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 Fourth Quarter 2024 Financial Results Conference Call. [Operator Instructions] Thank you. Mr. Peter Schuman, Vice President, Investor Relations, you may begin your conference call.

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. During the course of this conference call, ADTRAN representatives expect to make forward-looking statements that reflects 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 our forward-looking statements, 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. 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. We have not provided reconciliations of our first quarter 2025 guidance with regards to non-GAAP operating margin because we cannot predict and quantify 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. In addition, financial measures during the course of this conference call are preliminary estimates. They consequently remain subject to the company's internal controls and procedures, and are subject to risks and uncertainties, including, among others, changes in connection with the quarter-end or year-end adjustments. 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 performance in detail, and then we'll take any questions that you may have. I'd now like to turn the call over to Tom Stanton.

Thank you, Peter. Good morning, everyone. ADTRAN executed well during Q4 with improvements across several key operating metrics. Revenue increased sequentially, our non-GAAP gross margins remained strong, and our non-GAAP operating profits continued to expand. Revenue was up across all regions with non-U.S. revenue up 10% quarter-over-quarter. 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. 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. 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. The growth in our customers matches the diversity in network upgrade catalyst with our optical customer base. In some use cases, it is broadband operators upgrading their backhaul networks to 100 Gig or regional transport networks to 400 Gig or 800 Gig. In 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. Under any of these scenarios, these customers need scalable, secure, and automated optical networks from a vendor that they can trust. We address all of these needs. 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. 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. Investment remains strong among service providers in U.S. and Europe, and we are upgrading and expanding their fiber…

Thank you, Tom, and thank you, everyone, for joining us on the call this morning. To begin, I will first walk through our preliminary Q4 2024 financial performance, and then I will discuss our expectations for Q1 2025. Q4 revenue was $242.9 million, a sequential increase of $15.1 million or 7%, and above the midpoint of our guidance. Revenue increased $17.4 million year-over-year or 8%. Our network solutions segment delivered $197 million, accounting for approximately 81% of total revenue in Q4 compared to 80% in the prior quarter. Our services and support segment delivered $45.8 million or 19% of total revenue in Q4 compared to 20% in the preceding quarter. From a product category perspective, access and aggregation delivered $72.7 million or approximately 30% of total revenue, and increased 8% sequentially. Our optical networking solution category was $81.6 million or 34% of total revenue. This was up 16% sequentially. Subscriber solutions was $88.5 million or 36% of total revenue. This was down 2% sequentially. Non-U.S. and U.S. revenues were 57% or 43% of total revenue, respectively. We had one customer who represented more than 10% of our Q4 revenue. Non-GAAP gross margin during the quarter was 42.0%, a sequential decline of 11 basis points. Non-GAAP operating expenses in Q4 were $94 million, reflecting a quarter-over-quarter increase due to higher deferred compensation and increased sales commissions. For Q4, our non-GAAP operating profit was $7.9 million or 3.3% of revenue and above the midpoint of our guidance range. This compares to a non-GAAP operating profit of $2.5 million or 1.1% of revenue in Q3 2024 and a loss of $3.2 million in the year ago quarter. 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…

[Operator Instructions] Your first question comes from the line of Michael Genovese from Rosenblatt Securities.

Congratulations on the nice results. I guess I want to follow-up on the balance sheet point. To begin, $112 million of net debt, if I got that right, exiting the quarter, so you want to be in a net cash position by the end of the year. That seems -- am I right that, that seems fairly trivial with -- that a real estate sale and sort of cash generated from operations should be able to get us there easily? And that -- and I guess my question is really, is -- are there other assets, like this anything in the business that could be sold and kind of inventory, how much of this is going to 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?

The answer to your question is yes. So just directly, yes. We do expect inventory to come down through the year. We do expect to be generating 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 property and the market. And we have some properties that are relatively unique. So we have to find the right buyer and it's got to match up. Having said that, we have found 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 talked about anything that's nonstrategic, and our strategic areas are fairly easy to define. Subscriber, fiber-to-the-prem and optical, and those are the businesses we're in. So things that don't fall in line that, we would take a look at, and we -- yes, there's a potential for us to move forward on some of those assets as we find the right buyers. Does that answer your question?

Yes, absolutely. I guess my other one would be just kind of on the sustainability of the telecom recovery since -- so I don't want to ask too many multipart questions. But if I had the time, I would sort of -- kind of Europe and the U.S. visibility to -- as we move beyond the first quarter 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 the purchase order. And unfortunately, our business is typically more book and ship than maybe some longer-term businesses. But the -- so the confidence that we have is typically, number one, based off of what we have in backlog and is 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, the last 6 months has been substantially different than the 6 months prior to that. Bookings have picked up. In general, things -- yes, I mean, just things just look more positive. But we really don't have a crystal ball. I can't tell you explicitly what I'm going to do in Q4 of 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 very positive.

Your next question comes from the line of Christian Schwab from Craig-Hallum Capital Group.

Good quarter. Back to the inventory. You've done a significant job of reducing your inventory on your balance sheet over the last 2 quarters. Do you have a stated goal for inventory? And what level do you think that could potentially be reduced to before you would need to maintain it for future growth objectives?

Yes. We -- do you want to talk about our turn -- those turns? Go ahead.

Yes. So currently, our inventory turns are 2.2, 2.1, not where we want to be, not where we have been in the past, and our goal is to increase our inventory turns back up to in that 4x range for the year. Obviously, this is a process that takes some time. For this year, like Tom said during his part of the call earlier, we anticipate that inventory will continue to come down throughout this year. And how much depends on the demand profile from customers and how much additional material we need to buy from the outside in order to satisfy this demand. So -- but overall, I would anticipate inventory will come down some. Maybe not quite as significant as we have seen first quarter of last year, where we had a significant drop in inventory, but we are working through the process and anticipate a gradually decline in inventory.

Yes. I think the key is, the way to think about is 4x inventory turns. That's really where -- we're comfortable there. We've been there before. We get much above that. And we start having customer issues. So kind of low 4s is a comfortable place for the company. Christian David Schwab Craig-Hallum Capital Group LLC, Research Division – Partner & Senior Research Analyst And then given the improved business environment that you're seeing, I know you have limited visibility, but we are coming off a pretty challenged industry environment in calendar 2024. Would you expect revenues this year, although quarter-to-quarter volatility, but would you expect 10% plus type of top-line growth this year? Does that seem fair?

Fair. Let me just explicitly say, we really don't give full year guidance. We know that there are numbers that are out there. We're aware of that. But we've had, in the past, struggled to get quarter guidance. So 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, but we still have to see how the year plays out.

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

Nice job here. Uli, around the inventory, do you have much risk there around excess and obsolete? We're have to take any write-downs there on what you have today [indiscernible]

Well, we have a fairly large reserve built -- that we built over the last few years when our inventory was so high, so I think we are in a safe spot here. Obviously, it always depends on demand and what customers are asking for. But so far, I mean, our inventory reserve is fairly significant, so I don't have sleepless nights over it.

Yes, it's been fairly consistent over the last few quarters, and I don't see a big change that.

And you mentioned noncore assets. Any ballpark you can share on what percent of revenue we're talking about here? You believe it's like 5%, 10%...

We don't -- it's not a big part of our revenue, anything that we would -- if it was a big part of our revenue, we would really have to talk about whether or not it's strategic or not. So it's not a big piece.

And a couple of housekeeping pieces here. On your 10% customer in the quarter, I assume that was an international customer?

That's correct.

And did you have any -- in '24, any 10% customers for the year?

Food question. Do you...

For the year? No. We had -- for individual quarters, we always had a one -- actually, last quarter, we didn't have one, but we did not have a 10% revenue customer for the entire year last year.

And on the optical outlook, do you feel like demand and deployments are kind of finally back in balance here with regards to inventories? Or are we still a little headwind in optical relatively...

We know we still have -- I think we've been fairly vocal that we expect one inventory situation to clear itself up in Q1. That's still the case. Inventory, it was getting better and better through the year. We kind of have one outlier that we think will clear up in Q1. So exiting Q1, we expect to be in a good place.

And then you mentioned kind of cloud operators. Any details you can share there in terms of how meaningful that is to the optical business today?

It's lumpy. So 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 -- I will say it's good to have, and we're continuing to make inroads, but I would say there's no big inflection point there.

And then last one. On the broadband front, access and ag, what's your thinking around the U.S. market? Obviously, BEAD 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 driving some strength there. Any anecdotes you can share around broadband and fiber from the U.S. market?

Yes. I would say there are tails from previous stimulus programs that are still doing things, but they're not the meaningful driver to our business. We've had close to 200 customers come in a couple of weeks ago. And there is -- BEAD or no BEAD, there was a lot of positive energy about what their plans were. And that's kind of what's driving the business right now. I think in the Tier 3 space, I think there are a lot of people that are gearing up. I think the BEAD 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. We were kind of more excited about what was going on. Tier 3s, in general, we think that they have been kind of slower, and we think that they're going to have to start investing again. We also think that the Tier 2 space with some of the new equity that's been coming into there has been very exciting. And that continues to be the case. So these larger customers are just -- at least for us anyways, are doing better. And BEAD, it would 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.

And then 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 in [indiscernible]

Yes, yes. And Tier 2s would be some of these kind of newer footprint expansion people that have private equity and others have invested in. And then if you're an incumbent, even the incumbent Tier 2 carriers, they're worried about being overbuilt, right? So yes, I mean, there's a good kind of competitive dynamic going on there.

Your next question comes from the line of Tim Savageaux from Northland Capital Markets.

And congrats on seeing the top-line inflect higher here. And you're talking about or guiding to a modest increase in Q1 revenue. 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?

Yes. 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. So -- yes, so we're kind of, like I said, we think it's a positive thing. In general, I think we'll see a stronger access and ag growth. We tend to see 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 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 an 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?

It sure does. Sorry about that. And back on the optical front, and this is kind of combined with this overall kind of carrier behavior that you're seeing. But I, too, was interested in the cloud commentary to the extent you have some direct exposure there. But I guess the question is more about indirect impacts of what's happening with AI in the network. Heard Cisco talk about that recently and saying carriers are maybe working on their networks or investing in anticipation of bandwidth coming into the network. I wonder if you're seeing that in your customer base or any early indications whether that would be different kind of U.S. versus Europe. But I guess the overall question is, are there -- outside of direct exposure to cloud suppliers, are there indirect benefits in the carrier customer base that you're starting to see?

Yes. The direct answer to that is yes. And in both U.S. and Europe with -- yes, with some very specific things that they're trying to get done and going through. So it's -- 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. And I think when they do that analysis, that ultimately is going to lead to upgrades in their network. And some are farther along than others, but without a doubt, I would agree with the comment that was made.

And then last question for me. I know you mentioned the early buying in Europe as a potential driver in Q1. 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 in Europe on the access side, and whether that might be contributing as well.

It definitely is contributing. We're starting to see some of the -- I mentioned that we had started shipping GPON to some of those customers at the tail end of the year, and we have some other ones that we're starting to ship in Q1. But the numbers are so much driven by the kind of established players that it's a positive thing, but it's -- I don't want to mislead you here. We have a handful of customers that really drive the bigger numbers. And it's yet to see exactly how that's going to play itself out. What I'm going by is kind of historically what they have done and what we expect for this year. And yes, 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 larger things. We have some of them that come on at the end of this year, and then we have some come on early next year as well. But the ones that I had previously talked about coming online, I think all of those have or will start first half of the year.

Your next question comes from the line of Amira Manai from Oddo.

I have actually two questions. The first one is regarding the guidance for Q1 2025. You anticipate a non-GAAP operating 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 BEAD program? And how much would this potential impact affect the group's activity in the coming years?

It was about BEAD.

So I will start, Amira. So what would -- I mean, 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 gross margin. And then I think we touched on -- during my presentation, we touched on the fact that we anticipate a smaller increase in our operating expenses based on inflation or payroll adjustments and benefit adjustments for the year.

On the BEAD thing, we don't -- there's really no impact to us on BEAD if gets delayed. We don't have a whole lot in this year anyways. Definitely nothing in Q1.

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 of Q1. Thanks very much, everybody.

Ladies and gentlemen, that concludes today's quarterly all hands meeting. Thank you for your participation. You may now log off.