ADTRAN Holdings, Inc.

speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press bar followed by the number one on your telephone keypad. As a reminder, today's call is being recorded. 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, the statements involve risks and uncertainties, including the risk detailed in our earnings release, our annual report on Form 10-K, and our filings with the SEC. This risk and uncertainty 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 statement to reflect the events that appear 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 investor presentation and our earnings release. The investor presentation found on AdTrend Investor Relations website has been updated and is available for download. It is now my pleasure to turn the call over to Spam Stanton, Chief Executive Officer of AdTrend Holdings. Sir, please go ahead.

Thank you, John. Good morning, everyone. We appreciate you joining us for our second quarter 2024 earnings conference call. With me today is AdTrend Holdings CFO Uli Doffer. Following my opening remarks, Uli will review the quarterly financial performance in detail, and then we'll take any questions that you may have. The quarter came in largely as expected. Financially, we realized a non-GAAP operating profit driven by gross margin improvements and substantially lower operating expenses. Working capital was significantly reduced as we continued to decrease our inventory levels. Our non-GAAP free cash flow was positive for the second straight quarter, and we grew our customer base across the U.S. and Europe as customers continue to adopt our latest fiber networking solutions. We achieved all these despite the headwinds that we are all feeling. Taking a closer look at the results in the second quarter, we had a strong quarter in the U.S. with revenue up across all three categories in this region. On the product mix, we were well balanced in revenue across our three categories with 36% of our revenues coming from subscriber solutions, 31% of revenues coming from access and aggregation solutions, and 33% of our revenues coming from optical networking solutions. Our subscriber solutions category was up 18% quarter over quarter, with a growth led by our residential solutions that were up 47% quarter over quarter. In our access and aggregation solutions category, growth in the U.S. broadband revenue was offset by declines in shipments to our large European customers following a strong first quarter of shipments of these customers. Optical networking solutions was essentially flat relative to the prior quarter. Taking a closer look at the regional mix, we saw a sequence of growth in the U.S. across all major customer segments, with these customers purchasing a diverse set of in-home broadband access and optical networking solutions. From an investment perspective, we remained focused on our two key strategic initiatives, maximizing our opportunity in the U.S. broadband investment cycle and taking advantage of the shift away from high risk vendors in Europe. In the U.S., our highest growth opportunities remain with small to midsize operators. Our results this past quarter reflected our continued strength in these customers. In Europe, the biggest opportunity remains with large operators where we are well positioned with our fiber networking infrastructure solutions. Diving deeper into these two markets, I'll start with the U.S. market, where we are seeing signs of stability after the past couple of years have been more volatile, as the past couple of years have been more volatile due to the supply chain crisis, followed by inventory corrections. As noted earlier, our biggest opportunity in the U.S. is with the small to mid-sized operators in the U.S. that really see value in trusted partners that can meet their fiber networking needs from the optical core to the customer premise. This more comprehensive portfolio continues to pick up momentum. To give you a few highlights, we added 12 new Fiber to the Prem customers in Q2, most of this being U.S. regional service providers adopting our latest SDX fiber access platforms. We also had 16 new customers adopt our SDG in-home platforms this past quarter, bringing the total number of customers adopting our latest Wi-Fi platforms to well over 200. The success in our SDG platforms helped drive revenue growth in our subscriber solutions category this past quarter, and is closely aligned with our investment in our latest Wi-Fi 6 and Wi-Fi 7 platforms, along with our IntelliFi cloud-managed Wi-Fi solutions. For both our new fiber-to-the-prem wins, as well as the in-home platform wins this quarter, a material percentage of those were actually competitive takeaways. In our optical transport and packet networking solutions this past quarter, we had 11 existing customers in the U.S. expand their purchases to include this equipment that were previously broadband-only customers with AdTrans. This highlights our continued success in cross-selling our optical solutions into our existing broadband access customer base and the advancements we have made in this portfolio. In addition to cross-selling success with our optical solutions into the service provider market, We continue to grow our enterprise and ICP customers this past quarter. With the recent launch of our 800 gig transport platforms, 100 ZR pluggables, and several key enhancements to our optical network automation capabilities, we are well positioned to continue this momentum going forward. And finally, our long-term differentiation and portfolio synergies are driven by our software platforms. Mosaic One, our flagship software platform, provides a suite of SaaS applications to provide actionable insights and proactive optimization tools to reduce network operational costs while improving the subscriber experience. We now have more than 400 customers with the majority of those in the U.S. that have adopted our Mosaic One platform, including more than 200 customers that have adopted multiple applications within this platform. Moving forward, we expect to continue to grow the basic Mosaic One customers while also significantly increasing the adoption of additional applications by existing operators using the platform. Moving on to Europe, as mentioned earlier, we remain well positioned in fiber access and optical transport infrastructure to take advantage of the ongoing build-out of fiber networks in the region, as well as the shift away from high-risk vendors. We continue to make progress towards volume deployments late this year and early next year with multiple large European operators for both our fiber access and optical transport portfolios. In the fiber access space, the global market has been rapidly shifting to 10 gig PON platforms. In this technology segment, which is a key indicator for new platform deployments, AdTran is already a top two supplier in Europe in terms of port shipments. We have more than doubled our market share in this segment over the last year, and given our funneled activity and existing awards, we are strategically positioned to grow to continue to grow in this market as we move forward. In the optical transport space in Europe, we have maintained solid market share positioning while the overall service provider spending on optical transport has been down for the past year as operators deplete inventory. With further consolidation in this market segment, particularly in Europe, the ongoing shift away from high-risk vendors, a significantly enhanced portfolio, and our strong regional presence, we feel confident and our ability to become a top two supplier in optical transport equipment to service providers across Europe in the years ahead. In shifting to our operational performance, as you all know, we announced a program last year focused on improving our profitability and cash flow. The result of this past quarter highlights the success that we are having with this program. Moving forward, we will continue to execute against this program, and we look forward to additional improvements in the quarters ahead. In summary, we continue to make great progress on our operational efficiency and our competitive positioning has put us in a great situation to take advantage of the market opportunities we see in the US and Europe. While we have streamlined our operations, we continue to invest in our strategic platforms and these investments are paying off as we see strong adoption of these platforms across the growing customer base. Having a more competitive portfolio, a growing customer base, Key market tailwinds still ahead of us, and non-gap operational profitability, despite the near-term market headwinds, has us well-positioned for success moving forward. While we remain confident in our long-term outlook and we continue to expect growth in the quarters ahead, we still see cautious spending from some of our service provider customers, driving us to continue to be cautious in our approach to forecasting and our operating model. As a result, we will continue to focus on becoming a leaner, more efficient, and more profitable company with a best-in-class fiber networking portfolio. With that, I will now turn things over to Udali to go over our financial results, and then we will load up to any questions you may have.

Thank you, Tom. And hello, everybody. I will walk you through our financials of our last quarter and provide our expectations for the third 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. Additionally, I will discuss certain revenue information by segment and category, which is available on our investor relations webpage at investors.adtrend.com. We have also updated the investor presentation to this site, which is available for download. Unless stated otherwise, all financials are presented in US dollars. With that, let's dive into our financial performance for Q2 2024. Q2 2024 revenues of $226 million were similar to Q1 2024 revenues and slightly above midpoint of our guidance, but were down 31% year-over-year. Our network solutions segment accounted for 79.3% of revenues in Q2 2024, compared to 86.4% in Q2 2023 and 80.1% in Q1 2024. Our services and support segment contributed 20.7% of revenues in Q2 2024 compared to 13.6% in the year-ago quarter and 19.9% in the previous quarter. Access and aggregation contributed 30.9% of revenues and was down 31.9% compared to the year-ago quarter also down 14% sequentially. Our optical networking solutions category contributed 32.6% of revenues and was down 48.5% year-over-year and down slightly by 1.9% quarter-over-quarter. Subscriber solutions contributed 36.5% and was up 0.9% year-over-year and up 18.1% quarter-over-quarter. International revenues made up 52.4% of total revenues and domestic revenues contributed 47.6%. Domestic revenues were sequentially up in all three product categories. Q2 non-GAAP gross margin was 41.9% and increased by 334 basis points year over year and 37 basis points sequentially. The improved gross margin is reflective of our ongoing efforts to optimize our supply chain and supply-related processes. Q2 non-GAAP operating expenses were 93.2 million, down 24% year-over-year, and down 9.3% quarter-over-quarter. The decline in operating expenses is attributable to the impact from our business efficiency program. Year over year, we reduced non-GAAP R&D spend by 26% and SG&A expenses by 22%. For the second quarter of 2024, our non-GAAP operating profit was $1.5 million or 0.7% of revenues. This compares to a non-GAAP operating profit of $3.6 million or 1.1% of revenues in the year-ago quarter and an operating loss of 8.8 million or negative 3.9% of revenues in the prior quarter. Our Q2 2024 operating margin was at the upper end of our guidance range of between minus 3 and plus 2% of revenues. The increase in operating margin and return to profitability was attributable to improved gross margins and lower OPEX. The company's non-GAAP tax expense for the second quarter of 2024 was $10 million. Total non-GAAP net loss was $18.8 million after adjusting for minority shareholder interest in Adren Networks SE. This resulted in non-GAAP diluted loss per share attributable to the company of $0.24 per share compared to a loss of $0.02 per share in Q1 2024 and a loss of $0.00 per share in Q2 2023. Turning to the balance sheet and the cash flow statement. In Q2 2024, we continued to improve our working capital. Trade accounts receivable were $186.2 million at quarter end, resulting in DSO of 75 days, same as in the previous quarter. We reduced our inventories by $34.2 million compared to Q1 2024. The improved working capital resulted in an operating cash flow of almost 20 million compared to 36 million in Q1 2024. Consequently, we generated 3.9 million of free cash flow. At the end of the quarter, cash and cash equivalents were 111.2 million, a quarter-over-quarter increase of 4.4 million, or 4%. In summary, we made significant strides in operational efficiency positioning ourselves well to capitalize on market opportunities in the U.S. and Europe. Despite near-term market challenges, our competitive portfolio and growing customer base positions us well for future success. While we remain confident in our long-term outlook, we remain cautious due to spending trends from service providers. Our focus remains on becoming a leaner, more efficient, and more profitable company with a top-tier fiber networking portfolio. For the third quarter of 2024, we expect revenues to range between $215 and $235 million and a further improved non-GAAP operating margin range between negative minus one and positive 3%. Once again, additional information is available at Atron's investor relations webpage at investors.atron.com. We appreciate your time and attention, and we are now ready to address any questions you may have. I will turn now the call back over to the operator to begin the Q&A session. Hi, John. At this point, we'd like to open it up for any questions people may have.