Ladies and gentlemen, thank you for standing by. And welcome to ADTRAN Holdings Incorporated Fourth Quarter 2023 Earnings Release Conference Call [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 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 the forward-looking statements, which may be made during the call. We undertake no obligation to update any statements to reflect the 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 investment presentation and our earnings release. The investor presentation found on ADTRAN Investor Relations website has been available, 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. Sir, please go ahead.

Thank you, Krista. Good morning, everyone. We appreciate you joining us for our fourth quarter 2023 earnings conference call. With me today is ADTRAN Holdings CFO, Uli Dopfer. Following my opening remarks, Uli will review the quarterly financials performance in detail, and then we'll take any questions you may have. Our fourth quarter revenue came in as expected with operating profitability on the upper end of our guidance range, helped by lower operating expenses and improving gross margins. Revenue of course continued to be impacted by macroeconomic factors and elevated inventory levels. Given the environment, we continue to focus on managing our operational expenses and reducing our inventory levels. Taking a closer look at the results in the fourth quarter. 62% of our revenues came from outside of the US, which is similar to the geographical revenue mix in the first three quarters of the year. On product mix, subscriber solutions was up quarter-over-quarter due to an improving inventory situation with both RGs, residential gateways and ONTs. The access and aggregation solution category was down quarter-over-quarter due to timing of orders with a couple of our larger customers. Optical networking solutions continued to be impacted by inventory reduction initiatives with large customers. Coming into 2024, we remain focused on two strategic initiatives, the investment in fiber based broadband networks in the US and the high risk vendor replacements centered in Europe. These two initiatives have driven us to broaden our presence and strategic relevance in Europe and substantially increase our product portfolio breadth for customers here in the US. And while 2023 presented headwinds to equipment suppliers, operators continue to invest in deployment of fiber networks across most regions of the world. According to the Fiber Broadband Association, fiber broadband deployments in the US set a record in 2023, passing…

Thank you, Tom, and hello everybody. I will cover our Q4 2023 preliminary results and provide our expectations for the first 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 to the site, which is available for download. Unless stated otherwise, all financials are presented in US dollars. Q4 2023 revenue came in at midpoint of our guidance at $225.5 million but down 37% year-over-year and down 17% quarter-over-quarter. Our Network Solution segment accounted for 80% of revenues in Q4 2023 compared to 88.6% in Q4 2022 and 83.9% in Q3 2023. Our Services and Support segment contributed 20% of revenues in Q4 2023 compared to 11.4% in the year ago quarter and 16.1% in the previous quarter. Access and aggregation contributed 28.5% of revenue and was down 32.9% compared to the year ago quarter and down 32.1% compared to the previous quarter. Our optical networking solution category contributed 38.2% of revenues and was down 39.5% year-over-year and 26% quarter-over-quarter. Subscriber solutions was down 37.5% year-over-year but grew 22.3% quarter-over-quarter and contributed 33.4% of revenues. As Tom mentioned earlier, we continued to face a decline in service provider spending, driven by macroeconomic challenges and ongoing inventory adjustments. International revenue made up 62% and domestic revenue contributed 38% of total Q4 revenue. We had one 10% or more of revenue customer in Q4. Q4 non-GAAP gross margin was 41.9% and increased by 277 basis points year-over-year and 155 basis points sequentially. The year-over-year and quarter-over-quarter increase is due to reductions in manufacturing and transportation cost and a more favorable…

[Operator Instructions] George Notter from Jefferies.

I wanted to just ask some more questions about what you're seeing in the marketplace. You referenced inventory digestion, you referenced the macro economy. But I know one of your competitors was also talking about BEAD acting as an overhang on current demand. But could you tell us more about what you're seeing, is there a BEAD effect in your business, or what can you tell us that gives us more detail on demand trends?

So I think when you were talking about BEAD, we're typically talking about the Tier 3, the smaller carrier space. If I look at OLT shipments specifically into that space in the quarter, they were actually pretty flattish, maybe slightly down. I would expect it actually probably a little bit to pick up this quarter, so I don't know. I guess you could say, yes, there's an impact because that's a segment that had been growing 30% year-over-year for some period of time. But as to how much of that, I don't get a sense there's a lot of inventory in that Tier 3 space. I think what we're seeing is real demand. So I would say it's -- for us, anyways it's flattish at this point in time. There are without a doubt some customers that are waiting for BEAD and then there are some customers that are moving forward. So I would say, yes, I see the impact. But for us that kind of points back to a flattish number. Does that answer your question?

And then, I know there was an effort to look at the real estate portfolio in Huntsville and maybe elsewhere. Any update on where you guys are in rationalizing real estate?

We've got -- if you've ever been here, we've got three separate buildings here. We have consolidated everybody and there was just way too much space kind of post pandemic and even maybe a little bit pre-pandemic as we had hiring going on and post acquisition, we had a lot of resources in Europe, specifically in Poland as well as India. So we had too much space. So we are clearing out two of the towers that should be done right at the end of this quarter. We have started showing those properties and that's moving forward. We'd still expect second half of this year for the impact on that.

Any update on what kind of proceeds you might be able to get from that process?

So there are two -- I don't know if we've given specific ranges. So there are two different paths that we can go down, and we talked about one of those being on that is fairly straightforward to execute on, but we haven't made a firm decision to execute on that. And that's the tower, I guess what we call the East Tower, which we could do a sell and lease back on. On the North South, which is the one we're just talking about, I'm thinking it's in the range of $40 million to $60 million or something like that.

Your next question comes from the line of Michael Genovese from Rosenblatt Securities.

So is the CPE subscriber solutions inventory correction over, is that the right way to think about it?

Well, that's the way I'd like to think about it. And the real answer is, I can't say -- I don't want to say yes, because I think that we sell it to a lot of different people. We happen to have an uptick. We're expecting it to be kind of in the similar range during this quarter. So I would say for our specific inventory, I think, we're through the deep part of that. So let me just leave it at that.

And can you talk about on access and aggregation, just some of the timing issues some more? And I mean, we've got your first quarter guide sequentially flat. What should we be looking at as we move through further quarters given the timing on access and aggregation?

So we had a couple of customers and it really was to one in Europe, probably can guess who that one is. And then an MSO here in the US that had bought previous to that. I would expect the MSO probably to come back this quarter. The other customers are going to have a decent quarter this quarter, it will be stronger than last quarter. And then Tier 3s I already talked about, they're kind of flattish.

And then finally for me, I mean, just when we look at the overall guide, the midpoint of the guide at 225 flat sequentially. I mean, you've already mentioned subscriber solutions being about flat sequentially. I mean, should we look at the other two, optical [Technical Difficulty] and access aggregation roughly flat as well?

Let me just try to add some clarity there. Subscriber solutions, flattish is probably a good guess. It's probably a little conservative, but it's a good guess. You would expect access to be up just based off of the very specific customer thing I talked about. Optical is what we would expect to be down as I specifically mentioned. So I talked about inventory in optical, I really didn't talk about inventory corrections impacting subscriber and our fiber to the prem business that much and that was on purpose. So we still think there's inventory in the optical space. We think the other two are easing up. And if I had to look at the mix between optical and the other two, I would expect the other two to be up on a sequential basis and optical to be down.

And just for gross margins, does that mix make a difference for gross margins? I mean, I have a hard time thinking that gross margin will be quite as high in 1Q as in 4Q. Could you just help out with that?

The real shift there would be between is really what is the infrastructure piece of the fiber to the prem, which is actually pretty good gross margins versus the subscriber piece in app and prem. So yes, I mean, that's just some variability we have to get through. I really don't know where that will end up until we get to the end of the quarter. We also have some easement coming in our inventory costs, they're trying -- we're continuing to do better than we expect to do on gross margin. So the trend itself kind of helps us along in that math.

Your next question comes from the line of Ryan Koontz from Needham & Company.

I wanted to unpack gross margins in the fourth quarter a little bit there, really nice improvement along with a higher mix in CPE, which usually is a headwind on that line. So can you maybe unpack the kind of puts and takes there? You talked about transportation costs being down, and I haven't heard that elsewhere too much. So any color there would be helpful.

The transportation cost comment was mainly related to the comparison for Q4 2022 where transportation cost was still extremely high.

But I talked about transportation cost specifically just kind of the positive. So any other color you want to give on Q4?

I’m thinking on the sequential improvement, Uli.

The sequential improvement is mainly driven by customer and product mix.

And that includes a higher mix of CPE. So I guess that implies stronger shipments to smaller customers that maybe have better margins [indiscernible] that?

Well, the CPE is made up of several different things, and some of it depends on the actual customer itself. 10 gig CPE versus 1 gig CPE, for instance, makes a difference. And I will tell you this, the infrastructure business, in general, has been tending upwards, I think, just because of the nature of the competitive environment right now. So I think that has actually benefited. And then we continue to work down kind of higher price bill of material parts into lower price bill of material parts without expedite fees, and those have all just been positive attributes coming into really over the last couple of quarters.

And one kind of broader question, maybe stepping back from the European opportunity with Huawei displacements. How would you characterize Huawei's position in the European continent today outside of your specific projects you've talked about winning? Like where are they still competing and how would you kind of characterize the competitive environment relative to the Chinese supply…

Honestly, they're almost -- you don't see them that often. And when you do see them, it tends to be a pricing exercise versus a real award exercise. And I would say, if you look at it on a year-over-year basis, the number of carriers that are saying this is not just a near term problem but this is a longer term problem to the extent that they award business to kind of a high risk vendor then they have to worry about when does that equipment need to come out and when can I quit taking software drops from this company, and that momentum is doing nothing but getting stronger.

And so in terms of new bids, they're not competitive. But in kind of run rate business, they're still seeing a fair amount, I would think, of sales into the legacy footprint?

What you're seeing happen is in the legacy footprint if somebody has open slots in shelves then they are liable to fill those open slots right now until they get through an award process or get through -- until they have an alternative. But open slots are still being filled in a large part of Europe, but new shelves coming in you just don't see an awful lot of that. And we have some very specific opportunities where they're literally talking about taking equipment out.

Your next question is Tim Savageaux from Northland Capital Markets.

I had a question, I guess, about well the access and aggregation market in Q4, or segment was down pretty good sequentially. And you talked about Tier 3s being flat. It sounds like that's a reference more to Q1, or could I get some clarification on that? And I know that Tier 3 also includes subscriber. So as you look at that decline in Q4, what would -- would you attribute that more to a couple of large customers and is that flattish comment also hold in Q4 versus Q1?

There is a nuance there that you got to understand for it to all kind of click in there. So yes, without a doubt the biggest issue was two specific customers that we had previously shipped a significant amount to. I don't consider that inventory problem. I consider that as they buy kind of in six month increments, right, that's just the way that they buy. And so that impacted us. If you look at access and agg, access and agg was down but it's made up of several different things. It's made up of switching components that are sold into fiber to the prem and sometimes outside of hybrid to the prem and it's also made of optics, so pluggable optics that actually go along with the product. If I look at OLT shipments, and this is kind of a -- we're getting down into the weeds here. But if I look at OLT shipments into the Tier 3s, they were flattish, and that was in Q4. So in Q1, I'm expecting similar, maybe slightly up, but I'm expecting something similar to that. But if you look at optics, those vary pretty heavily by quarter-to-quarter. And the optics portion of that actually pluggable piece was down in Q4 and I would expect it to come back up a little in Q1. You can think about that as more inventory specific things, by the way, where they may have some optics but don't have the actual hardware components, the active hardware components in the OLT. Did that clarify [Multiple Speakers] for you?

And just continuing on that, if you look at the competitive dynamics, and I know you discussed that with regard to some of the Huawei replacement. But again, specifically in that US rural broadband market. I guess, what are you seeing there from a competitive standpoint in terms of the potential for competition to intensify here in kind of a flattish market environment or any other dynamics that you would be willing to comment on?

It's pretty similar to what we saw most of last year. I mean, that market is predominantly us competing against Calix and then in some cases Nokia. Don't see -- we're kind of the three that are actively in that market with Calix is who we run up against most, and the dynamics that really haven't changed. Software is a much bigger part of the story, that's why I mentioned the Mosaic One, kind of our take rate on Mosaic One has been fantastic. We also launched a very, very good offering in our Intellifi, which is our managed Wi-Fi specifically for that segment. But the dynamics really haven't changed, they're about the same. There's -- everybody's kind of getting positioned. There really haven't been any awards yet through the states, or I think Louisiana is the first one that actually has cleared all of the paths to start to get funding and then they have to go through an award process. So I think everybody is trying to touch every customer that's kind of potential in there and then as the money starts flowing through, we'll start seeing who's actually winning these customers.

That’s great. Thanks. Appreciate it.

At this point, I think we're out of question. So I appreciate everybody joining us for the call and look forward to talking to you next quarter.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.