ADTRAN Holdings, Inc. Price & Performance (ADTN)

During the course of the 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 in our earnings release. Have not provided reconciliations of our first quarter twenty twenty five guidance with regards to non GAAP operating margin because we cannot predict and quantify without 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, Atran Holdings' CEO and Chairman of the Board will provide the key investment highlights for the fourth quarter twenty twenty four and Uli Dopfer, our Senior Vice President and CFO, will review the quarterly financial 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 U. S. Revenue up 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 bottoms 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. 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. 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 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 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 our target markets. During the quarter, we began shipping infrastructure to 12 new fiber to premise service providers, Continuing our trend of new customer acquisition in this segment, a strong pipeline of expansion opportunities and network upgrades, 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 CPU is directly attributable to fiber access footprint expansion that we have experienced.

We expect meaningful growth in CP 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 WiFi seven products over the next six months, to help continue to drive new demand for our growing base of large and regional service providers. [indiscernible] The direction in our industry is clear. Our customers need fiber networks that scale from optical cord 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 [indiscernible] to the industry's highest density, most power efficient 10 gig fiber access platform and 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 is 10 gig WiFi 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 WiFi networks. The breadth and capabilities of these software applications paired with our networking platforms differentiate 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. Other 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 include to $104,300,000 during 2024. A significant improvement compared to net cash used in operating activities of $45,600,000 during 2023. Our free cash flow of $39,900,000 during calendar 2024 improved by $128,700,000 from the prior year. This focus on operational efficiency and financial discipline positions us well for a 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 up to any questions you may have. Uli? And thank you everyone for joining us on the call this morning. To begin, I will first walk through our preliminary Q4 twenty twenty four financial performance and then I will discuss our expectations for 2025.

Q1 twenty twenty five. Q4 revenue was $242,900,000 sequential increase of 15100000.07% above the midpoint of our guidance. Revenue increased $17,400,000 year over year or 8%. Network Solutions segment delivered $197,000,000 accounting for approximately 81% of total revenue in Q4 compared to 80% in the prior quarter. Our Services and Support segment delivered $45,800,000 or 19% of total revenue in Q4 compared to 20% in the preceding quarter. From a product category perspective, ExFlex and Aggregation delivered $72,700,000 or approximately 30% of total revenue. And increased 8% sequentially. Our optical networking solution category was $81,600,000 or 34% of total revenue. This was up 16% sequentially. Subscriber Solutions was $88,500,000 or 36% of total revenue.

This was down 2% sequentially. Non U. S. And U. S. Revenues were 57% or 43% of total revenue, respectively. We had one customer who represented more than 10% of our Q4 revenue. Non GAAP gross margin during the quarter was 42% sequential decline of 11 basis points. Non GAAP operating expenses in Q4 were 94,000,000 reflecting a quarter over quarter increase due to higher deferred compensation, and increased sales commissions. For Q4, our non GAAP operating profit was $7,900,000 or 3.3% of revenue and above the midpoint of our guidance range. This compares to a non GAAP operating profit of $2,500,000 or 1.1% of revenue in Q3 twenty twenty four and a loss of 3,200,000.0 the year ago 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 $3,100,000 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 twenty twenty four. 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 $100,000,000 a nearly $115,000,000 swing from the prior year.

During Q4, net working capital decreased by $4,700,000 quarter over quarter to $276,900,000 Trade accounts receivables were $178,000,000 at quarter end resulting in DSO of sixty seven days. This compares to seventy days in the prior quarter. Our inventories were down to $269,300,000.0 at the end of the quarter.

Accounts payable were $170,500,000 DPOs were seventy two days versus sixty seven days As I shared, cash flow for the year was $103,100,000 compared to negative $45,600,000 for the full year of 2023. [indiscernible] had free cash flow of negative $10,400,000 in Q4 compared to positive $23,200,000 of free cash flow in Q3 twenty twenty four. 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 EUR39.9 million dollars an increase of 128,700,000.0 from the full year 2023. At the end of Q4, cash and cash equivalents were 77,600,000.0 quarter over quarter decrease of 10,900,000.0 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. Due diligence 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 higher operating expenses for 2025 in line with normalized payroll and benefit increases. Turning now to our outlook for the first quarter. We expect revenue, to range between $237,500,000 to $252,500,000 and a non GAAP operating margin between 04%. Once again, additional financial information is available on Atran's newly updated Investor Relations website investors.attran.com ADTRAN. This concludes the prepared remarks portion of the call. And I will now turn the call back over to Rob to begin the Q and A session.

Thank you. We will now begin the question and answer session. Your first question comes from the line of Michael Genovese from Rosenblatt Securities. Line is open.

Great. Thanks so much. Congratulations on the nice results. I want to follow-up on the balance sheet point. To begin, hundred and 12,000,000 of dollars 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 rented, that seems fairly trivial with that a real estate sale and sort of cash generated from operations should be able to get us there easily? And I guess my question is really, are there other assets like 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 net cash breakeven 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 the market And we have some properties that are relatively unique. So got 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've talked about anything that's really that's non strategic and our strategic areas are fairly [indiscernible] fiber to prem 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 we Yes, there's definitely there's a potential for us to move forward on some of those assets as we find the right buyers. Yes. Does that answer your question? Okay, great. Yes, absolutely. Guess my other one would be just kind of on the sustainability of the telecom recovery. So I don't want to ask too many multipart questions. But if I had the time, I would sort of Europe and The U. S. Visibility to as we move beyond the first quarter, to the rest of the quarters of the year, how would you kind of describe visibility and the sources of visibility make you feel better that we could have sustained recovery throughout the year.

Well, the best visibility is a purchase order. And Unfortunately, our business is typically more book and ship than maybe some longer term businesses. But so the confidence that we have is typically number one, based off of what we have in backlog and and is tangible. And then the other is just kind 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, yes, I mean, just things just look more positive. But we really don't have a crystal ball. I can't tell you explicitly what I'm going to do in Q4 of 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 are looking very positive.

Perfect. Thanks so much.

Okay. Your next question comes from the line of Christian Schwab from Craig Hallum Capital Group.

Line is open. Great. Thanks for taking my questions. Good quarter. Back to the inventory, you've done a a significant job of reducing your inventory Do you have a stated goal for inventory and what level you think that could potentially be reduced to before you would need to maintain it for future growth objectives? Yes. We you want to talk about our churn those turns?

Go ahead. Yes. So currently our inventory turns [indiscernible] 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 and takes some time. For this year, like Tom said during his 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 materials we need to buy from the outside in order to satisfy this demand. So but overall, I would anticipate inventory will come down maybe not quite as significant as we have seen first quarter of last year, where we had a significant drop in inventory but we are working through the process and anticipate a gradually [indiscernible] Yes. I think the key is the way to think about it is four times inventory terms. 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 fours is a comfortable place for the company.

Fantastic. And then given the improved business environment that you're seeing, I know you have limited visibility, but we are coming off a pretty challenged industry environment in calendar 2024. Would you expect 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 give full year guidance. We know that there are numbers that are out there. We're aware of that we've had in the past to get core guidance. So we're comfortable with the guidance range that we've given for the next quarter. And And I think I would go back to the first round of questions, which was the environment is definitely improving. So I don't want to mislead anybody there. The trend is definitely positive.

But we start to see how the year plays out.

Great. No other questions. Thank you.

Okay.

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

Great. Thanks guys. Nice job here. Uli, around the inventory, you have much risk there around excess and obsolete ramping into take write downs there on what you have today? [indiscernible] Well, we have a fairly large reserve build that we built over the last few years when our inventory was so high. So I think we are we are in a safe spot here. Obviously, it always depends on demand and what customers are asking for. But so far, I mean, our inventory service is fairly significant. So I'm don't have sleepless nights over it.

Yes. It's been fairly consistent over the last few quarters and don't see a big change. Great. [indiscernible] Any ballpark you can share on what percent of revenue we're talking about here [indiscernible] It's not 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 strategic or not. So Got it, great. And a couple of 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 'twenty four, any types of customers for the year?

Good question.

Do you For the year, no. We had for individual quarters, we always had a one last quarter, we didn't have one. But we did not have a 10% revenue customer for the entire year. [indiscernible] And on the optical outlook, do you feel like demand and deployments are kind of finally back in balance here. With regards to inventories? Are we still a little headwind? In optical relative to We know we still have I think we've been fairly vocal about we expect one inventory situation to clear itself up in Q1 that's still the case. Inventory that we was getting better and better through the year. We kind of have one 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. [indiscernible] 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, kind of our our sense on that. And 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 inflection point there. Great. And then last one on the broadband [indiscernible] What you're thinking around The U. S. Market, obviously, bead is not a sure thing this year. But maybe some of these other government state programs and even [indiscernible] A couple of other federal programs are still driving some strength there. Any anecdotes you can share around broadband and [indiscernible] running from The U. S. Market Yes. I would say there are tails 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 of weeks ago and there was beat or no beat. There was a lot of positive energy about what they 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 bead 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 3s in general, we think that 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. ADTRAN continues to be the case. So these larger customers are just at least for us anyways are [indiscernible] And Bed it'd be nice to have a decision so that [indiscernible] to the customer base would be there, but like I said, it's not a big driver for this year's revenue.

Got it. Thanks, Tom. And then just to clarify what you just said about the Tier 2s, you're seeing more positive momentum, better financial footing for them to continue to ramp up in 2025?

Yes.

Yes. And tier two would be some of these kind of newer footprint expansion people that have private equity and others have invested in And then if you're an incumbent, even the incumbent Tier two carriers they're worried about being overbuilt, right? 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 the line of Tim Savageaux from Northland Capital Markets. Line is open.

Hey, good morning and congrats on seeing the top line inflect higher here, and you're talking about or guiding to a modest increase in Q1 revenue.

Sequentially that is, and 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 to drive that uptick or what some of the moving parts might be? [indiscernible] I mean, I agree with your term modest, but modest is in the eye of the beholder. For us, we're pretty happy with it. Because typically we're seasonally down So yes, so we're kind of like I said, we think it's a positive thing. In general, I think we'll see a stronger access in ag Growth We tend to see our 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 in the second half of the year and then the kind of more traditional customers have the typical seasonality where the first quarter is 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 see The U. S. Starting to pick up after that.

That answer your question? Sure does. Sorry about that.

Okay. And back on the the optical front, And is this kind of combined with this overall kind of carrier behavior that you're seeing But I too is interested in the 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 We heard Cisco talk about that [indiscernible] maybe working on their networks or investing anticipation of 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 kind of U. S. Versus Europe, But I guess the overall question is are there outside of direct exposure to cloud suppliers, are there indirect benefits in the carrier customer base that you're starting to see? Yes. The direct answer to that is yes. And in both U. S. With Yes, with some very specific things that they're trying to get done and 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 think when they do that analysis, that 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 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 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 GPON to some of those customers at tail end of the year and we had some other ones that we're 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 I don't want to mislead you here, those 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 historically what they have done and what we expect for this year. And yes, I think those are the ones that are driving 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 that come on at the end of this year and then we have Come on, early next year as well.

But the ones that I had previously talked about coming online, I think all will go have or will start first half of the year. Got it. Well, congrats once again and then I too am pleased with the modest uptick in Q1.

I'll pass it along. Thank you. Your next question comes from the line of Amira Menai from ODDO.

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 twenty twenty five. You anticipate a non GAAP operating margin between 04%. 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 bid program and how much would it would its potential impact affect the group's activity in the coming years? [indiscernible] So what would I mean, obviously, if we would end up at 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 gross margin. And then I think we touched on during my presentation, we touched on the fact that we anticipate smaller increase in our operating expenses based on inflation or payroll adjustments and benefit adjustments for the year.

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

Okay. You so much. Okay.

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. Very much everybody.

Ladies and gentlemen, that concludes today's quarterly all hands meeting.