Q4 2024 ADTRAN Holdings Inc Earnings Call
Good morning. My name is Rob, and I will be your conference operator. At this time, I would like to welcome everyone to the ADTRAN Holdings 4th Quarter 2024 Financial Results Conference Call.
All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad.
Speaker Change: Thank you, Rob. Welcome and thank you for joining us today for ADTRAN Holdings' fourth quarter 2024 financial results conference call, and welcome to all those joining by webcast.
Speaker Change: During the course of this conference call, ATTRAN representatives expect to make forward-looking statements that reflect management's best judgment based on factors currently known.
Speaker Change: 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 SEC. These risks and uncertainties could cause actual results to differ materially from those in our forward-looking statements.
Speaker Change: which may be made during the course of this call. We undertake no obligation to update any statements to reflect events that occur after this call.
Speaker Change: During the course of the call, we 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 in our earnings release.
Speaker Change: We have not provided reconciliations of our first quarter 2025 guidance.
Speaker Change: with regards to non-GAAP operating margin because we cannot predict and quantify without...
Speaker Change: without unreasonable effort all of the adjustments that may occur during the period. The investor presentation has been updated and is available for download on the ADTRAN Investor Relations website.
Speaker Change: In addition, financial measures during the course of this conference call are preliminary estimates.
changes in connection with the
quarter-end or year-end adjustments.
Speaker Change: Turning to the agenda, Tom Stanton, AdTran Holdings CEO and Chairman of the Board, will provide the key investment highlights for the fourth quarter 2024 and Uli Dopfer, our Senior Vice President and CFO, will review the quarterly financial report performance in detail and then we'll take any questions that you may have.
Tom Stanton: I'd now like to turn the call over to Tom Stanton.
Thank you, Peter. Good morning, everyone.
Tom Stanton: ADTRAN executed well during Q4 with improvements across several key operating metrics.
Tom Stanton: Revenue increased sequentially, our non-GAAP gross margins remained strong, and our non-GAAP operating profits continued to expand.
Tom Stanton: Revenue is up across all regions, with non-U.S. revenue up 10% quarter over quarter.
Tom Stanton: Diving deeper into the details, optical networking revenue showed meaningful growth in Q4 with a 16% sequential increase.
Supporting our belief that revenue bottomed in Q3.
Tom Stanton: Our optical networking solutions growth was up across all regions led by an uptick in business from a mix of service providers, internet content providers, and enterprise customers.
Tom Stanton: Optical Networking Solutions added 18 new customers during the fourth quarter. These new customers included a broad mix of fiber broadband customers, government agencies, utilities, and large-scale enterprises.
Tom Stanton: The gross in our customers matches the diversity and network upgrade catalyst with our optical customer base.
Tom Stanton: In some use cases, it is broadband operators upgrading their backhaul networks to 100Gbps or regional transport networks to 400Gbps or 800Gbps.
Tom Stanton: and other scenarios it is internet content providers upgrading capacity between large-scale compute sites or large enterprises or government institutions upgrading and securing their private networks.
Tom Stanton: Under any of these scenarios, these customers need scalable, secure, and automated optical networks from a vendor that they can trust. We address all these needs.
Tom Stanton: With continued advancements in our portfolio, improving customer inventory levels, and growing opportunities across multiple verticals in the optical segment, we are optimistic about the growth opportunities moving forward.
Tom Stanton: Our access and aggregation solutions grew 8% sequentially driven by fiber footprint expansion and network upgrades. The quarter's growth was led by the U.S. customers deploying multi-gig fiber services.
Tom Stanton: Investment remains strong among service providers in the U.S. and Europe and we are upgrading and expanding their fiber, who are upgrading and expanding their fiber footprint.
Tom Stanton: We remain the leading vendor option given our portfolio and presence in our target markets.
Tom Stanton: During the quarter, we began shipping infrastructure to 12 new Fiber-to-the-Premise service providers, continuing our trend of new customer acquisition in this segment.
Tom Stanton: With a strong pipeline of expansion opportunities and network upgrades, we expect meaningful revenue growth in this area.
Tom Stanton: Our subscriber solutions category had another strong quarter, although slightly down sequentially, that's following two strong quarter-over-quarter increases.
The strength in CPE is directly attributed to fiber access
Tom Stanton: We expect meaningful growth in CPE as our customers work to connect more homes, businesses, and critical infrastructure sites with fiber.
Within the category, we added 23 new
Tom Stanton: Within our product pipeline, we will be introducing several new multi-gig Wi-Fi 7 products over the next six months to help continue to drive new demand for a growing base of large and regional service providers.
Tom Stanton: The direction in our industry is clear, our customers need fiber networks that scale from optical cord to the customer premise, while delivering best-in-class subscriber experiences through better insights and automation.
Tom Stanton: We have made major upgrades across all aspects of our portfolio, from our recently introduced industry-leading 800-gig transport solution, the MFLEX,
Tom Stanton: to the industry's highest density, most power efficient 10 gig fiber access platform in our SDX family.
Tom Stanton: We have the leading fiber infrastructure platforms that customers need to build their networks of the future.
Tom Stanton: Whether it's 10 gig Wi-Fi platforms for residential services or 100 gig business services, we have high-performance and cost-effective solutions that offer world-class user experiences.
Tom Stanton: These networking platforms are complemented by our Mosaic software suite that automates and simplifies all aspects of our portfolio.
Tom Stanton: from automating the provisioning and monitoring of complex optical networks to automating and optimizing the performance of multi-gig Wi-Fi networks.
Tom Stanton: The breadth and capabilities of these software applications, paired with our networking platforms, differentiates us from our competition and positions us for additional success moving forward.
Tom Stanton: Turning to our operational performance for the year, we made substantial progress during 2024.
Tom Stanton: Although revenue for the year decreased due to softer end markets, including customers focusing on reducing inventory and higher interest rates, the non-GAAP gross margin for the year expanded to 41.9% on a non-GAAP basis from 39.3% the prior year.
Tom Stanton: reflecting higher efficiency and value realization directly related to our operational efficiencies and low overhead costs that were driven by both site and product consolidation.
Tom Stanton: Non-GAAP operating profit also meaningfully improved, turning positive for the full year 2024 compared to the negative figures earlier in the year. This growth underscores our ability to adapt to evolving market conditions and drive profitability.
Tom Stanton: Our free cash flow of $39.9 million during calendar 2024 improved by $128.7 million from the prior year.
Tom Stanton: This focus on operational efficiency and financial discipline positions us well for substantial future growth.
Tom Stanton: This past quarter's strong performance, combined with our improved outlook, reinforces our confidence in the long-term target operating model of gross margin percentages in the low-to-mid 40s and an operating profit margin percentage in the double digits.
In summary,
Tom Stanton: We had a good quarter of improved financial results, strong bookings, and positive momentum entering 2025. We continue to grow our customer base and invest in our strategic platforms with major opportunities in the U.S. and Europe still ahead of us.
Tom Stanton: With that, I will turn things over to Uli to provide a few of our financial results. Following Uli's remarks, we will open it up to any questions you may have. Uli? Thank you, Tom. And thank you, everyone, for joining us on the call this morning.
Uli Dopfer: To begin, I will first walk through our preliminary Q4 2024 financial performance and then I will discuss our expectations for 2025, Q1 2025.
Uli Dopfer: Q4 revenue was $242.9 million, a sequential increase of $15.1 million or 7% and above the midpoint of our guidance.
Uli Dopfer: Our network solution segment delivered $197 million accounting for approximately 81% of total revenue in Q4 compared to 80% in the prior quarter.
Uli Dopfer: Our services and support segment delivered $45.8 million, or 19% of total revenue in Q4, compared to 20% in the preceding quarter.
Uli Dopfer: From a product category perspective, access and aggregation delivered $72.7 million, or approximately 30% of total revenue, and increased 8% sequentially.
Uli Dopfer: Our optical networking solution category was 81.6 million with 34% of total revenue. This was up 16% sequentially.
Uli Dopfer: Subscriber solutions was 88.5 million or 36% of total revenue. This was down 2% sequentially.
Uli Dopfer: Non-U.S. and U.S. revenues were 57% or 43% of total revenue, respectively.
Uli Dopfer: We had one customer who represented more than 10% of our Q4 revenue.
Uli Dopfer: Non-gap cross-margin during the quarter was 42.0%, a sequential decline of 11 basis points.
Uli Dopfer: Non-GAAP operating expenses in Q4 were $94 million, reflecting a quarter-over-quarter increase due to higher deferred compensation and increased sales commissions.
Uli Dopfer: For Q4, our non-GAP operating profit was 7.9 million, or 3.3% of revenue, and above the midpoint of our guidance range.
Uli Dopfer: This compares to a non-GAAP operating profit of $2.5 million for 1.1% of revenue in Q3 2024 and a loss of $3.2 million in the year-ago quarter.
Uli Dopfer: The improvement in operating margin and profitability was driven by higher revenue, a healthy gross margin, and effective management of our fixed costs.
Non-GAAP tax expense in Q4 was $3.1 million.
Uli Dopfer: We generated a small amount of non-GAAP net income during Q4 and were break-even on an earnings-per-share basis.
Uli Dopfer: This compares to a loss of $0.05 per share in Q3 2024.
Turning to the balance sheet and cash flow statement.
Uli Dopfer: First, I'd like to highlight, for the full year 2024, operating cash flow was over $100 million, a nearly $115 million swing from the prior year.
Uli Dopfer: During Q4, networking capital decreased by $4.7 million quarter over quarter to $276.9 million.
Uli Dopfer: Trade accounts receivables were $178 million at quarter end, resulting in DSO of 67 days. This compares to 70 days in the prior quarter.
Uli Dopfer: Our inventories were down to $269.3 million at the end of the quarter. Accounts payable were $170.5 million. DPOs were 72 days versus 67 days the prior quarter.
Uli Dopfer: Operating cash flow was 5.8 million compared to 42.0 million in Q3 2024, mainly due to the timing of receivables at year-end.
Uli Dopfer: As I shared, cash flow for the year was 103.1 million compared to negative 45.6 million for the full year of 2023.
Uli Dopfer: We had free cash flow of negative 10.4 million in Q4 compared to positive 23.2 million of free cash flow in Q3 2024. The lower free cash flow number for the fourth quarter was the result of the lower operating cash flow.
Uli Dopfer: For the year, we generated positive free cash flow of 39.9 million, an increase of 128.7 million from the full year 2023.
Uli Dopfer: At the end of Q4, cash and cash equivalents were 77.6 million, a quarter over quarter decrease of 10.9 million.
Uli Dopfer: In 2025, strengthening our balance sheet is a key strategic priority.
We have taken several significant actions in this direction.
Uli Dopfer: As previously communicated, we are in the process of selling our unused corporate real estate, which is now listed on our balance sheet as assets held for sale.
We are also working to monetize other non-core assets.
Uli Dopfer: due diligence by interested parties continues although we are limited based on NDAs on what we can share
Thank you. Thank you.
In summary,
Although 2024 was challenging, we delivered solid operational execution.
Uli Dopfer: As we regain scale in our business, we anticipate an expanded operating margin.
Uli Dopfer: We do expect moderately higher operating expenses for 2025 in line with normalized payroll and benefit increases.
Turning now to our outlook for the first quarter.
Uli Dopfer: We expect revenue to range between $237.5 to $252.5 million and a non-GAAP operating margin between 0 and 4%.
Uli Dopfer: This concludes the prepared remarks portion of the call, and I will now turn the call back over to Rob to begin the Q&A session.
Rob: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again.
Uli Dopfer: We ask that you please limit yourself to one question and one follow-up. Your first question comes from the line of Michael Genovese from Rosenblatt Securities. Your line is open.
Michael Genovese: Great, thanks so much. Congratulations on the nice results. I guess I want to follow up on the balance sheet point, you know, to begin.
Michael Genovese: Fairly trivial with you know that a real estate sale and sort of
Michael Genovese: just cash generated from operations should be able to get us there easily. And that and I guess my question is really.
is, you know, are there other assets?
Michael Genovese: anything in the business that could be sold and kind of inventory, how much of this is gonna be inventory and working capital as we, so I guess just more detail on how we get to net cash and can we get much better than that cash break even by the end of the year?
Michael Genovese: We do expect inventory to come down through the year. We do expect to be generating...
Michael Genovese: free cash flow through the year. And you're right, with the asset sales that we're talking about, that should be really easy. As you know, the biggest issue is timing asset sales, especially when you're talking about
Michael Genovese: property and you know the market and and we have some properties that are relatively unique so you have to find the right buyer and it's got to match up. Having said that we have found
Michael Genovese: Some customers that are, we have seen that alignment, but getting them to closures is the biggest thing. As far as the other asset sales, we've talked about anything that's really, that's non-strategic, and our strategic areas are fairly easy to define. They're, you know, subscriber,
fiber-to-the-prim, and optical.
Michael Genovese: And those are the businesses we're in so things that don't fall in line that we would take a look at and you know we Yeah, there's definitely there's a potential for us to move forward on some of those assets as we find the right buyers
Okay, great.
Michael Genovese: I guess my other one would be just kind of on the sustainability
Michael Genovese: of the telecom, you know, recovery, you know, so I don't want to ask, you know, too many multi-part questions, but if I had the time, I would sort of, you know, kind of Europe and the U.S.
Michael Genovese: visibility to, as we move beyond the first quarter, you know, to the rest of the quarters of the year, how would you kind of describe visibility and the sources of visibility that make you feel better that we could have a sustained recovery throughout the year?
Well, the best visibility is a purchase order, and...
Michael Genovese: Unfortunately, our business is typically more book and ship than maybe some longer term.
Michael Genovese: And it's tangible. And then the other is just kind of planning from the different customer bases that we deal with. The environment has definitely picked up, without a doubt, I mean, in the last six months.
Michael Genovese: substantially different than the six prior to that. Bookings have picked up.
Michael Genovese: In general things, yeah, I mean just things just look more positive, but you know, we really don't have a crystal ball I can't tell you explicitly what I'm going to do in Q4 this year because I don't know. Q3 is still murky as well, right? But as that window comes in we get stronger and stronger confidence and I can just say trending-wise things are looking are looking very positive
Perfect. Thanks so much.
Okay.
Speaker Change: Your next question comes from a line of Christian Schwab from Craig Hallam Capital Group. Your line is open.
Great, thanks for taking my questions. Good quarter.
Back to the inventory, you've done a, uh, um...
Speaker Change: a significant job of reducing your inventory on your balance sheet over the last two quarters. Do you have a stated goal for inventory? And what level do you think...
Speaker Change: that could potentially be reduced to before you would need to maintain it for future growth objectives?
Speaker Change: Yeah, you want to talk about our turns? Go ahead. Yeah. So, currently our inventory turns...
Obviously, this is a process and takes some time.
Speaker Change: where we had a significant drop in inventory but we are working through the process and anticipate a gradually, you know, decline in inventory. Yeah, I think the key is the way to think about it is four times inventory terms. That's really where we're comfortable there. We've been there before.
Speaker Change: We get much above that and we start having customer issues. So kind of low fours is a comfortable place for the company.
you know, limited visibility, but we are coming off.
a pretty challenged, you know, industry environment in calendar 2024.
Speaker Change: Fair. Let me just explicitly say we really don't give full year guidance. We know that there are numbers that are out there, you know, we're aware of that.
Speaker Change: But, you know, we've had in the past struggled to get, you know, court guidance.
Speaker Change: We're comfortable with the guidance range that we've given for the next quarter. And I think I would go back to the first round of questions, which was the environment is definitely improving. So I don't want to mislead anybody there. The trend is definitely positive.
Speaker Change: But, you know, we just have to see how the year plays out.
Great. No other questions. Thank you. Okay.
Speaker Change: Your next question comes from the line of Brian Kutz from Needham & Company. Your line is open.
Brian Kutz: Great. Thanks, guys. Nice job here. Uli, around the inventory, do you have much risk there around excess and obsolete? We're going to have to take any write-downs there.
and what you have today. It's a bit abnormal.
Brian Kutz: demand, and what customers are asking for. But so far, I mean, our inventory is seriously significant, so I don't have sleepless nights over it. Yeah, it's been fairly consistent over the last few quarters.
Speaker Change: Great. And you mentioned non-core assets. Any ballpark you can share on, you know, what percent of revenue we're talking about here? You can, like, you know, 5%? It's not – yeah, it's –
Speaker Change: It's not a big part of our revenue anything that we would if it was a big part of our revenue we really have to talk about whether or not it's strategic or not so it's not a big piece.
Speaker Change: Got it, great. And a couple of housekeeping pieces here. On your 10% customer in the quarter, I assume that was an international customer?
That's correct.
Speaker Change: And did you have any in 24, any 10% customers for the year?
Oh, good question. Do you...
Speaker Change: No, we had for individual quarters, we always had one. Actually, last quarter we didn't have one. But we did not have a 10% revenue customer for the entire year, last year. Great. And on the optical outlook, do you feel like
Speaker Change: You know, demand and deployments are kind of finally back in balance here. With regards to inventories, are we still a little headwind in optical relative to inventory? We know we still have, you know, we...
Speaker Change: outlier that we think will clear up in Q1. So exiting Q1 we expect to be in a good place.
Great.
And then you mentioned kind of cloud operators. Any...
Speaker Change: Details you can share there in terms of how meaningful that is to the optical business today.
Speaker Change: It's lumpy so it can be it can be good and then some other quarters it can be less good so I wouldn't overweight on that I mean you know kind of our sense on that and then it's
Speaker Change: I will say it's good to have and we're continuing to make inroads but I would say there's no big collection point there. Great and then last one on the on the broadband front access nag
Speaker Change: What you're thinking around the U.S. market, obviously, BEAT is not a sure thing this year, but maybe some of these other government state programs and even a couple of other federal programs are still...
Speaker Change: Driving some strength there. Any anecdotes you can share around broadband and fiber from the U.S. market?
Speaker Change: Yeah, I would say, you know, there are tales from previous stimulus programs that are still doing things, but they're not the meaningful driver to our business. We've had
Speaker Change: Close to 200 customers come in a couple of weeks ago.
Speaker Change: And there was, be it or no be, there was a lot of...
Speaker Change: positive energy about what they what their plans were and that's kind of what's driving the business.
Speaker Change: right now. I think in the Tier 3 space, I think there are a lot of people that are
Speaker Change: I think the big question itself is still out there, but it's becoming less and less a part of people's near-term plans. For us, it's never been a big driver for this year.
Speaker Change: We were kind of more excited about what was going on. Tier 3s in general, we think that, you know, they have been kind of slower, and we think that they're going to have to...
Speaker Change: Start investing again. We also think that the tier two space with some of the new equity that's been coming into there It's been very exciting and that continues to be the case So it's these larger customers are just at least for us. Anyways are doing better
And, you know, bead.
Speaker Change: It'd be nice to have a decision so that the clarity to the customer base would be there, but Like I said, it's not a big driver for this year's revenue
Speaker Change: Thanks, Tom. And just to clarify what you just said about the Tier 2s, you're seeing more positive momentum, better financial footing for them to continue to ramp up investment? Yes, and Tier 2s would be some of these kind of newer...
footprint expansion people that have
And then if you're an incumbent, even the incumbent.
Speaker Change: Tier two carriers You know, they're worried about being overbuilt, right? So yeah, I mean there's a good kind of competitive dynamic going on there
Speaker Change: That's great. That's all I've got guys. Thank you. Okay. Thanks.
Speaker Change: Your next question comes from a line of Tim Savageau from Northland Capital Markets. Your line is open.
Hey, good morning and congrats on
Speaker Change: higher here and you're talking about or guiding to a modest increase in Q1 revenue.
Speaker Change: Sequentially, that is. I wonder if we can get any more color on what's happening there from either a product or geographic standpoint, what you expect to drive that uptick or what some of the moving parts might be.
Speaker Change: Yeah, I mean, I agree with your term modest, but modest is in the eye of the beholder. For us, we're pretty happy with it because typically we're seasonally down.
growth.
Speaker Change: We tend to see, you know, our European buyers tend to buy a little earlier in the year. We saw that last year where they bought kind of earlier in the year, and then less in the second half of the year, and then the kind of more traditional customers.
Speaker Change: have the typical seasonality where the first quarter is down and it starts picking up in the second and third and then fourth is a little bit of a unknown thing. I'm kind of expecting that same trend where we'll see a strong European content and then we'll see the U.S. starting to pick up after that.
Does that answer your question?
Sure does. Sorry about that.
Okay, and back on the optical front.
Speaker Change: And that's kind of combined with this overall kind of carrier behavior that you're seeing, but you know I too was interested in the in the cloud commentary.
to the extent you have some direct exposure there.
Speaker Change: I guess the question is more about indirect impacts of what's happening with AI in the network. You know, we heard Cisco talk about that.
Speaker Change: recently in saying that, you know, carriers are maybe working on their networks or investing, you know, in anticipation of
...you know, bandwidth coming into the network.
Speaker Change: I wonder if you're seeing that in your customer base or any early indications, whether that would be different, you know, kind of US versus Europe.
Speaker Change: But, I guess the overall question is, you know, are there, outside of direct exposure to cloud suppliers, are there indirect benefits in the carrier customer base that you're starting to see?
Speaker Change: Yeah, with some, you know, very, you know, specific things that they're trying to get done and going through. So, it's...
Speaker Change: I think it's made everybody of any size kind of look at their networks and see how do they play on a going forward basis.
Speaker Change: Some are farther along than others, but without a doubt, I would agree with the comment that was made.
Speaker Change: Great, and then last question for me, I know you mentioned...
Early buying in Europe is a potential driver in Q1.
Speaker Change: I imagine that comment is around your sort of established customers in Germany and the UK, but I wonder if we can get an update on what's happening with some of these newer ramps.
Speaker Change: in Europe on the access side and whether that might be contributing as well.
It definitely is contributing. We're starting to see...
Speaker Change: I'd mentioned that we'd started shipping GPON to some of those customers at the tail end of the year and we had some other ones that we're starting to ship in Q1. But the numbers are so much driven by, you know, the kind of established players.
Speaker Change: It's a positive thing, but I don't want to mislead you here. And it's yet to see exactly how that's going to play itself out.
Speaker Change: kind of historically what they have done and what we expect for this year and Yeah, I think I think those are the ones that are driving the bigger numbers although those other ones will continue to add on some of them don't come on though until the
end of the year, right? We have some
Speaker Change: got it well congrats once again and I too am pleased with the modest uptake in Q1 I'll pass it along
Thank you.
Speaker Change: Your next question comes from the line of Amir Amenai from Oto. Your line is open.
Amir Amenai: Yes, hi, thank you for the presentation. I have actually two questions. The first one is regarding the guidance for Q1 2025. You anticipate a non-dopper rating margin between 0% and 4%. Now, if you end up at the lower end of the range, the margin would decline compared to Q4. What factors could drive this decrease? And the second question is, what is the current status of the BEAT program and how much would its potential impact affect
the group's activity in the coming years.
Thank you.
I'll be
Amir Amenai: So, obviously, if we would end up at the lower end of our revenue guidance, then we would move towards the lower half of our profitability guidance range. Obviously, there are some uncertainties that we have baked into our guidance projections, and they are related to items that are more sitting in other cogs or cross-margin. And then I think we touched on, during my presentation, we touched on the fact that
Speaker Change: Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host of the Goldstein on Gelt radio show.
Speaker Change: On the B thing, there's really no impact to us on B. If B gets delayed, we don't have a whole lot in this year anyways. Definitely nothing in Q1.
Okay, thank you so much.
Okay.
Speaker Change: And that concludes our question-and-answer session. I will now turn the call back over to Tom for closing remarks. All right. Thanks, everybody. Thanks for joining us this quarter. We look forward to...
having a robust discussion at the end
Speaker Change: Ladies and gentlemen, that concludes today's quarterly all-hands meeting. Thank you for your participation. You may now log off.
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