Q2 2022 ADTRAN Inc Earnings Call

Taking a closer look at the two portfolios Advair has strength in optical transport Ethernet aggregation and network synchronization targeting a diverse mix of communication service providers internet content providers and large scale enterprise customer adds.

Advil has driven innovation in this segment emphasizing network security optics development, and new SaaS offerings targeting virtualization at the edge.

And trans strengths are in fiber access platforms residential and business networking solutions and software platforms focused on network automation and services.

By combining the two companies' complementary portfolios integrating their software platforms. We will offer end to end fiber network <unk> solutions with a broader suite of high value <unk> applications.

This solution set will help service providers and enterprise customers simplify the deployment of high scale secure programmable fiber networks, while expanding addressable markets.

Integration planning for the two companies is well underway. We are very excited about the progress we have made thus far and we look forward to the broader and more differentiated portfolio enabled through this business combination.

In terms of the quarter Q2, 2022 continued the trend of strong demand for our fiber broadband solutions with a diverse mix of service providers across our key growth markets in the U S and Europe .

This demand continues to be driven by the build out of fiber broadband networks paired with mesh Wi Fi solutions in the home and the adoption of cloud based networking automation tools.

Some of the key highlights for the quarter included the following.

Overall revenue was up 20% year over year.

And 11% quarter over quarter.

Bookings were up 60% compared to a strong year ago quarter led by our fiber access platforms fiber CPE and mesh Wi Fi platforms.

Combined fiber CPE and residential Wifi revenue was up 108% compared to Q2 of 2021, driven by the increased adoption of 10 gig fiber CPE and mesh Wi Fi platforms that complement our fiber access portfolio.

We saw continued rapid growth in our SaaS customer base up 34% year over year with a growing backlog of customers of our mosaic when service offerings.

Consistent with previous quarters, and the latest market share report from Delauro.

Dia for Q1, 2022, and transship more 10 gig <unk> ports into North America and EMEA then the next two closest U S based vendors combined.

This highlights our continued success and fiber footprint capture with our fiber access platforms.

We also saw a well balanced growth across customers of all sizes with increased revenue from tier one tier two and regional service providers globally on both a quarter over quarter and year over year basis.

The success in the quarter was driven by the increasing demand for our fiber broadband solutions across a broad base of tier one tier two and regional service providers in the U S and Europe .

Our growth continued across these market segments. Despite ongoing supply chain constraints that have limited our ability to achieve our full growth potential and have negatively impacted our profitability.

We expect the supply chain constraints to continue throughout this year.

Taking a closer look at what is driving our growth we see an ongoing trend towards service providers adopting AD trends full portfolio of solutions, including fiber access platforms mesh Wi Fi platforms and <unk> applications.

Looking back at the last couple of years that trend has been the fastest growing vendor in capturing new fiber footprint. This is especially true with 10 gig fiber access platforms that operators have shifted to for new builds.

As service providers are now connecting many of these homes previously passed with our fiber access platforms. We are starting to see a sharp ramp in our complementary fiber CPE and mesh Wi Fi platforms as well as our SaaS applications.

We expect this trend to continue resulting in sustained revenue growth and the strategic portfolio segments.

Taking a closer look at our portfolio investments in leading edge platforms continue to pay off.

These investments are focused on three key areas first is fiber access where <unk> is the market share leader in open disaggregated.

Platforms with our SPX series. These platforms led to many new customer wins, especially with tier one and tier two encumbered operators and msos.

The second is in home service delivery platforms, we're ramping deployments of 10 gig fiber CPE and multi gig mesh Wi Fi six drove sizable growth in our revenue for the quarter.

Finally, our software platforms are focused on network automation service automation optimization and improving customer experience.

This is led by AI, driven SaaS applications, and our mosaic <unk> platform sustained SaaS customer growth over the past year. The introduction of the Mosaiq platform and the expansion of our SaaS offerings have this segment poised for continued growth moving forward.

The progress we have made in driving innovation and scale deployments for these focused platforms comes at a time when we continue to see a strong environment for funding fiber broadband networks.

In the U S. It is estimated that there will be a.

Out of $100 million in federal stimulus targeted for broadband over the next five to seven years.

These funds have started to flow and will pick up momentum in the years ahead.

In Europe , similar trends are occurring with tens of billions and public stimulus funds paired with private investments driving a sizable increase in deployment of fiber networks. We.

Importance of full fiber networks as critical infrastructure for the modern economy is well understood by both the public and private sectors.

This is driving ongoing investment into these areas despite the headwinds facing facing global economies.

The growth trends, we see in broadband solutions aligned with industry reports are newly published report by Delauro Group last week forecasted that broadband.

Broadband spending will push the overall broadband access in home networking market from $15 9 billion in 2021 to $23 4 billion in 2026.

And the PON equipment growth will be driven largely by <unk> PON deployment in North America, EMEA and Carlo.

The lead analyst went on to state that we have made significant upward revisions to our long term broadband and home networking forecast.

As fiber access infrastructure build outs are resulting in more new subscribers and more CPE with advanced Wi Fi technology.

This view on both the regional market growth as well as the key technology shifts are very much aligned with our portfolio and sales strategy.

In summary, despite continuing supply chain constraints, we are making great progress with increased customer funding record demand a diversified customer base, a differentiated product portfolio and the ABA combination, we expect a very bright future.

With that background I will turn things over to Mike to provide a review of our financials and then following Mike's remarks, we will answer any questions you may have Mike.

Thanks, Tom and good morning to all.

I'll cover our second quarter of 2022 results and provide our expectations for the third quarter.

I'll be referencing non-GAAP information with reconciliations to GAAP presented in our press release and supplemental financial schedules on our Investor Relations webpage at investors Dot <unk> Dot com.

The supplemental financial schedules on our webpage also present certain revenue information by segment and category, which I will also be discussing today.

<unk> second quarter 2022 revenue came in at $172 million up 20% year over year led by a 24% increase in our network solutions segment.

Looking at a sequential quarter comparison revenue was up 11%, primarily driven by higher sales in our subscriber solutions and experience portfolio.

On a regional basis year over year U S revenue grew by 12% and international revenue increased by 36%.

Our growth was attributable to increased sales to customers of all sizes, partially offset by unfavorable foreign currency fluctuations.

Our customer diversity continues to be a focus with 310% of revenue customers two domestic distribution partners covering hundreds of broadband service providers in the U S and one domestic tier two customer.

Our gross margins continued to be impacted by constrained component supplies and the associated increase supply chain expenses and decreased by seven four percentage points compared to the year ago quarter.

Compared to the previous quarter gross margins improved by one two percentage points.

Due to the higher volume manufacturing efficiencies.

And some improvements in select component prices as well as fewer expedite fees.

While we anticipate continued supply chain challenges, we remain focused on managing higher component costs freight expenses and expedite fees.

Our non-GAAP operating expenses.

Increased by 3% year over year, and two 4% quarter over quarter.

The increase compared to the year ago quarter was driven by higher labor travel and trade show expenses, partially offset by lower contract services and legal expenses.

Quarter over quarter increase was primarily due to higher labor travel and professional services expenses.

Largely offset by a decrease in legal expenses.

Moving to our operating profitability.

Year over year decrease of 17% was the result of abnormally high cost of goods expense driven by supply chain constraints.

The significant quarter over quarter improvement in operating profitability was driven by higher sales volume and more favorable gross margins.

Other income on a non-GAAP basis decreased year over year and increased quarter over quarter.

The decrease on a year over year basis was mainly related to market driven losses in our investment portfolio as compared to gains in the prior year and realized foreign currency exchange fluctuations.

Quarter over quarter improvement was mainly due to higher realized foreign currency exchange fluctuations.

The company's non-GAAP tax provision for the second quarter of 2022 was a benefit of $1 $5 million, primarily driven by the change in our annual estimated effective tax rate due to the requirement to capitalize R&D expense in the U S. Beginning in 2022 and its effect on our value.

<unk> allowance.

Closing out our income statement results net income was $9 $7 million on a non-GAAP basis with 19.

Per share earnings assuming dilution.

<unk> to a net income of $8 $1 million and the diluted EPS of <unk> 16.

In Q2 of 2021.

Turning to the balance sheet and cash flow statement unrestricted cash and marketable securities totaled $74 $9 million at the end of the quarter for.

For the quarter, we used $10 8 million of cash for operations, mainly due to an increase in working capital.

Net trade accounts receivable was $172 1 million at quarter end, resulting in a DSO of 91 days compared to 87 days in the prior quarter and 78 at the end of the second quarter of 2021.

Net inventories were at $196 $9 million at the end of the second quarter compared to $171 $1 million in the first quarter of 2022 and $119 million at the end of Q2 of 2021, we can.

To carry a higher level of inventory in raw materials as we build supply to minimize further disruptions.

Given the ongoing and extremely challenging electronic component market and the extended lead times for components.

Revenues in the first half of 2022 were up 21% year over year and our order book remains strong.

Robust demand drivers our biggest challenge continues to be the ability to secure supply, while managing higher procurement and logistics costs.

Looking ahead to the next quarter, the continuing effects of the COVID-19 pandemic the ability of component supplies to align with our customer demand the book and ship nature of our business the timing of revenue associated with large projects the variability of ordering patterns from our customer base as well as fluctuations.

And currency exchange rates and any required purchase accounting adjustments related to the AD. The merger may cause material differences between our expectations and actual results.

This will be the first guidance provided for AD trend holdings, which will include the consolidation of the advil financials for a partial quarter beginning at the Finalization of the business combination, which was on July 15.

We expect that the business combination will be accounted for using the acquisition method of accounting under ASC 805, with AD trend holdings, representing the accounting acquirer.

With that in mind, we expect that our third quarter 2022 revenue will be between 320 and $340 million.

After considering the projected sales mix and component availability, we expect that our third quarter gross margin on a non-GAAP basis will be in the range of 35, 5% to 38, 5% still lower than normal due to higher expert.

Diving and freight costs.

We also expect non-GAAP operating expenses for the third quarter of 2022 will be between $103 million and $108 million.

And finally, we anticipate the consolidated tax rate for 2022 on a non-GAAP basis.

We'll be in the low to mid <unk> percentage rate.

Once again additional financial information is available AD trends Investor relations webpage at investors Dot AD trend Dot com.

Now I'll turn it back over to Tom and we will take your questions.

Alright.

Great you can tell at this point, we're ready to open up to any questions people may have.

Yes.

At this time I would like to remind everyone in order to ask a question press star one.

Just a moment to compile the Q&A roster.

Our first question comes from Rod Hall with Goldman Sachs. Your line is open.

Hi, This is Bob.

Taking my question first of all congratulations on the combination.

I don't know if you call.

Tom.

On <unk>.

Pakistan obligation plenty of them.

It declined.

Quarter over quarter Hep flips from Daniel.

You mentioned the strong momentum in CP CPE.

And broadband CPE deployment et cetera, I'm wondering is it more a function of hotline that mix change in the quarter.

<unk> aggregation declining at the moment and it's strong there.

Yes. It is a 100% first of all the mix that we do in any one quarter. At this point is largely driven by availability and then secondarily driven by need right. So if we have availability in components and we really are trying to make sure that we keep customers operating.

So any any.

I hate to say it but the mix right now is driven by <unk>.

Availability not just necessarily demand.

But I don't think it was really down I think you're really we're really talking about flattish, maybe slightly down but flattish, but that is a 100% driven by component availability.

Thanks, Bob.

Follow up.

On the acquisition.

Since announcing it nearly a year ago at this point.

Any talks.

In terms of addressable market opportunities any change really making a compare to your expectations.

Any add back.

Our funded backlog and maybe even <unk> for that matter, we all know how challenging.

<unk>.

But any thoughts in general on the.

Combination no no I will tell you nothing negative there really hasnt been customer wise continues.

Continues to be very positive.

Apply chain wise I do think that the combination and just from the kind of planning things that we have been doing with suppliers.

Make us feel that the combination will actually be a stronger.

Being a strong position as we go forward and try to make sure that we get the right supply at the right prices.

Portfolio Wise I think.

No real surprises there I think we understood and did enough due diligence on the portfolio too new to know where we're going to be able to plug in and kind of what the priorities were so really no changes there I would say in general it's.

It's tracking and even timing wise right, it's tracking pretty much the way that we had expected.

Okay.

Hello, Tom.

Jim you talked to customers as Tom had the conversations going is the biggest scale actually helping.

Let me ask it in different way.

When do you expect this part.

Seeing more inroads.

<unk>.

How do you win new projects.

This existing customer given given the combination of closed now.

I think I mean, there has been customer activity well first of all prior to close you know we have to.

We have to be very careful and even at this point in time, we do still have minority shareholders that we just need to make sure that we operate in the right mode, which is that we don't disenfranchisement any way hurt the minority shareholders, having said that.

The ability after the close for us to come together and make joint sales presentations and be able to really talk about the benefits of the portfolio is much better.

And.

So those are ongoing right now the I can tell you I think that we have.

No.

A few smaller deals.

Not necessarily tier one deals where I think we have actually seen directly seen the benefit and then there are larger deals where we are in the.

This call it negotiation stage or kind of a longer term planning stage.

Where I can absolutely see the direct benefit I mean, they're explicitly asking.

For the timing of the combination of the portfolios.

Got it and then just got one last question.

And then last one John .

Mike synergies related to the $52 million.

And that change.

But the combination I believe.

By two of the combination maybe any thoughts on the cadence of the linearity of this cost synergies how should we think about logging.

I appreciate it.

Certainly I think I think we've said in the past that you would expect more of it in the second year because there is a.

There is a large portion of the synergies that's tied to the consolidation of our it systems. Then if you think about that as it proves efficiencies throughout the back office and throughout the company.

I think you should you should think about the first year being quite a bit smaller than the second year. So it's more backend loaded as we as we combine our it systems coming out of the second near we'd expect to see that full number though.

Going forward.

That's really helpful. Thanks, so much.

Okay, alright, thanks very much.

Your next question comes from the line of Michael <unk> with Rosenblatt Securities. Your line is open.

Great. Thanks, a lot and congratulations also on the deal.

Yes.

I guess I wanted to start with.

The revenue guide and so we just see.

But it's a.

$25 million in 2000 25 million below the two companies' models put together for the quarter should we attribute that to.

Half a quarter of.

On the AD revenue not being an insurer or is there something else to attribute that to.

I'll leave that there might be maybe not half a quarter, but it could become.

Yes, it's probably a month after month, yes, yes, yes.

Yes, yes, that's exactly right. So all the the front end revenue for ads will not roll up.

We do the combined accounting.

It is a little tricky to think through here.

Sleep model because you got to go <unk> to GAAP to non-GAAP and then you have to look at a partial quarter as well so.

I think that is the biggest attribution matters that you don't have a full quarter of that.

Yes.

How do you expect to.

Report near and expect to have I mean, clearly different segments. When you have now when you report next quarter.

Okay.

We will have the same segments remember at the top level our segments, our network solutions and services. So we will still report that way the categories that we're using today are three categories will be combined with what's what's been shown on their side. So we will have.

Great helpful.

Okay, a couple more here.

I guess when I look at your.

Margin guidance gross margin guidance operating expense guidance for the quarter.

It's about what we would expect.

We're not we're not seeing the synergies yet and you were asked about that and the last question and we got some of that timing of how they expect the synergies so I guess.

It's almost a repeat of the question, but I would also add the revenue synergy part to that.

Give us a little bit more detail on the timing of how to layer in the expense and the revenue synergies going forward.

So on the expense side like I said youre going to see most of that happened in the second year. So you got to think about something quite a bit smaller than half of it in the first year.

So.

I mean, you can come up with with what you want there, but I think we've been modeling it more like 80, 20, or 70 30 with the back and the final year after those information systems.

Bringing them together and gaining those efficiencies and I think we've said on the revenue synergies for a while.

I would expect that it's going to take a while to be able to pull together combined contracts and make our combined portfolio pitches and bring from one company to the other additional market.

Ads, which I believe we said that we would see somewhere between five and 10% and at the time that was.

$60 million on the bottom end to 120 on the top end and we said that probably would take a couple of years to get into that range as well.

Perfect. Okay, Great and then last question for me.

Tom can you give us just color on.

The EMEA wins right.

First of all just.

How many are sort of.

Really in shipping and deployment phase how many are.

Not quite there yet and also.

Any new rfps or new wins too.

To update on there. Thank you.

Yes sure so.

Yes.

As we talked about one time, we have one in full deployment, we really have two at this point that are really I would say either trying to get the full deployment are in full deployment.

Which are the two larger ones in Europe are only.

The biggest the only constraint we really have at this point it is.

Component constraints, so I've got.

Plenty of backlog really for Europe in general, it's a matter of us trying to make sure that we get the right products.

All of the rest of them I think there were four more are moving forward I think we actually have four two of those tier ones now at least in place.

Although we're not completely through the lab with one of them one of them. We are one of them we're not in.

It's just a matter of us getting components and getting started so I would say they are.

Generally moving.

Along the same timelines that we were talking about before.

And how many are still in the RFP stage.

Or roughly.

It depends on.

It depends on the tier.

Customer.

I mean honestly my guess is we have more than 10 different various stages. If you look at kind of tier ones, which is people tend to talk about.

I'm thinking there's three or four but I really don't have that sheet in front of me for some reason today, so but I'm thinking there is three or four of them that are in different stages right now okay.

Some of them, but appreciate it.

Theres. So many countries there that you don't realize is a tier one carrier that you actually.

When unfortunately or fortunately, but.

Yes, but there is there is like I say, we're still fairly early in that cycle.

Great.

I appreciate it thanks for the answers and again, congratulations on the quarter and the acquisition.

Alright, thank you.

Our next question comes from Paul SC with William K will address your line is open.

Thanks for taking my question.

I wanted to maybe drill down a little bit on the middle mile area. This has been getting a lot of attention.

And that has a solution that's fairly competitive in the space and then on the call. The other day just last week, the CTO discussed the new offering.

They are bringing bringing online at the end of the year I was wondering if you could talk a little bit about.

What your strategy is in the United States now that you are together and exactly how you can approach. These.

These opportunities given.

Given the situation that is not totally merged.

And the size of the market in the U S and also overseas globally. The CTO had mentioned that.

There's a big pent up demand for upgrading.

The upgrade that you need that middle mile to build it out I wonder if you could expand doses, yes. So.

I mean.

What you just said it was exactly kind of what our thought process has been all along which is in the U S.

Especially with the smaller carriers with the larger carriers different process, but with the smaller carriers I'd mentioned in my notes that we're seeing more and more of the carriers.

The smaller carriers more specially.

Really take our complete solution base.

And what Theyre looking for somebody as one company that can come in and offer as much as their network as possible and really make sure that the entire thing works and that they can scale and theyre not necessarily trying to.

Pik.

The cheapest hopefully the best but the cheapest in any particular segment. They are really looking for the best overall solution and add the plays right into that so our ability to go in and help them.

In aggregate that portfolio into our tier three and tier two solution basis standing right in front of us. So we do have the biggest guidance that we have at this point is don't hurt the standalone portion of the company, that's a very easy not to do.

When we're talking about additive customer basis here in the U S. So that one is open right now we still have some alignment to get done, but I think that's going to happen in a very.

Quick.

In a quick fashion, but the second piece of this is this upgrade piece that we're talking about now is I mean, it's very straightforward to say that.

You upgrade the access network.

<unk> typically because you have to bring customers on board and then as you start bringing customers on board you App you upgrade that mid model and our thought has been that.

Mid model upgrades is typically about a year to a year and a half after you start seeing that real big movement in front and Thats exactly what were seeing today.

No.

Absolutely alignment is really good the pull from larger customers. That's typically on a customer by customer basis, where they are trying to see.

The benefit of us in that space as we have a complete portfolio that now competes with the biggest players in the space and Thats really what they were looking for especially in Europe , where they are kind of.

<unk>.

It's much more difficult.

After.

You've seen them kind of re rationalize their security positions on certain vendors.

So timing is really good for us, but there is still some sales alignment that we will be doing through the end of this year.

Trying to make sure that we have the right go to market strategy.

Okay.

Care to share any numbers on the size of the market you think it might be how much you guys.

Carve out over the next couple of years.

We have we had some numbers those numbers are right literally right now being upgraded I mentioned, the Delaware or report.

And.

We were talking about the broadband market.

Two years ago about it being under represented and what.

What people were forecasting versus what was really going to happen and I think the thing that we were seeing as one offs first of all a serious customer demand second of all announced.

Projects by major carriers here in the U S and major carriers in Europe , and those moved those numbers just weren't moving it and then we had the third component which is.

In Europe , Huawei was effectively taken out of the market.

The all of that Hasnt filtered through you're just now seeing those numbers come to fruition and that broadband report some of that $24 billion of that increase is an increase in the segment that is in the mid mile Theres a portion of that in that as well.

But so our total.

Available market.

If you remember a year ago, we were basically stating the reports and that was somewhere in the.

This was a $16 $16 billion to $17 billion, which we think right now is realistically has grown two thirds.

If not more.

Okay.

Okay, great. Thank you I guess, one other question I wanted to revisit your.

<unk> residential SaaS kind of on the list.

Quarter Conference call you had mentioned those huge backlog in your Onboarding on a lot of customers and I see your subscription solutions. His experience was up 44% sequentially I know a lot of that probably went into the tier ones, but I got to believe the tier twos and tier threes.

Saw some of that growth as well.

Last time. This inquiry you spoke you had mentioned $1 3 million at the end of March and I'm thinking my trajectory looks at about a one five to $1 6 million.

Signed up but there could be actually a little low now with the acceleration.

You care to comment on where you might be on that.

First signed up people.

Yeah. So so.

Without a doubt that number is growing and that number is growing as we are able to ship more CPE. The number of customers itself, which is I'm not sure. What you mean by growing so their subscribers and then theres customer there is carriers right.

On subscribers, the actual people signing up and payment service provider.

The end subscriber itself is really substantially driven by our ability to ship CPE. So we said did see a strong uptick this quarter, but.

The biggest throttling gate on that right now is our ability to ship CPE.

So.

So I'm not sure what else to tell you except that that number is bigger than what it was last quarter.

Okay.

I know that you wanted to you don't want to open up until it's material, but if you're taking $1 five.

In terms of numbers I was given it looks like Youre almost <unk> 20, a share on the $77 million after tax.

So, it's becoming meaningful to the earnings and I'm wondering if at what point would you because you're still worried about the visibility as far as being able to come out and talk more about it yes.

Yes, Im not sure where that math is coming from because I don't think we're at 20 a share at this point, so I am not sure where.

Where that particular piece was coming from.

We'll tell you that there is.

One of the things Thats kind of a tricky on this is there is a broad based of different size applications and they all have a different.

Dollar component, our sense component to them on a subscription basis. So what we have is we have we have some that are at the very low end as we ship more CPE, especially Wi Fi six CPE that.

We had just a fantastic quarter with the larger end number tends to grow right. The bigger numbers because they tend to buy the complete portfolio of solutions, including operations management as well as customer experience. So that will continue to grow but it but we're not at 20 cents a share.

Okay alright. Thank.

Thank you.

Okay.

Our next question comes from Paul Silverstein with Cowen Your line is open.

Yes.

Distribution accounted for in revenue as a percentage of revenue.

Sure.

And none of that has changed that's still tier threes are over 50% of revenue and distributions over 90% of which are three I'm.

Im sorry.

Yes, I don't want to give you an exact number on the percentage of tier three that go through distribution because I don't have that but my sense is it's yes, it's in the $90 90 ish percentile.

I'm sorry, Mike Susan now now I will tell you that's in the U S.

Understood.

Sure.

Go ahead <unk>.

During that time I apologize.

Just over 10 was it meaningfully over time can you give us any sense if not the number.

Yes.

I don't think it was 20.

So it is changing.

Okay.

I guess one question Bruce nature.

Mike.

Revenue was doing about $5 million to $6 million a quarter just funds. If I have my numbers right at about $5 6 million in each of the last several quarters I know this is a business combination.

Equally an outright acquisition if it was an acquisition you lose the benefit of the deferred revenue in this case is it the same thing.

Can you still get the benefit.

I think we still get the benefit now some of this is still yet to be worked out with our with our accountants slowly report, but I think what youre going to expect to see is consolidated revenue all the way down to EPS and then we will eliminate.

The minority interests.

Pull out all of the profit after tax profit associated with the minority interest and then we will have a.

After tax profit and EPS associated with AD trend holdings. So we're going to report the whole thing all the way down and then pull the minority interest setup at the bottom.

When you say alumina you mean.

Remember the interest line, where the 30% that you don't own that will all be accounted for and it will just be a net either profit or loss.

That's right that's right.

Won't do anything with revenue or all the rest of the way down.

I do expect that as those as those deferred revenues come through that we will see those in and the combined company.

Alright.

I figured.

Those fibers to being much Wi Fi were up 180%.

Driven by changing.

I trust from the numbers of fiber CPM nationalized Phi is not all of your subscriber solutions revenue for the third.

There is still some legacy.

Yes.

Well is that correct yes.

Yes, Theres also some enterprise business in there as well.

That leads me into my real question, which is what is fly recipient Mr. Largely on absolute dollars. How big is that when you talked about up to 100%, what's the revenue base now.

Sure.

Mike.

Break out that number I don't think we break out that number we don't break it to that level, but I can tell.

Oscar.

The piece that is subscriber solutions and experience the lion's share is in two pieces.

Right.

We're not talking about 510 15.

No no.

Great.

It's 40 plus module, so the 54 and Thats what it sounds like from what you said.

It's a big number yet alright.

Mike. Thank you Sidney made about SaaS customer base was up 34% year over year I Trust, you're referring to the number of customers as opposed to SaaS revenue or was that sales revenue number.

That's the number of customers.

Alright got it.

Hi, Robyn.

But that service provider customers not necessarily just subscribers as the number of service provider customer understood.

How many customers you have for sales.

Over $1 million.

Yes.

Overwatch.

Yeah, and subscribers excuse me subscribers over $1 million.

How many service providers from saving yourselves awesome.

<unk>.

It's hundreds I don't know the exact number.

Alright understood.

Sorry, it's getting a little more of this nature.

In terms of SaaS revenue, Paul and Mike can you give us an idea where you're at.

Right now it's too it's still fairly small because it's early.

Can you give us any sense for what.

Reporting requirements.

It's not at $50 million yet.

Silver that same range it was a tough enough.

That same range.

$5 to $50.

Okay.

A portion of the slide we closely with shifting.

Okay.

<unk>.

Probably closer to five to be honest with you.

Okay.

So I would expect.

Tom I apologize you guys launched a SaaS for approximately one.

Or so we've had multiple different iterations of this so we started off with relatively.

Simple solutions, maybe four years ago, or so and we added our managed Wi Fi roughly a year to a year and a half then we just brought out mosaic one.

And kind of Ernest.

Maybe beginning of this year, so that's and that is really what ties all of our solutions. Together, we also have and that used to be called MNI, which is.

Network operations and maintenance.

All of that brought together our mosaic once so that's really the thing that actually we think of it.

<unk>.

Key driver for us in the future.

And I trust off relatively small base, but understandable thoroughly but I trust the growth was well above the 34% customer growth. Yes. It is and it is somewhat it is substantially dependent upon our ability to continue to ship CPE as well yes.

Understood on the revenue synergy guidance.

I assume it's stating the obvious that you guys really don't know you hope to drive revenue synergies from 60 to 120 million several years, but it's not like there is some formula and you're good identified X Y Z youre talking about as being fairly disciplined that's your hope but.

I assume there's not a ton of empirical data behind that no. There is not because there's rfps that have to be one and.

We got to make sure we keep up with the competitive portfolio.

Theres plenty of variables in that and for a long time.

Didn't want to really talk about revenue synergies because it is unknown, we know theres going to be some but trying to actually nail down what we're going to be able to bring forward in the next two years is very difficult. So that's why that's why we came up with a range just to be able to say that.

Yes, we know theres going to be some but its I don't know how you.

Materially how do you forecast that.

Hey, granular understanding that's what I thought I just wanted to more on the <unk>.

On the expense side I know, there's been a couple of questions on it but Mike when you talk about 'twenty to 'twenty, one either through I assume the bulk of the 20 is not going to be realized in this through the next quarter, but would be in the latter it would be in the first and second quarters of calendar 'twenty three.

Yes, that's a good assumption.

Alright, and finally.

It was a little bit confused on.

I'm trying to follow you on EMEA you said there.

If I heard you right there are roughly <unk> <unk>.

Included three to four tier once you have skus that are out there you.

You mentioned <unk>.

Got four wins, two which I assume <unk> are now in full deployment.

Opponents, but on the other two I thought I heard you say, you've got to wonder what youre through the lab with the other which youre not yet through the lab.

One I want to make sure we that correctly and two you have peers for both of those notwithstanding not through the lab with one of them yet.

Yes, yes, I do have PFS for both of them.

Alright.

You should you should for more moving forward and menu roughly.

Through the pose are there additional ones beyond those two.

Total there are six.

That's what we're talking about so it's really.

Two in full steam to our we got pls for its a matter of us.

Getting things rolling with them and then two that are not yet to that point.

Still.

<unk> lab work or we have to.

<unk> that we have to give them.

Beyond the <unk>.

When do you expect initial revenue and when do you expect meaningful revenue.

Initial revenue is.

<unk> and its really dependent upon supply so.

So I would expect to see initial revenue maybe as early as this quarter.

Meaningful revenue honestly, it's going to be about supply.

Yes.

On your harmony.

Spine and leaf switches I can get <unk> can get because it's.

The reason they place these deals early.

Try to.

Trying to make sure that we understood how serious they were.

And moving forward and trying to get there.

Their supply requirements in the queue.

But it's really.

Most of the suffers.

Wrap is dependent upon supply Thomas supply, we're not a gating factor.

In the tens of millions lending business.

Yes, yes, yes, yes.

Alright, My last question honest.

On gross margin, Mike if I have the numbers correct or <unk> 33, this past quarter.

That may not be apples to apples because they do non item for us, but it sounds like from your guidance that while youre still being hampered understandably by constraints.

At least it's trending in the right direction, if I remember correctly, you bottomed out hard in Q3, there was a little bit of progress in Q4, a little more last quarter, a little bit more this quarter now it sounds like from your guidance, that's not add enhanced margins between <unk> and below yours right now it sounds like Youre, just seeing a little bit better from a core.

Cost perspective in the lower expedites to have that right.

Partially so so when you're looking at <unk> 33, <unk> and when you pull out that <unk>.

Capitalized R&D piece and and the amortization, that's coming through Cogs and <unk>.

Actually provide a pro forma U S GAAP comparison.

If you look back at last quarter, they would have been almost 39.

So I think when you when you put the two together now we're still in a pretty uncertain environment here.

It comes out very close to what our guidance is so we're not expecting any real significant improvement in the near term here, but like I've said in the past we expect in the longer term, we expect incremental improvement to get us back into that range.

Range.

So Michael all the step up in your guidance in Q3 as the impact of Apple.

As opposed to some incremental improvement in costs.

That's the largest piece of it.

Alright, I appreciate all the responses. Thank you.

Yes.

Yes.

Our next question comes from Brian comes with Needham <unk> Company. Your line is open.

Thanks for the question most of my have been answered, but I wanted to drill into the U S business given the real strength in international it looks like U S was a little light at 12% growth.

No changes in mix there.

Ross you are different.

Customer segments.

Then how do you feel about.

U S growth over the balance of this year.

Yes.

Okay.

Yes.

Let me first of all we did have a stronger CPE quarter and Thats that.

That was true pretty much globally.

And definitely true here in the U S.

But I want to make sure you check.

We character characterized it properly use could've seen substantially more growth that we had more material.

That's both on the <unk> side and on the CPE side. So here again, we're just hampered by our ability.

To get components, but.

But that's where it turned out this quarter, specifically because of the parts that we were able to get and how we're able to allocate those parts, but we have seen demand continue to grow.

On the CPE side, I mean bookings were very strong and very strong on the CP side as well.

Is there a big difference Tom.

Of ingredients there the bond between international and U S that kind of led you to be able to ship more international.

There is some difference in the ingredients.

Our European customers are.

Pending to go.

First of all others, they tend to be larger larger customers larger customers tend to go with our disaggregated solution.

So that's the SPX product platform.

<unk> 5000 platform so availability of components is somewhat.

<unk>.

We drive some of that and then a lot of it.

Lot of our decisions right now are based off of very hard commitments that were giving to different carriers to make sure that we don't hurt anybody. So I would say that that's a really big piece of got.

Got it and where Thats fair.

And we're really not looking additive.

To say that we're not looking at what makes the quarter look better geographic or whatever we're really going by how do we make sure we don't lose any customers.

Okay.

And on the mix shift here in the quarter any any trends there across the tier one two and three as you can point out and the revenue side.

I think I think that.

The biggest thing in here again is because it's still all driven by component availability.

But.

We we continue to see strong demand as networks built out about the build outs that's going on in Europe , right now and what that means for LP.

P demand I think the thing Thats really picked up though is we have.

Enough installed ports now, where we're seeing a very meaningful pick up on the <unk>.

RG side.

And Thats really what we expected a lot of the revenue associated with a fiber home is in the home and that follows the deployment of the LLP. So I think both of those are going to continue to grow but we're going to see that bottom line continuing to swell as people actually get these networks up and running.

Sure makes great sense.

And then on the any update you can give us on the subsidy programs, the ARPA and art off.

Kind of bookings and are you starting to see any impact on revenue Sir.

We have a we started.

Actually in the previous quarter I'm not sure if it was last quarter, maybe as early as the fourth quarter, we started seeing.

Orders those are picked up.

We actually have some customers that are.

<unk>.

They are definitely on our top we need to make sure we take care of list because of the commitments we've made.

And thats continuing to flow through not back then it was predominantly we could see it more in the tier ones.

And the Msos, let's say, but that's getting much broader based at this point.

Super helpful. Thanks, Tom.

Okay.

Okay.

Our next question comes from Tim <unk> with Northland Capital markets. Your line is open.

Alright, I made it.

Thanks for letting me hop on Paul's a follow up call here.

Alright.

But.

So a couple of questions ill try to keep it tight.

First maybe an observation I think it's pretty extraordinary youre able to put up the revenue number you did without any tier 110% customers.

But I would ask first question as you cite the 60% order growth did you see that.

Tier one activity, perhaps in the orders.

And first quarter out of the box here I think some more explicit Standalone guide as an order it looks to me like Standalone youre guiding up towards $180 million in Q3 is that about right and reflective of that strong order growth.

Have one and only one follow up.

Okay. So let me tell you that.

By saying it is not our guidance is not reflective of our order growth.

Our guidance is 100% reflective of what we think we're going to be able to get in material.

So the two unfortunately are disconnected.

And as far as the tier one piece the demand on the tier one piece hasnt.

Lightened up a bit the order rate in the tier one beach Hasnt lightened up a bit it's just a matter of what parts, we can get where we need to ship them.

So we.

We have three.

Three customers tier ones that could have easily been 10% customers. If we could shift what they were asking for.

So just.

Just to kind of set the stage there Mike what are we what are we doing about the standalone.

I think you said 180, I'd say, it's probably a range between 170 and 180 million would be the standalone guidance, a few brands pull it out of the larger number.

Yes.

Okay got it and then.

If I look at in Europe .

Youre right in six to 700 basis point difference between.

IRA.

FRS.

And.

And the non-GAAP stuff for AD still though it seems like youre being pretty unless you are.

Looking about some incremental supply impact.

Opex about $10 million higher than I would've thought.

Standalone combined and prorated for 11 weeks and so that's the R&D coming down.

From the Cogs line.

I don't quite see that amount.

Being put back up so it seems like we should be biased to the high end of your gross margin range.

Unless you're being incrementally conservative on supply or.

B are there are some short term expenses and.

Implied in Opex around the deal or something else that may not recur.

While the nonrecurring stuff really have not built in because we're not sure what that's going to be until we get down deep into the accounting here.

And I would expect that probably closer to the midpoint makes more sense than the high end because we are still.

Experiencing issues out there, even though we had a little bit less of an impact on a stand alone basis. This last quarter to our gross margin. We are still experiencing affect some elevated freight and logistics and then component issues pop up all the time. So I think if you think about.

The midpoint, youre, probably better off and thinking about the high end.

Yes, I hear that but are you intending to guide down.

Sequentially gross margins Standalone for either company.

We're a REIT or flat.

Flattish.

Okay, I think theres, a little conflict, there, but that's alright I'll work it out thanks, very much and congrats especially on the.

On the order book.

Okay. Thanks, very much at this point I think we're out of time. So I appreciate everybody for joining us and we look forward to talking to you next quarter.

This concludes today's conference call you may now disconnect.