Good morning. My name is Sarah, and I will be your conference operator. At this time, I would like to welcome everyone to ADTRAN Holdings First Quarter 2025 Financial Results Conference Call. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Peter Schuman, Vice President, Investor Relations, you may begin your conference.

Thank you, Sarah. Welcome and thank you for joining us today for ADTRAN Holdings first quarter 2025 financial results conference call, and welcome to all those joining by webcast. During the conference call, ADTRAN representatives will make forward-looking statements that reflect management's best judgment based on factors currently known. However, these statements involve risks and uncertainties, including those 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 conference call. We undertake no obligation to update any statements to reflect events that occur after this call. During today's call, we refer to certain non-GAAP financial measures. Reconciliations of non-GAAP to GAAP measures and certain additional information are included in our Investor Presentation and earnings release. We have not provided reconciliations of our second quarter 2025 outlook with regard 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, the financial measures discussed during the conference call are preliminary estimates. Turning to the agenda. Tom Stanton, ADTRAN Holdings' CEO and Chairman of the Board, will provide key investment highlights for the first quarter 2025; Tim Santo, our Senior Vice President and CFO, will review the quarterly financial performance in detail and our second quarter 2025 outlook, and then we will take any questions you may have. I would now like to turn the call over to Tom Stanton.

Thank you, Peter. Good morning, everyone. Before we discuss the quarterly results, I'd like to introduce Tim Santo, our new CFO, who joined ADTRAN in early March. Tim was brought on Board because of his extensive experience in finance and operational leadership, including more than a decade in leadership roles at General Electric. He has over 25 years of international experience in finance, accounting, and operations across multiple industries. I would also like to take this opportunity to thank Ulrich Dopfer for his significant contributions and leadership. ADTRAN's first quarter performance highlighted our improved operating efficiency and our strength in our business model. We delivered solid results with improvements across several key operating metrics. Revenue exceeded typical first quarter patterns showing growth both sequentially and year-over-year. This increase reflects heightened customer activity and strong execution by our team. Our non-GAAP gross margin remained strong and non-GAAP operating profit was at the high-end of our guidance range. We also generated a robust $41.6 million in cash from operations and $22.9 million in free cash flow. We continue to believe that 2025 will be a year of accelerating performance and this should translate to meaningful cash generation, which a significant -- which is a key strategic priority for us. Let me talk a little bit about tariffs. In the near-term, the impact of tariffs is expected to be minimal. Post 90 days, we are one of the few manufacturers that own and operate our own facilities, which puts us in a stronger position to respond effectively to policy changes. Although the environment is continuously evolving and the mid to long-term effects from tariffs remain uncertain, ADTRAN is well-positioned to adapt, thanks to our global customer base and diverse supply chain. Over the years, we have built a durable global network with manufacturing…

Thank you, Tom, and thank you, everyone, for joining us on the call this morning. Before I walk through our preliminary financial results for Q1 2025 and discuss our expectations for Q2 2025, I'd like to take a moment to introduce myself and offer a little perspective on why I chose ADTRAN. So I've been with the company for just 2 months, I have had an opportunity to engage with many of our investors, analysts and team members. These early conversations have been incredibly valuable as I continue to listen, learn, and build a deeper understanding of the business. What drew me to ADTRAN was the strong alignment between my background, the company's strategic priorities, and the opportunity to join a growing technology company with strong potential in an attractive market. Over the past 25 years, I have led corporate finance, accounting and treasury functions across both global enterprises and transformation focused organizations. My work is consistently centered on financial discipline, simplifying capital structures and enabling strategic execution. Looking ahead, my priorities are clear, strengthening our capital structure, continuing to enhance the finance organization and deepening engagement with our external stakeholders. These are essential elements in positioning ADTRAN to drive long-term sustainable value for our stockholders. With that, let's dive into the financial results for the first quarter of 2025. We began the year with a stronger than typical first quarter performance, exceeding seasonal trends amid a gradually improving industry environment. As market conditions continue to improve combined with recent customer wins, we are beginning to recognize the benefits of scale in our business. ADTRAN delivered revenue of $247.7 million for the first quarter, representing a year-over-year revenue increase of $21.6 million or approximately 10%. This is up $4.9 million or 2% sequentially demonstrating our outsized seasonal trends while underscoring…

[Operator Instructions] Your first question comes from Michael Genovese with Rosenblatt Securities. Your line is open.

Great. Thanks. So Tom, it looks like in the quarter, right, all the growth came from access and aggregation. So I just want to ask, across the three revenue segments, sort of what the outlook is going forward? What will access and aggregation keep up this toward growth? And what should we expect from subscribers and from optical, specifically this quarter, but over the next couple of quarters? Thank you.

Yes. Some of that, as you may know, Michael, was supply-related because we had gotten a little bit slow in our most specifically on subscriber. So without that, we less than demand sitting on the dock. That has gotten -- notwithstanding tariffs and everything, that has gotten better. We did, but to be frank, we had a strong access quarter. We expected a strong access quarter. As you know, some of our customers tend to buy a little early. Our access customers, especially in Europe, tend to buy a little early in the year, then they go down a little bit and then they pick up a little bit towards the end of the year. So that's kind of a new seasonal pattern that we've seen over the last couple of years. Optical, I would say that what we saw in optical was just a seasonal thing. And there's optical is growing. I mean, we -- I would expect without getting into too much detail, but I would expect better performance this quarter, and we expect growth from those segments moving forward. It was actually across the board from a pure order and environmental perspective, it was actually a good quarter.

Okay. And then just a follow-up for me on margins. So I guess when we look at the revenue guidance compared to the first quarter and the operating margin guidance compared to the first quarter, it looks like there's some margin pressure in the second quarter. And it sounds like you're saying that that's on the OpEx side because of the exchange rate and not because of gross margin. I just want to verify that that's a correct read. And then I guess it's hard to predict ForEx beyond the quarter, but how do you think OpEx should trend beyond the second quarter?

That's just it. I think you're going to have to project exchange rates. As you know, our core operating on a constant currency basis, our operating expenses, would expect to be basically flat through the year, And that hasn't changed a bit. I mean, the movement we saw right around the turn of the quarter here was pretty substantial, not typical. But on a -- from a pure how we're running the business, we would expect OpEx to be effectively flat.

Okay. I appreciate it. And I'll pass it on. Thank you.

The next question comes from Brian Kuntz with Needham & Company. Your line is open.

Thanks. Tom, any evidence or inquiries around pull ins from customers ahead of tariffs that you're hearing about from customers?

Maybe a little bit, really not a lot. I think most people are kind of in the same boat that everybody else is, which is it's kind of hard to figure out what's going to happen.

Yes.

And we're really not -- look, we're not entertaining a whole lot of pull ins. In fact, we're not -- we're trying not to have pull ins because we just kind of went through an inventory situation …

Yes.

… and try not to recreate that. There has been no strong pressure for [indiscernible], so it just hasn't materialized.

Got it. And then maybe stepping back a little, you've got great exposure in Europe, now. Can you maybe just top down, help us see what's going on in the macro there as it relates to kind of top five carriers, the BT and DT types? What's going on with those large customers? And then broadly, what's happening in Europe with respect to high risk Chinese displacements and any other wins you're anticipating ramping up over the balance of the year? Thanks.

Yes. Sure. So the environment hasn't changed and that it has been really positive now for a solid year. We had inventory issues as you know. We went through those inventory issues, but the underlying demand hasn't changed. The success rate is probably pick -- it has picked up in some areas. In some of our biggest customers, their conversion rate has gone up, which has driven, stronger subscriber, backlog. And -- but their overall plans for deployment stay in place. In fact, one of them has recently expanded theirs. I think last quarter expanded the number of homes they were trying to get to by a couple of million. So all of that's in place. The wins that we've had, I just talked about one in my notes, which is a brand new customer …

Yes.

… that is a large Tier 1. Yes. But the other ones that we've talked about before are still on track. We will start shipping some of them right around, hopefully, a little bit before the half. Some of them have already started shipping, and there is a big replacement opportunity where they're actually going to decommission some Huawei equipment. That is probably about to start. It should it's right around the time for that to kick off. Yes, so we haven't lost anything. All those are still on track, although they're being operationalized and those take a long time.

Great. And that replacement opportunity, Tom, is in fiber, not optical?

It's in fiber.

Yes. Maybe one more if I could squeeze it in, please. Any changes in your attach rate of selling ONTs versus OLTs and with regards to XGS and kind of modern products, you still have a high attach rate there, and how would you characterize kind of thoughts about that going forward?

I would say with the -- I would say with XGS, the attach rate is probably higher than what it was with PON. I think that that's just because it was a newer technology and interoperability and things. I don't think -- I mean, surprisingly, if you follow the industry much, it has remained strong. I mean, we pick -- we've gotten some Tier 1s that have selected our subscriber equipment where traditionally Tier 1s shop more. Smaller carriers typically end-to-end and they buy everything. Larger carriers tend to go shopping. It's going to be interesting to see how that environment changes. I think it is changing. I think more and more looking at trying to buy a more end-to-end solution and maybe not go direct to some of the Asian vendors. So it will be interesting to see how that, but it's the attach rate is fairly strong.

Great. That's all I've got. Thank you.

Okay.

The next question comes from Christian Schwab with Craig-Hallum. Your line is open.

Great. Thanks for taking my question. I know you guys historically have not put in any hedge instruments regarding currency swings, given the big roughly 9% move in a short period of time. Is that something you guys are considering? Or are you going to evaluate?

The short answer is yes. With -- we've realized the benefit of the downside, and now we're moving the other direction, and it's something that we are exploring.

Great. And then from a business momentum perspective, I know we're excluding new design wins, is there any commentary you can give on further confidence and conviction and strength in Europe versus North America, or are they both hitting on all cylinders?

Good question. Without a doubt, Europe is just really hot right now. It is -- booking rates coming out of Europe are very strong. That area is definitely hot. In the U.S., it is more in Europe, I guess what I'm saying is you can say that pretty much across the board. In the U.S., it's a little more hit and miss. The Tier 2s have been strong. They continue to be strong, and I mentioned in my notes that we want incremental business with a couple of the larger Tier 2s. The Tier 3s have been kind of in a low. May call it a bead low or whatever. They seem to be waking up, and we'll see. We haven't seen that yet, but they seem to be getting better. There's a lot of talk about them getting better. Numbers have been just incrementally moving up. No big change over the last 6 to 9 months. But Tier 2s have definitely been strong.

Great. No other questions. Thank you.

Okay.

The next question comes from Amira Manai with ODDO BHF. Your line is open.

Yes. Hello, can you hear me?

Yes.

Thank you for the presentation. I have actually a few questions. Regarding the increase, could you provide more details of the Group supply chain and whether you have suppliers in China or Asia for certain components?

Sure. We do have -- well, let me start back. So we have moved and have been moving the majority of our supply chain contingencies outside of China for some time. If you go far enough back, pre-merger of the two companies, the ADTRAN portion had moved out a long time ago. And then on the ad beside, they were moving out and we accelerated that. So that's been going on for a couple of years now. So we're in a pretty good position to where on a finished good basis, there's very little that's done there. And I think the majority of any finished goods, I shouldn't say any, but by and large any finished goods will be out of there sometime around the middle of this year. So we don't expect a whole lot of impact from tariffs. Now on a raw material perspective, you everybody buys capacitors, everybody buys resistors, everybody buys PC boards. And then the real thing there is where does the product actually get finished. We're going to have tariffs on some of those materials. But in the overall scheme of things, I think that it's -- we're not in a bad place as of today.

Okay.

I don't know what they're going to be tomorrow. I don't know what the tariffs are going to be tomorrow. But as of today, yes, we're not in a bad place.

Okay. And the Group's performance quarter-over-quarter was mainly driven by Europe, while the U.S remained relatively stable. What explains the dynamic? And do you foresee continued decline in the U.S share versus non U.S in the coming quarters?

I would say U.S was actually -- I wouldn't call it not strong, it was actually not bad. It was just that Europe was stronger. And Europe is just a hot area right now. It is pretty much from any metric we see. It's actually -- it's just -- it's they're just buying at a stronger rate. I wouldn't say the U.S is bad, it's not. But I would say that the Europe is just and we have a couple of customers that really can materially drive those numbers upwards, and they're kind of hitting on all cylinders right now.

Okay. And how would you compare a transposition to its main competitors today? I mean, from financial perspective, do you see stronger growth trends in the market? And from technological side, how does ADTRAN's offer [indiscernible] against its peers, particularly in emerging areas like fiber broadband, AI, data centers, et cetera? And there are any specific areas where do you believe ADTRAN is technological -- has a technological advantage for today?

Yes. I think that the -- I think the key to what we do is maybe the focus on where we put our resources. So on the optical side, we very much focus on that mid network transport kind of a regional size network, and we're very, very good at that. And as that market we do believe that's a growth market, both from just a carrier perspective as they reach more homes with fiber. And from a enterprise perspective, as people try to find on ramps into the ICP cloud or that becomes more distributed. And we've seen some signs of that. On the fiber access side, we just fundamentally across the board. Now I'm biased, but we have a better product. We have a kind of a next generation product, which is very, very scalable. We did a press release maybe last quarter that said we had passed over 8 million homes with British Telecom in an incredibly short period of time. It is very flexible because it is software based and disaggregated, so you can use it in small locations as well as large locations. And it's just a better product. Subscriber, it's a little more difficult to differentiate yourself. With subscriber, it's all about the software. And you have to keep up with the generational changes in the hardware, but it's really about the software. We launched our Mosaic One product about 2 years ago, and the big piece that we're missing was Intellifi, which is in home Wi-Fi management, which is a real cornerstone for a lot of our customers. We launched that, I think, earlier last year. Phenomenal success so far. It's still relatively new into the market. I think that piece has yet to shake out. I think competitively, we have a very good product. But we just need some more time in that market. Hopefully, that answers your question.

Okay. Thank you so much. That's all for me.

Okay. All right.

The next question comes from Tim Savageaux with Northland Capital Markets. Your line is open.

Hi, good morning. A couple of questions. But first, I wanted to start with, it really seems like you're starting to see a greater amount of synergy across your product portfolio, right, particularly between access and optical transport. You've talked about that a couple of times here. Are we right to observe some kind of breakout here or inflection point with regards given the companies have been together for a while now in cross-selling that portfolios? Then I have a follow-up.

Yes. The only problem I have with Tim is, how do you define breakout? So without a doubt, I mentioned it in my notes. And the reason that I mentioned them is we have seen good reception in the Tier 3 space. If we sell them an access product, there's a good chance that we're going to be able to get the transport needs and meet the transport needs, and that they'll be open to that because they don't want to do business with a whole lot of vendors. In the larger, kind of more sophisticated, it's a real fight. And what we started to see, it may be earlier than this, but I'll tell you last quarter was a good quarter for that. We won the European carrier, which is a very large carrier, and we had not done business. And they flat out told us that it had to do with the breadth of our product line and the synergies that we're able to bring in the management and operations. And they liked the scale of the company. Same thing happened in the U.S. So we had two large Tier 2s that now are broadening, one specifically in our optical space that we had been locked out of for a period of time, forever, really. And they move forward. So there's these anecdotal pieces with the larger customers, but you they had not been in existence before. We had I mean, it's really starting -- it feels like it's really getting much more reception now. Maybe some of that may have to do with inventory, by the way. They had a lot of optical inventory, not just ours, but everybody's. And until they were getting out of that inventory, they weren't in a position to make a decision on a new vendor. So I think some of that may just be the fact that they're now in a position to actually start making some moves.

Great. Appreciate that. And as I ponder [ph] large Southern European carriers that you're not already engaged with in some way, which I will continue to do, I'd ask about the at this point, how you're seeing the size of that opportunity relative to some of your current big European customers and what sort of timing we should expect in terms of a ramp there?

They're in a hurry, and they're in a hurry on the optical side first. It's hard to predict what you ultimately end up with, but if you think about them in the tens of millions a quarter, that's probably the way to think about them. Once with -- once they get rolling with the full portfolio.

That's across optical and access?

Yes. Yes. When I say 10 …

Great. [Indiscernible].

… that's a broad range. So, yes, we definitely got

I know. I get it. All right. Appreciate it.

Okay.

And ladies and gentlemen …

At this point, that's the end of our question queue. So I appreciate everybody for joining us today, and we look forward to talking to you next quarter.

Ladies and gentlemen, that concludes today's call. Thank you for your participation. You may now disconnect.