ADTRAN Holdings, Inc.

Good morning. My name is Rob and I will be your conference operator. At this time, I would like to welcome everyone to the ADTRAAN Holding's 4th quarter 2024 Financial Results 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 session. 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, again press the star one. Thank you. Mr. Peter Schuman, Vice President Investor Relations, you may begin your conference call.

Thank you, Rob. Welcome and thank you for joining us today for ADTRAAN Holding's 4th quarter 2024 Financial Results Conference call and welcome to all those joining by webcast. During the course of this conference call, ADTRAAN 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 our forward-looking statements, which may be made during the course of this call. We undertake no obligation to update any statements to reflect events that occur after this call. During the course of the call, we will – we 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 in our earnings release. We have not provided reconciliations of our first quarter 2025 guidance with regards to non-GAAP operating margin because we cannot predict and quantify without unreasonable effort all of the adjustments that may occur during the period. The investor presentation has been updated and is available for download on the ADTRAN Investor Relations website. In addition, financial measures 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 the quarter end or year end adjustments. Turning to the agenda, Tom Stanton, ADTRAN Holding CEO and Chairman of the Board, will provide the key investment highlights for the fourth quarter 2024. And Uli Dapfer, our Senior Vice President and CFO, will review the quarterly financial support performance in detail and then will take any questions that you may have. I'd now like to turn the call over to Tom Stanton.

Thank you, Peter. Good morning, everyone. ADTRAN executed well during Q4 with improvements across several key operating metrics. Revenue increased sequentially, our non-GAAP gross margins remained strong, and our non-GAAP operating profits continued to expand. Revenue was up across all regions with non-US revenue of 10% quarter over quarter. Diving deeper into the details, optical networking revenue showed meaningful growth in Q4 with a 16% sequential increase, supporting our belief that revenue bottomed in Q3. Our optical networking solutions growth was up across all regions, led by an uptick in business from a mix of service providers, internet content providers, and enterprise customers. Optical networking solutions added 18 new customers during the fourth quarter. These new customers included a broad mix of fiber broadband customers, government agencies, utilities, and large-scale enterprises. The growth in our customers matches the diversity and network upgrade catalyst with our optical customer base. In some use cases, it is broadband operators upgrading their backhaul networks to 100 gig, or regional transport networks to 400 or 800 gig. In other scenarios, it is internet content providers upgrading capacity between large-scale compute sites or large enterprises or government institutions upgrading and securing their private networks. Under any of these scenarios, these customers need scalable, secure, and automated optical networks from a vendor that they can trust. We address all these needs. With continued advancements in our portfolio, improving customer inventory levels, and growing opportunities across multiple verticals in the optical segment, we are optimistic about the growth opportunities moving forward. Our access and aggregation solutions grew 8% sequentially, driven by fiber footprint expansion and network upgrades. The quarter's growth was led by the US customers deploying multi-gig fiber services. Investment remains strong among service providers in the US and Europe, and we are upgrading and expanding their fiber, who are upgrading and expanding their fiber footprint. We remain the leading vendor option given our portfolio and presence in our target markets. During the quarter, we began shipping infrastructure to 12 new -the-premise service providers, continuing our trend of new customer acquisition in this segment, with a strong pipeline of expansion opportunities and network upgrades. We expect meaningful revenue growth in this area. Our subscriber solutions category had another strong quarter, although slightly down sequentially, that's following two strong -over-quarter increases. The strength in CPE is directly attributable to fiber access footprint expansion that we have experienced. We expect meaningful growth in CPE as our customers work to connect more homes, businesses, and critical infrastructure sites with fiber. Within the category, we added 23 new service provider customers during the fourth quarter. Within our product pipeline, we will be introducing several new multi-gig Wi-Fi 7 products over the next six months to help continue to drive new demand for a growing base of large and regional service providers. The direction in our industry is clear. Our customers need fiber networks that scale from optical cord to the customer premise, while delivering -in-class subscriber experiences through better insights and automation. We have made major upgrades across all aspects of our portfolio, from our recently introduced industry-leading 800-gig transport solution, the M-Flex, to the industry's highest-density, most power-efficient 10-gig fiber access platform in our SDX family. We have the leading fiber infrastructure platforms that customers need to build their networks of the future. On the customer premise side, we have the connectivity solutions for nearly any need. Whether it's 10-gig Wi-Fi platforms for residential services or 100-gig business services, we have high-performance and cost-effective solutions that offer world-class user experiences. These networking platforms are complemented by our Mosaic software suite that automates and simplifies all aspects of our portfolio, from automating the provisioning and monitoring of complex optical networks to automating and optimizing the performance of multi-gig Wi-Fi networks. The breadth and capabilities of these software applications paired with our networking platforms differentiates us from our competition and positions us for additional success moving forward. Turning to our operational performance for the year, we made substantial progress during 2024. Although revenue for the year decreased due to softer end markets, including customers focusing on reducing inventory and higher interest rates, the non-GAP gross margin for the year expanded to .9% on a non-GAP basis from .3% the prior year, reflecting higher efficiency and value realization directly related to our operational efficiencies and low overhead costs that were driven by both site and product consolidation. Non-GAP operating profit also meaningfully improved, turning positive for the full year 2024 compared to our negative figures earlier in the year. This growth underscores our ability to adapt to evolving market conditions and drive profitability. Additionally, we achieved success in optimizing our cash flow. Net cash provided by operating activities increased to 104.3 million during 2024, a significant improvement compared to net cash used in operating activities of 45.6 million during 2023. Our free cash flow of 39.9 million during the year 2024 improved by 128.7 million from the prior year. This focused on operational efficiency and financial discipline positions as well for substantial future growth. This past quarter's strong performance combined with our improved outlook reinforces our confidence in the long-term target operating model of gross margin percentages in the low to mid-40s and an profit margin percentage in the double digits. In summary, we had a good quarter of improved financial results, strong bookings, and positive momentum entering 2025. We continue to grow our customer base and invest in our strategic platforms with major opportunities in the U.S. and Europe still ahead of us. With that, I will turn things over to Uli to provide a few of our financial results. Following Uli's remarks, we will open it up to any questions you may have. Uli?

Uli Reinhart Thank you, Tom, and thank you everyone for joining us on the call this morning. To begin, I will first walk through our preliminary Q4 2024 financial performance, and then I will discuss our expectations for 2025, Q1 2025. Q4 revenue was $242.9 million, a sequential increase of $15.1 million, or 7 percent, and above the midpoint of our guidance. Revenue increased $17.4 million year over year, or 8 percent. Our network solution segment delivered $197 million, accounting for approximately 81 percent of total revenue in Q4 compared to 80 percent in the prior quarter. Our services and support segment delivered $45.8 million, or 19 percent of total revenue in Q4 compared to 20 percent in the preceding quarter. From a product category perspective, expects and aggregation delivered $72.7 million, or approximately 30 percent of total revenue, and increased 8 percent sequentially. Our optical networking solution category was $81.6 million, or 34 percent of total revenue. This was up 16 percent sequentially. Subscriber solutions was $88.5 million, or 36 percent of total revenue. This was down 2 percent sequentially. Non-US and US revenues were 57 percent, or 43 percent of total revenue, respectively. We had one customer who represented more than 10 percent of our Q4 revenue. Non-GAAP gross margin during the quarter was 42.0 percent, a sequential decline of 11 basis points. Non-GAAP operating expenses in Q4 were $94 million, reflecting a -over-quarter increase due to higher deferred compensation and increased sales commissions. For Q4, our non-GAAP operating profit was $7.9 million, or 3.3 percent of revenue, and above the midpoint of our guidance range. This compares to a non-GAAP operating profit of $2.5 million, or 1.1 percent of revenue in Q3 2024, and a loss of $3.2 million in the year quarter. The improvement in operating margin and profitability was driven by higher revenue, a healthy gross margin, and effective management of our fixed costs. Non-GAAP tax expense in Q4 was $3.1 million. We generated a small amount of non-GAAP net income during Q4 and were breakeven on an earnings per share basis. This compares to a loss of $0.05 per share in Q3 2024. Turning to the balance sheet and cash flow statement. First, I'd like to highlight for the full year 2024, operating cash flow was over $100 million, a nearly $115 million swing from the prior year. During Q4, networking capital decreased by $4.7 million -over-quarter to $276.9 million. Trade accounts receivables were $178 million at quarter-end, resulting in DSO of 67 days. This compares to 70 days in the prior quarter. Our inventories were down to $269.3 million at the end of the quarter. Accounts payable were $170.5 million. DPO's were 72 days versus 67 days the prior quarter. Operating cash flow was $5.8 million compared to $42.0 million in Q3 2024, mainly due to the timing of receivables at year end. As I shared, cash flow for the year was $103.1 million compared to negative $45.6 million for full year 2023. We had free cash flow of negative $10.4 million in Q4 compared to positive $23.2 million of free cash flow in Q3 2024. The lower free cash flow number for the fourth quarter was the result of the lower operating cash flow. For the year, we generated positive free cash flow of $39.9 million, an increase of $128.7 million from the full year 2023. At the end of Q4, cash and cash equivalents were $77.6 million, a -over-quarter decrease of $10.9 million. In 2025, strengthening our balance sheet is a key strategic priority. We have taken several significant actions in this direction. As previously communicated, we are in the process of selling our unused corporate real estate, which is now listed on our balance sheet as assets held for sale. We are also working to monetize other non-core assets. Utilization by interested parties continues, although we are limited based on NDAs on what we can share. Our intent is to substantially strengthen our financial position during 2025, aiming to exit the year with a positive net cash position. In summary, although 2024 was challenging, we delivered solid operational execution. As we regain scale in our business, we anticipate an expanded operating margin. We do expect moderately high operating expenses for 2025 in line with normalized payrolls and benefit increases. Turning now to our outlook for the first quarter, we expect revenue to range between $237.5 to $252.5 million and a non-GAAP operating margin between 0 and 4%. Once again, additional financial information is available on AdTrend's newly updated Investor Relations website at .adtrend.com. This concludes the prepared remarks portion of the call. And I will now turn the call back over to Rob to begin the Q&A session.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one in your telephone keypad to raise your hand and join the queue. If you would withdraw your question, simply press star one again. We ask that you please limit yourself to one question and one follow-up. Your first question comes from a line of Michael Genovese from Rosenblatt Securities. Your line is open.

Great. Thanks so much. Congratulations on the nice results. I guess I want to follow up on the balance sheet point. To begin, $112 million of net debt, if I got that right, exiting the quarter. So you want to be in a net cash position by the end of the year. That seems, in my right, that seems fairly trivial with, you know, that a real estate sale and sort of just cash generated from operations should be able to get us there easily. And I guess my question is really, is, you know, are there other assets, anything in the business that could be sold and kind of inventory? How much of this is going to be inventory and working capital as we, so I guess just more detail on how we get to net cash and can we get much better than that cash break even by the end of the year?

The answer to your question is yes. So just directly yes. We do expect inventory to come down through the year. We do expect to be generating free cash flow through the year. And you're right with the asset sales that we're talking about. That should be really easy. As you know, the biggest issue is timing asset sales, especially when you're talking about property and and, you know, the market. And we have some properties that are relatively unique, so you have to find the right buyer and it's got to match up. Having said that, we have found some customers that are, we have seen that alignment, but getting them to closures is the biggest thing. As far as the other asset sales, we talked about anything that's really, that's non-strategic, and our strategic areas are fairly easy to define. You know, subscriber, fiber to prim, and optical. And those are the businesses we're in. So things that don't fall in line that we would take a look at and, you know, we, yeah, there's definitely, there's a potential for us to move forward on some of those assets as we find the right buyers.

Yep. Okay, great.

Yep, absolutely. I guess my other one would be just kind of on the sustainability of the telecom, you know, recovery. You know, so I don't want to ask, you know, too many multi-part questions, but if I had the time, I would sort of, you know, kind of Europe and the U.S. visibility to, as we move beyond the first quarter, you know, to the rest of the quarters of the year, how would you kind of describe visibility and the sources of visibility that you feel better that we could have a sustained recovery throughout the year?

Well, the best visibility is a purchase order. And, you know, unfortunately, our business is typically more book and ship than, you know, maybe some longer-term businesses. But they, so the confidence that we have is typically, number one, based off of what we have in backlog and is tangible. And then the other is just kind of planning from the different customer bases that we deal with. The environment has definitely picked up without a doubt. I mean, in the last six months, substantially different than the six months prior to that, bookings have picked up. In general, things, yeah, I mean, just look more positive. But, you know, we really don't have a crystal ball. I can't tell you explicitly what I'm going to do in Q4 this year because I don't know. Q3 is still murky as well, right? But as that window comes in, we get stronger and stronger confidence. And I can just say, trending-wise, things are looking very positive.

Perfect. Thanks so much.

Okay. Your next question comes from a line of Christian Schwab from Craig Hallam Capital Group. Your line is open.

Great. Thanks for taking my questions. Good quarter. Back to the inventory, you've done a significant job of reducing, you know, your inventory on your balance sheet over the last two quarters. Do you have a stated goal for inventory? And, you know, what level do you think that could potentially be reduced to before you would need to maintain it for future growth objectives?

Yeah, you want to talk about our turn, those turns? Go ahead.

Yeah. So currently, our inventory turns are, you know, 2.2, 2.1, not where we want to be, not where we have been in the past. And our goal is to increase our inventory turns back up to in that four-times range for the year. Obviously, this is a process that takes some time. For this year, like Tom said part of the call earlier, we anticipate that inventory will continue to come down throughout this year. And how much just depends on the demand profile from customers and how much additional, you know, material we need to buy from the outside in order to satisfy this demand. So, but overall, I would anticipate inventory will come down some. Maybe not quite as significant as we have seen, you know, first quarter of last year, where we had a significant drop in inventory, but we are working through the process and anticipate a gradually, you know, decline in inventory.

Yeah, I think the key is the way to think about it is four-times inventory turns. That's really where we're comfortable there. We've been there before. We get much above that and we start having customer issues. So kind of low forces is a comfortable place for the company.

Fantastic. And then, you know, given the improved business environment that you're seeing, I know you have, you know, limited visibility, but we are coming off a pretty challenged, you know, industry environment in calendar 2024. You know, would you expect, you know, revenues this year, although quarter to quarter volatility, but would you expect 10% plus type of top line growth this year? Does that seem fair?

Fair. Let me just explicitly say we really don't get full year guidance. We know that there are numbers that are out there. You know, we're aware of that. But, you know, we've had in the past struggled to get, you know, quarter guidance. So we, you know, we're comfortable with, you know, the guidance range that we've given for the next quarter. And I think I would go back to the, you know, the first round of questions, which was, you know, the environment is definitely improving. So I don't want to mislead anybody there. The trend is definitely positive. But, you know, we still have to see how the year plays out.

Great. No other questions. Thank you. Okay.

Your next question comes from Brian Kutz from Needham and Company. Your line is open.

Great. Thanks, guys. Nice job here. Uli, around the inventory, do you have much risk there around excess and obsolete? We're going to have to take any write downs there on what you have today? Well,

we have a fairly large reserve that we built over the last few years, you know, when our inventory was so high. So I think we are in a safe spot here. Obviously, it always depends on, you know, demand and what customers are asking for. But so far, I mean, our inventory service is fairly significant. So I don't have to sleep as night so early. Yeah, it's been fairly

consistent over the last few quarters and don't see a big change.

Great. And you mentioned non-core assets. Any ballpark you can share on, you know, what central revenue we're talking about here? We're talking like, you know, 5%.

It's not a big part of our revenue, anything that we would... If it was a big part of our revenue, we really have to talk about whether or not it's strategic or not. So it's not a big piece.

Got it. Great. And a couple housekeeping pieces here. On your 10% customer in the quarter, I assume that was an international customer. That's

correct.

And did you have any in 24, any 10% customers for the year?

Good question. For the year? No, we had for individual quarters, we always had one. Actually, last quarter, we didn't have one. But we did not have a 10% revenue customer for the year. Great.

And on the optical outlook, do you feel like the, you know, demand and deployments are kind of finally back in balance here with regards to inventories? Are we still a little headwind in optical relative inventory? We

know we still have, you know, we... I think we've been fairly vocal that we expect one inventory situation to clear itself up in Q1. That's still the case. Inventory, it was getting better and better through the year. We kind of have one outlier that we think will clear up in Q1. So exiting Q1, we expect to be in a good place.

Great. And then you mentioned kind of cloud operators. Any details you can share there in terms of how meaningful that is to the optical business today?

It's lumpy. So it can be good and then some other quarters it can be less good. So I wouldn't overweight on that. I mean, you know, kind of our sense on that. And then it's... I will say it's good to have and we're continuing to make inroads, but I would say there's no big reflection point there.

Great. And then last one, on the what you're thinking around the U.S. market, obviously, BEDE is not a sure thing this year, but maybe some of these other government state programs and even, you know, a couple of other federal programs are still driving some strength there. Any anecdotes you can share around broadband and fiber from the U.S.

market? Yeah, I would say, you know, there are tales from previous stimulus programs that are still doing things, but they're not the meaningful driver to our business. We had close to 200 customers come in a couple weeks ago, and there was a bit or no bit. There was a lot of positive energy about what their plans were, and that's kind of what's driving the business right now. I think in the tier three space, I think there are a lot of people that are gearing up. I think the BEDE question itself is still out there, but it's becoming less and less a part of people's near-term plans. For us, it's never been a big driver for this year. We were kind of more excited about what was going on. Tier threes in general, we think that, you know, they have been kind of slower and we think that they're going to have to start investing again. We also think that the tier two space with some of the new equity that's been coming into there has been very exciting, and that continues to be the case. So these larger customers are just, at least for us anyways, are doing better. It'd be nice to have a decision so that the clarity to the customer base would be there, but like I said, it's not a big driver for this year's revenue.

Thanks, Tom. And just to clarify what you just said about the tier twos, you're seeing more positive momentum, better financial footing for them to continue to ramp up the

investment? Yes. Yeah. And tier twos would be some of these kind of newer footprint expansion people that have, you know, their private equity and others have invested in. And then if you're an incumbent, even the incumbent tier two carriers, you know, they're worried about being overbuilt, right? So, yeah, I mean, there's a good kind of competitive dynamic going on there.

That's great. That's all I've got, guys. Thank you. Okay.

Thanks. Your next question comes from a line of Tim Savagio from Northland Capital Markets.

Your seeing the top line reflect higher here. And you're talking about or guiding to a modest increase in Q1 revenue. Sequentially, that is, I wonder if we can get any more color on what's happening there from either a product or geographic standpoint, what you expect to drive that uptick or what some of the moving parts might be?

Yeah. I mean, I agree with your term modest, modest is in the eye of the beholder. For us, we're pretty happy with it. Because typically, we're seasonally down. So, yeah, so we're kind of like, we think it's a positive thing. In general, you know, I think we'll see a stronger access and ag growth. We tend to see, you know, European buyers tend to buy a little earlier in the year. We saw that last year where they bought kind of earlier in the year and then less in the second half of the year. And then the kind of more traditional customers have the typical seasonality with the first quarters down and it starts picking up in the second and third and then fourth is a little bit of a unknown thing. I'm kind of expecting that same trend where we'll see a strong European content and then we'll see the US starting to pick up after that. That answer your question?

Sure does. Sorry about that. Okay, and back on the optical front and just kind of combined with this overall kind of carrier behavior that you're seeing. But, you know, I too was interested in the cloud commentary. To the extent you have some direct exposure there. But I guess the question is more about indirect impacts of what's happening with AI in the network. You know, we heard Cisco talk about that recently in saying, you know, carriers are maybe working on their networks or investing, you know, in anticipation of, you know, bandwidth coming into the network. I wonder if you're seeing that in your customer base or any early indications whether that would be different, you know, kind of US versus Europe. But I guess the overall question is, you know, are there outside of direct exposure to cloud suppliers, are there indirect benefits in the carrier customer base that you're starting to see?

Yeah, the direct answer to that is yes. And in both the US and Europe with, yeah, with some, you know, very, you know, specific things that they're trying to get done and going through. So it's, I think it's made everybody of any size kind of look at their networks and see how do they play on a going forward basis. And I think when they do that analysis that ultimately is going to lead to upgrades in their network and some are farther along than others. But without a doubt, I would agree with the comment that was made.

Great. And then last question for me, I know you mentioned, you know, the early buying in Europe is a potential driver in Q1. I imagine that comment is around your sort of established customers in Germany and the UK. But I wonder if we can get an update on what's happening with some of these newer ramps in Europe on the access side and whether that might be contributing as well.

It definitely is contributing. We're starting to see some of the, I mentioned that we'd started shipping Jeep onto some of those customers at the tail end of the year and we had some other ones that were starting to ship in Q1. But the numbers are so much driven by the kind of established players that it's a positive thing, but it's, you know, I don't want to mislead you here. We have a handful of customers that really drive the bigger numbers and it's yet to see exactly how that's going to play itself out. When I'm going by it's kind of historically what they have done and what we expect for this year. And yeah, I think those are the ones that drive the bigger numbers. Although those other ones will continue to add on. Some of them don't come on though until the end of the year, right? We have some larger things. We have some of them that come on at the end of this year and then we have some come on early next year as well. But the ones that I had previously talked about coming online, I think all of those have or will start first half of the year.

Got it. Well, congrats once again. And I too am pleased with the modest uptake in Q1. I'll pass it along. Thank you. Thank you.

Your next question comes from the line of Amira Manai from Oto. Your line is open.

Yes. Hi. Thank you for the presentation. I have actually two questions. The first one is regarding the guidance for Q1 2025. You anticipate a non-deplibrating margin between 0 and 4%. Now if you end up at the lower end of the range, the margin would decline compared to Q4. What factors could drive this decrease? And the second question is what is the current stages of the BEAT program and how much would its potential impact affect the group's activity in the coming years? Thank you.

So I will start, Amira. So what would, I mean, obviously if we would end up at the lower end of our revenue guidance, then we would move towards the lower half of our profitability guidance range. Obviously there are some uncertainties that we have baked into our guidance projections and they are related to items that are more sitting in other cogs or presentations. We touched on the fact that we anticipate a smaller increase in operating expenses based on inflation or payroll adjustments and benefit adjustments for the year.

On the BEAT thing, there's really no impact to us on BEAT. If BEAT gets delayed, we don't have a whole lot in this year anyways. Definitely nothing in Q1.

Okay. Thank you so much.

Okay.

And that concludes our question and answer session. I will now turn the call back over to Tom for closing remarks.

All right. Thanks everybody. Thanks for joining us this quarter. We look forward to having a robust discussion at the end of Q1. Thanks very much everybody.

Ladies and gentlemen, that concludes today's quarterly all hands meeting. Thank you for your participation. You may now log off.