ADTRAN Holdings, Inc. (NASDAQ:ADTN) Q2 2023 Earnings Conference Call August 8, 2023 10:30 AM ET Company Participants Tom Stanton - Chief Executive Officer Uli Dopfer - Senior Vice President and Chief Financial Officer Conference Call Participants Michael Genovese - Rosenblatt Securities Greg Mesniaeff - WestPark Capital George Notter - Jefferies Ryan Koontz - Needham & Company Bill Dezellem - Tieton Capital Management Operator Ladies and gentlemen, thank you for standing by, and welcome to ADTRAN Holdings, ...

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]

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 ...