ADTRAN Holdings, Inc.

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.

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?

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.