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 ADTRAN Holdings fourth 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 AdTran Holdings' fourth quarter 2024 financial results conference call, and welcome to all those joining by webcast. During the course of this 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 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 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 Holdings CEO and Chairman of the Board, will provide the key investment highlights for the fourth quarter of 2024 And Uli Dopfer, our Senior Vice President and CFO, will review the quarterly financial report performance in detail, and then we'll 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 of 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 U.S. customers deploying multi-gig fiber services. Investment remains strong among service providers in the U.S. 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 fiber-to-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 quarter-over-quarter increases. The strength in CPE is directly attributed 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 best-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-GAAP gross margin for the year expanded to 41.9% on a non-GAAP basis from 39.3% 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-GAAP operating profit also meaningfully improved, turning positive for the full year 2024 compared to the 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 calendar 2024 improved by 128.7 million from the prior year. This focus on operational efficiency and financial discipline positions us 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 operating 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.