Ladies and gentlemen, thank you for standing by, and welcome to the ADTRAN Holdings, Inc. Fourth Quarter 2022 Preliminary Earnings Release 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 period. [Operator Instructions] 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 continued spread and the extent of the impact of the COVID-19 pandemic, the ability of component supplies to align with customer demand, the successful development and market acceptance of our products, competition in the market for such products, the product and channel mix, component cost, freight and logistics costs, manufacturing efficiencies, our ability to effectively integrate mergers and acquisitions and other risks detailed in our annual report on Form 10-K for the year ending in December 31, 2022, and our quarterly report on Form 10-Q for the quarter ending September 30, 2022. These risks and uncertainties could cause actual results to differ materially from those in the forward-looking statements, which may be made during the call. It is now my pleasure to turn the call over to Tom Stanton, Chief Executive Officer of ADTRAN Holdings. Sir, please go ahead.

Thank you, Lisa. Good morning, everyone. We appreciate you joining us for our fourth quarter 2022 earnings conference call. With me today is ADTRAN Holdings CFO, Mike Foliano. Following my opening remarks, Mike will review the quarterly financial performance in detail, and then we will take any questions that you may have. I want to start by highlighting the importance of the milestone reported last month and our combination with ADVA Optical Networking SE. The Domination and Profit and Loss Transfer Agreement or DPLTA was registered. This was the final administrative step in operating as one company. We can now focus our integration efforts to drive synergies and shareholder value. With that context going forward, I will just talk about ADTRAN as a single integrated company rather than a combination of two different companies. Our initial motivation for combining with ADVA was due to our belief that the combination would make both companies stronger and more diversified. The key components of our combined value proposition were that we would have a more diverse and differentiated portfolio, a more diverse customer base in both customer type and region, and a stronger presence in our focus markets, especially the US and Europe, to capitalize on the fiber networking growth opportunities in these regions. The results in Q4 highlight the increased product and customer diversity of the combined company. We are looking at the quarter, I will provide some quarter-over-quarter growth statistics on a pro forma full quarter basis, to reflect what the performance was in Q4 versus Q3 had the ADVA financials, then consolidated for all of Q3. The financials that Mike will review, will compare Q4 quarter totals – excuse me, Q4 totals quarter-over-quarter with a partial contribution from ADVA beginning July 15, 2022 the closing date, and year-over-year without ADVA…

Thank you, Tom, and good day to all. I will cover the fourth quarter 2022 preliminary and unaudited results and provide our expectations for the first quarter 2023. Please note that Q4 2022 results include a full quarter consolidation of the ADVA financials, which affects year-over-year and quarter-over-quarter comparisons. Please be reminded that Q3 2022 incorporated only a partial quarter with ADVA beginning July 15, 2022. Since this is the case, I will refrain from repeating the consolidation effects when discussing the year-over-year comparisons of our results. I will be referencing non-GAAP information, with reconciliations to the most directly comparable 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've uploaded and updated investor presentation to this site, which is available for download. Unless stated otherwise, all financials are presented in U.S. dollars. ADTRAN's fourth quarter 2022 revenue came in at $358.3 million, up 132% year-over-year, and up 5% quarter-over-quarter within the lower half of our guidance range of $355 to $375 million. Our Network Solution segment accounted for 89% of revenues in Q4 2022, compared to 90% in Q4 2021, and also 90% in Q3 of 2022. Our Services and Support segment contributed 11% of revenues in Q4 2022, compared to 10% in the year ago quarter and in the previous quarter as well. Year-over-year and quarter-over-quarter revenue increases were driven by our optical Networking Solutions category, which comprises 40% of revenues, compared to 35% in the previous quarter. Subscriber Solutions & Experience contributed 34% of revenues, compared to 35% in the year ago quarter and 39% in the previous quarter. Access & Aggregation revenue share was 27%, compared to 65% in Q4, 2021, and 26% in Q3 2022.…

Super. Thanks Mike. Lisa, at this point, we'd like to open up to any questions people may have.

Thank you. The question-and-answer session will be conducted electronically. [Operator Instructions] We'll take our first question from Michael Genovese with Rosenblatt Securities.

Hey guys, this is Andrew King on for Genovese. Thanks for taking my question. First off, just -- not sure if I missed this or not. Can you break out the revenue contribution from ADVA versus ADTRAN organic?

Yes, so the ADVA contribution on a US dollar basis was $202 million.

Got it? And then I'm not sure if I missed this detail this quarter, but I know last quarter you had mentioned that on gross margin side, you've seen approximately 350 basis points of impact from supply chain. If you could update that number for this quarter? And then if you continue to see the supply chain improvements that you saw through this quarter, how much of that would you expect to gain back through the year of FY 2023?

Yes, the first part is a little easier than the second part on that question. So, let's start with the easy one. So, compared to the 350 basis points for this past quarter, it was 260. So, roughly 2.6 percentage points of impact is still out there. So, you see it's going in the right direction. We expect it will continue to move in that direction, but it's not going away over the near-term quarters. So, I think there'll be -- there's going to be a hangover for a while there just of extra purchase price variation and cost that we have paid to secure components that some of that is remaining on the balance sheet. I think we've said before that we're starting to see freight and logistics costs dropping as more capacity has come online and rates have reduced a bit. But that's -- it's still a bit elevated from where it has been in the past. So I can't tell you exactly what's going to happen in the future. But we do expect it to continue to move in the right direction.

Got it. And if I can just sneak in one more quick one here. You saw a trend that started to defy the industry this quarter, which is your book to bill remained around 1% and your backlog let's say it came up about a 2% sequentially. So I mean, what do we have to see in the improvement in supply chain to see that backdrop logs start to get released and come back down to historical levels, and how much that you expect to be released over this next year and this next quarter?

Yeah. Well, you're correct about the book to bill, so we still have very strong order entry coming in. I think over the next three quarters, hopefully we don't know exactly. Some of these are down to, you know, you're missing one or two components, many times one component on a build material of 200 components. So those are getting better and better. Unfortunately, those ones where you're missing one are still probably the most problematic. So I would expect it to get materially better throughout this year. We're going to try to really -- we're managing and our focus is on longest lead, longest things in our backlog right now and really trying to clear those out. And then any customer impacting pieces, so that will get materially better through the third quarter I would think.

Understood. Thanks for taking my questions.

Okay.

We’ll take our next question from Ryan Koontz with Needham.

Thanks for the questions. Tom, I was wondering if you could expand on the strength in Europe sounds like ADVA had a great quarter there, and what applications are driving that success with their service provider customers that they highlighted. Can you also update us on where ADTRAN’s progress with -- with ADTRAN’s core fiber wins are progressing in Europe? That would be great. Thank you.

In Europe, I will tell you for the optical solutions piece that was actually pretty much across the board, metro networks, private networks. It was just broad strength interesting people upgrade their networks now to handle new speeds not only access space, but if you're a corporation or whatever you're -- the amount of information flow is growing dramatically right now. So there wasn't really one particular highlight, I would say it was across the board. On the access piece, we have on the ADTRAN fiber access piece, we have several awards that are in play that we expect it to get close. This quarter actually, I think all of the ones that we have talked about being in the works are at this point through lab trials and completed. So we'll see those pickup, really the gating factor there is our ability to supply product. I'd mentioned in my notes that the 6330 got delayed to this quarter. Many of those customers are waiting on the 6330. That's our newest best differentiated really great platform that lot of these awards were premised on, so we have to get that out the door and we expect to be shipping that towards the tail end of this quarter.

Super helpful. Thanks. And just as a follow-up, you mentioned your large software run, do you have any color on that you can share what type of customer or what type application?

Yeah. That was the largest. So we have NFV solutions, which are kind of by feature solution that was our largest NFV went to-date. So that was using the ensemble platform.

Got it. That's like business demark, like a universal CPE type model?

Yes. That's correct.

Got it. That's it, Tom. Thanks so much.

And NFV is final shipping after -- has been around for a while.

Yes. All right. Thanks so much.

We’ll take our next question from Greg Mesniaeff with WestPark Capital.

Yes. Thank you for taking my question. I was wondering if you can discuss the Huawei replacement cycle, if you will. And where are you seeing the greatest amount of activity? I assume it's in the UK. But -- and also how much of that was a contributor to your revenues in the quarter? Thanks.

I think that's a good question. I probably should have pointed that out on what's going on in Europe with our optical solution set too, because a lot of that activity is driven by the fact that you have carriers or even enterprises that have non-trusted vendors in their network that they're having to remove. The activity, you can do it a couple of different ways. If I just look at flat out borders, then you're right, UK is the strongest. They were kind of ahead of the curve early on and made a decision a couple of years ago that they needed to migrate away. But almost all of the carriers, if not all of the carriers at this point in time are doing something, let's say, all of the major carriers at least. I talked about the fact that we had one five additional carriers in Europe, most if not all of those were impacted. In fact, I would say, all of those were impacted by what they're having to do with their vendor space, and that either kicked off this award or accelerated awards. So it's in -- and that's also happening in the optical solution space as well. I think that's why we're starting to finally see this activity or I shouldn't say finally, but we're seeing this activity really kind of pick up, because people are being forced to make decisions.

Thank you for that.

We'll take our next question from Paul Essi with William K. Woodruff & Company.

Yes. Thank you for taking my question. Well, first question is residential SAS. I wondering if you could give us an update on that, and also with the Wi-Fi 6 chip kind of getting freed up, do you expect that -- maybe give us some idea of how quickly this thing can grow in 2023.

Yes. So it is a hot area. I mentioned that our subscribers solutions were down on a quarter-over-quarter basis, but we had a really kind of super focused on trying to clean up some of that backlog in Q3. Demand hasn't lightened a bit in that product area, both for RDS and RNTs [ph]. In fact, I think RNTs made actually set a record this quarter. They were very, very strong. On the SAS front, I'd also mentioned, we've crossed 150 customers. I will tell you, carrier customers. All of those, of course, have subscribers that are tethered to them. We are working through the backlog of onboarding these customers. So my guess is we're probably of that 150. We're probably about 50% of those are online now or very close to being online. That backlog continues to grow. Our SAS customer kind of continues to grow at over 30%, kind of year-over-year rate, and I -- was actually at that rate again this year. So, a very good uptake on that. And I would say software in general was a positive note. I mentioned the ensemble piece, but just from a revenue perspective, all of that's coming in line and we're very happy with what we did this quarter.

Okay. As you had 2 million end subscribers, not service providers, but end subscribers at the end of September. Do you have an idea where you were at the end of the December?

Yeah. It's actually we're over 2 million and when I said that number, we're over 2 million. We're still over 2 million, that continues to grow. Like, if we want to give much more color because we -- at some point, that gets to where we want to break that number out. We haven't gotten to that point yet. But it -- let me just say, it's well in excess of 2 million.

Okay. Another question on the middle-mile, can you talk a little bit about what your strategy is in the States and what you're seeing out there and what we might expect this year and next as far as new orders?

Yes. That’s actually been a positive, a real -- the recession in the US has been very positive. We have already started -- we’ve already booked deals. In fact, we probably have already started shipping deals, where the introduction of the combined company's assets being brought to us carriers that have kicked them into buying decisions that were either ongoing and we were able to secure it, or it's kicked off buying decisions, most specifically in the RSP space here in the US, as we've seen very good reception and I think we're in the early days of that. Europe, it's going exactly the way we planned. We have gotten some introductions from the ADVA customer base with ADTRAN equipment. We started really joining our forces in the way we're going to customers. From large carriers, without a doubt, it's making an impact on how we're presenting to them, what they're asking for. I think it's -- I think really out of customer space, I can't think of a single negative on the customer side.

Okay. And if I could have one more -- sneak one more in. Your German security company, what business was put inside of that and what is your strategy for going after new business? Who is your target market and what might we expect revenue wise in that? And also, will that be broken out going forward?

Mike, do you want to cover is -- the break out of that ANS revenue.

Yes. We don't break it out today. If it grows larger, we would actually break it out, but it's not reported separately today. The customers that we're focused on mostly there are government customers who have high security requirements, mostly in Europe. But they can actually sell elsewhere as well. The products, I think, Paul, that are in there are all around high level encryption and security technologies. So its things that governments' are using for their own private networks to ensure secure communications.

I think you can think about, just so you can scope it, is less than $50 million. It's probably -- it's in the multi 10s-of-millions. And we fully expect it to grow but it is very focused in it target.

Okay. Thank you. That's all I had.

We’ll take our next question from Tim Savageaux with Northland Capital Markets.

Hey, good morning. I wanted to get a quick one in on the tax rate. It's been pretty volatile. So, Mike, I wonder if you have any expectations for Q1 or the year. And then, on to a more substantive question. Tom, you mentioned you couldn't think of any negatives on the customer side, maybe we can explore that a little further. Seems like one of your US based competitors is seeing a pretty good size win at Deutsche which given the strength that you saw in the quarter with ADVA, I assume that's your largest customer for the quarter or at least in competition. I wonder if you could talk about that competitive environment more broadly. And if I have time for a follow-up I'll jump in there. Thanks.

Yeah. Let me take the tax -- do I start with the tax?

Well, I think the other one is actually more…

Okay. Go ahead. Either way.

Well, I will tell you know everybody has to have two vendors and well I should say most companies have to have two vendors. I would say with our position within that account both from a relationship side, but really more specifically from the technology side where giving the possible scenarios of what could have happened, we're happy with where we are. I think we're in a good position there. So as you know, that used to be a three vendor account, with us Huawei and Nokia and that is materially changing. And we think we're in a really good position. So hopefully, that answered that question. Mike, you want to cover.

Sure. I think you're right that we've had some pretty big volatility on our tax rate, the 50% that we ended with in the quarter there is driven just by a lot of the International taxes that are coming from the business combination. And then with the global intangible low tax income rolling across that we've had some increases there. Now our non GAAP rate for the year was 21.7, so maybe just slightly higher than we had expected. The last quarter was really making up for some benefits that we saw earlier in the year because of the changes that happened in the tax code. Looking ahead, at what we're expecting for 2023, I would say our non GAAP rate should be in the low to mid-20s percentage rate, and we should have a lot less volatility going forward. Now that the valuation allowance has been mostly eliminated, I think that changes in the valuation allowance caused some swings in that non-GAAP rate as well. So I think it should settle out a bit into that low-20s ish percentage rate.

Tim, that answer your question?

It sure does. If I could maybe follow-up real quick. And this is just about the standalone ADTRAN performance in the quarter procured down double-digit sequentially and kind of flattish year-over-year and you broke out to the subscriber solutions maybe driving some of that, but either you talked about strengthen US rural, so anything in particular outside of the -- and maybe it is just a new product stuff driving that within the ADTRAN standalone numbers?

Yeah. The biggest kind of impact the thing that we didn't expect was we launched -- I have mentioned the 63 30, which was supposed to start shipping in Q4. It's now targeted towards the end of this quarter. So we had a little misstep there and both supply and then just getting all of the things that we needed to get done in order to finish up the lab approval so that that hurt us some and then we also had some redesigns on many of them 60, the predecessor 6330, it's called the 6320 and we had some issues getting those out the door. That was the biggest impact to us - and in -- and actually drives what the performance that you're talking about. Those will be 6320 is now up and shipping. So that's kind of past us. 6330 we still have a little bit of work to do.

Okay. Thanks very much.

Okay. All right. I think that's the end of our questions session. So I appreciate everybody joining us today and we look forward to talking to you next quarter. Thanks very much, everyone.

Thank you. That does conclude today's presentation. Thank you for your participation and you may now disconnect.