Q3 2021 ADTRAN Inc Earnings Call

As AD trends CFO, Mike fully onno.

Following my opening remarks, Mike will review the quarterly financial performance in detail and then we will take any questions that you may have.

The results for the quarter were mixed from.

From a demand and long term outlook perspective, the results were very positive with record quarter bookings for any quarter in our history and the addition of two new tier one fiber operator customers in the EMEA region.

And since our last call we have picked up yet a third.

However, near term growth was constrained in profitability for the quarter was negatively impact due to the unprecedented supply chain challenges facing our industry.

While we do expect macroeconomic constraints to persist through 2022, our current outlook show some improvement during the first half of next year.

Taking a closer look at the demand for our solutions bookings were up 43% year over year with a book to Bill ratio of 143 for the quarter.

Our record bookings were well balanced across the growth segments of our portfolio as well as across our growth regions, especially in the U S and Europe.

This growth included a sharp increase in bookings for our tier one fiber access customers. As we are now transitioning these customers from field trial evaluation phase two scale deployments.

The three new tier one operators in EMEA are just the latest example of an increasing pipeline of new customer growth opportunities for us.

We now have five tier one operators in the region with two previously announced tier ones moving into scale deployments and the others preparing for deployment in 2022.

The success in the region is not limited to the tier ones. If you look at the UK For example, we have won dozens of all net customers representing more than half of the avnet fiber operators in that country.

Our incredibly high win rate in EMEA, both at tier one and regional operating levels provide us with an optimistic outlook for the future as more operators continue to diversify away from high risk vendors.

We are also experiencing great success in the U S market looking at our tier one customers in the region. One is placing orders for scale deployments next year, while the other one is exiting the lab phase and planning for larger field deployments.

And the regional operator segment, our fastest growing segment, we continue to see the same positive trends that we have experienced for more than a year with operators continuing to select us to deploy end to end broadband solutions spanning fiber access to cloud software and the connected home.

Taking a closer look at what is driving this high success rate there are two leading factors.

Number one we are incredibly talented and experienced people equipped with the necessary infrastructure to succeed in the regions in which we are growing.

Second we have invested heavily over the past five years in our next generation fiber access cloud software and connected home solutions.

These investments are starting to pay off in terms of differentiating our end to end solutions from our competitors.

Monitor fiber access networks are driven by intelligence software solutions that optimize the performance of the fiber access and home networks and simplify network operations, while improving the subscriber experience and increasing business.

We have invested in these software solutions ranging from service orchestration to AI driven service optimization applications and those investments are now resulting in key customer wins.

Our subscriber base for SaaS applications has increased 61% year over year and we expect this to be a key contributor to our growth and continued success moving forward.

The success in our fiber access platform and SaaS applications is also driving an increase in demand for our in home service delivery platforms as more operators look to deploy end to end solutions.

We have a record backlog of our latest cloud managed mesh Wi Fi Gateway and we expect the revenue for this segment of our portfolio to significantly increase in the current quarter and sustain that growth throughout next year's out as operators upgrade their in home Wifi experience to match the multi b multi gigabit service delivery enabled by our fiber connectivity to those homes.

In addition to a great run rate and differentiated portfolio the market segments in which we compete continue to experience a surge in investment.

In the U S market are dot funding is just getting started and funds from ARPA are being allocated towards broadband at higher levels and much faster than many had anticipated.

In Europe, we continue to see increased investments for a mix of private and public funding as many countries look to close the gap in fiber connectivity and diversify away from high risk vendors and their supplier base.

This funding paired with a new customer acquisition has helped us drive a 51% year over year increase in revenue from our international regional service providers.

On the operations side inventory levels remain higher than normal due to the increased lead times, resulting from the global chip shortage and COVID-19 related logistics issues.

Taking a closer look at that inventory mix, we reduced our finished goods inventory from the previous quarter, while increasing our raw materials inventory to minimize further disruptions to our supply chain.

Looking ahead, we believe the supply chain challenges, we have experienced are peaking and will begin to improve and we will begin to improve for us in 2022.

Therefore, we expect the impact on our results to be temporary.

We are taking the necessary steps to mitigate these challenges, but supply chain constraints do present risk to revenue and gross margins in the near and mid term.

In summary, we are experiencing record demand for our solutions, especially in high growth segments of our portfolio.

We continue to make great progress in new customer acquisition.

Recently launched product offerings within the growth segments of our portfolio will further drive the consistent increase in demand that we had been seeing over a year or.

Over the last year across our entire portfolio.

As supply picks up in the current quarter and moving forward, we expect to be able to fulfill this demand and meaningfully accelerate topline growth.

Our long term strategy and positive outlook for the business remains.