revenue contributed 38% of total Q4 revenue. We had one 10% or more of revenue customer in Q4. Q4 non-GAAP gross margin was 41.9% and increased by 277 basis points year over year and 155 basis points sequentially. The year-over-year and quarter-over-quarter increase is due to reductions in manufacturing and transportation costs and a more favorable customer and product mix. In the fourth quarter of 2023, we successfully achieved our target with a 15% sequential reduction in non-GAF operating expenses. Expenses. Q4 non-GAAP operating expenses were 97.6 million, decreasing by 15% quarter-over-quarter and 18% year-over-year. We reduced non-GAAP R&D spend by 18% and SG&A expenses by 11% quarter-over-quarter. Non-GAAP operating loss was 3.2 million, which translates into a non-GAAP operating margin of negative 1.4 compared to negative 1.9% in Q3 2023. Our operating margin was at the upper end of our guidance range of between minus 7 and 0% of revenues. The sequential improvement in operating margin was attributable to higher gross margins and the successful implementation of our cost initiatives. The year-over-year decrease in operating profitability was due to the lower sales volume, partially offset by improved gross margins and operating expense reductions. The company's gap and non-gap tax expenses for the fourth quarter of 2023 were 64.4 million and 73.1 million respectively. Given the current environment, the company decided to establish a valuation allowance related to our domestic deferred tax assets during the quarter. Of course, the company will be able to release this valuation allowance as we return to profitability. including the $81.6 million tax valuation adjustment. Total non-GAAP loss was $82.9 million and a net loss of $85.9 million after adjusting for minority shareholder interest in AdTrend Networks SE. This resided in non-GAAP diluted loss per share attributable to the company of $1.09 per share. Turning to the balance sheet and cash flow statement. Cash and cash equivalents totaled 87.2 million at quarter end. Cash flow used for operations was 23.6 million compared to 6.8 million of operating cash flow generated in the previous quarter. The increased usage in cash flow from operations quarter over quarter was primarily driven by lower revenue inflows, partially offset by reduced expenses. Trade accounts receivables was 216.4 million at quarter end, resulting in DSO of 88 days compared to 77 days in the prior quarter. Inventories were 362.3 million at the end of the fourth quarter, down 11.7 million compared to Q3 2023, and down 65.2 million compared to Q4 2022. Q4 inventory included a 3.3 million write-off as we accelerated the end of life of certain products to streamline our product offerings as tom mentioned earlier we remain focused on reducing our inventory levels moving forward accounts payable were 163 million resulting in dpo of 67 days compared to 60 in the previous quarter in summary we are still experiencing cautious service provider spending due to economic uncertainty and continued customer inventory adjustments. Given these uncertainties, we will continue to focus on aspects of our business that we can influence, such as managing our operational expenses and reducing our own inventory levels. We are convinced that the long-term growth drivers for our business are fully intact. We expect that the investment in data-driven infrastructure and the Fiber Everywhere future will continue, supported by stimulus funding and the desire to reduce exposure to high-risk vendors. We continue to focus on capturing fiber footprints with our upgraded fiber access and optical transport platforms, while driving the adoption of our latest subscriber platforms, software solutions, and high-value services. Consequently, for the first quarter, of 2024, we expect revenue to range between $210 and $240 million, and we expect a non-GAAP operating margin between negative 7 and 0% of revenues. Once again, additional information is available at Atron's Investor Relations webpage at investors.atron.com. Thank you for attending our call. I will now turn back over to the operator, and we will take your questions.
spk07: Thank you. And as a reminder, if you would like to ask a question, please press star followed by the number one on your telephone keypad. And if you would like to withdraw that question, again, press star one. Thank you. George Nodder from Jefferies, please go ahead.
spk04: Hi, guys. Thanks very much. I wanted to just ask some more questions about what you're seeing in the marketplace. You referenced inventory digestion. You referenced the macro economy. But... I know one of your competitors was also talking about bead, you know, acting as an overhang on current demand. But could you tell us more about what you're seeing? Is there a bead effect in your business? Or, you know, what can you tell us that gives us more detail on demand trends?
spk00: Yeah, thanks, George. So I think when you were talking about bead, we're typically talking about the Tier 3, you know, the smaller carrier space. If I look at OLT shipments, specifically into that space in the quarter, they were actually pretty flattish, maybe slightly down. I would expect it actually probably a little bit to pick up this quarter. So I don't know. I guess you could say, yes, there's an impact because that's a segment that had been growing, you know, 30%, you know, year over year for some period of time. But as to how much of that, I don't get a sense there's a lot of inventory in that tier three space. I think what we're seeing is real demand. So I would say it's, for us anyways, it's flattish at this point in time. There are, without a doubt, some customers that are waiting for bead. And then there are some customers that are moving forward. So I would say, yeah, I see the impact. But for us, that kind of points back to a flattish number. Did that answer your question?
spk04: Got it. Yep. That's helpful. And then... I know there was an effort to look at the real estate portfolio in Huntsville and maybe elsewhere. Any update on where you guys are in rationalizing real estate?
spk00: Sure. If you've ever been here, we've got three separate buildings here. We have consolidated everybody, and there's just way too much space kind of post-pandemic and even maybe a little bit pre-pandemic as we had hiring going on and post-acquisition. We had a lot of resources in Europe, specifically in Poland as well as India. So we had too much space. So we're clearing out two of the towers. That should be done right at the end of this quarter. We have started showing those properties, and that's moving forward. We'd still expect second half of this year for the impact on that.
spk04: Got it. Any update on what kind of proceeds you might be able to get from that process?
spk00: Yeah, so there are two. I don't know if we've given specific ranges, so there are two different paths that we can go down and we talked about one of those. Being one that is fairly straightforward to execute on, but we haven't made a firm decision to execute on that. And that that's, you know, the tower. I guess what we call the East Tower, which we could do a sell and lease back on. On the north-south, which is the one we're just talking about.
spk07: I'm thinking it's in the range of 40 to 60 million or something like that Okay, thank you very much, okay Your next question comes from the line of Michael Genovasi from Rosenblatt securities, please go ahead Great.
spk03: Thanks very much so is the Is the CPE subscriber solutions inventory correction over? Is that the right way to think about it?
spk00: Well, that's the way I'd like to think about it. And the real answer is I can't say I don't want to say yes, because I think, you know, we sell it to a lot of different people. We happen to have an uptick. We're expecting it to be kind of in the similar range during this quarter. So I would say for our specific inventory, I think we're through the deep part of that. So let me just leave it at that.
spk03: Okay. And can you talk about the access and aggregation, some of the timing issues some more? And, you know, I mean, we've got your... your first quarter guide sequentially flat, you know, what should we be looking at as we move through further quarters, you know, given the timing on access and aggregation?
spk00: Yeah, so, you know, we had a couple of customers, and it really was two. One in Europe, you probably can guess who that one is. And then an MSO here in the U.S. that had bought previous to that I would expect the MSO probably to come back this quarter. The other customers are going to have a decent quarter this quarter. It'll be stronger than last quarter. And then Tier 3s I already talked about. You know, they're kind of flattish.
spk03: Okay, and then finally for me, I mean, just when we look at the overall guide, the midpoint of the guide, you know, at 225 flat sequentially, I mean, you've already mentioned that subscriber solutions being about flat sequentially? I mean, should we look at the other two, you know, optical and access aggregation roughly flat as well?
spk00: Oh, yeah. Let me just try to add some clarity there. Subscriber solutions, flattish is probably a good guess. It's probably a little conservative, but it's a good guess. You would expect access to be up just based off of the, you know, the very specific customer thing I talked about. Optical is what we would expect to be down, as I specifically mentioned. So I talked about inventory and optical. I really didn't talk about inventory corrections impacting subscriber and our fiber-to-prem business that much, and that was on purpose. So we still think there's inventory in the optical space. We think the other two are easing up. And if I had to look at the mix between optical and the other two, I would expect the other two to be up on a sequential basis and optical to be down. Okay.
spk03: And just for gross margins, does that make a difference for gross margins? I mean, I have a hard time thinking that gross margins would be quite as high in 1Q as in 4Q. Could you just help out with that?
spk00: You know, the real shift there would be between, you know, is really what is the infrastructure piece of the fiber to the PRIM, which is actually pretty good gross margins versus the subscriber piece in PRIM. So, yeah, I mean, that's just some variability we have to get through. I really don't know where that will end up until we get to the end of the quarter. We also have some easement coming in our inventory cost. You know, we're continuing to do better than we expect to do on gross margins, so the trend itself kind of helps us along in that math. Great. Thanks a lot. Thanks for taking the questions. All right.
spk07: Your next question comes from the line of Ryan Coons from Needham and Company. Please go ahead.
spk05: Ryan, are you on mute?
spk02: I was on mute. Sorry about that. Yes, I wanted to unpack gross margins in the fourth quarter a little bit there. Really nice improvement along with a higher mix in CPE, which usually is a headwind on that line. So can you maybe unpack the kind of puts and takes there? You talked about transportation costs being down, and I haven't heard that elsewhere too much. So any call there would be helpful. Thanks, man.
spk00: Go ahead, Eugene.
spk06: The transportation cost comment was mainly related to the comparison for Q4 2022, where transportation cost was still extremely high.
spk00: Yeah, but I talked about transportation costs, specifically just kind of the positive. Yeah. Yeah, so any other color you want to give on Q4?
spk06: I'm thinking on the sequential improvement, Uli. The sequential improvement is mainly driven by customer and product mix.
spk02: Yeah, and that includes a higher mix of CPE. So I guess that implies, you know, stronger shipments to smaller customers that maybe have better margins. Do you have something about that?
spk00: Well, the CPE is made up of several different things, and some of it depends on the actual customer itself. 10 gig CPE versus 1 gig CPE, for instance, makes a difference. Yeah. And I will tell you, just the infrastructure business in general has been tending – I think just because of the nature of the competitive environment right now. So I think that has actually benefited. And then we continue to work down kind of higher price bill of material parts into lower price bill of material parts without expedite fees. And those have all just been positive attributes coming into really over the last couple of quarters.
spk02: Got it. That's helpful, guys. And one kind of broader question, maybe stepping back from the European opportunity with Huawei displacements, you know, how would you characterize Huawei's position in the European continent today, you know, outside of your specific projects you've talked about winning? Like, where are they still competing, and how would you kind of characterize the competitive environment relative to the Chinese suppliers?
spk00: Honestly, they're just, they're almost, you just don't, you don't see them that often. And when you do see them, it tends to be a pricing exercise versus a real award exercise. And I would say, you know, if you look at it on a year over year basis, the number of carriers that are saying, you know, this is not just a near term problem, but this is a longer term problem to the extent that they award business to, you know, kind of a high risk vendor, then they have to worry about when does that equipment need to come out? And when can I quit taking software drops from this company and I would that momentum is doing nothing but getting stronger Got it, but so in terms of new bids, they're not competitive but In the kind of run rate business, they're still seeing a fair amount. I would think of sales into the legacy footprint What you're seeing happen is in the legacy footprint if somebody has open slots in shells then they're liable to fill those open slots right now until they get through an award process or get through, you know, until they have an alternative. But open slots are still being filled in a large part of Europe. But new shelves coming in, you just don't see an awful lot of that. And we have some very specific opportunities where they're literally talking about taking equipment out. Wow. That's great. Great to hear.
spk02: Thanks, guys. That's all I've got. All right.
spk07: That concludes our question and answer session. I will now turn the call back over to... Oh, I'm sorry. Your next question is Tim Savino from Northland Capital Markets. Please go ahead.
spk01: Hey, glad I was able to sneak in there. The question, I guess, about... Well, the access and aggregation market in Q4... or segment was down pretty good sequentially. And you talked about Tier 3s being flat. It sounds like that's a reference more to Q1. Or could I get some clarification on that? And I know that Tier 3 also includes subscriber. So as you look at that decline in Q4, Would you attribute that more to a couple of large customers? And does that flattish comment also hold in Q4 versus Q1?
spk00: Yeah, there's a nuance there that you've got to understand for it to all kind of click in there. So, yes, without a doubt, the biggest issue was two specific customers that we had previously shipped a significant amount to. I don't consider that inventory problem. I consider that as, They buy kind of in six-month increments, right? That's just the way that they buy. And so that impacted us. If you look at access and ag, access and ag was down, but it's made up of several different things. It's made up of switching components that are sold into fiber to the prim and sometimes outside of fiber to the prim. And it's also made of optics, so pluggable optics that actually go along with the product. If I look at OLT shipments, and this is a – kind of getting down into the weeds here. But if I look at OLT shipments into the Tier 3s, they were flattish. And that was in Q4. So in Q1, I'm expecting similar, maybe slightly up, but I'm expecting something similar to that. But if you look at optics, those vary pretty heavily by quarter to quarter. And the optics portion of that, the actually pluggable piece, was down in Q4, and I would expect it to come back up a little in Q1. You can think about that as more inventory-specific things, by the way, where they may have some optics but don't have the actual hardware components, the active hardware components in the OLT. Did that clarify anything for you? Got it.
spk01: Yeah, that's super helpful. Thanks. And just continuing on that, if you look at the competitive dynamics And I know you discussed that with regard to some of the Huawei replacement. But again, specifically in that U.S. rural broadband market, you know, I guess what are you seeing there from a competitive standpoint in terms of the potential for, you know, competition to intensify here in kind of a flattish market environment or any other dynamics that you'd be willing to comment on? Thanks.
spk00: It's pretty similar to what we saw most of last year. I mean, that market is predominantly us competing against Calix and then in some cases Nokia. We're kind of the three that are actively in that market with Calix is who we run up against most. And the dynamics there really haven't changed. Software is a much bigger part of the story. That's why I mentioned the Mosaic One and kind of our take rate on Mosaic One has been fantastic. We also launched a very, very good offering in our Intellify, which is our managed Wi-Fi specifically for that segment. But the dynamics really haven't changed. They're about the same. Everybody's kind of getting positioned. There really haven't been any awards yet through the states. I think Louisiana is the first one that actually has cleared all of the paths to start to get funding, and then they have to go through an award process. So I think everybody is trying to touch every customer that's kind of potential in there, and then as the money starts flowing through, we'll start seeing who's actually winning these customers.
spk01: Okay, thanks very much.
spk00: Okay. Yep, appreciate it. Okay, thanks very much. At this point, I think we're out of questions, so I appreciate everybody joining us for the call and look forward to talking to you next quarter.
spk07: This concludes today's conference call. Thank you for your participation, and you may now disconnect.
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