ADTRAN Holdings, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the AdTrend Holdings Incorporated third quarter 2024 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. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one 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 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 statement to reflect the events that occur after this call. In addition, the financial measures discussed during the course of this conference call are preliminary estimates. They consequently remain subject to the company's internal controls and procedures and are subject to risks and uncertainties, including, among others, changes in connection with quarter-end adjustments. Finally, during the course of today's call, we will refer to certain preliminary 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 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, Rochelle. Good morning, everyone. We appreciate you joining us for our third quarter 2024 earnings conference call. With me today is AdTran Holdings CFO, Uli Daufer. Following my opening remarks, we will review the quarterly financial performance in detail, and then we will take any questions you may have. We executed according to plan in Q3 and made improvements across several key operating metrics. During the quarter, we continued to grow our non-GAAP operating profit and generated positive free cash flow for the third consecutive quarter. Our quarter-over-quarter performance was driven by further improvements and our non-GAAP gross margin as we maintained our reduced cost structure and grew revenue. During the quarter, we also saw signs of further improvement in customer activity and bookings. Geographically, 55% of our revenues were generated outside of the U.S. as we experienced higher demand from both our EMEA and APAC regions. Both the U.S. and non-U.S. regions benefited from a 10% sequential increase in large service provider sales. Diving deeper into the portfolio details, Optical Networking Solutions added 13 new carrier customers this past quarter as we continue to introduce our optical portfolio to our fiber broadband customer base. As we have previously noted, we had expected our optical networking revenue to bottom in Q3, and we continue to believe that that will have been the case. While revenue was in line with our expectations, bookings continue to accelerate, supporting our optimism. In our access and aggregation solutions, we began shipping products to 12 new carrier customers. Revenue in our access and aggregation solutions was up outside of North America. However, it was down slightly in the aggregate due to slower sales in the US. We expect revenue from our access and aggregation solutions to increase in the upcoming quarter. Our subscriber solutions category increased 9% quarter over quarter. This growth was driven by an increase in sales of our residential ONTs and RGs, which were up 25% quarter over quarter and a strong 102% year over year. Within this category, we added 11 new customers to our latest SDG series of Wi-Fi platforms. As demand for fiber broadband continues to grow, we expect to continue to increase our revenue and customers in this category. In addition to residential broadband, We continue to see strong demand for our carrier Ethernet CPE solutions as carriers connect more businesses with higher speed fiber services. Looking ahead, you may have seen our recent press releases announcing customer trials to bring 50 gig PON connectivity to the market. As customers begin to realize the value of converging residential, business, and mobile backhaul into a single network, the breadth and power of our open disaggregated networking platforms will further differentiate ADTRAN from our competition. While 50 gig access technology is still in its early stages, we remind listeners of the ascendancy of XGS PON, which has quickly become the preferred access technology for PON deployment. The adoption of these higher speed access technologies is an ideal match for our broader fiber networking portfolio. As service providers deploy higher speed access networks, They must upgrade their backhaul networks with a mix of 100, 400, and 800 gig coherent optical solutions. We currently offer edge optimized transport solutions to address this need. To support these new access technologies, we have a full suite of in-home networking platforms, SMB solutions, and carrier ethernet CPE to address the full range of subscriber connectivity needs. This complete solution offering from the core to the customer premise is managed by our Mosaic software suite and covers everything from optical networking automation to proactive in-home network monitoring. With it, we partner to help service providers deliver best-in-class subscriber experiences as they automate the scale of their fiber networks. Transitioning to our operational performance, we continue to make progress with the program we launched last year to improve our profitability and operating cash flows. The results can be seen on our non-GAAP gross margins over the last nine months of 2024, which improved from 38.6% last year to 41.9% this year. This improvement was directly related to operational efficiencies and lower overhead costs that were driven by both site and product consolidation. This past quarter's performance paired with our improved outlook reinforces our confidence that our long-term operating model of gross margin percentages in the low to mid 40s and operating profit percentages in the low double digits. We continue to move forward with our capital efficiency program as we are working to monetize non-strategic business side assets. We hope to update you next quarter on tangible results as we continue to progress. In summary, we had a successful quarter in terms of improving our financial positioning while growing our customer base and investing in our strategic platforms as major opportunities in the U.S. and Europe are still ahead of us. While we remain confident in our long-term outlook, we expect more meaningful growth in the current quarter. We will continue to, and we expect more meaningful growth in the current quarter, we will continue to take a cautious approach with our forecast and operating model, given the relatively cautious spending we still see from our service provider customers. This approach has proven to be successful over the past few quarters, and we have stabilized our results in a difficult macro environment, and we expect meaningful improvements in profitability once market conditions improve. With that, I will turn things over to Uli to provide a review of our financial results, and following Uli's remarks, we'll answer any questions you may have. Uli?

Thank you, Tom, and thank you to everyone on the call this morning. I will first walk you through our Q3 2024 financial performance, and then I will discuss our expectations for the fourth quarter. Revenue in the third quarter was $227.7 million, a sequential increase and above the midpoint of our guidance. Our network solution segment delivered $181.5 million, accounting for approximately 80% of total revenues in Q3, compared to 79% in the prior quarter. Our services and support segment delivered 46.2 million, or 20% of total revenues in the quarter, compared to 21% in the prior quarter. From a product category perspective, access and aggregation delivered 67.1 million, or approximately 29% of total revenue, which was down 4% sequentially. Our optical networking solutions was $70.5 million, or 31% of total revenues. This was also down 4% sequentially. Subscriber Solutions was $90.1 million, or 40% of total revenue, and this was up 9% sequentially. We had one customer represent more than 10% of our revenue in the quarter. Non-GAAP gross margin during the quarter was 42.1%, an increase of 17 basis points sequentially. The improved gross margin is reflective of our ongoing efforts to optimize our supply chain and supply-related processes. Non-GAAP operating expenses in the third quarter were 93.3 million, in line with levels in Q2 2024. For the third quarter of 2024, our non-GAAP operating profit was 2.5 million or 1.1% of revenues, which was again above the midpoint of our guidance range. This compares to a non-GAAP operating profit of 1.5 million or 0.7% of revenues in Q2 2024. The increase in operating margin and profitability was attributable to improved growth margins and stable OPEX. Non-GAAP tax expense for the third quarter of 2024 was $1.1 million. This is a result of the non-deductibility of impairment charges and losses for which no tax benefits can be realized. Including the $2.4 million dividend attributed to the minority shareholder interest of Atra Networks SE, as well as $3 million credit related to an adjustment to the redeemable non-controlling interest in the non-GAAP dilute interest, the non-GAAP diluted loss per share was $0.05 negative compared to a loss of negative $0.12 in Q2 2024. Turning to the balance sheet and cash flow statement. During the quarter, we continued to improve our working capital by $33.9 million. Trade accounts receivable were $172 million at quarter end, residing in DSO of 70 days. This compares to 75 days in the prior quarter. Our inventories were down to 282.9 million at the end of the quarter. Accounts payable were 173.4 million, an improvement of DPOs of seven days. The improved working capital resulted in operating cash flow of 42 million compared to 19.9 million in Q2 2024. Consequently, we generated $23.2 million of free cash flow in Q3 2024. At the end of the quarter, cash and cash equivalents were $88.5 million, a quarter-over-quarter decrease of $22.7 million. This decrease includes the scheduled annual dividend payment to the minority shareholders of Adren Networks SE of $10.1 million and $17.4 million in repurchases of Adren Networks SE shares that were processed during the quarter. In summary, we have made significant strides in our operational performance and execution. Revenue increased on a sequential basis, we expanded growth and operating margins, and we generated positive free cash flow during the quarter. We're seeing improvements in each of our key end markets and are growing our customer base. The continued trend to increase fiber access and optical transport globally is a catalyst that we believe will help us to drive accelerated profitability and increased cash generation. Turning now to our outlook for the fourth quarter. We expect revenues to range between $230 and $245 million and non-GAAP operating margin between 0 and positive 4% of revenues. Once again, additional information is available on AdTrans Investor Relations web page at investors.adtrans.com. And finally, I'd like to welcome the addition of our new vice president of investor relations, Peter Schuman, who many of you may know. Peter is here today with us, and he will be ramping up his new role. Please reach out to him for any investor relations inquiries. This concludes. the prepared remarks portion of the call, and I will now turn the call back over to the operator to begin the Q&A session.