Financial Data and Key Metrics Changes - Q1 2023 revenue was $323.9 million, up 109.6% year-over-year but down 9.6% quarter-over-quarter, missing the guidance range of $355 million to $375 million by 8.8% [15][16] - Non-GAAP gross margin was 37.3%, an increase of 200 basis points year-over-year but a decrease of 180 basis points sequentially [17] - Non-GAAP operating loss was $5.2 million, translating to a non-GAAP operating margin of negative 1.6%, compared to positive 1% in Q1 2022 [18] Business Line Data and Key Metrics Changes - The Network Solutions segment accounted for 87.2% of revenues in Q1 2023, down from 89.6% in Q1 2022 [15] - Optical Networking Solutions contributed 45.6% of revenue, up 3.9% quarter-over-quarter, while Access & Aggregation revenue share was 29.9%, slightly down 1% year-over-year [16] - Subscriber Solutions category was up 39.9% year-over-year but down 34.1% quarter-over-quarter due to inventory management issues [15][16] Market Data and Key Metrics Changes - Domestic revenue grew by 32.7% year-over-year, while international revenue increased by 246.9%, making up 59.4% of total revenue [16] - In the U.S. market, there was a 47% quarter-over-quarter growth in fiber access platforms, driven by success in the regional service provider market [10] Company Strategy and Development Direction - The company is focused on long-term growth in fiber networks, with a comprehensive fiber network portfolio built on Optical Network Solutions, Access & Aggregation Solutions, and Subscriber Solutions [8][12] - Management emphasized the importance of integrating teams and processes to enhance cross-selling opportunities within the fiber portfolio [8][12] - The company aims to achieve cost synergies of $52 million, with 40% expected to materialize in 2023 and 60% in 2024 [22] Management's Comments on Operating Environment and Future Outlook - Management noted that while inventory management issues are expected to persist in the near term, the long-term demand for fiber networks remains strong [7][12] - The company is cautious about spending due to current market uncertainties but remains confident in its long-term growth outlook [12][24] - Management highlighted that the supply chain situation is improving, which should positively impact gross margins in the second half of the year [36][25] Other Important Information - The company transitioned CFO roles from Mike Foliano to Uli Dopfer, with a focus on financial performance and operational efficiency [13] - Cash and cash equivalents totaled $136.5 million at quarter-end, with a negative operating cash flow of $19.9 million due to lower earnings and increased working capital [19][20] Q&A Session Summary Question: Can you provide insights on the broadband infrastructure and optical business outlook? - Management acknowledged good performance in the infrastructure business but expressed caution due to unclear inventory levels and adjustments in customer ordering patterns [28][30] Question: What are the current lead times for fiber access and optical products? - Lead times have improved from 52 weeks to approximately 2 to 4 months, although some complex chips still face constraints [42] Question: How is the Mosaic One deployment progressing? - The uptake of Mosaic One has been positive, with 200 service providers adopting the offering, but onboarding remains a challenge [57] Question: Are there any labor constraints affecting fiber deployment? - Labor constraints are more pronounced in Europe, with some projects throttled due to labor availability, while the U.S. market is less impacted [66][67]

[Part I. Financial Information](index=7&type=section&id=Part%20I.%20FINANCIAL%20INFORMATION) [Financial Statements](index=7&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) Q1 2023 financial statements reflect significant revenue growth and increased operating loss, primarily due to the ADVA business combination [Condensed Consolidated Balance Sheets](index=7&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The balance sheet as of March 31, 2023, shows **$1.94 billion** in total assets, increased liabilities, and a new **$442.7 million** Redeemable Non-Controlling Interest Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $136,457 | $108,644 | | Inventory, net | $416,291 | $427,531 | | Goodwill | $385,755 | $381,724 | | Total Assets | $1,938,595 | $1,943,494 | | **Liabilities & Equity** | | | | Revolving credit agreements | $190,843 | $95,936 | | Total Liabilities | $675,765 | $639,881 | | Redeemable Non-Controlling Interest | $442,668 | $0 | | Total Equity | $820,162 | $1,303,613 | - The non-controlling interest in ADVA was reclassified to **Redeemable Non-Controlling Interest (RNCI)** on January 16, 2023, now classified outside stockholders' equity upon DPLTA effectiveness[50](index=50&type=chunk) - The December 31, 2022 balance sheet was revised to correct a **$61.6 million** understatement of deferred tax assets and liabilities, affecting gross balances but not the net amount[47](index=47&type=chunk)[48](index=48&type=chunk) [Condensed Consolidated Statements of Loss](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Loss) Q1 2023 total revenue surged **109.6%** to **$323.9 million** due to the ADVA acquisition, resulting in a **$49.7 million** operating loss and **$34.5 million** net loss Q1 2023 vs. Q1 2022 Performance (in thousands, except per share data) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Total Revenue | $323,912 | $154,518 | | Gross Profit | $87,808 | $54,316 | | Operating Loss | $(49,732) | $(68) | | Net Loss Attributable to ADTRAN | $(34,464) | $(1,127) | | Loss Per Share (diluted) | $(0.44) | $(0.02) | - Significant increases in operating expenses, with **SG&A at $67.4 million** and **R&D at $70.1 million**, primarily drove the operating loss, reflecting expanded post-ADVA operations[28](index=28&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=12&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Q1 2023 operating activities used **$19.9 million** cash, while financing activities provided **$55.6 million** from increased borrowings, leading to a **$27.8 million** cash increase Cash Flow Summary (in thousands) | Activity | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(19,926) | $4,869 | | Net cash used in investing activities | $(6,794) | $(2,700) | | Net cash provided by (used in) financing activities | $55,628 | $(3,924) | | **Net increase (decrease) in cash** | **$28,908** | **$(1,755)** | - Financing activities were driven by **$94.8 million** net proceeds from revolving credit agreements, used to fund operations, repay **$24.7 million** in notes, and pay **$7.1 million** in dividends[40](index=40&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=13&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Notes detail the ADVA business combination's impact, including purchase price allocation, goodwill, intangibles, DPLTA effects, new revenue categories, debt, and segment performance [Note 2. Business Combination](index=15&type=section&id=Note%202.%20Business%20Combination) ADTRAN acquired ADVA for **$578.3 million**, recognizing **$350.5 million** goodwill and **$403.8 million** intangibles, with ADVA contributing **$192.3 million** revenue and a **$25.4 million** net loss in Q1 2023 Purchase Price Allocation (in thousands) | Category | Fair Value | | :--- | :--- | | Total purchase price | $578,260 | | Non-controlling interest | $316,415 | | **Net Assets Acquired** | **$544,217** | | **Goodwill** | **$350,458** | - Identifiable intangible assets acquired totaled **$403.8 million**, primarily **Developed Technology ($291.9 million)**, **Backlog ($52.2 million)**, and **Customer Relationships ($32.7 million)**[59](index=59&type=chunk) - For Q1 2023, the ADVA business contributed **$192.3 million** in revenue and a net loss of **$25.4 million** to consolidated results[59](index=59&type=chunk) [Note 3. Revenue](index=19&type=section&id=Note%203.%20Revenue) Q1 2023 total revenue was **$323.9 million**, disaggregated into new categories post-ADVA, with **Optical Networking Solutions** contributing **$147.8 million**, and remaining performance obligations increasing to **$389.0 million** Revenue by Category (in thousands) | Revenue Category | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Subscriber Solutions | $79,336 | $56,722 | | Access & Aggregation Solutions | $96,820 | $97,796 | | Optical Networking Solutions | $147,756 | $0 | | **Total** | **$323,912** | **$154,518** | - Remaining performance obligations totaled **$389.0 million** as of March 31, 2023, with approximately **68%** expected to be recognized within the next 12 months[64](index=64&type=chunk) [Debt (Revolving Credit & Notes Payable)](index=30&type=section&id=Note%2012%20%26%2013.%20Debt) Total revolving credit agreements increased to **$190.8 million** as of March 31, 2023, primarily from increased Wells Fargo borrowings, while **$24.6 million** in notes payable were fully repaid - Borrowings under the main Wells Fargo credit facility increased from **$60.0 million** to **$180.0 million** during the quarter, with the total facility size expanding to **$400 million** upon DPLTA effectiveness[107](index=107&type=chunk)[108](index=108&type=chunk) - The company fully repaid the **$24.6 million** syndicated credit agreement note payable on January 31, 2023[113](index=113&type=chunk)[114](index=114&type=chunk) [Segment and Geographic Information](index=35&type=section&id=Note%2018.%20Segment%20and%20Geographic%20Information) Q1 2023 revenue was **$282.4 million** for Network Solutions and **$41.5 million** for Services & Support, with international revenue growing to **59.4%** of total, driven by the ADVA combination Revenue by Geographic Area (in thousands) | Geographic Area | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | United States | $131,466 | $99,048 | | Germany | $76,286 | $10,920 | | United Kingdom | $57,397 | $30,388 | | Other international | $58,763 | $14,162 | | **Total** | **$323,912** | **$154,518** | Segment Performance (in thousands) | Segment | Q1 2023 Revenue | Q1 2023 Gross Profit | | :--- | :--- | :--- | | Network Solutions | $282,418 | $63,288 | | Services & Support | $41,494 | $24,520 | | **Total** | **$323,912** | **$87,808** | [Commitments and Contingencies](index=37&type=section&id=Note%2020.%20Commitments%20and%20Contingencies) The company faces significant DPLTA commitments, including potential **$335.6 million** Exit Compensation or **$11.3 million** annual recurring compensation, alongside **$459.3 million** in purchase commitments - Under the DPLTA, the company is obligated to offer either Exit Compensation of **€17.21 per share** (totaling approximately **$335.6 million**) or Annual Recurring Compensation of **€0.59 per share** to remaining ADVA shareholders[144](index=144&type=chunk) - As of March 31, 2023, the company had purchase commitments totaling **$459.3 million** for inventory and manufacturing services[147](index=147&type=chunk) [Management's Discussion and Analysis (MD&A)](index=40&type=section&id=ITEM%202.%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) MD&A attributes **109.6%** Q1 2023 revenue growth to ADVA, noting gross margin decline due to purchase accounting, increased operating expenses, and ongoing integration for synergies, with liquidity managed via cash and credit facility [Results of Operations](index=45&type=section&id=Results%20of%20Operations) Q1 2023 revenue increased **109.6%** to **$323.9 million** due to ADVA, but gross margin fell to **27.1%** due to purchase accounting, leading to a **$49.7 million** operating loss - Revenue increase was primarily attributable to a **$192.3 million** increase in sales from the ADVA business combination[174](index=174&type=chunk) - Gross margin was negatively impacted by **$32.6 million** of ADVA acquisition adjustments, including intangible amortization and fair value adjustments to inventory[176](index=176&type=chunk)[177](index=177&type=chunk) - Customer concerns over inventory stocking levels negatively affected the **Subscriber Solutions** category, a trend expected to continue into Q2 2023[167](index=167&type=chunk)[174](index=174&type=chunk) [Liquidity and Capital Resources](index=48&type=section&id=Liquidity%20and%20Capital%20Resources) Q1 2023 ended with **$136.5 million** cash and access to a **$400 million** credit facility, deemed sufficient for operations and DPLTA obligations, including potential **$335.6 million** exit payments and **$459.3 million** purchase obligations - The company believes its liquidity, including **$136.5 million** cash and available credit, is adequate to meet obligations for at least the next 12 months[191](index=191&type=chunk) - Material cash requirements include operating leases (**$33.5 million**), purchase obligations (**$459.3 million**), outstanding debt (**$190.8 million**), and significant potential DPLTA payments[201](index=201&type=chunk) - The company entered into forward contracts to hedge an aggregate notional amount of **$160.0 million** of its Euro-denominated DPLTA payment obligations[203](index=203&type=chunk)[205](index=205&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=55&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company faces interest rate and foreign currency risks, with a **50 basis point** rate increase impacting annual interest expense by **$1.0 million**, and uses forward contracts to hedge Euro and British pound exposures, including DPLTA obligations - A hypothetical **50 basis point** increase in interest rates would increase annual interest expense by **$1.0 million** on the **$190.8 million** variable-rate debt[211](index=211&type=chunk) - The company's primary foreign currency exposures are to the **Euro** and **British pound sterling**, with approximately **40.9%** of Q1 2023 operating expenses paid in local currencies[212](index=212&type=chunk) - To manage DPLTA payment risk, the company entered into Euro/U.S. dollar forward contracts to hedge a notional amount of **$160.0 million**[212](index=212&type=chunk)[214](index=214&type=chunk) [Controls and Procedures](index=57&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) Management concluded disclosure controls were effective as of March 31, 2023, excluding the ADVA acquisition as permitted by SEC guidance, with ongoing efforts to integrate ADVA's internal controls - The CEO and CFO concluded that disclosure controls and procedures were effective as of the end of the period[217](index=217&type=chunk) - As permitted by the SEC, the evaluation of internal control over financial reporting excluded the ADVA acquisition, which represented **42.4%** of consolidated assets and **59.4%** of consolidated revenues for the quarter[218](index=218&type=chunk) [Part II. Other Information](index=58&type=section&id=Part%20II.%20OTHER%20INFORMATION) [Legal Proceedings & Risk Factors](index=58&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS%20%26%20ITEM%201A.%20RISK%20FACTORS) The company faces various legal matters, including a new ADVA lawsuit against Huawei, with no material changes to previously disclosed risk factors regarding revenue predictability, gross margins, and ADVA integration - In May 2023, ADVA filed a lawsuit against Huawei Technologies Co. Ltd seeking a declaration that Huawei violated commitments to license standard essential patents on FRAND terms[156](index=156&type=chunk)[225](index=225&type=chunk) - No material changes to risk factors from the 2022 Form 10-K were noted, with reiterated risks including revenue predictability, gross margin sustainability, and ADVA internal control integration challenges[221](index=221&type=chunk)[222](index=222&type=chunk)[224](index=224&type=chunk) [Other Corporate Matters](index=39&type=section&id=Other%20Corporate%20Matters) No common stock repurchases occurred during the quarter, Ulrich Dopfer was appointed Principal Accounting Officer, and a **$0.09 per share** quarterly cash dividend was declared post-quarter end - The Board of Directors declared a quarterly cash dividend of **$0.09 per common share** on May 8, 2023[154](index=154&type=chunk) - Effective May 10, 2023, **Ulrich Dopfer** was appointed as the company's Principal Accounting Officer[155](index=155&type=chunk)[228](index=228&type=chunk) - No shares of common stock were repurchased during the three months ended March 31, 2023[227](index=227&type=chunk)

[PART I](index=9&type=section&id=PART%20I) [Business](index=9&type=section&id=Item%201.%20Business) ADTRAN Holdings, Inc. provides open networking and communications platforms, significantly expanding its portfolio in 2022 through the ADVA business combination - In 2022, the company completed a business combination with ADVA Optical Networking SE, significantly expanding its technology portfolio, especially in optical networking[35](index=35&type=chunk) - The company operates under two reportable segments: **Network Solutions** (hardware and software products) and **Services & Support** (network design, implementation, and SaaS applications)[39](index=39&type=chunk)[40](index=40&type=chunk) - Following the ADVA combination, revenue is reported across three new categories: **Subscriber Solutions**, **Access & Aggregation Solutions**, and **Optical Networking Solutions**[43](index=43&type=chunk)[44](index=44&type=chunk)[47](index=47&type=chunk) Research and Development Expenditures (2020-2022) | Year | R&D Expense (in millions) | | :--- | :--- | | 2022 | $173.8 | | 2021 | $108.7 | | 2020 | $113.3 | - As of December 31, 2022, the company had **3,307 full-time employees**, with 1,948 from ADVA and its subsidiaries[76](index=76&type=chunk) - One service provider customer accounted for **more than 10% of total revenue** in 2022, with the U.S., U.K., and Germany each contributing over 10% of total revenue[55](index=55&type=chunk) [Risk Factors](index=27&type=section&id=Item%201A.%20Risk%20Factors) The company faces multiple risks including ADVA integration, financial predictability, supply chain, competition, and complex regulatory environments - **Business Combination & DPLTA Risks:** - Failure to realize anticipated strategic and financial benefits from the ADVA combination[92](index=92&type=chunk) - Complex operational and personnel integration challenges may disrupt business[93](index=93&type=chunk) - The DPLTA creates significant financial obligations, including potential Exit Compensation payments to minority ADVA shareholders of approximately **€310.6 million** and an Annual Recurring Compensation payment obligation[96](index=96&type=chunk) - **Financial & Operational Risks:** - Revenue is difficult to predict quarterly due to short order-to-delivery cycles and supply chain constraints[106](index=106&type=chunk) - Heavy dependence on sales to a few major customers, the loss of which would significantly reduce revenue[107](index=107&type=chunk) - Gross margins may be adversely affected by supply chain costs, inflation, and product mix[108](index=108&type=chunk) - Reliance on a limited number of suppliers for key components has led to delivery delays and increased costs[108](index=108&type=chunk) - **Industry & Technology Risks:** - The telecommunications market requires continuous product updates and innovation due to rapidly changing technology and evolving standards[110](index=110&type=chunk) - Intense competition from companies with greater financial and R&D resources could reduce market share and gross margins[129](index=129&type=chunk) - Products must interoperate with diverse and complex customer networks, and failure to do so can lead to delayed or canceled installations[129](index=129&type=chunk) - **Regulatory & Macroeconomic Risks:** - Subject to complex and evolving U.S. and foreign laws, including trade policies, tariffs (especially concerning China), and environmental regulations[140](index=140&type=chunk) - Changes in tax regulations or assessments from tax audits could adversely impact results[142](index=142&type=chunk) - Rising inflation and central bank monetary policy actions could increase borrowing costs and negatively impact profitability[144](index=144&type=chunk) [Unresolved Staff Comments](index=47&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports that there are no unresolved staff comments from the SEC - None[148](index=148&type=chunk) [Properties](index=47&type=section&id=Item%202.%20Properties) ADTRAN's global headquarters are in Huntsville, Alabama, with a European headquarters in Munich, Germany, and various other leased facilities - The company's primary facilities include its global headquarters in Huntsville, Alabama, and a leased European headquarters in Munich, Germany[148](index=148&type=chunk) [Legal Proceedings](index=47&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in various legal matters incidental to its business, but the outcome and potential loss cannot be estimated - The company is subject to various legal proceedings arising from the normal course of business, but the outcome and potential financial impact cannot be estimated at this time[149](index=149&type=chunk) [Mine Safety Disclosures](index=47&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section is not applicable to the company's operations - Not applicable[150](index=150&type=chunk) [PART II](index=48&type=section&id=PART%20II) [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=48&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) ADTRAN's common stock trades on NASDAQ and Frankfurt, paid quarterly dividends of $0.09 per share in 2022, and had no share repurchases - The company's common stock is traded on the NASDAQ (ADTN) and the Frankfurt Stock Exchange (QH9)[152](index=152&type=chunk) - A quarterly dividend of **$0.09 per share** was declared in each quarter of 2022[158](index=158&type=chunk) - The company did not repurchase any of its common stock during the fourth quarter of 2022 and has no current repurchase plan authorized[157](index=157&type=chunk) [(Reserved)](index=50&type=section&id=Item%206.%20%28Reserved%29) This item is intentionally left blank - This item is reserved[160](index=160&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=51&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) 2022 revenue significantly increased due to the ADVA acquisition, gross margin declined, operating expenses rose, and net loss improved, supported by strong liquidity Financial Performance Comparison (2022 vs. 2021) | Metric | 2022 (in millions) | 2021 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $1,025.5 | $563.0 | 82.2% | | Gross Profit | $327.3 | $218.4 | 49.9% | | Gross Margin | 31.9% | 38.8% | (6.9 p.p.) | | Operating Loss | ($72.8) | ($14.7) | 395.2% | | Net Loss Attributable to ADTRAN | ($2.0) | ($8.6) | (76.7%) | - The **82.2% revenue increase** in 2022 was primarily driven by a **$365.9 million** contribution from the ADVA business combination and a **$96.6 million** increase from legacy ADTRAN operations[173](index=173&type=chunk) - Gross margin declined to **31.9%** from 38.8% in 2021, attributed to acquisition-related expenses and ongoing supply chain constraint costs[175](index=175&type=chunk)[177](index=177&type=chunk) - Operating expenses increased substantially due to the ADVA acquisition, with SG&A expenses rising **67.9% to $208.9 million** and R&D expenses increasing **59.9% to $173.8 million**[178](index=178&type=chunk)[180](index=180&type=chunk) - The company recorded an income tax benefit of **$62.1 million** in 2022, compared to a $2.3 million expense in 2021, primarily due to the release of a valuation allowance against U.S. deferred tax assets[186](index=186&type=chunk) - Inventory increased **205.6% to $427.5 million** at year-end 2022, driven by the ADVA acquisition and strategic buffer purchases to mitigate supply chain constraints[190](index=190&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=71&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company is exposed to interest rate and foreign currency risks, managed through its investment portfolio and derivative instruments - **Interest Rate Risk:** A hypothetical **50 basis point increase** in interest rates would increase the company's annual interest expense by approximately **$0.6 million**, primarily affecting its revolving credit agreements and notes payable[234](index=234&type=chunk) - **Foreign Currency Risk:** Primary exposures are to the Euro and British pound sterling; a hypothetical **10% strengthening/weakening** of the U.S. dollar would result in a gain/loss of **$8.0 million** on receivables and **$10.4 million** on payables denominated in non-functional currencies[235](index=235&type=chunk) - The company utilizes hedging instruments to manage currency risk, including **47 forward contracts** and a Euro/U.S. dollar cross-currency swap with a notional amount of **$160 million** to hedge DPLTA payment obligations[235](index=235&type=chunk) [Financial Statements and Supplementary Data](index=73&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents audited financial statements with an unqualified auditor's opinion, highlighting the critical audit matter of ADVA intangible asset valuation - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[247](index=247&type=chunk) - A Critical Audit Matter was identified concerning the valuation of developed technology (**$291.9 million**), customer relationships (**$32.7 million**), and backlog (**$52.2 million**) intangible assets from the ADVA acquisition, due to significant management judgment and complex assumptions[251](index=251&type=chunk) Consolidated Balance Sheet Summary | (In thousands) | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | **Total Assets** | **$1,881,865** | **$569,017** | | Total Current Liabilities | $488,575 | $155,359 | | Total Liabilities | $578,252 | $211,915 | | **Total Equity** | **$1,303,613** | **$357,102** | Consolidated Statement of (Loss) Income Summary | (In thousands) | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Total Revenue | $1,025,536 | $563,004 | | Gross Profit | $327,252 | $218,377 | | Operating Loss | ($72,827) | ($14,700) | | Net Loss Attributable to ADTRAN | ($2,037) | ($8,635) | Consolidated Statement of Cash Flows Summary | (In thousands) | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($44,228) | $3,008 | | Net cash provided by investing activities | $55,831 | $10,266 | | Net cash provided by (used in) financing activities | $52,936 | ($12,958) | [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=129&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants regarding accounting principles or financial disclosure - None[474](index=474&type=chunk) [Controls and Procedures](index=129&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded disclosure controls and internal controls were effective, excluding the recently acquired ADVA business from the assessment - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[475](index=475&type=chunk) - The assessment of internal control over financial reporting excluded the ADVA acquisition, which constituted **41.4% of consolidated assets** and **35.7% of consolidated revenues** for the year[476](index=476&type=chunk)[480](index=480&type=chunk) [Other Information](index=131&type=section&id=Item%209B.%20Other%20Information) An "Integration Bonus Plan" was established to incentivize key employees for achieving cost-saving synergies from the ADVA business combination - An "Integration Bonus Plan" was established on March 1, 2023, to incentivize key employees to achieve cost-saving synergies from the ADVA business combination[482](index=482&type=chunk) Integration Bonus Plan Potential Awards for NEOs | Named Executive Officer | Base Salary (as of Mar 1, 2023) | Max Total Value of Award | | :--- | :--- | :--- | | Thomas R. Stanton | $1,000,000 | $1,320,000 | | James D. Wilson, Jr. | $405,072 | $534,696 | | Ronald D. Centis | $349,398 | $461,206 | | Raymond Harris | $313,611 | $413,966 | [Disclosure Regarding Foreign Jurisdictions that Prevent Inspections](index=131&type=section&id=Item%209C.%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20that%20Prevent%20Inspections) This section is not applicable to the company - None[483](index=483&type=chunk) [PART III](index=132&type=section&id=PART%20III) [Directors, Executive Officers and Corporate Governance](index=132&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the forthcoming 2023 Proxy Statement - The company has adopted a Code of Business Conduct and Ethics applicable to all employees, officers, and directors[485](index=485&type=chunk) - Other required information for this item is incorporated by reference from the forthcoming 2023 Proxy Statement[485](index=485&type=chunk) [Executive Compensation](index=132&type=section&id=Item%2011.%20Executive%20Compensation) Executive compensation information is incorporated by reference from the 2023 Proxy Statement - All information required by this item is incorporated by reference from the 2023 Proxy Statement[486](index=486&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=132&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Details on securities authorized for issuance under equity compensation plans are provided, with other ownership information incorporated by reference Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Securities to be Issued Upon Exercise (a) | Weighted-Average Exercise Price (b) | Securities Remaining for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by stockholders | 4,234,225 | $9.06 | 3,311,439 | | Equity compensation plans not approved by stockholders | — | — | — | | **Total** | **4,234,225** | **$9.06** | **3,311,439** | - Other information required by this item is incorporated by reference from the 2023 Proxy Statement[489](index=489&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=133&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on related party transactions and director independence is incorporated by reference from the 2023 Proxy Statement - All information required by this item is incorporated by reference from the 2023 Proxy Statement[490](index=490&type=chunk) [Principal Accountant Fees and Services](index=133&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information on principal accountant fees and services is incorporated by reference from the 2023 Proxy Statement - All information required by this item is incorporated by reference from the 2023 Proxy Statement[491](index=491&type=chunk) [PART IV](index=134&type=section&id=PART%20IV) [Exhibits and Financial Statement Schedules](index=134&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists all documents filed as part of the Form 10-K, including financial statements, schedules, and key exhibits - This item lists the financial statements, financial statement schedules, and exhibits filed with the report[493](index=493&type=chunk) - Key exhibits include the Business Combination Agreement, Credit Agreement, Domination and Profit and Loss Transfer Agreement, and various employee and director compensation plans[495](index=495&type=chunk)[501](index=501&type=chunk)[503](index=503&type=chunk) [Form 10-K Summary](index=138&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company has elected not to provide a summary of the information contained in this Form 10-K report - ADTRAN has elected not to provide a Form 10-K summary[509](index=509&type=chunk)

Financial Data and Key Metrics Changes - ADTRAN's Q4 2022 revenue was $358.3 million, up 132% year-over-year and up 5% quarter-over-quarter, within the guidance range of $355 to $375 million [18] - Non-GAAP gross margin for Q4 was 39.1%, improving by 3.7 percentage points year-over-year and 1 percentage point sequentially [20] - Non-GAAP operating profitability was $21.5 million, translating to a non-GAAP operating margin of 6%, compared to 1% in Q4 2021 and 6% in the previous quarter [22] Business Line Data and Key Metrics Changes - Optical Networking Solutions revenue was up 7% quarter-over-quarter, comprising 40% of total revenues, compared to 35% in the previous quarter [19][7] - Subscriber Solutions contributed 34% of revenues, down from 39% in the previous quarter, while Access & Aggregation revenue share was 27% [20] - Revenue from access and aggregation solutions was up 7% quarter-over-quarter, driven by growth in fiber access platforms [8] Market Data and Key Metrics Changes - Domestic revenue grew by 41% year-over-year, while international revenue increased by 310%, making up 60% of total revenue [20] - Non-US optical networking revenue was up 10% quarter-over-quarter, contributing to a 15% increase in overall non-US revenues [7] Company Strategy and Development Direction - The combination with ADVA is expected to enhance product and customer diversity, particularly in the US and Europe, capitalizing on fiber networking growth opportunities [6] - Continued investment in innovation across all segments is anticipated to drive demand for solutions [9] - The launch of the SDX 6330 fiber access platform is expected to significantly contribute to growth, with strong demand from national and regional service providers [11] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about growth potential, citing improvements in the semiconductor supply chain and a focus on cost management [15][27] - The company expects Q1 2023 revenues to be between $355 million and $375 million, with a non-GAAP operating margin between 5% and 6.5% [27] - Long-term public and private investments in fiber networks remain strong, with significant funding initiatives planned [15] Other Important Information - The company anticipates total synergy savings of $52 million from the merger, with 43% expected in 2023 and 57% in 2024 [21] - Cash and cash equivalents totaled $108.6 million at the end of Q4, with net inventories at $427.5 million [24][25] Q&A Session Summary Question: Can you break out the revenue contribution from ADVA versus ADTRAN organic? - ADVA contributed $202 million in revenue [29] Question: What is the current impact of supply chain issues on gross margin? - The impact on gross margin was approximately 260 basis points this quarter, down from 350 basis points previously [30] Question: What applications are driving success in Europe? - Success in Europe was broad across metro networks and private networks, driven by upgrades to handle new speeds [36] Question: Can you discuss the Huawei replacement cycle? - The UK is seeing the most activity, with carriers needing to remove non-trusted vendors, which has accelerated awards [41] Question: What is the update on residential SAS and Wi-Fi 6 chip availability? - Demand for residential solutions remains strong, with over 150 carrier customers onboarded [45] Question: What is the strategy for middle-mile in the US? - The introduction of combined company assets has positively impacted buying decisions among US carriers [50] Question: What is the outlook for the tax rate? - The non-GAAP tax rate for 2023 is expected to be in the low to mid-20s percentage range, with less volatility anticipated [58]

[PART I. FINANCIAL INFORMATION](index=7&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Financial Statements](index=7&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) The financial statements reflect the significant impact of the ADVA business combination, substantially increasing assets, liabilities, revenue, and expenses Condensed Consolidated Balance Sheets Balance Sheet Summary (in thousands) | Balance Sheet Items | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $111,099 | $56,603 | | Inventory, net | $416,163 | $139,891 | | Goodwill | $357,869 | $6,968 | | Intangibles, net | $393,575 | $19,293 | | **Total Assets** | **$1,838,054** | **$569,017** | | **Liabilities & Equity** | | | | Accounts payable | $276,026 | $102,489 | | Revolving credit agreements | $84,503 | $0 | | **Total Liabilities** | **$653,227** | **$211,915** | | **Total Equity** | **$1,184,827** | **$357,102** | - The significant increase in assets and liabilities is primarily due to the business combination with ADVA, which added substantial **goodwill**, **intangible assets**, **inventory**, and **debt** to the balance sheet[33](index=33&type=chunk)[66](index=66&type=chunk) Condensed Consolidated Statements of Loss Statement of Loss Summary (in thousands, except per share amounts) | Metric | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | **Total Revenue** | **$340,709** | **$138,081** | **$667,265** | **$408,846** | | Gross Profit | $103,027 | $47,673 | $219,849 | $163,942 | | Operating Loss | $(48,018) | $(10,058) | $(39,953) | $(7,462) | | Net Loss | $(44,859) | $(10,427) | $(43,843) | $(4,445) | | **Net Loss attributable to ADTRAN** | **$(41,934)** | **$(10,427)** | **$(40,918)** | **$(4,445)** | | **Loss per share - diluted** | **$(0.57)** | **$(0.21)** | **$(0.72)** | **$(0.09)** | - Revenue for Q3 2022 **more than doubled** year-over-year, driven by the ADVA acquisition, however, operating and net losses **widened significantly** due to increased operating expenses, acquisition-related costs, and a $17.0 million asset impairment charge[36](index=36&type=chunk) Condensed Consolidated Statements of Cash Flows Cash Flow Summary (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(42,733) | $28,891 | | Net cash provided by (used in) investing activities | $43,381 | $(3,620) | | Net cash provided by (used in) financing activities | $61,129 | $(7,126) | | **Net increase in cash** | **$61,777** | **$18,145** | - Operating cash flow was **negative** for the first nine months of 2022, a **significant decrease** from the prior year, driven by higher net loss and increased working capital needs, particularly for inventory, while investing activities included $44.0 million in cash acquired from the ADVA business combination, and financing activities were **positive** due to proceeds from new revolving credit agreements[48](index=48&type=chunk) Notes to Condensed Consolidated Financial Statements - The company completed its business combination with ADVA on July 15, 2022, acquiring **65.43%** of ADVA's outstanding shares and consolidating its financial results, with ADTRAN determined to be the **accounting acquirer**[51](index=51&type=chunk)[61](index=61&type=chunk)[62](index=62&type=chunk) Preliminary Purchase Price Allocation for ADVA (in thousands) | Item | Amount | | :--- | :--- | | Total purchase price | $578,260 | | Non-controlling interest | $316,415 | | Total net assets acquired | $535,518 | | **Goodwill** | **$359,157** | - Following the business combination, the company recast its revenue categories into **Subscriber Solutions**, **Access & Aggregation Solutions**, and a new category, **Optical Networking Solutions**, which represents a significant portion of ADVA's portfolio[81](index=81&type=chunk)[197](index=197&type=chunk) - On October 18, 2022, the company and ADVA agreed on a draft **Domination and Profit and Loss Transfer Agreement (DPLTA)**, which is subject to ADVA shareholder approval and, if approved, would require ADTRAN to offer compensation to remaining ADVA shareholders[52](index=52&type=chunk)[212](index=212&type=chunk)[213](index=213&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=41&type=section&id=ITEM%202.%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) Management attributes the significant Q3 2022 revenue increase primarily to the ADVA business combination, despite gross margin declines and increased operating expenses leading to wider losses Results of Operations Revenue Performance (Q3 2022 vs Q3 2021) | Metric | Q3 2022 | Q3 2021 | Change | | :--- | :--- | :--- | :--- | | **Total Revenue** | **$340.7M** | **$138.1M** | **+146.7%** | | Network Solutions Revenue | $304.9M | $120.8M | +152.5% | | Services & Support Revenue | $35.8M | $17.3M | +106.6% | | International Revenue | $171.0M | $46.2M | +270.1% | - The increase in revenue for Q3 2022 was primarily driven by a **$163.8 million** contribution from the ADVA business combination[251](index=251&type=chunk) - Gross margin **decreased to 30.2%** in Q3 2022 from 34.5% in Q3 2021, attributed to **$25.5 million** in acquisition-related expenses (amortization, inventory fair value adjustments), supply chain constraint costs, and changes in product/customer mix[250](index=250&type=chunk)[258](index=258&type=chunk) - Operating expenses **increased significantly** due to the inclusion of ADVA's operations, with Selling, general and administrative (SG&A) expenses rising to **$74.9 million** from **$31.0 million**, and Research and development (R&D) expenses increasing to **$59.2 million** from **$26.8 million**[264](index=264&type=chunk)[266](index=266&type=chunk) - The company recognized an asset impairment charge of **$17.0 million** in Q3 2022 related to capitalized costs for a cloud computing arrangement that no longer fits the company's needs following the business combination[268](index=268&type=chunk) Liquidity and Capital Resources - As of September 30, 2022, the company had available short-term liquidity of **$111.9 million** in cash and short-term investments, which the company believes, along with cash from operations and credit facilities, will be **adequate for at least the next 12 months**[276](index=276&type=chunk)[277](index=277&type=chunk) - Net cash used in operating activities was **$42.7 million** for the first nine months of 2022, a **sharp decline** from **$28.9 million** provided in the same period of 2021, mainly due to an inventory build, an increase in accounts receivable, and transaction costs[279](index=279&type=chunk) - Inventory **increased by 197.5%** to **$416.2 million** from year-end 2021, driven by the ADVA acquisition and strategic buffer purchases to mitigate supply chain constraints[281](index=281&type=chunk) Material Cash Requirements as of Sep 30, 2022 (in thousands) | Obligation | Total | Less than 1 year | | :--- | :--- | :--- | | Debt Obligations | $114,285 | $104,284 | | Purchase Obligations | $454,143 | $444,922 | | Operating Lease Obligations | $32,027 | $10,630 | | **Total** | **$601,599** | **$560,980** | [Quantitative and Qualitative Disclosures About Market Risk](index=54&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company faces market risks from foreign currency fluctuations, interest rate changes, and marketable securities, with ADVA increasing Euro exposure and necessitating hedging strategies - The company's primary foreign currency exposure is to the **Euro**, **Australian dollar**, and **British pound sterling**, with currency fluctuations decreasing net sales by approximately **$34.4 million** for the first nine months of 2022[256](index=256&type=chunk)[311](index=311&type=chunk) - A hypothetical **50 basis point increase** in interest rates would reduce the fair value of the company's **$28.7 million** in fixed-rate bonds by approximately **$0.2 million**[310](index=310&type=chunk) - To manage currency risk related to the proposed DPLTA payment obligations, the company entered into a **Euro/U.S. dollar cross-currency swap** arrangement in November 2022 with a notional amount of **$160.0 million**[216](index=216&type=chunk)[381](index=381&type=chunk) [Controls and Procedures](index=55&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) Management concluded disclosure controls were effective as of September 30, 2022, excluding the recently acquired ADVA business, which is currently being integrated - The evaluation of disclosure controls and procedures as of September 30, 2022, **excluded the impact of the ADVA acquisition**, which was completed on July 15, 2022[316](index=316&type=chunk)[317](index=317&type=chunk) - ADVA's assets represented approximately **66.0% of consolidated assets** as of the reporting date, and its revenues were **48.1% of consolidated revenues** for the third quarter[317](index=317&type=chunk) [PART II. OTHER INFORMATION](index=56&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Legal Proceedings](index=56&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) The company is involved in various legal matters incidental to its business, with outcomes and potential losses currently unpredictable - The company is subject to various lawsuits, claims, and investigations that arise in the normal course of business[319](index=319&type=chunk) [Risk Factors](index=56&type=section&id=ITEM%201A.%20RISK%20FACTORS) The company faces significant new and heightened risks primarily from the ADVA business combination, including integration challenges, DPLTA implications, increased debt, and supply chain pressures - The company may **fail to realize anticipated strategic benefits and cost savings** from the ADVA business combination due to integration challenges, greater-than-expected costs, or difficulties in unifying product offerings[320](index=320&type=chunk)[321](index=321&type=chunk) - There are **significant risks** related to the proposed DPLTA with ADVA, including potential delays or failure to get shareholder approval, which could **hinder synergy realization** and access to increased credit facilities, and if implemented, the DPLTA would create **substantial payment obligations** to minority shareholders and require ADTRAN to **cover any of ADVA's annual net losses**[326](index=326&type=chunk)[329](index=329&type=chunk)[330](index=330&type=chunk) - The company incurred a **substantial amount of new debt** in connection with the business combination, which could make it **more difficult to service debt obligations**, reduce cash available for operations, and limit future business opportunities[336](index=336&type=chunk)[337](index=337&type=chunk) - Gross margins may **not be sustainable** and could be **adversely affected** by supply chain expenses, price inflation for components, increased transportation costs, and changes in product or customer mix[355](index=355&type=chunk)[357](index=357&type=chunk) - The business combination added **significant goodwill and intangible assets**, which could be subject to **impairment charges** if the business underperforms or economic trends are negative, potentially affecting financial results[372](index=372&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=66&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECU RITIES%20AND%20USE%20OF%20PROCEEDS) The company did not repurchase any common stock during the nine months ended September 30, 2022, and has no current repurchase authorization - **No shares of common stock were repurchased** during the nine months ended September 30, 2022[380](index=380&type=chunk) [Other Information](index=66&type=section&id=ITEM%205.%20OTHER%20INFORMATION) On November 3, 2022, the company entered a Euro/U.S. dollar cross-currency swap for $160.0 million to hedge potential DPLTA payment obligations - The company entered into a **Euro/U.S. dollar cross-currency swap** on November 3, 2022, to **hedge potential payment obligations** from the proposed DPLTA[381](index=381&type=chunk)

ADTRAN Holdings, Inc. (NASDAQ:ADTN) Q2 2022 Earnings Conference Call August 4, 2022 10:30 AM ET Company Participants Tom Stanton - Chief Executive Officer Mike Foliano - Chief Financial Officer Conference Call Participants Michael Genovese - Rosenblatt Securities Paul Essi - William K. Woodruff Paul Silverstein - Cowen Ryan Koontz - Needham & Company Tim Savageaux - Northland Capital Markets Operator Ladies and gentlemen, thank you for standing by and welcome to ADTRAN Holdings’ Second Quarter 2022 Earnings ...

ADTRAN, Inc. (NASDAQ:ADTN) Q1 2022 Earnings Conference Call May 5, 2022 10:30 AM ET Company Participants Tom Stanton - Chief Executive Officer Mike Foliano - Chief Financial Officer Conference Call Participants Bala Reddy - Goldman Sachs Michael Genovese - Rosenblatt Securities Bill Dezellem - Tieton Capital Paul Essi - William K. Woodruff Tim Savageaux - Northland Capital Fahad Najam - Loop Capital Orin Hirschman - AIGH Operator Ladies and gentlemen, thank you for standing by and welcome to ADTRAN's First ...