Q1 2023 ADTRAN Holdings Inc Earnings Call
Following my opening remarks, <unk> will review the quarterly financial performance in detail and then we'll take any questions that you may have.
I will start by offering a high level summary of what happened in the quarter and our views of the market going forward.
As I mentioned in our pre release the results of the quarter were impacted by slowing revenue predominantly in our subscriber solutions category.
While we did have more than enough backlog to cover this gap supply chain constraints hindered our ability to overcome these challenges.
During the quarter.
We believe the slowdown in subscriber solutions was the result of increased scrutiny of inventory levels with our customers driven by a combination of reduced lead times in the market.
And uncertainty in the broader economic environment.
Looking ahead, while we do expect tighter inventory management to continue to impact impact us in the near term or longer term growth outlook remains unchanged given the historically high demand for fiber networks or.
Our diversified customer base and the progress we have made with foot fiber footprint capture.
With that background, let me provide some additional context.
<unk> is both a comprehensive fiber network portfolio built upon three key pillars optical network solutions access and aggregation solutions and subscriber solutions.
Each of these categories are ultimately tied to the build out of fiber networks, which continue to have a positive outlook given the investments planned in fiber networks in the years ahead.
In addition to market growth trends. We are also benefiting from cross portfolio synergies as we integrate our teams and processes and are better positioned to cross sell our larger fiber portfolio.
In the optical networking solutions, we have had back to back record quarters, and we experienced growth across all regions in this past quarter.
Our strongest region for this portfolio has been Europe with the strength of the combined company. We have been the biggest beneficiary of share shift away from high risk vendors.
Vendor selection activities in the Metro optical space remain at their highest levels in many years highlighted by our involvement in eight large carry opportunities right now.
And our access and aggregation solutions, we continue to see good progress in wrapping our large carrier customers in Europe , while also being well positioned in six new large carrier investments selections in that area.
Like the optical transport segment. This elevated vendor selection activity is accelerated by the shift away from high risk vendors and that trend continues to be a key beneficiary in this market shift.
Okay.
Within our existing fiber large fiber access customers in Europe . There has been some notable theres been one notable customer that was publicized to have capex reductions.
In their current plans with continued collaboration with its customers and others.
In this region, we are assured that their long term fiber deployment plans remain in place and in some cases, we've actually seen an acceleration in these plants into this year.
Reinforcing this long term strength in fiber network investments.
That we see going on in Europe .
In the U S market, we had 47% quarter over quarter growth with our fiber access platforms driven by success in the regional service provider market <unk>.
Reinforcing our continued growth and capturing new fiber footprint.
We now have over 600 operators globally deploying our fiber access platforms, including 11, new operators that we added this quarter.
On the subscriber solutions category, we did experienced high volatility high volatility during the past quarter.
However, as we capture new fiber footprint and more customers upgrade to 10 gig fiber access networks and multi gig Wi Fi networks, and we expect to see this category returned to higher growth.
The same is true for business and wholesale services that continue to shift to higher speed fiber services.
This fiber network and portfolio spanning the metro core to the customer premises is complemented by a comprehensive software and services offering that simplifies engineering deployment and ongoing operations associated with these fiber networks.
On the software side, we see continued demand for SaaS applications with over 200 service providers are already adopting our mosaic one offering up from 150 customers at the end of last quarter.
In summary, the long term demand for fiber networks has not changed despite near term inventory adjustments and economic uncertainties.
Our progress in capturing new for fit for our optical infrastructure platforms, including both optical transport and fiber access as well as has us well positioned to benefit from the long term investment in infrastructure software and services to support these fiber networks.
Our ability to grow our customer base and cross sell our combined portfolio will continue to improve as we further integrate our sales teams and processes.
While we remain confident in the long term outlook, we will be cautious in our spending as we divest this period of uncertainty in the market.
We are on track with our previously stated synergy goals and we expect to see meaningful improvements in our operational expenses. This court this quarter as compared to last.
Before I hand things over to Julie I'd like to thank my colleague Arno.
Mike as all of you many of you on the call knows that our CFO for several years and has been with the company for 17 years with.
With airtran.
Mike has been a very very dedicated very professional just a fantastic team mate.
And I'm really extremely grateful for Mike for all the years of service that he contributed and I wish him all the best.
As we move forward into his new life.
We of course transition that well, we are transitioning that ROE from Mike too early and with that I'm going to turn things over to Hulu.
Go over the financials after that we'll open up for any calls you may have.
Thank you, Tom and Hello, everybody.
I will cover our first quarter 2023 final results and provide our expectations for the second quarter of 2023.
Please note that Q1 2023 results include a full quarter consolidation of the <unk> finances, which affect year over year comparisons.
Since this is the case I will refrain from repeating the consolidation effects when discussing the year over year comparisons of our results.
I will be referencing non-GAAP information with reconciliations to the most directly comparable to GAAP financial measures presented in our press release and also certain revenue information by segment and category, which is available on our Investor relations webpage at investors <unk> com.
In addition, we have updated the investor presentation to the site, which is available for download.
Unless stated otherwise all financials are presented in U S dollars.
Let's move to the revenues.
Q1, 2023 revenue came in at $323 9 million up 109, 6% year over year and down nine 6% quarter over quarter.
As already presented in our pre announcement.
The lower end of our guidance range of 355 to 300.
$75 million by eight 8%.
Our network solutions segment accounted for 87, 2% of revenues in Q1 2023 compared to 89, 6% in Q1, 2022 and 89, 4% in Q4 2022.
Our services and support segment contributed 12, 8% of revenues in Q1 2023, compared to 10, 4% in the year ago quarter, and 10, 6% in the previous quarter.
Year over year and quarter over quarter revenue decline was primarily driven by inventory management and our customer inventory for <unk> and Ethernet knits in subs in the subscriber solutions category.
While this category was up 39, 9% year over year, it was down 34, 1% quarter over quarter.
Yeah.
Supply constraints also limited our flexibility to clear past due backlog across all product categories.
However, optical networking and access and aggregation performed as expected uptick.
Optical networking solutions category contributed 45, 6% of revenue and was up three 9% quarter over quarter.
Access and aggregation revenue share was 29, 9% and was slightly down 1% year over year and increased by one 1% compared to Q4 2022.
Yes.
On a regional basis for.
For year over year first quarter domestic revenue grew by 32, 7% International revenue increased by 246, 9%.
International revenue made up 59, 4% of our revenue and domestic revenue contributed 46% of Q1 2023 revenues similar to Q4 2022.
We had 210% or more revenue customers in Q1.
Q1, non-GAAP gross margin was 37, 3% and increased by 200 basis points year over year and decreased 180 basis points sequentially.
The year over year increase is due to improved purchasing and transportation costs.
Quarter over quarter decline in gross margin was primarily attributable to an increase of our inventory reserves as well as lower absorption credit compared to the previous quarter.
In addition, an unfavorable customer and product mix contributed negatively to our gross margins.
Okay.
Our non-GAAP operating expenses were $125 9 million, increasing by 137% year over year, and 6% quarter over quarter, which were primarily primarily driven by increased labor costs and higher R&D expenses.
non-GAAP operating expenses were 39% of revenues compared to 34% of revenue in Q1, 2022, and 33% of revenue in Q4 2022.
non-GAAP operating loss, both $5 2 million, which translates into a non-GAAP operating margin of negative one 6% compared to positive 1% in Q1, 2022 and 6% in the previous quarter.
The decrease in profitability was driven by the low revenue volume at lower margins and an increased cost base.
Let me emphasize that we are striving to significantly lower our cost base in the near term to adjust for the lower than expected revenues by accelerating our synergy efforts in optimizing discretionary spending.
Okay.
non-GAAP other expenses was negative $3 3 million, mainly driven by higher interest expense.
Yeah.
The company's non-GAAP tax provision for the first quarter of 2023 was $1 million or 12%. The company's GAAP tax was a benefit of $11 3 million or 22%.
The difference between the GAAP and non-GAAP rate was primarily driven by the two fictional mix of the non-GAAP adjustments during the quarter.
Closing out our income statement results total non-GAAP net loss was $9 5 million and a net loss of $5 million after adjusting for minority shareholder interest in Atlanta.
This resulted in diluted loss per share attributable to the company of <unk> <unk> per share.
I will discuss the details of the EPS calculation later in this call.
Let's move to the balance sheet.
Okay.
Turning to the balance sheet and cash flow statement cash and cash equivalents totaled $136 5 million at quarter end for the fourth quarter operating cash flow for the quarter operating cash flow was negative $19 9 million due to lower earnings and increased working capital.
Trade accounts receivables were 262 million at quarter end, resulting in DSO of 73 days compared to 72 days in the prior quarter.
<unk> $416 3 million at the end of the first quarter, resulting in turns of two 2% compared to $2 four in Q4 2022.
Okay.
Accounts payables were $198 6 million, resulting in <unk> of <unk> 69, compared to <unk> 80 in the previous quarter.
Q4, 2022 was an unusually backend loaded back end loaded quarter, which resulted in higher trade accounts payable and explains the drop in <unk> in Q1.
Okay.
Working capital management and free cash flow generation is one of our focus areas during 2023.
We expect that we will continue to carry a high amount of inventory in 2023, which should improve during the second half of the year.
Paired with improvements in operating results and strict cost control as we expect free cash flow to turnaround in 2023.
Okay.
Following the <unk> registration in January 2023.
<unk> and <unk> can now fully integrate and work on utilization of revenue and cost synergies.
As of today <unk> owned 65, 4% of adverse shares, which we sites into outstanding Alpha minority shares of $18 million.
After a minority shareholder still have the option to tender their shares for a cash compensation of $17 21 Euro.
Or to receive 59 euro cents fixed annually annually recurring compensation payment from Aaron for the duration of the DPA.
As of today 62435 shares were tendered.
On April 18 at applied for a segment changed from prime to generative standard to reduce complexity and cost.
Our focus is on successful integration of both companies combined with achieving our cost targets.
The increase of operational efficiency and as a result free cash flow generation.
A potential <unk> offer is not a priority for 2023.
Since the DPA Teva with registered on January 16, the accounting treatment of minority shareholder for Q1 is a combination of the previously applied method or percentage of adverse loss of profit for the time prior to the <unk> plus the recurring cash compensation of $2.
$8 million.
In Q2, 2023 and beyond only the recurring cash compensation of approximately $2 $8 million will be applied.
Quick update on synergies.
We remain committed to realize cost synergies of $52 million as already communicated previously.
Of which we expect to materialize approximately 40% in 2023% and 60% in 2024.
30% of cost synergies can be allocated to cost of revenue sold and referred to synergies in purchasing and logistics.
2023 cost synergies were already identified and we are on track to achieve them during the year.
Further $31 2 million cost synergies are expected to be achieved in 2023.
Now to the guidance.
Looking ahead to the second quarter of this year.
The ability of component suppliers to align with customer the customer demand.
The book shipped nature of a large portion of our business.
The timing of revenue associated with large projects.
The variability of ordering patents from our customer base as well as the fluctuation in currency exchange rates and any additional required purchase accounting adjustments related to the business combination may cause material differences between our expectations and the actual results.
We continue to focus on the supply side optimize our cost base and our merchant integration.
We anticipate further improvements in our semiconductor supply chain and expect our backlog to moderate and to decrease inventories over the next few quarters.
We will continue to focus on cost management and operational efficiencies, while investing in key areas to drive growth.
As Tom already stated, we believe that the inventory reductions that we experienced with our customers and across the industry is transitory and we expect to see some improvements to both the oversupply of CPE products enter backlog of products across all categories in the coming quarters.
The fundamental growth catalyst remain intact, and we remain confident to be ideally positioned for sustainable growth due.
Due to the ongoing demand to upgrade and deploy new fiber networks.
While we are confident in regards to our long term outlook, we remain cautious in the near term due to tighter inventory management of our customers.
Consequently, we guide for a second quarter 2023 revenues to range between 325 and $335 million.
And we expect our non-GAAP operating margin of between one and 2% of revenues.
Once again additional financial information is available at <unk> Investor Relations webpage at Investor <unk> Com.
And with that thank you and novel turn over back to Tom and we will take your questions.
Alright, Thanks Julien.
Rob with that we're ready to open up for questions.
Certainly at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
And your first question comes from the line of Michael Genovese from Rosenblatt Securities. Your line is open.
Alright, great. Thanks, Thanks for that.
Tom.
Yes.
<unk>.
So in terms of the business of infrastructure and broadband infrastructure in optical.
<unk> came in good so I'm just trying to understand.
Forward looking commentary in in those businesses I know I.
I think Adam this morning guided to high single digit revenue to low double digit revenue growth for 2023.
So could you talk I guess give us color on that end, but on the broadband infrastructure portion.
What youre seeing the error in the U S.
And in the year.
Europe , and maybe expand on some of those comments you made earlier about the macro event specific carriers. Please.
Yeah sure so.
So youre right as far as.
Infrastructure business had a good quarter.
The trepidation that we have.
Is the fact that.
It's not very clear where inventory pockets are so I think theres two things going on.
Better.
Kind of creating that and that.
That nervousness.
One is as people are bringing their inventory levels down so they have been buying inventory at our trying to effectively stockpile inventory during the.
Supply chain crisis.
In certain areas they start they stockpiled more inventory than others. So.
On CP, if you think about how our network has built the one thing you don't want and we've I've talked myself to tens of different carriers.
And as a company, we've talked probably to 50 or 60 different customers and in general.
One thing that ran through as you did not want to not have.
CPE year, because that was the area that.
You actually start generating revenue at so you can always forego other things, but that's one piece you don't want to forego so that inventory built out buildup was.
Various levels of different carriers, but in general everybody was building inventory so.
That was the one that was the most exacerbated.
The thing that we're also being cautious of though is that although there may not be large inventory builds and other areas of the business people are going to readjust to the current lead times, which are down materially from where they were six months ago.
So lead times used to be 52 weeks. They are probably closer to three to US give me, maybe four months ish or something like that so not only do you have more inventory on your shelves, but you're ordering will also now reflect that lower lead time, so trying to figure out how much inventory in the field.
How much do they have to burn through.
Then.
And then adjusting for that impact as they actually when that inventory off.
Just.
It gets us to a position to or we just need to be cautious going through this and plan with that cautious mindset and if it burns off quicker, we're fine right I mean, no no problem, but we just need to make sure that we actually.
Managing the company.
Sure.
A an environment that is a little bit right now murky because of that inventory situation.
Underlying demand really not nothing has lightened up I would say and in fact, we were talking.
Over the last week or so about the activity going on.
In Europe right now in both fiber access and optical transport.
It just has not slowed down and in fact, it's probably as I think I'm missing my notes that in optical transport is the highest we've seen.
And a very very long time, maybe 10 years or more so really when there was the last big upgrade cycle activity Hasnt.
The slowdown in none of the plans of the major carriers have slowed down.
So and I mentioned in my note have there has been some acceleration in some of them most.
Most specifically in Europe , so that hasnt changed a bit the U S. There are a couple of pockets, where you have people that are slowing down tier threes still had a good quarter, they still seem to be going well and.
In the U S. It's more about.
Inventory adjustment as well.
I'd say there is similar although I would say.
The thing going on in Europe seems to have been less impacted than what we saw in the U S.
I don't know if I answered your question or not Michael I hope so.
Actually you hit on every point and that was essentially the answer so I appreciate that but I do want to follow up and then I want to ask one more question on the.
The follow up is.
On the piece of inventory that you really came to your attention this quarter on the CPE and the channel.
We're at that.
At the customers as well.
I think there was some commentary on the call that you really don't expect that.
That to get very much worse, it sounds like it may be impacting part of this quarter, but you.
You don't expect that but my question is.
It's safer Wi Fi routers lead times already went from 30 weeks to 16 weeks I'm just roughly I hope those are in the ballpark.
Could they go down again, two eight or so.
Could there be more to go in that inventory. It seems like you are more worried about other inventory you might not know about and less worried about the CPE now is that that's fair. That's fair that's fair I mean, we think that the.
Yes.
We've kind of we've we've checked the inventory levels I think at the revenue projections that we have right now we actually right now our outlook is getting beyond what our typical guidance it would be but our outlook is for our subscribers to actually tick up slightly this quarter and thats because theres. So many different variants and some people have some and some people don't.
Others, but yes.
Yes.
That's.
We think we that's kind of that bubble is kind of.
We've gotten the biggest piece of that bubble. It will take some time for it to play out until it gets back to last year levels.
And we're kind of projecting that to take over the next six to nine months before it gets back to that level. So we will see improvement and we think we're at the end of that that we hit the big pocket this quarter.
So I hope that answers, okay, great great and then at this revenue level.
Margins are very good.
But the supply we see lead times clearly supply is getting better and we expect some of these expenses excess expenses to go away. So.
We see from where gross margins are right now.
Meaningful improvement in the back half of the year, both because of revenue but.
Lower.
Supply chain expenses, yes.
Yeah, Let me, let me not really.
Touch on the supply chain expenses, obviously are going down as we speak we've seen it in the first quarter and.
I assume that this will continue to drop and then of course, it's a matter of economies of scale and also product and customer mix, but yes to answer your question. We assume increased gross margins in the second half of the year.
Perfect. Thank you.
Thanks.
Your next question comes from the line of George Notter from Jefferies. Your line is open.
Hi, guys. Thanks, very much I guess I wanted to just.
You ask about.
You mentioned that the fiber access business had a strong quarter.
The optical business had a strong quarter I mean could you just give us a sense for where lead times are on those products right now.
Where were they say in the summer of last year.
Then do you think there is some possibility of excess inventory build in those areas of the business as well.
Yes, I think there is some possibility.
So let me start with lead times, our lead times.
<unk> tended to have the most.
Difficult chips situations, because they tend to be very complex.
<unk> that are using those typically higher price chips in.
And then in <unk>.
Some cases, where you are buying.
Optical sub assemblies those lead times also extended out as well so.
And in General you can say 52 weeks and so the thing thats kind of a little bit harder to figure out is.
Okay fit at 52 weeks.
This cycle less at over 52 weeks. So we were forecasting out 52 weeks, we were still getting delays in that and I'm just talking about let's say a year ago or even a year ago, let's say second half of the second quarter of last year.
Yeah, So 52 weeks plus I guess you could say.
But we were forecasting out 52 weeks and we're replacing orders in some cases for 52 weeks ahead. So you would think that would start getting better and that's really kind of the benefit that we're seeing right now in some of these complex chips that is.
He is getting better and those lead times are coming down one one because of orders that we placed in two because lead times in general are diminishing we still have this issue.
There are a few chips that still hold up things.
But I would say thats materially better today than where it was even this time last quarter. So that is.
That's just getting better I don't did I answer your question George.
Yes, I'd just be curious about where lead your product lead times are now.
I would say for optical and then and then OLED, yes, yes, I would say there so.
We were asking for 52 weeks I think in general we were getting solid commitments out there with some customers I would say in general we're probably getting.
Six to eight months and this is just off the top of my head kind of.
Solid commitment and then some flexibility beyond that that's that's let's say six to eight month period is probably now down to two to four months.
In general there are still there are still pieces that you got to.
There are still constrained, but in general I would say it's half.
Got it Okay and then also I know you started shipping the $63 30 in.
In the last few months I'm just curious about.
How that product is doing what our early customer.
Receptivity look like for that product. Thanks.
So we have started shipping that predominantly in Europe .
Although we started shipping a few here it is still a burden to build we are still.
I mean, we're not at full production, but we are shipping.
We shipped some last quarter as well so we're not meeting demand yet, but we're getting there and majority of that is just.
Refining the evaporation process I can't stress enough, how complex or a product that is.
Got it down right now and we're continuing to improve the yield on that.
Great. Thank you.
Okay.
And your next question comes from the line of Brian <unk> from Needham <unk> Company. Your line is open.
Thanks for the question.
If you could update us on your latest view on the U S and European government subsidy programs and whether youre hearing much.
Back in terms of interest rates and kind of ROI hurdles such impacting customer programs it sounds like.
From your initial comments, Tom there is not much of that but any color you can share in that regard would be helpful. Thanks, Yes, yes, yes. So there is a list of questions that we're asking people when we go into.
And when we have these conversations about inventory and that that is one of the questions that would cover every once a while you'll hear some spotty people that would say, let's say study that you have sporadic comments of planting builds tighter and.
Tighter lead times.
So they are kind of getting the capital and then executing when they get the capital.
And then kind of shortened.
Periods for build and Thats kind of a project by project basis versus the entire plan.
I would say that that's still very sporadic in general we just haven't heard.
And impact on on.
On kind of project plans.
We do have a couple of we have one Big instance, where there is a lot of talk about capital plan, which really wasn't because of.
Capital cost it was more about capital overrun our capital expense overrun.
As I mentioned on my in my comments, we've got.
Just solid reassurance that that is not impacting our program and that that if anything they are looking to accelerated and I will say the big plans in Europe , we have a 22 million homes passed the 25 million homes passed none of those have seen theres been no waver on any of those plans.
So I would say that those have not been affected and.
In relation to the funding we have some funding and maybe I'll even.
To get a bit of color on Europe , I'll ask Christophe to comment on the funding in Europe and the U S. Those things are still on track we are getting art off money at this point.
Through some of the carriers that we have that we're expecting that the majority of the ARPA funding is still a ways off the current forecast for that is kind of <unk>.
<unk> 2425, so the art off money is where we're actually starting to see some tick up.
And demand and that will be kind of rolling through this year.
This year into next year.
Capital overrun is that more on the labor side.
Okay.
I would say.
The answer is yes, but.
Because of the multiplying effect as you deploy.
<unk> is typically the biggest thing.
Yes, but the impact is.
If you've got labor you are cutting deployment so.
The direct answer is yes.
And.
That has of course been impacted by other things Christoph any comment on the capital excuse me on the funding government funding in Europe .
Yes. So we also see going on in Europe , it's a little bit more complex to.
To say Bryan so we see it more in <unk>.
Consorts films coming into Gaza looking at underserved areas country areas and so on.
It's different.
Is Europe is more complex in different countries in different areas, but we see it going on and also hoping to accelerate but even also had so funding we see some of the bigger.
Customers, even accelerating is announcing to accelerate so that's probably about <unk>.
Got it helpful Christophe and Tom one quick follow up on.
Feedback on kind of your joint customer engagements Cross Jim Cross product in terms of some of your larger accounts yes.
Yes universally positive we are in.
One big well first of all we are and I had mentioned before that the RFP situation in Europe is gangbusters right now.
There is a piece of that that is directly related to the strength of.
Of the combined company and the perception within Europe of the combined company and I'll, even let Christoph is you want to comment on that as well, but that has been a.
Not a single negative to that and we have the earliest wins have been some cross winds here in the U S, which is kind of as expected.
Because smaller carriers tend to make decisions quicker.
I think I saw a number we have 33 that are either closed or near closing.
Majority of those are in the U S.
The.
The benefit that we see.
<unk> positioning within Rfps.
Both for existing customers and new customers actually has been very beneficial Christophe you want to give any color on that.
Yes.
We could put it in three different categories. One is what we expected basically market reach like Tom Tom just said for the Oxford products.
In America.
London market reach so those products, we didn't hit Standalone.
The other one the size it hosts with some of the bigger carriers in discussions obviously, we've seen as a bigger company better supply and so on and everything which comes with it and the next one is market reach the other way around in Europe .
A stronger let me say salesforce on the Oxford side or more distributed one in Europe , and obviously, we can push through our term products only European site.
Really helpful. Thanks, so much alright, thank you.
Your next question comes from the line of Greg <unk>.
West Park capital your line is open.
Thank you for taking my question.
I was wondering if you can give us some color on the Mosaiq, one deployments and how they're ramping and what kind of impact are they having on your.
Gross margins both in this current most.
The most recent quarter.
See that playing out later this year. Thanks.
Yes so.
<unk>.
Thanks, Mike.
Yes, so I had mentioned before.
To that.
The uptick.
Our mosaic one has been good.
Early days in that it's still taking us.
Some period of time as we fine tune the product to be able to.
Get turn up time, so it takes.
In many cases in most cases months to actually get the product installed its not just a piece of software that you download.
And so.
The uptake is right now it's not so much demand limited its Q limited and getting these customers onboard so we have.
The number I had was 200 that are right now in Q or executed.
And then they get executed in different phases.
I will tell you still it's probably.
The impact of the company is.
Nowhere near where it will be just actually if we were to monetize the number of contracts that we have today currently signed but at this point its still until we get those customers up and running and get the subscribers on boarded.
It's still a relatively small number.
Uptake has been fantastic.
We added 50 customers in the last quarter, which is a 20% 30% or something like that.
In the last quarter.
And that uptick we expect to continue if not grow.
It'll be a meaningful number or let's say a year from now I don't think it's a meaningful number now because we're still in the early onboarding phase of these customers.
Got it and just a quick follow up on the same topic.
Mosaiq Warner originally started as a U S.
Patrick the product is still there its still U S centric and that is okay. So it's not there's no plans to migrate it beyond the U S.
There are plans to migrate it beyond the U S, but theyre not plans today because.
We need to make sure that we execute well in the U S and to broaden that focus to a new customer base in and there are differences.
In many cases implementation of that.
A little more difficult so we.
We need to get our Onboarding time down as the number one thing we've got to do with rolling out some things to actually do that so it's we're kind of getting it set up here and then I think the jump over will be relatively straightforward because we will have 90% of the.
The required with.
The software features for the customer base, but right now our focus is the U S.
Thank you.
Hey.
And your next question comes from the line of Paul FC from William K, What's your company. Your line is open.
Thank you for taking my call question.
To talk about the 63 30 <unk>.
Hello.
Rollout of that is that causing any delays in some of the larger customers, particularly in Europe at this point.
Yes.
The answer is yes.
Yes, but not materially so we have another product called the $63 20, which is the precursor that to the extent people arent getting able to deploy 63 30 <unk>.
That they're deploying $63 <unk>, which is a.
Kind of a it's just a less density kind of less capable. It is what they many of them that are ongoing customers have been using for some period of time, so that host 6300 series.
As a family of products with the $63 30 kind of being at the top of that family that itself was a little bit hindered during this.
Supply chain prices that had to be redesigned two to three times, nor does it continue supply that seems to be now stable and we're able to supply that products are where they are not doing it.
The issue, where it could really hurt us is in new lab designs I mentioned that we've got it just on the access side in Europe . We've got six new large carriers that are in different phases of testing or RFP decisions.
And what we're doing is prioritizing those so.
Where we have customers that are going to thumb selection process, we're making sure that they get those units.
Okay.
Second question is are you seeing any.
Constraints and labor and trying to deploy some of the fiber out there and then also.
Some of this government money starts to roll in.
What do you expect that labor market to look like six to 12 months from now.
It's going to be it's going to be.
Tight.
It depend on how many people.
Now, that's direct and Thats kind of tied down unemployment rates.
Things so.
Where we have seen constraints has been mostly in Europe .
We have seen projects that are throttled in fact.
If you look on a project by project basis, a lot of.
A lot of deployments are throttled by labor costs.
Excuse me by labor the ability to get labor in the U S. It's not as predominant it does.
Happen, but I would say it happens.
It's.
Noticeably worse in Europe , I would expect that.
I really don't know I think people there have been people have been very progressive on there we have customers that have gone out and started training program.
And kind of internship programs to onboard.
A material amount of labor, Unlike a significant number of people and bringing them into the workforce for this.
These are typically the ones that have these kind of large.
Any longer term builds.
And I think they're doing a good job of that and I think they are actually seeing the fruits of that actually happening this year.
But in general.
It is a very tight labor market and I think it's just going to be dependent on.
What's the recession, how deep is the recession, what does that do to the labor pool, but.
Yes.
More people deploying fiber today than any time in history.
And that is a a skilled workforce that has to do that but I do think they're actively bringing people into that workforce.
Okay. So at this point in time, you don't see that as the.
The next bottleneck like the supply chain was I don't think its the next model I think it has been a bottleneck so.
And I don't hear people.
Talking about that is that's not high on our list of things that they want to talk about or that's where I met with the carrier.
Here in the U S with.
Three weeks ago.
And we talked a little bit about their labor pool, and they were the ones that are doing some job shifting and things and Thats just not a big worry for them. They are there projects or labor limited, but they fall in line with the capital plans that they have in place and they're able to meet them.
I really didn't talk about elevation in the wage base in that in that segment I am sure there has been some.
But it's it's it's.
Not I.
I think it's just kind of this ongoing tax that's been there for some period of time.
Okay. Thank.
Thank you. Thank you very much that's all I had.
Okay.
And your next question comes from the line of Tim <unk> from Northland Capital markets. Your line is open.
Hi.
Hi, pardon me good morning good.
Good morning.
Hey, Tim your microphone just died.
How about that that.
Much better.
Okay great.
So in kind of guiding flat to a little bit up for.
For Q2.
Do you envision a similar pattern to what we saw in Q1, which is.
Growth in access and optical and.
Maybe further declines in subscribers and if thats. The case understanding inventory visibility is tough would you expect Q2 to be a.
A bottom on the subscriber side nine I have a follow up.
Yes, we do expect at this point Q2, really what we're expecting as subscribers to tick up slightly so you can kind of think of slightly up.
Across the board.
And.
Some of that will still unfortunately, the gist of what our ability can and can't ship all of that is less of an impact so.
We think somewhere around this area is the bottom.
We're being very.
The way we're looking at this quarter as you can imagine as we're being very cautious in the way that we're looking at it. So I don't have a PEO or near line side to Apio and if I don't have material or very near line cited material, we're throwing it out of the forecast so.
So.
Some of it will just be our ability to execute in the different segments, but in general I think you are correct. This.
Period of time, we expect to be kind of the downside of what happens in the subscriber solutions.
Great.
I think it was mentioned before.
Add those guiding to stand alone as a pretty steady increase.
Throughout the year. So it seems like the second half will be stronger than the first half there.
Yes, I would expect.
Same for access and aggregation.
Maybe.
With the caveat for for some of the inventory comments, you made before whether that's kind of spreading or not but.
In general is it reasonable to.
Extend from the optical strength that you are looking for a stronger second half and just given the level of activity on the tier one front. It seems like that should be the case for access.
I wonder what you're willing to.
Say on that right now sort of second half versus first.
I'll be honest I'm not willing to say a whole lot I mean.
If you look at our current projections.
Then.
Yes, I mean, it looks like because there has been.
The appetite for deployment of those products still.
Is robust and we have new projects coming in my Trepidation and the reason you won't.
Hear me say that I don't really know where inventory levels are until we see the bubble.
I don't know what the impact of lead time adjustments is ultimately going to do to the extent that capital gets tighter.
So.
Depending on your capital costs and your and your.
Appetite for inventory you can squeeze and then try to bet on the vendor to be able to makeup.
For.
Shrinking lead times beyond what their stated goals are.
And while there will be some customers that will want to do that.
Because the definition of normal has disappeared over the last two years.
So everybody is trying to figure out what normal lead times are right now and it is spotty there are some areas where getting a product. The next day is not a problem and then there are some problems with getting a problem in six months, it's still a problem so that adjustment.
In field inventory, regardless of the segment relative its optical or whatever.
<unk> is still a period of time that is still something that we have to see.
So.
When you think about that kind of short term view.
I see no benefit honestly.
We had a huge disappointment and internal team disappointment.
A personal disappointment in what happened in Q1, and I don't want to repeat that.
And we've gone through periods, we've been through cycles before where.
Things happen in visibility.
Looks good if you look at activity, but there are other factors that are playing into what ultimately drives near term demand.
So im not hanger us ourselves out there on that near term demand picture, what I'm going to do is make sure that we manage through the near term as we have many times in the past.
And that we actually keep our eye on what the bigger picture is which is we are in a wholesale fundamental change in the network.
The biggest player in that network has been kicked out and we are absolutely positively the best.
Company and the best product set that's available in the market and we need to capitalize on it and that's what our focus is.
And Thats fair enough.
Couple of quick questions.
If I may just last questions.
I think it was mentioned R&D spending was was pretty heavy in the quarter. I am wondering is anything in particular, you can call out too.
As a driver of whether it's finishing development of certain platforms or what have you.
And kind of same thing with the increased borrowing in the quarter you seem to put some of that on the balance sheet.
Any particular drivers there and that's it for me thanks.
Yes.
Net.
When we add any color to it but in general with the balance sheet there.
It's a matter of receivables and payables.
And that fluctuates, a little bit from quarter to quarter, a little bit more this quarter and there were a couple of things that were kind of one time things that hit us.
That probably won't be repeated in the R&D side.
We do have some programs that are finishing up and we have some contractors on some programs that are finishing up so we did see kind of a.
An uptick there as you can imagine we have a very very focused.
Hi on expenses.
And.
There'll be rationale for anything like that on a going forward basis, but there were some some programs that we are in fact affected asset.
That will be in line this quarter any other color on that.
Well I would just say R&D spend across the board.
Tom said as you know we are still in a time where inflation hits us.
Kind of depending on the region more or less.
On the debt side I mean, as you as you could see how inventories remain high in <unk>.
AAP went down so.
We used some of the debt to finance our working capital.
Okay.
Anything else Tim.
Okay.
Tim Tim are you still there.
I am good thanks very much.
Alright, thanks very much.
With that I see that we are at the end of our questions here. So I appreciate everybody for that.
Joining us this quarter and we look forward to a much happier conversation next time next quarter. Thanks, very much everybody.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
[music].
Yes.
Yeah.