ADTRAN Holdings, Inc. (NASDAQ:ADTN) Q4 2023 Earnings Call Transcript

ADTRAN Holdings, Inc. (NASDAQ:ADTN) Q4 2023 Earnings Call Transcript February 27, 2024

ADTRAN Holdings, Inc.   isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. And welcome to ADTRAN Holdings Incorporated Fourth Quarter 2023 Earnings Release Conference Call [Operator Instructions]. 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 statements to reflect the events that occur 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 investment presentation and our earnings release. The investor presentation found on ADTRAN Investor Relations website has been available, 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.

Tom Stanton: Thank you, Krista. Good morning, everyone. We appreciate you joining us for our fourth quarter 2023 earnings conference call. With me today is ADTRAN Holdings CFO, Uli Dopfer. Following my opening remarks, Uli will review the quarterly financials performance in detail, and then we’ll take any questions you may have. Our fourth quarter revenue came in as expected with operating profitability on the upper end of our guidance range, helped by lower operating expenses and improving gross margins. Revenue of course continued to be impacted by macroeconomic factors and elevated inventory levels. Given the environment, we continue to focus on managing our operational expenses and reducing our inventory levels. Taking a closer look at the results in the fourth quarter.

62% of our revenues came from outside of the US, which is similar to the geographical revenue mix in the first three quarters of the year. On product mix, subscriber solutions was up quarter-over-quarter due to an improving inventory situation with both RGs, residential gateways and ONTs. The access and aggregation solution category was down quarter-over-quarter due to timing of orders with a couple of our larger customers. Optical networking solutions continued to be impacted by inventory reduction initiatives with large customers. Coming into 2024, we remain focused on two strategic initiatives, the investment in fiber based broadband networks in the US and the high risk vendor replacements centered in Europe. These two initiatives have driven us to broaden our presence and strategic relevance in Europe and substantially increase our product portfolio breadth for customers here in the US.

And while 2023 presented headwinds to equipment suppliers, operators continue to invest in deployment of fiber networks across most regions of the world. According to the Fiber Broadband Association, fiber broadband deployments in the US set a record in 2023, passing 9 million homes, up 13% year-over-year from previous year’s record of 8.3 million homes passed. These results brought the total homes US passed to 77.9 million. Even with this impressive growth number though, nearly half of the US homes are still not passed with fiber. Similar trends are happening in Europe. In the UK, full fiber coverage increased by 4.6 million premises in 2023 according to Ofcom, now covering 17.1 million premises. As more homes are connected with fiber based broadband enabling multi gigabit speeds per household, upgrades to in home connectivity solutions and middle mile transport are following.

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Q&A Session

These investments underscore the importance of fiber as a critical infrastructure in the modern digital economy and reinforce the continued push by service providers to connect more customers with fiber and upgrade the capacity of their networks. With several large broadband stimulus programs still ahead of us in the US and Europe, including the $42.5 billion in funding from BEAD in the US that is still on track to begin allocations later this year. We still have an optimistic outlook on the growth for fiber networks over the next few years. For the US market opportunity, we see real differentiation in being able to provide a complete fiber networking portfolio that spans from optical core to the customer premise, and is paired with software applications that simplify and lower the cost to deploy and operate.

The value of our offering was reinforced by the 15 additional fiber to the home operators we added during the quarter, increasing the total for the year up to 66 fiber to the home operators. These operators are primarily from the US regional service provider segment. In addition to providing fiber access platforms to these customers, we are having increasing success in ongoing software and in home platforms for this customer segment. We added 50 [Indiscernible] one customer this past quarter and more than 225 in the past year. Our current total is approximately 380 independent operators. A lot of the interest in our SaaS applications is driven by Intellifi, our latest cloud managed Wi-Fi offering that is supported by our latest generation of Wi-Fi 6, Wi-Fi 6E and Wi-Fi 7 platforms in our SDG series.

The enhancements that we have made to our SDG series along with the launch of Intellifi helped drive strong growth with our residential gateways in this past quarter. To complete our fiber networking offering in the US, we have our packet optical portfolio. As we have educated our customers on our full portfolio of solutions, including our latest FSP 3000 solutions, tailored towards the need of regional service providers, we have been able to secure dozens of new packet optical wins over the past six months that were from customers that had traditionally been broadband only customers for ADTRAN. We see this packet optical segment as offering meaningful upside for the US market. And as I mentioned, it is the key component of our strategy to offer broader fiber networking portfolio solutions to our customers.

In addition to our portfolio offering, I want to highlight the value US customer see in a US based vendor that not only has R&D support and services teams in country but also has a long history of manufacturing solutions at volume in country. When looking at the Build America, Buy America requirements that are part of the BEAD program, we are already well positioned to address these needs with minimal changes to our supply chain. Considering the breadth of our fiber networking portfolio and the full suite of onshore capabilities, you can see why the value proposition is unique in the industry and why we are excited about the ongoing investment cycle in fiber networks for the US market. I mentioned there was a second key initiative for us and that is the high risk vendor replacement opportunity that is centered out of Europe.

Given the current geopolitical environment, we see the high risk vendor replacement as gaining momentum and is really a question of timing of the phase out in Europe rather than a question of whether it will happen or won’t happen. Similar to our situation in the US, we now have a very strong regional presence in Europe, including a broad support staff and regional R&D resources. We have also greatly enhanced our local supply chain capabilities with the recent opening of our Terafactory in Germany, which was supported by significant backing from the state government in the region. The power of our new combined portfolio is most notably highlighted by our recent win in Europe with a Tier 1 carrier who selected ADTRAN specifically for its combined portfolio for meeting the challenges of a new service rollout they are planning later this year.

We continue to make progress with multiple Tier 1s in Europe that have previously selected ADTRAN. Q4 marked the beginning of volume shipments to our largest customer in Germany of the 6330, our flagship product. And our largest customer in the UK continues to pass millions of homes per year with fiber utilizing our platform. And with another carrier in Northern Europe, we have begun fiber access deployments in three countries, while being qualified for four. We are in the lab for certification with yet another large multinational Tier 1 operator and that we were selected for large scale deployments a couple of quarters ago. On the optical transport side, we continue to progress our Tier 1 opportunities in Europe with one of our recent new customer wins set to begin deployment late this year.

We are also investing in significant upgrades to our line systems, pluggable transceivers, muxponders and software platforms to stay on the leading edge of innovation in the metro oiptical and enterprise optical segments. One example of our optical innovation is pioneering effort to introduce coherent transceiver technology at the edge of the network with our 100 ZR pluggable. We have successfully completed customer trials with our 100ZR coherent optical pluggable optic and we will ramp production of these modules this year. The 100ZR lowers the cost by up to 50% or more to provide 100 gigabit backhaul over DWDM to fiber access nodes, a key need as service providers continue to deploy higher volumes, multi gigabit residential access services, while also delivering higher speed services for enterprise and 5G site connectivity.