Q3 2022 ADTRAN Holdings Inc Earnings Call
Ladies and gentlemen, thank you for standing by.
Welcome to the AD trend holding.
Third quarter 2022 earnings release conference call.
Lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question at that time simply press star followed by the number one on your telephone keypad.
If he would like to withdraw your question again press Star one thank you.
During the course of the conference call.
Try and representatives expect to make forward looking statements that reflect managements best judgment based on factors currently known.
However, these statements involve risks and uncertainties, including the continued spread and the extent of the impact of the COVID-19 pandemic the ability of component supplies to align with customer demand.
The successful development and market acceptance of our products comp.
Competition in the market for such products.
Product and channel mix component cost freight and logistics costs.
Manufacturing efficiencies, our ability to effectively integrate mergers and acquisitions and other risks detailed in our annual report on Form 10-K for the year ending December 31, 2021, and our quarterly report on Form 10-Q for the quarter ending June.
On the 30th 2022.
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.
It is now my pleasure to turn the call over to Tom Stanton Chief Executive Officer of AD trends Holdings. Sir. Please go ahead.
Thank you Brent good morning, everyone. We appreciate you joining us for our third quarter 2022 earnings Conference call.
With me today is that trend Holdings' CFO , Mike <unk>.
Following my opening remarks, Mike will review the quarterly financial performance in detail and then we will take any questions that you may have.
Q3 marked a new era for AD trends following the closure of the business combination agreement with AD the optical networking on July 15th.
This transition point as timely as it coincides with our industry continuing a rapid transition to the fiber everywhere era.
Especially in AD trans highest growth regions in the U S and in Europe .
Service providers have aggressive goals to rapidly deploy fiber to homes businesses and critical infrastructure sites, while increasing customer satisfaction streamlining operations, reducing energy consumption and ensuring network security.
Our vision is clear.
We want to help service providers achieve these goals by having the most complete portfolio from optical core to the customer Prem.
This portfolio includes scalable secure and efficient networking infrastructure and customer premise platforms paired with best in class software.
These solutions and maximize subscriber experience, while simplifying operations through automation.
The combination with App provides us with the most complete portfolio to execute on this vision.
Given that this is our first quarter of combined results with a four quarter with a full quarter of results from <unk> and a partial quarter from adverse we have adjusted our revenue categories to reflect our broader fiber networking portfolio.
The new revenue categories for both products and services our subscriber solutions.
Access and aggregation solutions and.
In optical networking solutions.
These categories cover our complete portfolio of fiber network and products and services that span from optical core from the optical core network to the customer premise network a more detailed breakdown of these categories is provided on our investors website.
As for integration planning. This process is well underway, we are on target and the two companies remain excited by the customer reactions to the business combination.
Looking at the results for the quarter, a key few points stand out.
For one we are very balanced geographically with our U S and non U S business, each contributing about 50% of the total revenue in the quarter.
Second each of our product categories, along with our consolidated service offerings contributed meaningfully from a revenue perspective, highlighting our continued diversification across our combined portfolio.
We believe this well balanced and comprehensive fiber networking portfolio, coupled with our strong global presence with <unk>.
We'll continue to provide us with higher growth potential in this ongoing investment cycle and fiber networks.
Our success in the quarter was driven primarily by a diverse mix of service providers that are upgrading their optical transport networks deploying new fiber access networks connecting residential and business subscribers to these fiber networks.
Grading to multi gigabit capability in home Wi Fi networks.
Our strongest revenue contribution came from the U S and Europe as expected where operators continue to invest heavily in fiber networks, and where we have a strong presence.
Taking a closer look at the combined portfolio, let's step through each category of our portfolio and look at the key areas of investment and growth drivers.
Starting with our optical network solutions, we see broad based demand and a growing backlog for AD was optical transport solutions with a mix of service providers Internet content providers government agencies and large scale enterprise customers.
Demand remains strong from large scale transport systems too.
Two internally developed optical modules and plausible transceivers.
This category has several exciting developments, especially in the metro edge with a mix of optical modules advanced security solutions and edge optimized platforms that are an ideal complement to AD trans fiber access and aggregation solutions.
In optical networking add the recently announced the creation of an S. A wholly owned about separate company to serve the increasing requirements for secure network infrastructure.
The new legal entities specializing in secure transmission technology to protect highly sensitive communication networks with from cyber attacks.
<unk> will collaborate with national security organizations to ensure end to end networking protection that meet the highest industry requirements, including safe guarding data against strikes from quantum computers.
Moving to our fiber access and aggregation solutions, we continue to see great demand for our 10 gig fiber access platforms and the latest industry market share report from del Oro at try and held the number two market position in North America and number three market position in EMEA for 10 gig PON aggregation port shipments.
Irrigation and network synchronization solutions from ads.
That will further enhance our ability to meet the fiber access and aggregation needs for all subscriber types.
And the subscriber solutions category, we saw tremendous growth during the quarter.
On the residential side, where the growth is the highest and we are benefiting from enhancements to our cloud managed multi gig multi gig mesh Wi Fi six solution.
Offering and the growing number of subscribers that are now connecting homes that were previously passed with our fiber access platforms.
On the business side, we now have a much broader solution offers offering ranging from carrier Ethernet edge devices and network virtualization solutions to enterprise class routers and switches.
These solutions, which are also complementary to our residential offerings and aggregation solutions helped to fuel additional growth in our subscriber solutions segment.
Incorporated into each of these product categories. Our software solutions led by AD Trans mosaic one SaaS platform.
AD Trans status customer base, which includes hundreds of service providers is up 31% and year over year.
And this includes more than 100, plus service providers that have adopted the latest version of mosaic of our mosaic one platform with.
A much broader portfolio and larger customer base and the combined company along with expanded capabilities and that transcends portfolio. We expect to further accelerate growth in this strategic area.
100, <unk> <unk> coherent transceiver.
A solution that is an ideal match for AD trans access and aggregation portfolio by greatly reducing the cost power and space needed to deploy 100 gig connectivity deeper into the network for mobile backhaul fiber access backhaul or large scale enterprise service delivery and.
In addition to the 100 G. R. We also announced the access wave optical module.
And the access and aggregation space add trend is expanding its lead an open disaggregated fiber access.
This is the densest highest capacity and most energy efficient 10 gig fiber access platform in the industry and is well ahead of the competition in terms of scale performance cost and expand ability.
On the subscriber side Andres is having great success with its STG series of platforms for Wi Fi six and is expanding these solutions to incorporate Wi Fi six <unk>.
And business class features for work from home and small business users.
In the software space will continue to make great advancements in our mosaic portfolio, helping service providers automate the management of both customer premise and network infrastructure, while providing end users with tools needed to maximize their service experience.
With the combined company, we will be integrating the complete portfolio.
From the optical core to the customer premise under a seamless management environment with AD trends mosaic one platform.
This will both improve subscriber experience and increase operational efficiency.
The success, we are having in these focus platforms along with exciting innovations on our roadmap have us well positioned for further growth during this ongoing investment cycle and fiber networks.
Our key regions in the U S and Europe , you fiber networks as critical infrastructure.
And sizable public investments remain ahead to ensure their deployment.
While supply chain issues continue.
Continue.
Two impact as the outlook is improving given these factors we remain very optimistic about our future.
With this background I'll 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. Thank.
Thank you Tom and good day to all.
Cover our third quarter 2022 results and provide our expectations for the fourth quarter.
Please note that this is the first quarter for <unk> Holdings, Inc, which includes the consolidation of the adverse financials for a partial quarter beginning its finalization of the business combination on July 15th.
Which affects year over year and quarter over quarter comparisons.
Since this is the case I will refrain from repeating the first time colleagues consolidation effects when discussing year over year and quarter over quarter comparisons of our results.
I will be referencing non-GAAP information with reconciliations to GAAP presented in our press release and supplemental financial schedules on our Investor Relations page at investors that AD trends Dot com.
The supplemental financial schedules on our webpage also provide certain information by segment and category, which I will also be discussing today.
<unk> third quarter 2022 revenue came in at $347 million up 147% year over year and exceeded the upper end of our guidance range of $320 million to $340 million.
Inclusive of additive revenues our network solutions segment makes up 90% of revenues in Q3 2022 compared to 87% in Q3 of 'twenty one.
Our services and support segment contributed 10% of revenues in Q3, 2022 compared to 13% in the year ago quarter.
Year over year and quarter over quarter revenue increases are driven by our subscriber solutions category, which makes up 39% of revenues compared to 34% in Q3 of 21% and 46% in the previous quarter.
The newly introduced technology category optical networks <unk> solutions includes the optical networking, our cloud interconnect portfolio of Advair and contributed 35% of revenues.
Access and aggregation revenue share was 26% compared to 66% in the year ago quarter to 54% in Q2 of 2022.
On a regional basis year over year domestic revenue grew by 85% and international revenue increased by 270%.
Domestic and international revenues are split about equally with about 50% of our revenues each providing a more balanced business with an expanded portfolio and global footprint.
Our customer diversity continues to be a focus with 210% of revenue customers. One U S service provider customer and one international service provider customers.
Q3, non-GAAP gross margin was 38, 1%.
Improving by three five percentage points year over year, and one seven percentage points sequentially.
Increase in gross margin is due to an improved customer and product mix in the combined company and improvement in supply chain expenses, partially offset by unfavorable currency developments.
GAAP gross margin is inclusive of $25 5 million acquisition related expenses amortization and adjustments due to the business combination with add back.
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 were $109 million, increasing by 116% year over year and 101% quarter over quarter.
Operating expenses were 32% of revenues compared to 36, 5% of revenues in Q3, 21, and 31, 5% in Q2 of 2002.
non-GAAP operating profitability was $29 million, which translates into a non-GAAP operating margin of six 1%.
Compared to negative one 9% in Q3 of 'twenty, one and four 9% in the previous quarter <unk>.
The improvement in operating profitability was driven by higher revenue volume at 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 driven by market related losses and impairments in our investment portfolio and.
And higher interest expense related to our credit agreements, partially offset by favorable realized foreign currency exchange fluctuations.
Yes.
The Companys non-GAAP tax provision for the third quarter was an expense of $8 8 million or 42% tax rate.
Primarily driven by the change in our annual estimated effective tax rate related to the closing of the business combination with add that during the quarter and the requirement to capitalize R&D expense in the U S. Beginning in 2022 and the subsequent effect on our valuation allowance.
Closing out our income statement results.
non-GAAP net income was $12 2 million and $7 7 million after adjusting for a minority shareholder interest in advance.
This results in EPS attributable to the company of <unk> 11 per share.
The significant difference in non-GAAP net income of $12 2 million and GAAP net loss of $44 9 million is mainly due to purchase accounting adjustments, which also explains the significant difference in non-GAAP net income.
Of $7 7 million and GAAP net loss.
Of $41 9 million.
After eliminating the minority interest.
Turning to the balance sheet and cash flow statement.
Cash and cash equivalents totaled $111 1 million at quarter end.
For the quarter, we used $36 8 million of cash for operations, mainly due to deal closure expenses and an increase in working capital.
Net trade accounts receivable were $302 million at quarter end, resulting in DSO of 82 days compared to 91 days in the prior quarter.
Net inventories were $416 million at the end of the third quarter, resulting in inventory turns of three one compared to $2 four in the second quarter of 2022.
Both companies continue to carry a higher level of inventory in raw materials as we build supply to minimize further disruptions given the challenging electronic component market and extended lead times.
Trade account payables or $276 million, resulting in a <unk> of 71% compared to 100 and.
In the previous quarter.
Once again Q3 was the first quarter, which includes at the financials for a partial quarter beginning at the Finalization of the business combination on July 15th.
The fourth quarter, however will be the first quarter that fully includes at the financials.
Integration planning process is progressing well and we have now aligned our earnings call schedules to coincide on the same day.
We have also taken further steps in the integration of our combined IR efforts and will align our key performance indicators as we guide in the future.
Going forward, we will provide guidance on revenue and non-GAAP operating margin similar to the guidance measures provided by Advair.
Looking ahead at the final quarter of the year, the continuing effects of the COVID-19 pandemic the ability of component supplies to align with customer demand to book and ship nature of our business the timing of revenue associated with large projects the variability of ordering patterns from our customer base is.
Well as the fluctuation in currency rates and any additional required purchase accounting adjustments related to the AD. The merger may cause material differences between our expectations.
And the actual results.
With that in mind.
Our fourth quarter 2022 revenue is expected to be between three.
<unk> $355 and $375 million.
And we expect a non-GAAP operating margin between 5% and six 5%.
Once again additional financial information is available at AD trends Investor Relations page at investors Dot <unk> Dot com.
Now I'll turn it back over to Tom and we will take any questions that you may have.
Okay. Thanks, Mike Alright at this time, we're ready to open up to any questions people may have.
At this time I would like to ask a question press star followed by the number one on your telephone keypad.
Your first question calls comes from Paul Silverstein with Cowen Your line is open.
Thanks, Tom and Mike.
Last week Thursday night you'd be RB.
Talking about weakness in particular, and they're just they're field test equipment I assume directly related Jeff TTP.
And they indicated the weakness was general in nature I heard that offline you were seeing AT&T lumen.
Perhaps some others raises an obvious concern I trust from your comments you're.
Certainly seem to be suggesting that youre not seeing that weakness, but let me ask you the direct question.
Or are you seeing any of your customers, especially the larger ones, indicating to you.
Coming pullback cut back.
We want to term it of any nature that would adversely impact future revenue.
No.
So the answer is no in fact.
We have of course, hundreds and hundreds of customers. There are I will tell you that at any point in time, some customers are pulling back or moving forward. There are some that are worried about.
Capital Theres always this capital shift that goes on towards the end of the year, which sometimes helps you and sometimes richa.
But.
Those are in the noise, especially when you take a look at the backlog we have so those are in the noise and explicitly towards the large customers. The answer is now.
Okay.
Mike If I heard you correctly I think you said the balance sheet was 111 million of cash any chance look directly we've got the number.
That's right 100 less one.
Let me I think you've publicly stated that you plan to take out the remaining shares of the Alba with cash I understand it's not going to happen overnight.
So you are plus to fully accomplish the full acquisition.
But it begs the obvious question you've only got 111, if I do the basic back of the envelope math, it's about 350 plus million I think that you need to take out the remaining shares.
The direct question would be I assume you don't want to raise debt financing at these interest rates.
That begs the question the only way to do it I guess would be for you all to do with secondary no.
Well, that's not the only way to do it but that is that is one possibility we have lined up the debt to do it the numbers a little bit less than what you said, it's closer to 300.
Now to take out the rest of them with the current offer price that put price in the DP LTA agreement that is still working its way through approval by the adverse shareholders. So that the plan has been to do it with debt to do it with earnings from the company.
But also there are other options that we will explore so I think we should we secure the debt just to make sure that we have a backstop.
That allows us to have flexibility, but as we get closer to those periods of times, we'll make the call.
As the question comes up.
Got it and one more if I may Tom going back to the quarterly question of how is the ramp.
At the various Huawei displacement opportunities both ones you've already secured like beauty that are already ramping as well as any update you can give us on the number of awards that might have converted or the number of rfps or other opportunities that might have converted into awards and the remaining outstanding Rfps that haven't yet been awarded any update would be appreciated.
Yes, they are.
A handful that we have one that we are.
In the process of.
Monetizing that may be a strong and maybe a tough word, but it's really coming online and then monetizing.
I think this quarter, we will give.
So sometimes between.
Where we are now and the end of Q1, we expect roughly four new European.
And these are all tier one so these are some countries are bigger than others.
Two.
Start.
Ordering and deploying now they will take some time to ramp up but those seem to be going well. Our biggest we are launching I mentioned in my notes that were launching the $63 30, which is a.
A new generation of disaggregated fiber platform that allows.
10 gig in really high density really low power.
It's a fantastic platform. So that's just starting to come out we will start first production of that at the end of this year is what its scheduled for right now.
We will start trial, we will start lab entry and we've already started land <unk> lab entry with.
Some of our current generation products, but the key to that being really.
Coming online is.
The successful deployment of the $63 30, which really changes the economics of fiber deployment and that larger space. So those kind of coincide with each other.
But anyway, it's a handful of them will come online between now and the end of Q1.
There are a couple more after that which will happen.
Probably in the Q3 timeframe and there are asked that question. This morning thereabout for different kind of very large tier one opportunities that are kind of in play over the next let's say three quarters or so that hasn't been decided yet.
Tom suite for options that Havent been decided for brand New awards, the Mckee remind us the number of awards previously were how many.
We had six tier ones in Europe .
<unk> tier one here.
The four so we have two that were monetized so its really those four.
The additional ore being new new relative to what you've previously shared with us.
New relative to what we're shipping.
Right, so not new relative to what I'm talking about.
Basically of the six four coming the other four coming online between now and the end of Q1.
Tell me online being initial revenue.
Initial revenue yes.
And you mentioned they are all different sizes or any one of those four are the tier one of the type of a beauty you did see that type of tier one.
Honestly nothing is as big as <unk> at this point in time.
Because theyre just theyre doing a lot of things at one time.
They're kind of in the tier I would say, they're probably slightly.
Some of the bigger ones are are right in the DTA or slightly below that range, but that's.
It's a little lumpy. So some of them have some huawei replacement things projects that are coming online fairly early on some of them have them geared towards the end of the year next year. So it depends on the carrier and then there'll be periods of time, where they pop up and then go back down to a normal run rate.
So it's really hard to categorize them.
In the life and the total span btn DT are still the biggest things out there.
At Tommy and the way you just described it it sounds like in the aggregate those are worth it.
Tens I assume.
Collectively the one one.
Yeah.
<unk> range, if not more.
I don't know if I could I would say when we think about them in the tens yes.
Individually or collectively.
Go individually individually some of them will be 10, some of them will be a time will be 15, and some of them will pop up to 'twenty when they do a big replacement.
I appreciate the responses all personal thank you alright, alright.
Your next question is from Fahad <unk>.
With loop capital your line is open.
Hey, good morning, Thank you for taking my question.
One.
Yes.
If we look at and while this is really creating that full year outlook.
Then.
It sounds like for the fourth quarter.
Your organic guidance is slightly lower than what I would have anticipated given the <unk>.
Moving supply chain outlook.
And the backlog that you're accounting can you.
We've talked a little bit about.
What youre seeing in terms of the supply chain dynamics.
Organic guidance of fourth quarter.
And I have a couple of follow ups.
Yeah, Let me take a stab at this and Mike.
I mean I don't.
I would be surprised we have our internal projections of what we think the mix will be.
Q4 is coming out pretty much where we were hoping Q4 was going to come out.
So I'm not sure where your numbers are versus kind of what our numbers are but it is pretty much right in line, we're still assuming.
Supply chain is getting better but it is not.
We're talking about the overall environment there are specific things that are still.
Difficult and we're assuming that that difficulty doesn't cure itself.
This quarter.
I mean really my comments are really kind of as we move going forward I do absolutely think that by the half of next year.
Most of those issues will have been soft but.
The environment.
Though the number of parts is less the criticality of the individual parts is as high as it's ever been.
So we're really expecting an environment, that's very similar to what we saw in Q3, which was very similar to Q2.
But I don't know what the disappointment is on.
From your numbers, because like I said, we're pretty much right, where we expected to be.
Okay.
I bet.
Can you maybe discuss a little bit about what you're seeing between the tier one and tier.
Tier two tier three.
In North America, I suspect, even if we take the all the comments that <unk>.
It relates to pricing, primarily tier ones, one of which is not to your customer.
I still think that tier two tier three capex outlook is really solid. So maybe can you just talk a little bit about what you are seeing between the tier one the dynamic between the tier one tier two tier three.
The U S and also in EMEA.
Yes, really no change in EMEA.
Just broadly speaking theres really no.
Theres been no change at all in the U S I'm not familiar with.
The tier one that Paul mentioned as far as what they are.
Okay explicit activity is because we don't really sell to that customer or.
Our other tier one here in the U S and <unk>.
Not just that but excluding the MSR space.
It really hasnt.
Slow down at all so.
In fact, our tier one in the U S. We had just started ramping we've got in.
Orders on top of that initial ramp they've updated their forecast for next year. So I haven't seen any any slowdown there. If you go down to the kind of the next tier down you always see in that space towards the end of the year movements in capital this way or that way, depending on where they are in their program. So I don't see anything thats.
Systemic there I have some customers that are doing more ads.
Other customers.
That are doing less but in aggregate.
No material change from what we normally say and all of this by the way.
I still have backlog that everybody is asking me to ship so.
It really isn't that impactful over the near term.
The longer term, we worried about the recession as much as everybody else does.
So we think a lot of the momentum here Theres tears, that's is that a recession would impact.
The government spending piece seems to be very very solid the kind of larger carrier initiative piece seems to be very very solid.
Most of these people.
Their definition of success is how they how quickly they deploy broadband and the take rates seem to be going.
Way above expectations.
Tier three no no real change in the tier three space either so.
I am not saying that there arent pockets I don't know if these pockets are because changes in capital long term capital spend or because of kind of nearer term.
Capital forecasting and.
Where they are with budgets.
But in general the environment Hasnt changed I will tell you I worried like everybody else about what.
With a longer recession would do.
To the macro economy, and then into the vertical that we play in but right now I haven't seen it.
One last follow up if I may.
So if you look at 2023, you still have the significant stimulus funded that are yet to flow our Dawson Creek laying the cable msos are beginning their DOCSIS four <unk> dot or upgrade cycle. So how are you thinking about.
Calendar quantity I know youre mindful of the recession, but shouldn't your especially your tier two tier three tier four customer segments and the people segments it really be more resilient.
In the face of macroeconomic.
Yes, I mean, if you think about how recession impact these things.
First of all broadband is.
Pretty much up there close to electricity I don't mean to be.
Overstating that and I don't mean to offend anybody, but it's pretty much a requirement.
So.
I think it's a very resilient resilient piece I think.
I think.
There are pieces, where you have.
Companies that are themselves.
Bidding on capital markets in order for funding those are the ones that you have to watch out for I think enterprise spending you tend to see a downtick in enterprise spending.
And you have these type of.
Problems, but.
The longer term impact to capital budgets on the carrier side.
They tend to take a long time to come to fruition. So I think the depth of the recession is important if those of you that don't remember.
Kind of the last recession was when we during the financial crisis or at least the last one that really kicks into my head and the companies. The company was very resilient during that period of time.
And.
I don't expect to change here I think we'll just have to watch it.
<unk> is really the <unk>.
Thing that I would worry about.
But right now we don't see it.
I appreciate the answers thank you.
Okay.
Your next question is from Michael Genovese.
With Rosenblatt Securities. Your line is open.
Great. Thanks, a lot.
Have you given or can you give.
The total adds.
Revenue that was recognized in the quarter.
Yes, we can.
I'll just I'll just give you.
Percentage of the total so far the total quarter revenue AD trend was 52% and admin was 48%.
Okay great.
Perfect.
Now is this.
Is the ownership structure pretty set I mean AD was going to continue to have a separate conference call every quarter Andy.
Income attributable to <unk>.
Yes.
Non address not non AD trend shareholders is going to stay about the same percentage or will that change going forward.
I think I mentioned the details of the damage and the detailed timing, yes I can.
So Mike there is there is a plan to work our way to a domination agreement and I think you might've seen some of the releases that came out with that it needs to be.
<unk> that the shareholder meeting of ads, which is now scheduled for the 13th of November after that agreement. There is other things that we will be able to do to move the profits.
Way from the advil entity and Oliver toward the AD trend entities. They will continue to have a conference call as long as they're traded at some point in the future there would be a delisting offer and we would actually D list those shares but that kind of goes back to the same question.
Paul asked earlier about our plan is actually to to buy out the rest of those shares and then that would be a wholly owned subsidiary of AD trend in the longer term.
Okay great.
So <unk> been asked so I'm going to ask again about the macro risks continue to sort of add was European.
Metro and sort of enterprise optical revenues I think you've answered that.
Pretty clearly in pretty pretty bullishly, I would say.
But it looks like overall.
Out there.
The supply chain that optical does seem to be the most supply constrained I mean, thats, the message from Nokia and and and others, who play in multiple areas that some of these analog parts specifically needed for optical are the most supply constrained does that.
What you're seeing.
I mean, the performance there looks pretty good. So do you have any insight in how they're managing that maybe better than some of the larger companies in the optical networking space.
I would say in general.
And it is managing it better than some of the other players in the optical space.
They say they still have.
They still have issues.
The majority of the issues.
That.
I see and I think we see collectively are not specific to optical I think there.
First of all there are there are still these issues associated with.
Power supply.
Analog devices that aren't specific to the optical space and then there are kind of key processors. They have some key processors and we have some key processors, which are still at my biggest issue. This quarter. It has typically been.
Kind of glue logic I now have some very specific processor issues and they have some very specific process processor issues that they're working through this quarter. So.
I don't think that the issues on the AD side or.
And a deeper materially different.
And the issues that we're seeing on the <unk> side.
And in the in the combined company is still.
Factoring in our gross margins.
In the past.
Tried to lay out the impact on our gross margins and although it is improving.
Moving somewhat it was still nearly three five percentage points and that was due.
You too.
Purchase price variation expedite fees and freight costs that have been elevated now the bright spots. So far is that freight is finally moving in the right direction, but the other ones there are still.
Pretty good amount of flow through of additional cost that we're paying to be able to obtain those components in the timeframe that they are needed.
Great I appreciate the color thanks, very much alright.
Right.
Your next question is from the line of Ryan Koontz with Needham and company. Your line is open.
Thanks for the question.
Wanted to ask about your different product areas. It sounds like Tom from your remarks that subscriber solutions is the one maybe outperformed where the upside came from us and is that more demand related or is it kind of alleviating the supply chain.
Instructions can be.
Any commentary on kind of puts and takes in the quarter and kind of you think about the product.
Forward would be helpful I think.
I don't have my notes in front of me, but I think I mentioned on last quarter that we.
We saw that the subscriber solutions was.
Probably the area, where we had the most work to do we needed to get the stuff to ship and moving to <unk>.
<unk> had more focus into that area to make sure.
Once customers get a network employed it's really important for them to be actually turn customers on to that network.
For obvious reasons, so we really focused on that and saw really good movement. There this quarter. So.
That was.
I think by far the biggest.
Kind of year over year increase for the company and we've always had we've had plenty of backlog in that area for a long time. So it was a matter of less than.
The demand still seems to still strong, but it was a matter of us kind of clearing out some of that backlog in and moving that.
Number in the right direction to help customers.
I would call it more of a product called and then anything.
Significantly shifting in this space.
Got it and are you seeing any help on the kind of share side, where.
You may be able to execute a little better than some of your peers and able to take share in any cases in this case.
Able to ship.
Yeah, but the share is really the way it.
It has been happening maybe a little bit different in Europe , but in general the way to that sure happens does that share is kind of given to you as you win the <unk> business.
So as you win the infrastructure piece than most times theyre going to move forward with <unk> and many times if not most times your <unk> as well.
So this was kind of share that we have been winning and it's just a matter of us being able to monetize that sure.
Yes.
Got it Super helpful and just a quick clarification on Jim's comment earlier about some early about 350 basis points impact in the quarter from supply chain Expedites and such that would hurt.
That's correct.
Great. That's all I had thanks, so much alright alright.
Your next.
Question is from the line of Paul <unk> with William K Woodruff and company. Your line is open.
Okay. Thank you for taking my question.
I wanted to talk a little bit about <unk> competitive position.
I know that they've concentrated their focus on from the core to the edge, where some of the larger players have not put as much resources in that area, mostly concentrating on the long haul.
Wondering how this is going to affect AD was competitive position down in that space for basically the core to the edge.
Even though spending and also how does the encryption and security.
Expertise fit into this first of all and then secondly, maybe I know you touched on it Tom maybe you can give us a little bit more color on this 100, ZR that youre jointly developed and what that might mean for revenues.
Going into 'twenty, three 'twenty, four and also who the customers that you may be selling to and also if you could touch a little bit about the excess weight as well and I had a follow up.
Okay.
That's a bunch of questions all right. So let me.
I'll cover the <unk> piece first.
So <unk> actually sense for ads.
What was it Mike.
Sure.
Network secured debt ever network security so.
When we went.
When we.
Combined the companies we of course had to have government approval from both.
From several different countries.
And.
And this was.
A piece of that negotiation with the German government in order to make sure that.
The technology that is being used by.
Various entities within the German government remained.
At the right security level for them to be able to continue to use that.
The technology Thats coming out of that group is something that can be used.
By the entire company.
Though.
There is still a pause.
A real wall between what's done four different countries not unlimited what happens here in the U S by the way.
This was a means for us to be able to continue that development continue chairman, which is Germany, which is an important customer.
And actually allow us to get to another level of security within the government to actually enhance sale. So over time, we think it's a very.
It's a very good move it's a very profitable move as well.
Really have differentiated security in that vein. So this was just it.
It is part of the merger it was something that I think what's going to happen anyway, because I think it made sense for <unk>.
But it kind of opened up the different revenue streams and different technology streams that we wouldn't.
Have had in the past in relation to how these things.
Hello, and what adverse focus has been yes, I tend to think of them as last mile or metro edge is kind of where they are kind of hotspot is in relation to optical.
The reason they were a good fit for us is.
That's exactly where our customer base is looking at augmenting at this point at this point.
Their network as they kind of finish out these.
Last mile networks that they are building I shouldn't say finish out because we're a long ways to go but as they increase their capacity requirements of those last mile networks, they need to be able to aggregate and efficiently.
Transport that traffic, so thats kind of where their sweet spot was and we're already seeing.
Cross selling opportunities across both companies where they are.
<unk> they have a very good product a very competitive product.
And.
We feel good about where that's at.
Mike you get the information on the 100 CR, yes.
Pat product actually is commercially available in the next few years. So I really can't tell you what the revenues are at this point, but it will it will fit in for service providers as well as Msos is the market that it's targeted toward that will have.
More information to come on that has it's released.
Okay.
The other follow up question again is on the SaaS subscribers is there anything that you can share with US I think you were at $1 3 million for something like that at the end of June can you talk to that at all and give us a little flavor for how thats going maybe some hard numbers.
Well you can think about SaaS subscribers, let me, let me put it in a way that we actually have the numbers for so you can think about SaaS subscribers as a fallout too.
As carriers right.
And our SaaS carrier growth was up 31%.
Year over year, this quarter and thats been about the rate that it has been.
King along at.
SaaS customer growth will typically outpace SaaS carrier growth because in fact, it will outpace right because you have new cost carriers coming online plus you have the older carriers being more mature and adding more.
Subscribers to their network.
Okay, Yeah, I was trying to focus on the actual number.
That your customers have signed up.
Scriber.
Have anything available on that just the actual paying customers.
I mean.
I don't have the growth rate on that number Mike I know, it's it's well in excess of the <unk> you mentioned before and I had mentioned before it's over.
$101 2 million and actually it's closer to $2 million at this point, but I don't know if I have that I don't have that number in front of me.
Okay.
Thank you very much.
Alright, thanks very much.
Your next question is from the line of Tim <unk> with Northland Capital markets. Your line is open.
Yes.
Hey, good afternoon, I want to make sure I get this one in there which is if we can address kind of where you expect the tax rate to go over time and kind of bouncing around but thats not my main question, but I want to make sure I don't forget it.
Where I did want to focus is on the kind of add train organic front.
As has been discussed before it looks like the subscriber.
Driving the growth you actually saw access and aggregation down a bit both sequential and year over year.
I'm wondering if you could address dynamics there for the quarter.
And then as you look at the guide it looks like organically you are guiding down a bit.
Sequentially from an AD trend perspective is that just really normalizing that supply catch up on the subscriber side or how.
How do you expect things to breakdown between you know do you expect any growth on the <unk>.
The access and aggregation side and now in Q4.
Let's start with the tax go ahead.
And then we can move to the other piece. So you are right our tax rate has bounced around a lot as we've gone through the quarters. This year and you saw the 42% effective rate there on a non-GAAP basis in Q3.
I would expect that going forward that for the year.
Meaning that it's probably going to be about in the high teens, which is a little lower than what we had said previously so probably high teens somewhere sub 20, but to get to that rate for the year I think for Q4, we will still have an elevated <unk>.
Right that will be something similar to what we saw in Q3.
So if you look at the total year and adjust that out.
End up with something Thats, probably also in the low <unk> again.
And then as moving into the next years I think here.
You are a lot better off to try to model it somewhere.
Just under 20%.
In relation to the guidance I mean, the guidance is basically flat.
<unk>.
Which is.
As you probably know if you follow us typically we see it down.
Q4, so like I said, it's pretty much in line with what we expected it to be.
In relation to aggregation.
We have a lot of irons in the fire there we have backlog that would allow us to.
It's actually materially grow that number from this space. We're also trying to still get a lot of.
CPE out the door a lot of the subscriber solutions pieces out the door and then we really have a ramp up of the $63 30, which is kind of a critical wrap up for us which should start at the end of the quarter.
So I mean, we have a lot of different ways to get there, but I can't tell you explicitly what that aggregation numbers kind of looks like at this point.
Okay.
Okay. Thank you.
Okay.
Your next question comes from Paul Silverstein with Cowen Your line is open.
Paul Thanks for the question.
Quite a few helpful. Tom.
Okay.
Three questions if I might add.
Im joined back to macro concerns avid correct me if I'm wrong historically, they've gone derived about 30% I think.
The revenue from enterprise with the bulk of that I believe being in Europe , consistent with them being headquartered in Europe , and having done a good job in Europe historically.
One would think that European enterprise would be most at risk from macro again it doesn't it sounded from your guidance, but I got to ask any signs of weakness and then I've got three quick questions.
Now a lot of that is kind of their Ethernet product.
<unk>.
<unk>.
Just no the answer is no.
From any way you look at it I wont tell you that it won't be impacted but I will tell you we haven't seen that impact yet.
Alright.
Back to.
Mike going back to the mosaic SaaS number you gave for the SaaS number that was number of carriers was that the 31% year over year increase youre referencing in your service provider customers that are adopting.
Okay.
Yes, correct.
And break in Hoffmaster subscribers.
I mean, we can do that we just haven't done that.
Right and I assume also by extension of that.
If we spoke in terms of revenue you can share with us.
I assume the number is very small.
If I look at my software and service number which includes contracts associated with software and maintenance.
That number is getting to be.
The growth rate has been solid for the last two years, but.
I don't think its going to be too far to where we actually start just breaking those numbers out. So you can see them.
As I'm looking for stability and I'm looking for longer term.
The key.
As I want to be confident about the growth rate and kind of where we are with that product line before I start.
And making sure that.
<unk>.
We're in a mature place there and I don't think we're quite there yet.
Yes.
Tom I apologize if you said this in the past over $10 billion are well less than $10 million.
In the quarter at $1.
Sumit.
Yes, it's over it.
Yes.
Software and SaaS number.
Hi.
But it is over $10 million, but that is not.
Just SaaS that includes software as a whole software category.
Software and software and says it over 10 million yes.
Alright.
I'll move on my last question.
Mike on the gross margin progression.
<unk> seen a more significant recovery than most but you also you were also on the more severe in.
In terms of the impact of supply chain judicial impacting getting hit.
My question to you is.
Looking forward any thoughts on how far how fast you can get back to the look forward is from once you came in I understand now that was added in the mix with their margin structure. If I remember on a like for like base design using U S. non-GAAP .
It was actually a little bit better I think than your margin structure, one last point in connection with the questions correctly.
Correct me, if I'm wrong, but subscriber solutions has got a lot of different products, including software in there, but I assume the dominant revenue is from your relatively lower margin. We're absolutely low margin Owens <unk> platforms that you referred to as being a big part of the year over year growth.
Which is counterintuitive given the nice rebound you saw.
I guess another way stated as you put up strong growth through strong carbon gross margin notwithstanding what I would think would be the negative the drag effect of that big increase in <unk> revenue, which is encouraging all things being equal, but any insight you could sure Michael what happened in the quarter.
More importantly, let me take the first let me let me take the first step of that which is on the second part of your question first of all that is.
Fairly insightful, yes, we did ship a lot more CPE on purpose and yet.
We were able to come up with pretty decent gross margins on what is typically a very low gross margin mix I will tell you that has been absolutely helped by the software sales associated with that piece.
Which was impactful and then there's a secondary help which is some of the functionality, including things like 10 gig are also helpful.
But in general.
It was it was a pretty good quarter from a gross margin perspective for subscriber solutions, Mike I don't know if you want to cover the first part yes. So Paul some of it was mix, but you heard me say that there is about $3 five percentage points of still headwinds I think one I reported last quarter, how does that about four points.
If I recall, our $4 seven so it's definitely moving in the right direction. The biggest improvements so far has been in freight and logistics where rates are starting to fall and things are starting to free up as far as paying extra fees to be able to get components.
You heard Tom say, there are fewer issues, but there is still some big issues that all have to be resolved and work. So I think overall, that's moving in the right direction, we're seeing fewer and fewer of the broker buys and excessive payments to be able to get components now some of that is still on the balance sheet.
So it will for ones that we may have purchased in prior quarters at higher costs that will bleed off over time as we go but I think you saw a pretty good improvement in the quarter moving in the right direction, we do have a different headwind, but we've had for some amount of time and Thats just the.
The FX issues that are out there with the euro and the pound Sterling when you roll those back to dollars and if you. If you tried to just look at that over the last quarter and say what was the effect on gross margin on that one it's almost two.
Tonnage points, maybe a little bit less than that so I think that one has somewhat stabilized at this point, but I think over the last quarters, we've seen that whole flow on the downward trend with the dollar strengthening as well. So I think we're just we're just learning how to manage it all better.
As we go.
Mike I know you didn't give guidance for gross margin, but any thoughts given all those puts and takes so any thoughts on what type of gross margin you could generate in Q4.
I think it may be just a bit stronger sequentially.
I'm not expecting much and think about it kind of in the same range of where we are right now.
Very close.
Great.
Yes, I think your question was when do we get back to back to <unk> I think I'm pretty confident as we go through next year, we will continue to move in that direction in some time in 2023, barring any kind of other craziness that happens we should we should be we should have some.
Mix improvement, even though <unk> is.
It was pretty good its still not the same as well.
What we get on the access and aggregation sites.
Alright anything.
Paul.
Tom just to be clear <unk> to my statement, you expect to get back to the low forty's at some point in 'twenty three.
I think you said improvements I'll, let Mike answer that yes, I think fortyish or slightly above.
I mean some of this.
Unknown with what happens to the supply chain, but.
But we're definitely heading in the right direction.
Alright, guys I appreciate it. Thank you okay. Okay. At this point I see we are past time. So I appreciate everybody joining us for our conference call. This quarter and we look forward to talking to you next time bye bye.
Ladies and gentlemen, thank you for participating. This concludes today's conference call you may now disconnect.
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