Q1 2024 ADTRAN Holdings Inc Earnings Call
Operator: Ladies and gentlemen, thank you for standing by, and welcome to ADTRAN Holdings Inc.'s first quarter 2024 earnings release conference call. All lines have been placed on mute to prevent any background noise.
Ladies and gentlemen, thank you for standing by and welcome to <unk> Holdings, Inc. First quarter 2024 earnings release Conference call.
Operator: All lines have been placed on mute to prevent any background noise.
Operator: After the speaker's remarks, there will be a question and answer period. If you would like to ask a question at that time, please press a star followed by one on your telephone keypad. As a reminder, today's call is being recorded. During the course of the conference call, ADTRAN representatives expect to make forward-looking statements that reflect management's best judgment based on factors currently known. However, these statements involve risks and uncertainties, including the risks detailed in our earnings release, our annual report on Form 10-K, and our filings with the FCC.
Operator: After the Speakers' remarks, there will be a question and answer period.
Operator: If you would like to ask a question at that time. Please press star followed by one on your telephone keypad.
Operator: As a reminder, today's call is being recorded.
Operator: These risks and uncertainties could cause actual results to differ materially from those in the forward-looking statements which may be made during the call. We undertake no obligation to update any statements to reflect events that occur after this call. During the course of today's call, we will refer to certain non-GAAP financial measures. Reconciliations of non-GAAP to GAAP measures and certain additional information are also included in our investor presentation and our earnings release.
Operator: During the course of the conference call I'd try and Representatives expect to make forward looking statements that reflect management's best judgment based on factors currently known.
Operator: However, these statements involve risks and uncertainties, including the risks the risks detailed in our earnings release, our annual report on Form 10-K, and other filings with the SEC.
Operator: 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.
Operator: We undertake no obligation to update any statements to reflect the events that occur after this call.
Operator: During the course of today's call, we will refer to certain non-GAAP financial measures reconciliations.
Operator: Reconciliations of non-GAAP to GAAP measures and certain additional information are also included in our investor presentation and our earnings release.
Operator: The investor presentation found on the ADTRAN Investor Relations website has been updated and is available for download. It is now my pleasure to turn the call over to Tom Stanton, Chief Executive Officer of ADTRAN Holdings.
Operator: The Investor presentation found on <unk> Investor Relations website has been updated and is available for download.
Operator: It is now my pleasure to turn the call over to Tom Stanton Chief Executive Officer of I Train Hall. Thanks, Sir. Please go ahead.
Thomas R. Stanton: Thank you, Juliana. Good morning, everyone. We appreciate you joining us for our first quarter 2024 earnings conference call. With me today is ADTRAN holding CFO Uli Dopfer. Following my opening remarks, Uli will review the quarterly financial performance in detail, and then we'll take any questions you may have.
Thomas R. Stanton: Thank you Julianna good morning, everyone.
Thomas R. Stanton: We appreciate you joining us for our first quarter 2024 earnings conference call.
Ulrich Dopfer: With me today is Ed trend holding CFO lead offer.
Ulrich Dopfer: Following my opening remarks really will review the quarterly financial performance in detail and then we'll take any questions you may have.
Thomas R. Stanton: Our first quarter revenue came in as expected, with revenue just above the midpoint of our guidance range and non-GAAP operating margin within guidance. Our focus on managing expenses and reducing inventory levels helped us achieve positive free cash flow during the quarter, despite the near-term headwinds that continue to impact service provider spending. While we do see signs that the market will improve as we move through the year, we will continue to focus on managing our expenses and further reducing our inventory levels.
Ulrich Dopfer: Our first quarter revenue came in as expected with revenue just above the midpoint of our guidance range and non-GAAP operating margin within guidance.
Thomas R. Stanton: Our focus on managing expenses and reducing inventory levels helped us achieve positive free cash flow during the quarter. Despite the near term headwinds that continue to impact service provider spending.
Thomas R. Stanton: While we do see signs that the market will improve as we move through the year. We will continue to focus on managing our expenses and further reducing our inventory levels.
Thomas R. Stanton: Taking a closer look at the results in the first quarter, the overall revenue and geographical mix was very close to the results from the previous quarter, with 63% of our revenues coming from outside the US. On the product mix, we were well-balanced in revenue across the three categories, with 31% of our revenue coming from subscriber solutions, 36% of revenue from access and aggregation solutions, and 33% of our revenue coming from optical networking solutions. Our subscriber solutions category was down 7% quarter over quarter after posting a strong quarter in Q4.
Thomas R. Stanton: Taking a closer look at the results in the first quarter. The overall revenue and geographical mix was very close to the results from the previous quarter was 63% of our revenues coming from outside the U S.
Thomas R. Stanton: On the product mix, we were well balanced revenue across the three categories with 31% of our revenue coming from subscriber solutions, 36% of revenue from access and aggregation solutions and 33% of our revenue coming from optical networking solutions.
Thomas R. Stanton: Our subscriber solutions category was down 7% quarter over quarter after posting a strong quarter in Q4.
Thomas R. Stanton: The access and aggregation solutions category was up 27%, quarter over quarter, driven by an increase in shipments of our fiber access platforms for both European and U.S. customers. Optical networking solutions continued to be impacted by inventory reduction initiatives with customers. We had two primary areas of sequential growth in the quarter.
Thomas R. Stanton: The access and aggregation solutions category was up 27% quarter over quarter, driven by an increase in shipments of our fiber access platforms for both the European and U S customers.
Thomas R. Stanton: Optical networking solutions continued to be impacted by inventory reduction initiatives with customers.
Thomas R. Stanton: We had two primary areas of sequential growth in the quarter.
Thomas R. Stanton: In the U.S. market, we had a strong quarter with our small to mid-sized service provider customers purchasing our fiber access platforms and residential fiber CPE. This customer segment was up sequentially for both direct purchases and indirect purchases through our distribution partners. The second area of strength was our large customers in Europe. This customer segment had a strong quarter with purchases of our fiber access platforms and Ethernet CPE.
Thomas R. Stanton: In the U S market, we had a strong quarter with our small to mid sized service provider customers purchasing our fiber access platforms and residential fiber CPE.
Thomas R. Stanton: This customer segment was up both sequentially was up sequentially for both direct purchases and indirect purchases through our distribution partners.
Thomas R. Stanton: The second area of strength was our large customers in Europe. This customer segment had a strong quarter with purchases of our fiber access platforms and Ethernet CPE.
Thomas R. Stanton: These two customer segments, the small to mid-sized service providers in the U.S. and the larger service providers in Europe, are the segments where we continue to see the highest growth potential moving forward, given their close alignment with our strategic initiatives and portfolio investments. These two key strategic initiatives to maximize the investment opportunity in fiber-based broadband networks in the U.S. and high-risk vendor replacements in Europe continue to drive our corporate focus. Taking a closer look at these market segments, I will start with the U.S. market.
Thomas R. Stanton: These two customer segments, the small to mid sized surplus riders in the U S and the largest services service providers in Europe.
Thomas R. Stanton: Are the segments, where we continue to see the highest growth potential moving forward given their close alignment with our strategic initiatives and portfolio investments.
Thomas R. Stanton: These two key strategic initiatives to maximize the investment opportunity in fiber based broadband networks in the U S.
Thomas R. Stanton: And high risk vendor replacements in Europe continues to drive our corporate focus.
Thomas R. Stanton: Taking a closer look at these market segments I will start with the U S market.
Thomas R. Stanton: This past week, we hosted our Broadband Business Solutions Summit at our corporate headquarters here in Huntsville. This is a multi-day event that we host twice per year with attendees primarily being small to mid-sized U.S. broadband service providers. These are the customers that are leading the charge in building out fiber across the U.S. And the energy there was high. It's as high as it's ever been.
Thomas R. Stanton: This past week, we hosted our broadband business solutions summit at our corporate headquarters here in Huntsville.
Thomas R. Stanton: This is a multi day event that we host twice per year with attendees, primarily being small to mid size U S broadband service providers.
Thomas R. Stanton: These are the customers that are leading the charge in building out fiber across the U S.
Thomas R. Stanton: And the energy there was high it's as high as it's ever been and we had a record attendance with over 180 customers and partners at the event.
Thomas R. Stanton: And we had a record attendance with over 180 customers and partners at the event. That excitement and energy really comes from two areas. For one, despite some recent challenges, it is still a good time to be in the market. Nearly half of U.S. households still lack a fiber connection, and government stimulus programs funding further investment in these networks are still in their early stages. During our event last week, a quick poll of the audience showed that more than 80% of customers in attendance were participating in broadband stimulus programs.
Thomas R. Stanton: That excitement had an energy that excitement Andrew really comes from two areas for one despite some recent challenges. It is still a good time to be in the market.
Thomas R. Stanton: Nearly half of U S households, still lack a fiber connection.
Thomas R. Stanton: And the government stimulus programs funding further investment in these networks are still in their early stages.
Thomas R. Stanton: During our event last week, a quick poll of the audience showed that more than 80% of customers in attendance will participating in broadband stimulus programs.
Thomas R. Stanton: The second driver for this excitement comes from the broader set of needs that we can meet with our customer segment. We have been very intentional in creating a more comprehensive fiber networking portfolio that is optimized for the needs of these small and mid-sized U.S. service providers. These customers ideally want to buy in-home networking solutions, business networking solutions, fiber access platforms, optical transport platforms, network automation software, and cloud-based monitoring tools from a single vendor that they can trust to deliver reliable solutions and support them throughout their deployment. On top of that, the solutions need to integrate seamlessly with their existing systems without a lot of custom IT integration activity. There is only one vendor that can check all of these boxes, and that's ADTRAN.
Thomas R. Stanton: The second driver for this excitement comes from the broader set of needs that we can meet with our customer segment with this customer segment.
Thomas R. Stanton: We have been very intentional in creating more comprehensive fiber networking networking portfolio that is optimized for the needs of the small and mid sized U S service providers.
Thomas R. Stanton: These customers ideally want to buy in home networking solutions business networking solutions fiber access platforms optical transport platforms.
Thomas R. Stanton: Network automation software and cloud based monitoring tools from a single vendor that they can trust to deliver reliable solutions and support them throughout their deployments.
Thomas R. Stanton: On top of that the solutions need to integrate seamlessly with their existing systems without a lot of custom integration activities.
Thomas R. Stanton: One vendor that can check all of these boxes and Thats ad trends.
Thomas R. Stanton: You can go through each segment of our portfolio and see where our investments in a more comprehensive and integrated portfolio are paying off. In our residential portfolio, we have launched IntelliFi, along with our latest SDG series of Wi-Fi 7. We have already signed up dozens of customers for IntelliFi, making it the highest growth application in our Mosaic SaaS application suite, and we are hoping to push the total number of service providers adopting Mosaic One to 400. We have added 36 new Mosaic One customers this past quarter.
Thomas R. Stanton: You can go through each segment of our portfolio and see where our investment.
Thomas R. Stanton: More comprehensive and integrated portfolio are paying off.
Thomas R. Stanton: In our residential portfolio, we have launched <unk>, along with our latest STG series of Wi Fi service we.
Thomas R. Stanton: We have already signed up dozens of customers for <unk>, making it the highest growth application and our mosaic SaaS application suite that.
Thomas R. Stanton: We're hoping to push the total number of service providers adopting mosaiQ1 to 400.
Thomas R. Stanton: We have added 36, new mosaic one customers this past quarter.
Thomas R. Stanton: On the network infrastructure side, we have taken the best fiber access platform in the industry, our SDX series, and integrated it into the leading billing systems targeting U.S. regional service providers. These efforts have led to a surge of deployments over the last six months, helping us add nine new fiber-to-the-home operators just this past quarter. These customers were a mix of new operators and vendor swap-outs
Thomas R. Stanton: On the network infrastructure side, we have taken the best fiber access platform in the industry, our SPX series and integrated into the leading billing systems targeting the U S Regional service providers.
Thomas R. Stanton: These efforts have led to a surge of deployments over the last six months, helping us add add nine new fiber to the home operators just this past quarter. These.
Thomas R. Stanton: These customers are a mix of new operators and vendor swap outs.
Thomas R. Stanton: As operators build out these higher-capacity fiber access networks, they need to upgrade their transport networks as well. We've spent the past two years developing an optical network solution that is optimized for the needs of regional networks. Regional middle-mile backhaul networks need the capacity and REACH enabled by technologies like Coherent and DWDM, widely deployed in core networks, but they need these technologies to be optimized for regional network deployment. This network optimization means integrated temperature-hardened pluggables enabling up to 800 gigabit speeds instead of the traditional large overlay system.
Thomas R. Stanton: As operators build out these higher capacity fiber access networks, they need to upgrade their transport networks as well.
Thomas R. Stanton: We spent the past two years developing and optical network solution that is optimized for the needs of regional networks reach.
Thomas R. Stanton: The regional middle mile backhaul networks need the capacity.
Thomas R. Stanton: And reach enabled by technologies like coherent VW DM widely deployed in core networks, but they need these technology to be optimized for <unk> regional network deployments.
Thomas R. Stanton: This network optimization means integrated temperature hardened plug levels, enabling up to 800 gig speeds instead of the traditional large overlay systems.
Thomas R. Stanton: It also means you need end-to-end service automation and precision monitoring of the fiber infrastructure after a sizable and well-thought-out investment. We have launched an optical portfolio that is tailored to address all these needs and is the perfect complement to our fiber access and subscriber solutions portfolio. Reinforcing that progress, over the past two quarters, we have had over 20 U.S. broadband service providers start to purchase our Ethernet and optical portfolio that were previously broadband-only customers for ADTRAN.
Thomas R. Stanton: It also means you need end to end service automation and precision monitoring of the fiber infrastructure.
Thomas R. Stanton: After a sizable and well thought out investments.
Thomas R. Stanton: We have launched an optical optical portfolio that is tailored to address all these needs and is the perfect complement to our fiber access and subscriber solutions portfolio.
Thomas R. Stanton: Reinforcing that progress over the past two quarters, we have had over 20 U S. Broadband service providers start to purchase our Ethernet and optical portfolio that were previously broadband only customers for ad trends.
Thomas R. Stanton: We see this segment continue to accelerate as these customers increase their bills with stimulus funds. Our Fiber Networking Solution Set, covering everything a small and mid-sized operator needs to deploy fiber to every home and business in a 5G site, is paired with an increasingly integrated management suite that simplifies the deployment and operation of these networks. We believe the progress in selling our complete portfolio offering, paired with our strong regional capabilities that include local manufacturing, has us well-positioned to succeed in upcoming bead projects in the US.
Thomas R. Stanton: We see this segment continue to accelerate as these customers increased their builds their builds with stimulus funding.
Thomas R. Stanton: Our fiber networking solution set.
Thomas R. Stanton: Covering everything a small and mid sized operator needs to deploy fiber to every home <unk>.
Thomas R. Stanton: Business in <unk> site is paired with an increasingly integrated management suite that simplifies the deployment of operation of these networks.
Thomas R. Stanton: We believe the progress in selling our complete portfolio offering paired with our strong regional capabilities that include local manufacturing as is well positioned to succeed in upcoming bid projects in the U S.
Thomas R. Stanton: One notable milestone with our local manufacturing is that we have now shipped over 1 million OLT containers that comply with the latest Build America, Buy America rules, which is part of B, highlighting our long history of U.S.-based manufacturing. Moving to Europe, the theme around investments in our portfolio. Our portfolio is beginning to pay off, as it is consistent with what we are seeing in the U.S. market, but the customer segmentation and market drivers are a bit different.
Thomas R. Stanton: One notable milestone that our local manufacturing with our local manufacturing is that we have now shipped over 1 million OLED ports that comply with the latest build America by America rules.
Thomas R. Stanton: That is part of bead highlights.
Thomas R. Stanton: Highlighting our long history of U S based manufacturing.
Thomas R. Stanton: Moving to Europe, the theme around investments in our portfolio.
Thomas R. Stanton: Okay.
Thomas R. Stanton: Our our portfolio beginning to pay off as this consistent with what we are seeing in the U S market.
Thomas R. Stanton: But that customer segmentation and market drivers are a bit different.
Thomas R. Stanton: In Europe, many of these service providers are migrating away from high-risk vendors, and they are making this shift as they upgrade their fiber network infrastructure. Also, while we are very successful with smaller Altnets in Europe, the bulk of the investment is still coming from larger service providers in the region. These customers value a trusted, secure partner with a broad portfolio and scaled deployment in the region. It is also just as important to have in-region R&D, sales, installation, and support services, and supply chain capabilities as well. ADTRAN is really one of only two vendors that can address these needs.
Thomas R. Stanton: In Europe. Many of these service providers are migrating away from high risk vendors.
Thomas R. Stanton: And they are making the shift as they upgrade their fiber network infrastructure.
Thomas R. Stanton: Also while we are very successful with smaller outlets in Europe. The bulk of the investment is still coming from larger service providers in the region.
Thomas R. Stanton: These customers value a trusted secure partner with a broad portfolio and scale deployments in the region.
Thomas R. Stanton: It is also just as important to have an in region R&D sales installation and support services and supply chain capabilities as well.
Thomas R. Stanton: <unk> is really one of the all of only two vendors that can address these needs.
Thomas R. Stanton: As I mentioned earlier, this past quarter was very successful with our large European customers deploying our Fiber Access platform. For our two largest customers in the UK and Germany, we continue to ramp up deployments of our latest high-density 10-gigabit fiber access platform, the SDX6330, which was the key catalyst for this growth this quarter. We were also selected as a vendor in the latest Ethernet aggregation service offering at one of these customers. The technical superiority of the STX-6330, which has better power efficiency and density than competitive solutions, while also building on a more modern architecture, has us well positioned for sustainable success with these customers and other operators in the region.
Thomas R. Stanton: As I mentioned earlier this past quarter was a very successful with our large European customers deploying our fiber access platforms.
Thomas R. Stanton: For our two largest customers in the UK and Germany, we continued to ramp deployments of our latest high density 10 gigabit fiber access platform the <unk>.
Thomas R. Stanton: <unk> 63 three.
Thomas R. Stanton: Which was the key catalyst for this growth this quarter.
Thomas R. Stanton: We were also selected as a vendor in the latest Ethernet aggregation service offering at one of these customers.
Thomas R. Stanton: The technical superiority of the SPX $63 30.
Thomas R. Stanton: Which has better power efficiency and density than competitive solutions.
Thomas R. Stanton: While also building on a more modern architecture has us well positioned for sustainable success with these customers and other operators in the region.
Thomas R. Stanton: One of these operators is a multinational Tier 1 operator where we have already been deployed in three countries. We have recently launched customer trials in a fourth and much larger country that they operate in, opening new growth opportunities for us later this year. And another Tier 1 Fiber Access Operator that we won last year with the SDX6330. We continue to make great progress in the lab and remain on track for scaled deployments next year.
Thomas R. Stanton: One of these operators is a multinational tier one operator, where we have already been deployed in three countries. We.
Thomas R. Stanton: We have recently launched customer trials, and a fourth and much larger country that they operate in opening new growth opportunities for US later this year.
Thomas R. Stanton: And another tier one fiber access operator that we won last year with the SPX $63 30, we continue to make great progress through the lab and remain on track for scale deployments next year.
Thomas R. Stanton: In addition to these projects, we have recently won a strategic software award for MPLS edge routers with a multinational Tier 1 operator. This MPLS software suite for our packet aggregation platforms has experienced high demand in the past six months, providing another growth opportunity for us moving forward. On the optical transport side, where we have traditionally been very strong in Europe, we remain on track to start deployments late this year with our recent Tier 1 optical win.
Thomas R. Stanton: In addition to these projects we have recently awarded a strategic software award for Mpls edge routers with a multinational tier one operator.
Thomas R. Stanton: This mpls software suite for a packet aggregation platforms has experienced high demand in the past six months, providing another growth opportunity for us moving forward.
Thomas R. Stanton: On the optical transport side, where we have traditionally been very strong in Europe. We remain on track to start deployments late this year with our recent tier one optical wins.
Thomas R. Stanton: With the recent launch of the MFLEX 800, our latest 800-gig optical platform, we are still well-positioned to benefit from the next upgrade cycle from 400-gig to 800-gig across our broad optical customer base in that region. In summary, we have introduced key enhancements across our portfolio, enabling us to be more competitive in landing new customers and expanding our business with existing customers. These portfolio enhancements, paired with our strong regional presence and progress in selling our complete portfolio offering, have us well-positioned for success in the ongoing investment cycle in fiber networks across both the U.S. and Europe.
Thomas R. Stanton: With the recent launch of the <unk> 800, our latest 800 gig optical platform, we're still well positioned to benefit from the next upgrade cycle from 400 gig to 800 gig our cost across our broad applicable customer base in that region.
Thomas R. Stanton: In summary, we have introduced key enhancements across our portfolio are enabling us to be a more competitive more competitive and landing new customers and expanding our business with existing customers.
Thomas R. Stanton: These portfolio enhancements paired with our strong regional presence and progress in selling our complete portfolio offering has us well positioned for success and ongoing and the ongoing investment cycle and fiber networks across both the U S and Europe.
Thomas R. Stanton: While we remain confident in our long-term outlook, we see the path to growth in the quarters ahead. However, we continue to see cautious spending from service provider customers driving us to continue our cautious approach to our forecast and operating model. As a result, we will continue our focus on becoming a leaner, more efficient, and more profitable company with a best-in-class fiber networking portfolio. With that, I will turn things over to Uli to provide a review of our financial results, and following Uli's remarks, we will answer any questions you may have. [inaudible]
Thomas R. Stanton: While we remain confident in our long term outlook, we see a path to <unk>.
Thomas R. Stanton: <unk> growth in the quarters ahead.
Thomas R. Stanton: We continue to see cautious spending from service provider customers driving us to continue our cautious approach to our forecast and operating model.
Thomas R. Stanton: As a result, we will continue our focus on becoming a leaner more efficient and more profitable company with a best in class fiber networking portfolio.
Uli: With that I will turn things over to Julie to provide a review of our financial results and following <unk> remarks, we will answer any questions you may have Julie.
Uli: Thank you Tom.
Uli: And Hello, everybody.
Ulrich Dopfer: I will cover our Q1 2024 results and provide our expectations for the second quarter of 2024. I will be referencing non-GAAP information with reconciliations to the most directly comparable 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.adtran.com. In addition, we have updated the investor presentation on this site, which is available for download. Unless stated otherwise, all financials are presented in U.S. dollars.
Uli: I will cover our Q1 2024 results and provide our expectations for the second quarter of 2024.
Ulrich Dopfer: I will be referencing non-GAAP information with reconciliation to the most directly comparable GAAP financial measures presented in our press release and also certain revenue information by segment and category, which is available on our Investor Relations Web page at investors <unk> com.
Ulrich Dopfer: In addition, we have updated the investor presentation to the site, which is available for download.
Ulrich Dopfer: Unless stated otherwise all financials are presented in U S dollars.
Ulrich Dopfer: Q1 2024 revenue came in slightly above the midpoint of our guidance at $226.2 million and went down 30% year-over-year, but slightly up sequentially. Our network solutions segment accounted for 80.1% of revenues in Q1 2024 compared to 87.2% in Q1 2023 and 80% in Q4 2023. Our services and support segment contributed 19.9% of revenues in Q1, compared to 12.8% in the year-ago quarter and 20% in the previous quarter. Axis and aggregation contributed 36% of revenue and was down 16% compared to the year-ago quarter, but it grew 26.6% sequentially.
Ulrich Dopfer: Q1, 2024 revenue came in slightly above midpoint of our guidance at $226 2 million and were down 30% year over year, but slightly up sequentially.
Ulrich Dopfer: Our network solutions segment accounted for 81% of revenues in Q1 2024 compared to 87, 2% in Q1, 2023 and 80% in Q4 2023.
Ulrich Dopfer: Our services and support segment contributed 19, 9% of revenues in Q1 compared to 12, 8% in the year ago quarter and 20% in the previous quarter.
Ulrich Dopfer: Excellent aggregation contributed 36% of revenue and was down 16% compared to the year ago quarter, but grew 26, 6% sequentially.
Ulrich Dopfer: Our Optical Networking Solutions category contributed 33.2% of revenues and was down 49% year-over-year and down 12% at 12.7% quarter-over-quarter. Subscriber solutions contributed 30.8% and was down 12.1% year-over-year and down 7.3% quarter-over-quarter. International revenue made up 63.2% of total revenue, and domestic revenue contributed 36.8%.
Ulrich Dopfer: Our optical networking solutions category contributed 33, 2% of revenues and was down 49% year over year and down 12% at 12, 7% quarter over quarter.
Ulrich Dopfer: Subscriber solutions contributed 38% and was down 12, 1% year over year and down seven 3% quarter over quarter.
Ulrich Dopfer: International revenue made up 63, 2% of total revenue and domestic revenue contributed 36, 8%.
Ulrich Dopfer: We had two 10% or more revenue customers in Q1 2024. Q1 non-gap growth margin was 41.6% and increased by 429 basis points year-over-year and was slightly below Q4 2022. The year-over-year improvement is mainly driven by lower manufacturing and transportation costs and more favorable customer and product quality. Q1 non-GAAP operating expenses were $102.7 million, 18% down year over year and slightly up quarter over quarter. The sequential increase was mainly due to unfavorable currency exchange rates, as well as... Year over year, we reduced non-GAP R&D spend by 20% and SG&A expenses by 16%.
Ulrich Dopfer: We had 210% or more of revenue customers in Q1 2024.
Ulrich Dopfer: Q1, non-GAAP gross margin was 41, 6% and increased by 429 basis points year over year and was slightly below Q4 2023.
Ulrich Dopfer: The year over year improvement is mainly driven by lower manufacturing and transportation costs and a more favorable customer product mix.
Ulrich Dopfer: Q1, non-GAAP operating expenses were $102 7 million.
Ulrich Dopfer: 10% down year over year, and slightly up quarter over quarter.
Ulrich Dopfer: The sequential increase was mainly due to unfavorable currency exchange rates as well as to.
Ulrich Dopfer: Two seasonal effects.
Ulrich Dopfer: Year over year, we reduced non-GAAP R&D spend by 20% and SG&A expenses by 16%.
Ulrich Dopfer: The non-gap operating loss was 8.8 million, which translates into a non-gap operating margin of negative 3.9 percent compared to negative 1.4 percent in Q4 2023. Our operating margin was within our guidance range of between minus 7 and 0% of revenue. The sequential decline in operating margin was attributable to higher OPEX and slightly lower gross margin. The year-over-year decrease in operating profitability was due to lower sales volume, partially offset by improved gross margins and operating expense reduction.
Ulrich Dopfer: non-GAAP operating loss was $8 8 million, which translates into a non-GAAP or non-GAAP operating margin of negative three 9% compared to negative one 4% in Q4 2023.
Ulrich Dopfer: Our operating margin was within our guidance range of between minus 7% and see what percent of revenues.
Ulrich Dopfer: The sequential decline in operating margin was attributable to higher opex and slightly lower gross margins.
Ulrich Dopfer: The year over year decrease in operating profitability was due to lower sales volume, partially offset by improved gross margins and operating expense reduction.
Ulrich Dopfer: The company's non-gap tax benefit for the first quarter of 2024 was $13 million, the total non-gap loss was $1.7 million, and after adjusting for minority shareholder interest in ADTRAN Networks as usual, this resulted in a non-GAP diluted loss per share attributable to the company of $0.02 per share compared to $1.09 in Q4 2023 and 14th Sense in Q1 2020 Turning to the balance sheet and cash flow state, in Q1 2024, we made significant improvements to our working capital.
Ulrich Dopfer: The Companys non-GAAP tax benefit for the first quarter of 2024 was $13 million.
Ulrich Dopfer: Total non-GAAP loss was $1 7 million.
Ulrich Dopfer: And after adjusting for minority shareholder interest in <unk>.
Ulrich Dopfer: This resulted in non-GAAP diluted loss per share attributable to the company of <unk> <unk> per share compared to $1 nine in Q4 2023.
Ulrich Dopfer: And 14.
Ulrich Dopfer: In Q1 2023.
Ulrich Dopfer: Trade accounts receivables were $187.6 million at quarter end, resulting in DSO of 75 days compared to 88 days in the prior quarter. We reduced our inventories by 40.1 million compared to Q4 2023. The improved working capital resulted in positive operating cash flow of $36.6 million compared to a negative operating cash flow of $16.3 million, an increase of $52.9 million quarter over quarter. Consequently, we generated $23.2 million of free cash flow. This resulted in a noticeable increase in cash and cash equivalents, which came in at $106.8 million, a quarter-over-quarter increase of $19.6 million, or 22 percent.
Ulrich Dopfer: Turning to the balance sheet and cash flow statement.
Ulrich Dopfer: In Q1 2020 forward, we've made significant improvements to our working capital.
Ulrich Dopfer: Trade accounts receivables were $187 6 million at quarter end, resulting in DSO of 75 days compared to 88 days in the prior quarter.
Ulrich Dopfer: We reduced our inventories by $40 1 million compared to Q4 2023.
Ulrich Dopfer: The improved working capital resulted in positive operating cash flow of $36 6 million compared to a negative operating cash flow of $16 3 million, an increase of $52 9 million quarter over quarter.
Ulrich Dopfer: Consequently, we generated $23 2 million of free cash flow.
Ulrich Dopfer: This resulted in a notable noticeable increase in cash and cash equivalents, which came in at $106 8 million.
Ulrich Dopfer: Order of a quarter increase of $19 6 million.
Ulrich Dopfer: Or 22%.
Ulrich Dopfer: Yes.
Speaker Change: In summary.
Ulrich Dopfer: In summary, near-term headwinds continue to impact service provider spending throughout the quarter. However, we continued to focus on the execution of our business efficiency program and, as a result, managed to significantly increase our cash flow quarter over quarter, resulting in positive free cash flow, even as we continue to see cautious spending from our service provider customers. We remain confident in our long-term outlook as we see a path to growth in the quarters ahead. We are convinced that the long-term growth drivers for our business are fully intact.
Ulrich Dopfer: Near term headwinds continued to impact service private spending throughout the quarter.
Ulrich Dopfer: We continued to focus on the execution of our business efficiency program and is a retired managed to significantly increase our cash flow quarter over quarter, resulting in positive free cash flow.
Ulrich Dopfer: Even if you continue to see cautious spending from our service provider customers.
Ulrich Dopfer: We remain confident in our long term outlook as we see a path to growth in the quarters ahead.
Ulrich Dopfer: We are convinced that the long term growth drivers for our business are fully intact, we expect that the investment in data driven infrastructure and a fiber everywhere future. We continue supported by stimulus funding and the desire to reduce exposure to high risk vendors.
Ulrich Dopfer: We expect that the investment in data-driven infrastructure and a fiber-everywhere future will continue, supported by stimulus funding and the desire to reduce exposure to high-risk vendors. We continue to capture fiber footprints with our upgraded fiber access and optical transport platforms while driving the adoption of our latest subscriber platforms, software solutions, and high-value services. We maintain our focus on becoming a leaner, more efficient, and more profitable company with a best-in-class fiber networking and software portfolio.
Ulrich Dopfer: We continue on capturing fiber footprints with our upgraded fiber access and optical transport platforms by driving the adoption of our latest subscriber platforms software solutions and high value services.
Ulrich Dopfer: We maintained our focus on becoming a leaner more efficient and more profitable company with a best in class fiber networking and software portfolio.
Ulrich Dopfer: Consequently, for the second quarter of 2024, we are narrowing our guidance range to between $215 and $235 million. And we expect a non-gap operating margin between negative minus 3 and positive 2% of revenue. Once again, additional information is available on ADTRAN's investor webpage at investors.adtran.com. I will now turn it back over to the operator, and we will take your questions.
Ulrich Dopfer: Consequently for the second quarter of 2024, we are narrowing our guidance range to between 215 and $235 million.
Ulrich Dopfer: And we expect our non-GAAP operating margin between negative minus three and positive 2% of revenues.
Ulrich Dopfer: Once again additional information is available at <unk> Investor Web page at investors <unk> com.
Speaker Change: I will now turn it back over to the operator, and we will take your questions.
Operator: Thank you. If you would like to ask a question, please press star followed by the number one on your telephone keypad. Our first question comes from George Notter from Jeffreys. Please go ahead. Your line is open.
Speaker Change: Thank you if you'd like to ask a question. Please press star followed by the number one on your telephone keypad.
Operator: Our first question comes from George Notter from Jefferies. Please go ahead. Your line is open.
Operator: Okay.
George Charles Notter: Hi, thanks a lot guys. I guess I would like to just step back and kind of, I guess, better understand the bigger narrative here on the business. Obviously, over the last year, year and a half, we've been talking a lot about excess inventories at customers. I know that.
George Charles Notter: Hi, Thanks, a lot guys I guess I would like to just step back and kind of.
George Charles Notter: I guess better understand the bigger narrative here on the business.
George Charles Notter: Obviously over the last year year, and a half we've been talking a lot about excess inventories at customers I know that.
Thomas R. Stanton: Your CPE business kind of went through that excess inventory and digestion phase. I think we're out of it now, but I'd love to hear your comments there. It seems like we're still in that phase with Optical, but just give us the picture on excess customer inventories. What do you see? What parts of the business are getting better? What parts of the business are still going through it? You know, what's in the picture? Thanks.
George Charles Notter: Your CPE business kind of went through that excess inventory and digestion phase I think we're out of it now, but I'd love to hear your comments there and it seems like we're still in that phase with optical but just give us the picture on excess customer inventories what do you see what parts of the business are getting better what parts of.
Thomas R. Stanton: The business are still going through it.
Thomas R. Stanton: What's the picture.
Thomas R. Stanton: Yeah, sure, so let me start with where I think the least amount of inventory is, and that's in our access and aggregation and, predominantly, our fiber-to-the-prem OLT product line. So I just, there's just not a lot out there at this point in time. So that one has been the least affected. And I think, you know, you can kind of see that in the numbers and the growth that we saw on Fiber to the Prim. Middle of the road would be subscribers.
Speaker Change: Yes, sure. So let me start with where I think the least amount of inventory is and that's in our access and aggregation and predominantly our fiber to the Prem OLED product line. So.
Thomas R. Stanton: There's just not a whole lot out there at this point in time, so that one has been the least impacted.
Thomas R. Stanton: And I think you can kind of see that in the numbers and the growth that we saw in fiber to the prem.
Thomas R. Stanton: I think there are many customers that no longer have inventory, but there are some that still do. I mean, we kind of did. I talked to some customers this last week, and there are some that still have a buildup of inventory because they just got too many in. But I would say, I would say it's a mixed bag with more and, you know, every month that gets better. And then optical, I think you're correct.
Thomas R. Stanton: Middle of the road would be subscriber I think there are many customers that no longer have the inventory.
Thomas R. Stanton: Situations, but there are some that still do I mean, we kind of did talk to some customers as last week and there are some that still have.
Thomas R. Stanton: Ill buildup of inventory because they just got too many in but I would say.
Thomas R. Stanton: I would say, it's a mixed bag with more every month that gets better and then optical I think youre correct I think thats, probably the least one where were through that inventory situations. It there are some larger customers that just have some.
Thomas R. Stanton: I think that's probably the least one where we're through that inventory situation. If there are some larger customers that just have some, and those impact the numbers, you know, kind of disproportionately, but... You know, that itself is getting better, but it's got the longest path ahead of it. That answers your question. Got it.
Thomas R. Stanton: And those impact the numbers.
Thomas R. Stanton: Disproportionately but.
Thomas R. Stanton: That itself is getting better, but it's yes, it's got the longest longest path ahead of it.
Thomas R. Stanton: That answer your question it okay.
Thomas R. Stanton: Any expectation as to when you would get through that inventory on the optical side of the business?
Thomas R. Stanton: Any expectation on when you would get through that inventory on the optical side of the business.
Thomas R. Stanton: I think it's going to end up being a lot like the other three, so we'll see some pickup, and it'll be muted because of the ones that do have it. But, you know, we'll see some improvement in the second half of the year. We may get most of the way through it. If I look at the inventory situation today at those larger customers, our expectation is that we will get through that in the second half.
Thomas R. Stanton: I think it's going to end up being a lot like the other three so we'll see some tick up and it will mute the pickup will be muted because of the ones that do have it.
Thomas R. Stanton: But.
Thomas R. Stanton: Is there we'll see we'll see some improvement in the second half of the year, we may get most of the way through it if I look at the inventory situation today at those larger customers our expectation as we get through that in the second half.
Thomas R. Stanton: But you'll see some, I think, that will come on stronger. So I would expect better numbers going forward. Let me caution you a little bit. We feel like we're at the lowest level at this point in time, but we could be surprised. But at this point in time, we feel like the pluses and minuses will even themselves out. Okay. On the other two, we expect those just to get stronger through the second half.
Thomas R. Stanton: But you will see some I think that will come on stronger so I would expect better numbers going forward.
Thomas R. Stanton: Yes.
Thomas R. Stanton: Let me caution that a little bit I mean.
Thomas R. Stanton: We feel like we're at the lowest level at this point in time, but we could be surprised but at this point in time, we feel.
Thomas R. Stanton: Alright.
Thomas R. Stanton: The pluses and minuses even themselves out at this point.
Thomas R. Stanton: Got it on the other two of those.
Thomas R. Stanton: On the other two we expect those just to get stronger through the second half.
Thomas R. Stanton: Okay, great. And then you also made some comments about just softer service provider spending, cautious service provider spending. I guess I... I want to delineate between what is a byproduct of excess inventory versus what is just genuinely softer consumption rates by customers. Do you have a perspective on that?
Speaker Change: Okay, Great and then.
Thomas R. Stanton: Then you also made some comments about just.
Thomas R. Stanton: Softer service provider spending cautious service provider spending I guess.
Thomas R. Stanton: Well to delineate between what is a byproduct of excess inventory versus what is just genuinely softer consumption rates by by customers do you have a perspective on that.
Thomas R. Stanton: It depends. There are so many different ways to, you know, dissect that.
Thomas R. Stanton: In.
Thomas R. Stanton: It depends there are so many different ways.
Thomas R. Stanton: Dissect that so.
Thomas R. Stanton: In Europe, especially with larger customers on the access side. They are just moving ahead with their plans so.
Thomas R. Stanton: So in Europe, especially with larger customers on the access side, they're just moving ahead with their plans. So, again, one of the reasons we had a strong European quarter in the U.S. I'd say there's some caution, but it's spotty, and you've talked to customers, I'm sure, as well. It depends on which customer you're talking to. So there are some that are moving forward. You know, there are some that are equity-backed, that are moving forward, that have aggressive plans.
Thomas R. Stanton: One of the reasons, we had a strong European quarter.
Thomas R. Stanton: And for U S.
Thomas R. Stanton: I would say there is some caution, but it's spotty and you talked to customers I'm sure as well.
Thomas R. Stanton: Depends on which customer you're talking to.
Thomas R. Stanton: So there are some that are moving forward.
Thomas R. Stanton: There are some that are equity back to theyre moving forward that have aggressive plans there are some there.
Thomas R. Stanton: There are some that are trying to see how the stimulus thing is going to roll out. And then there are some that are kind of in both camps, wanting to see how the stimulus is going to roll out, but they're going ahead with their plans. So I think it's a mixed bag. I'd say demand is there, but I mean, there's no doubt that demand has been impacted by the current environment, but trying to figure out how much inventory there is, and I would still say inventory is the bigger, by far, the bigger hanger.
Thomas R. Stanton: Trying to see how the stimulus thing is going to rollout.
Thomas R. Stanton: And then there are some that are kind of in both camps wanted to see how stimulus is going to rollout.
Thomas R. Stanton: They're going ahead with their plans so.
Thomas R. Stanton: It's a mixed bag.
Thomas R. Stanton: I'd say demand is there, but I mean, there is no doubt that demand has been impacted by the current environment, but trying to figure out how much is inventory and I would say still inventories are the bigger by far the bigger hangover.
George Charles Notter: Okay, great. I'll pass it along. Thanks very much.
Speaker Change: Got it okay, great I'll pass along thanks very much.
Speaker Change: Alright, thank you.
Operator: Our next question comes from Michael Genovese from Rosenblatt Securities. Please go ahead; your line is open.
George Charles Notter: Our next question comes from Michael Genovese from Rosenblatt Securities. Please go ahead. Your line is open.
Michael Edward Genovese: Great. Thank you.
Thomas R. Stanton: I guess first, you know, I sort of understand what's going on in access and aggregation, and then it sounds like we need a couple more quarters of inventory burn-off for optical platforms before we see an uptick there. Can you comment more specifically on subscriber solutions and experiences? What's going on with, you know, inventory versus demand there? And, you know, and also just discuss roughly how much of that category is related to access and how much is related to optical. And, you know, if there's any differentiation to answer the first question between optical and access and subscriber, that would be interesting to hear about. Thank you.
Michael Edward Genovese: Great. Thank you.
Thomas R. Stanton: I guess first.
Thomas R. Stanton: I sort of understand what's going on in access and aggregation and then it sounds like we need a couple more quarters of.
Thomas R. Stanton: The inventory burn off for optical platforms before we see an uptick there I guess could you comment more specifically on subscriber solutions and experiences what's going on with.
Thomas R. Stanton: Inventory versus demand there and.
Thomas R. Stanton: And also just roughly like how much of that is related to how much of that category is related to access and how much is related to optical and.
Thomas R. Stanton: If there's any differentiation to answer the first question.
Thomas R. Stanton: Optical access.
Thomas R. Stanton: Describe where that would be interesting to hear about thank you.
Thomas R. Stanton: Well, let me just give you some things that just come off the top of my head here that I think may help shed some light on it. First of all, subscribers had a pretty strong quarter last quarter, especially if I look at the residential piece of subscribers. So it was down a little, but it was, you know, it was not a bad quarter for that residential piece of the business, which makes you feel like that inventory piece is working itself out. You know, through the system, and I think for most people, it's a past event versus, you know, still an upcoming event for most customers. So that piece as well.
Speaker Change: Well, let me just give you some things that just come off the top of my head here.
Thomas R. Stanton: May help shed some light on it if you look at.
Thomas R. Stanton: So first of all subscribers had a pretty strong quarter last quarter, especially if I look at the residential piece of subscribers. So it was down a little but it was it was it was not a bad quarter for.
Thomas R. Stanton: For that residential piece of the business, which makes you feel like that inventory piece isn't working itself.
Thomas R. Stanton: Through the system in.
Thomas R. Stanton: I think for most people, it's a past event versus still on upcoming events for most customers.
Thomas R. Stanton: The only piece, the piece on subscribers, even on a year-over-year basis. Right, subscriber solutions was down on a year-over-year basis. But I can pinpoint that residential was actually up, right? ONT shipments were actually up, CPE shipments, and Ethernet NID shipments were actually up. The only thing that was down was some legacy products that we sell to large carriers. Well, one large carrier in Europe and one large carrier here in the U.S., who we know have inventory situations. If I were to subtract those two customers from the mix, that whole category would be up sequentially year-over-year for that matter, so we are definitely getting through that bubble.
Thomas R. Stanton: So that piece as well the only piece the piece on subscriber even on a year over year basis.
Thomas R. Stanton: Alright subscriber solutions was down on a year over year year over year basis, but I can pinpoint that residential was actually operate <unk> shipments were actually up.
Thomas R. Stanton: CPE ship as Ethernet Nic shipments were actually up the only thing that was down was some legacy products that we sell to two large carriers.
Thomas R. Stanton: While one large carrier in Europe, and one large carrier here in the U S who are who we know have inventories.
Thomas R. Stanton: Situations, if I look if I were to subtract those two customers from the mix that whole category would be up.
Thomas R. Stanton: Sequentially and year over year for that matter so.
Thomas R. Stanton: So we are we are definitely getting through that bubble.
Thomas R. Stanton: I don't know if you have this number or would give this number, but I mean, I assume most of the subscriber solutions are related to the access business, but I think there's probably also a meaningful piece that's related to the optical business. Could you help us understand that breakout at all?
Thomas R. Stanton: Okay.
Thomas R. Stanton: Is there a meaningfully I guess.
Thomas R. Stanton: I don't know if you have this number or we give this number but I mean I assume most of such subscriber solutions is is related to the access business, but I think there's probably also a meaningful piece that's related to the optical business.
Thomas R. Stanton: Could you help us understand that breakout at all.
Thomas R. Stanton: On the optical side, it's the Ethernet NID piece. It's kind of the traditional, I'll call it ADVA, piece that we're talking about here.
Thomas R. Stanton: On the optical side, it's the it's the Ethernet Nic pieces to kind of the traditional.
Thomas R. Stanton: I'll call it add.
Thomas R. Stanton: The piece that we're talking about here in.
Thomas R. Stanton: That business is actually, you know, doing pretty good. And then the other pieces of that are the subscriber piece is broken up in multiple areas, right? One is residential, and that's kind of the ONTs, RGs, the things that are driven by fiber to the home. That business is up on a year-over-year basis. The piece that is down is that we have, if you remember, traditional switches and routers. Those typically go through carriers. And they go along with service offerings from those carriers. And we have two big customers that drive that business, and both of those customers were down. That's the whole total number of subscribers.
Thomas R. Stanton: That business was actually.
Thomas R. Stanton: Doing doing pretty good.
Thomas R. Stanton: And then the other pieces of that are.
Thomas R. Stanton: The subscriber pieces broken up multiple areas right. One is residential and that's kind of the <unk> rgs to things that are driven by fiber to the French events.
Thomas R. Stanton: That business is up on a year over year basis piece that is down is we have a few of them are traditional switches and routers those typically go through carriers.
Thomas R. Stanton: And they go along with service offerings from those carriers and we have two big customers that drive that business and both of those customers with that.
Thomas R. Stanton: Thats the whole totality of subscriber solutions.
Thomas R. Stanton: Got it. Thanks for that. That's helpful. And then my other question is, I mean, you guys are clearly doing a lot on the management front too, I think, as you say, make it Professor at the U.S. Embassy in the Philippines, Dr. Michael Dezellem, Dr. Timothy Savageaux, Dr. Ulrich Dopfer, Gregory Mesniaeff, Thomas Stanton, Ryan Koontz, Paul Essi, Steven Williams,
Speaker Change: Got it thanks for that that's helpful. And then my other question is.
Thomas R. Stanton: I mean, it just you guys are clearly doing a lot on the management front I think as you say make it a more profitable company.
Thomas R. Stanton: It's revenues.
Thomas R. Stanton: Our lower than before for short period of time, and then we can see that but I think that I want to make sure I'm not missing anything right, so theres restructuring and theirs.
Thomas R. Stanton: <unk> capital management, bringing down inventory I guess I look my question really is am I missing anything there that I should be focusing on.
Thomas R. Stanton: And then also can you give us an update on <unk>.
Thomas R. Stanton: Anything related to the real estate portfolio transactions.
Thomas R. Stanton: So we do have some real estate here in Huntsville that is for sale. We have two different, think about it as two different pieces.
Thomas R. Stanton: Yes, yes. So we have we do have some real estate here in Huntsville that is for sale.
Thomas R. Stanton: We have a.
Thomas R. Stanton: We have two different thinking about it as two different pieces.
Thomas R. Stanton: We have a tower that, at this point in time, is 90% unoccupied. We're moving the rest of that, and I think this quarter we should be done with that. That's on the market right now. We do have an interest in it. We haven't closed anything yet. We also have the sale and leaseback potential on the other building here in Huntsville. That is one that we're putting off and just trying to make sure that we're doing the right thing at the right point in time on that, so we may or may not actually do it.
Thomas R. Stanton: Have a tower that at this point in time.
Thomas R. Stanton: 90% unoccupied, we're moving the rest of that I think this quarter, we should be done with that.
Thomas R. Stanton: That's on the market right now we do have interest in that we haven't closed anything and we also have the.
Thomas R. Stanton: Sale leaseback potential.
Thomas R. Stanton: Other building here in Huntsville that is work that we're putting off and just trying to make sure that we're doing the right thing at the right point in time on that.
Thomas R. Stanton: So that we may or may not execute on that one.
Thomas R. Stanton: And Ulrich, were there any other categories of, you know, like, so there's, you know, OPEX restructuring, working capital management, any other kind of big categories of what you're thinking about to improve the market? These are the main categories, Mike. Okay. The efficiency program includes, you know, getting more efficient as a company, bringing down costs, optimizing the physical footprint, and then, of course, the working capital measures you mentioned. The big piece here is inventory management.
Thomas R. Stanton: Yes.
Thomas R. Stanton: And were there any other categories of kind of.
Thomas R. Stanton: So there is opex restructuring working capital management.
Thomas R. Stanton: Any other kind of big categories.
Thomas R. Stanton: What youre thinking about.
Thomas R. Stanton: To improve the margin.
Thomas R. Stanton: These are the main categories Mike Okay.
Thomas R. Stanton: Business efficiency program includes getting more efficient as a company bring optimizing costs optimizing physically fit footprint and then of course, the working capital measures you mentioned the big piece here is the management of inventory.
Thomas R. Stanton: We did also announce the closure of a site in... in Germany earlier in the quarter.
Thomas R. Stanton: Yes.
Thomas R. Stanton: We had also announced closure of it.
Thomas R. Stanton: <unk> also announced the closure of a site in.
Thomas R. Stanton: In Germany.
Thomas R. Stanton: Earlier in the quarter.
Thomas R. Stanton: All right. Well, I'm all set. Thanks a lot.
Thomas R. Stanton: Okay Alright.
Speaker Change: Thanks, a lot.
Speaker Change: Okay Alright.
Operator: Our next question comes from Brian Koontz from Needham & Company. Please go ahead; your line is open.
Thomas R. Stanton: Our next question comes from Brian <unk> from Needham and company. Please go ahead. Your line is open.
Ryan Boyer Koontz: Thanks for the question. I want to ask for some feedback from your customers; some of you have been there. We heard one of your peers in the U.S. here talk about BEAD really stalling customer activities, customer planning for 24. We've also heard, you know, I've heard in my work a lot of concern from the smaller customers about the regulatory requirements around BEAD, maybe some pushback there. Any feedback for us on either of those topics from your summit?
Ryan Boyer Koontz: Hi, Thanks for the question.
Ryan Boyer Koontz: I would ask for some feedback from your customers. Some of you had there.
Ryan Boyer Koontz: We heard one of your peers.
Ryan Boyer Koontz: Use your talk about.
Ryan Boyer Koontz: B really stalling.
Ryan Boyer Koontz: Customer activities customer planning for 'twenty four we will.
Ryan Boyer Koontz: Also heard.
Ryan Boyer Koontz: I have heard in my work a lot of concern from the smaller customers about.
Ryan Boyer Koontz: The regulatory requirements around B, maybe some pushback there any any feedback for us on either of those topics from your summit.
Thomas R. Stanton: Yeah, yeah, so we talked a lot about that. And there are, what I, you know, Bede for the most part hasn't started flowing yet. It's real clear that some states are better at implementing than others. There was a lot of interest there. There were a lot of people, I mentioned about 80%, said that they were taking stimulus dollars. They were getting ARPA funds today.
Speaker Change: Yes, yes, so we talked a lot about that and there are without being for the most part hasnt started falling yet its real clear that some states.
Thomas R. Stanton: Are better at implementing than others. There was a lot of interest there there were a lot of people I mentioned like 80%.
Thomas R. Stanton: So that they were taking stimulus dollars they were getting ARPA funds today, there are different buckets out there.
Thomas R. Stanton: There are different buckets out there, but most of them are participating in some form or fashion. There was skepticism about B, but on the regulatory piece of that, and we had some breakout sessions on that. But you have this group that's just going to do it, and think they can do it, and they see it as a headache, but they see it as a manageable headache, and then you have people that are, you have some that are saying no, but those typically have different, you know, financing arrangements.
Thomas R. Stanton: But most of them are participating in some form or fashion.
Thomas R. Stanton: Yes.
Thomas R. Stanton: There was skepticism lumpy, but in the rare.
Thomas R. Stanton: The regulatory piece of that and we had some breakout sessions on that.
Thomas R. Stanton: But you got to you.
Thomas R. Stanton: You have this group Thats, just going to do it and think they can do it in.
Thomas R. Stanton: Don't see that they see it as a headache, but they see it as a manageable headache.
Thomas R. Stanton: And then you have people that are you have some that are saying no but those are typically.
Thomas R. Stanton: Different.
Thomas R. Stanton: Financing.
Thomas R. Stanton: Arrangements.
Thomas R. Stanton: I would say the majority of people there were very open to it, and we're kind of just waiting to see how the state rules roll out and, you know, where they get in line. So I think that's very fluid. The money feels like it's definitely going to be taken, it's just who's going to take it. But there was, it was way more... Like I said, 80%. I'm saying they were going to take some form or fashion of stimulus funding over our retake.
Thomas R. Stanton: I would say the majority of people that we're very open to it and we're kind of just waiting to see how the state rules roll.
Thomas R. Stanton: All out and where they get in line that so I think that's very fluid.
Thomas R. Stanton: The money feels like it's definitely going to be taken that just who's going to take it.
Thomas R. Stanton: But there was it was way more.
Thomas R. Stanton: Like I said, 80% of them, saying they were going to take some form or fashion of stimulus funding over already taking it.
Thomas R. Stanton: Got it, helpful, helpful, Tom. And on OPEX efficiency, I understand there's some selection one-time impacts on FX and probably seasonal kind of payroll type things that hit Q1, where are we headed there in terms of OPEX efficiency? Any more you can share in terms of... What do you think about that line for the rest of the year?
Thomas R. Stanton: Got it helpful helpful. Tom and on the on the Opex efficiency I understand there is some.
Thomas R. Stanton: So I'll take some onetime impacts on FX.
Thomas R. Stanton: Probably seasonal payroll type things that hit Q1.
Thomas R. Stanton: Yes.
Thomas R. Stanton: Where are we headed to there in terms of Opex efficiency anymore, you can share in terms of.
Thomas R. Stanton: How do you think about that line for the rest of the year.
Thomas R. Stanton: Well, we haven't gotten to our, you know, I think we laid out a plan where Q2 was going to be kind of where we, our ultimate target that we want to get to, and that's actually below one level, and that's where we're headed this quarter. Got it. A couple of thoughts on that. Thank you. Yeah, Uli, I don't know if you said any more things granular than that.
Tom: Well, we haven't gotten to our.
Uli: I think we laid out a plan, where Q2 was going to be kind of where we.
Uli: Kind of hit the hit our ultimate target that we want to get too and that's actually below.
Speaker Change: The Q1 level.
Uli: That's where we're headed to this quarter.
Speaker Change: Got it so it will be.
Uli: Yes Julio.
Thomas R. Stanton: Julio you said any more things Granularly, we said, we said not the last earnings call. The earnings call before if you recall it Ryan we said our target is to reduce our 2024 expenses by $90 million compared to 2023, and this is to lower target together.
Thomas R. Stanton: We said, we said, not the last earnings call, the earnings call before, if you recall it, Ryan, we said our target is to reduce our 2024 expenses by 90 million compared to 2023, and this is still our target.
Thomas R. Stanton: Got it. Thank you. All right, thanks. Do we have any more in the queue or not?
Speaker Change: Okay got it thank you.
Speaker Change: Alright. Thanks.
Thomas R. Stanton: We have any more in next few months.
Operator: We do have one more question from Tim Savageau from Northland Capital.
Speaker Change: We do have one more question.
Timothy Paul Savageaux: Tim savvy, Joe from Northland capital.
Timothy Paul Savageaux: I think that was it. Go.
Operator: I think that was.
Operator: Yeah, I think that was him right there.
Timothy Paul Savageaux: Yes, I think that was Tam right there no dead horse right.
Timothy Paul Savageaux: Tim can you hear me.
Operator: Oh, yep, sorry. See you there.
Speaker Change: Oh I'm sorry.
Speaker Change: Okay great.
Timothy Paul Savageaux: We had a couple of questions. The first one is on the outlook, which is sort of, you know, flattish, but I wonder if you could.
Timothy Paul Savageaux: We had a couple of questions.
Timothy Paul Savageaux: First one is on the outlook, which is sort of flattish, but I wonder if you might.
Thomas R. Stanton: You know, give us a little more color on your expectations by segment, it sounds like, and especially after a nice quarter in access and aggregation, that maybe that growth is likely to continue, maybe even subscriber or two and be offset by optical continued inventory work down there, but like, you know. Comment on whether directionally that's accurate or if there's something else going on. Yeah, I think, yeah, the answer is yes, directionally that is, to just the way you said it exactly. Great
Timothy Paul Savageaux: Give us a little more color on your expectations by segment, it sounds like and especially after.
Thomas R. Stanton: A nice quarter in the access and aggregation.
Thomas R. Stanton: That maybe that growth is likely to continue maybe even subscriber to and be offset by optical continued inventory work down there.
Speaker Change: Thank you Dave.
Thomas R. Stanton: Kind of comments on whether Directionally, that's accurate or is there something else going on yes, I think yes. The answer is yes, directionally that is accurate.
Thomas R. Stanton: Sure.
Thomas R. Stanton: We would the other two just the way you said it is accurate.
Thomas R. Stanton: And, you know, I'd assume... You had some pretty sharp moves sequentially in Q1, would you expect those? movements by segment to be a little more modest in Q2? I don't know what you mean by sharp moves.
Thomas R. Stanton: Great.
Thomas R. Stanton: Jim.
Thomas R. Stanton: You had some pretty sharp moves sequentially.
Thomas R. Stanton: In Q1 would you expect those moves.
Thomas R. Stanton: Movements by segment to be a little more modest in Q2.
Thomas R. Stanton: I guess I don't know what you mean by it by sharp moves.
Thomas R. Stanton: I mean, access and aggregation was up 30% sequentially in almost Q1. I mean, those types of movements versus... Yeah, we're not modeling for that type of, you know, sequential increase. Yeah, we were expecting to just, you know, get to the numbers that we're talking about, right? We were expecting modestly higher on a sequential basis, and then optical to be modest. Great, that's what I was looking for on the 10% customer front.
Thomas R. Stanton: <unk> access and aggregation was up 30% sequential almost in Q1.
Thomas R. Stanton: Those types of I don't think movements versus.
Thomas R. Stanton: Yes.
Thomas R. Stanton: Yes.
Thomas R. Stanton: We're not modeling for that type of sequential increase.
Thomas R. Stanton: On a quarterly basis.
Thomas R. Stanton: We would expect them to just.
Thomas R. Stanton: Get to the numbers that we're talking about right we were expected to be <unk>.
Thomas R. Stanton: Modestly up on a sequential basis, and then optical to be modestly down.
Thomas R. Stanton: Great that's what I was.
Thomas R. Stanton: Looking for.
Thomas R. Stanton: On the.
Thomas R. Stanton: 10% customer fronts.
Thomas R. Stanton: Can you comment on, you know, did you have anybody in the U.S., or should we assume that those are both international? Great, and last question on the Q2 guide: obviously, your gross margins are up pretty sharply. And you mentioned the drivers there. OPEX, although I just reiterated the target there, it was certainly higher than I was looking for. I mean, to some degree, as you look at the Q2 guide for modestly negative operating margins, should we expect that to reverse a little bit, maybe with gross margins backing off and along with OPEX coming down pretty solidly? I mean,
Thomas R. Stanton: Can you comment on did you have anybody in the U S or should we assume those are both international.
Thomas R. Stanton: These are both international.
Thomas R. Stanton: Great.
Thomas R. Stanton: And last question on the Q2 guide obviously your gross margins are up.
Thomas R. Stanton: Pretty sharply.
Thomas R. Stanton: And you mentioned the drivers there.
Thomas R. Stanton: Opex.
Thomas R. Stanton: Are you just reiterated the target there, but certainly higher than I was looking for.
Thomas R. Stanton: I mean to some degree as you look at the Q2 guide for modestly negative operating margins should we expect that to reverse a little bit maybe with gross margins back along with opex coming down pretty solidly.
Thomas R. Stanton: I mean, as you all know, gross margin is always a subject to customer mix and product mix, especially when it comes to the last month of the quarter. There are many moving parts, but if you look at your model, Tom just said we expect OPEX to come down in the second quarter, which would then mean that if you model the midpoint of the guidance at cross-margin, it would come down slightly a little bit as well.
Thomas R. Stanton: I mean.
Thomas R. Stanton: As you know gross margin is always a subject to customer mix and product mix, especially.
Thomas R. Stanton: When it comes to the last month of the quarter. There is many moving parts.
Thomas R. Stanton: But if you if.
Thomas R. Stanton: If you look into your model right. Tom just said to Opex, we expect opex to come down in the second quarter, which would then mean that if you model the midpoint of the guidance that gross margin would come down slightly a little bit as well.
Speaker Change: Great. Thanks very much.
Thomas R. Stanton: Okay.
Thomas R. Stanton: Well, I think we're through the call queue, so thank you very much for joining us on our conference call this quarter, and we look forward to talking to you next quarter. Thank you.
Speaker Change: Well I think we're through the call queue. So thank you very much for joining us on our conference call. This quarter and we look forward to talking to you next quarter. Thank you.
Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Speaker Change: This concludes today's conference call. Thank you for your participation you may now disconnect.
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