ADTRAN Holdings, Inc. Q4 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to ADTRAN's Fourth Quarter 2021 Earnings Release Conference Call. During the course of the conference call, ADTRAN representatives expect to make forward-looking statements, which reflect management's best judgment based on factors currently known. However, these statements involve risks and uncertainties, including the continued spread and extent of the impact of the COVID-19 global pandemic, the ability of component suppliers to align with customer demand, the successful development and market acceptance of our products, competition in the market for such products, the product and channel mix, component costs, freight and logistics costs, manufacturing efficiencies, and other risks detailed in our Annual Report on Form 10-K for the year ended December 31, 2020, and our quarterly report on Form 10-Q for the quarter ended October 31, 2021. These risks and uncertainties could cause actual results to differ materially from those in the forward-looking statements, which may be made during the call. It is now my pleasure to turn the call over to Tom Stanton, Chief Executive Officer of ADTRAN. Sir, please go ahead.

Thank you, Elliot. Good morning. We appreciate you joining us for our fourth quarter 2021 earnings conference call. With me today is ADTRAN's CFO, Mike Foliano. Following my opening remarks, Mike will review the quarterly financial performance in detail and then we will take any questions that you may have. Q4 was highlighted by record demand for our fiber broadband solutions with a diverse mix of large and small service providers across our key growth markets in the US and Europe. This demand was driven by the accelerated expansion of fiber to the home networks, upgrades to in-home Wi-Fi connectivity, and the adoption of cloud-based automation tools. Some of these key highlights for the quarter included overall revenue up 18% year-over-year. Record product revenues for our fiber access platforms were up 48% year-over-year, led by a diverse mix of regional service providers in the US and Europe, along with a significant ramp in shipments to our Tier 1 access customers. Record product revenue for our residential Wi-Fi platforms were up 72% year-over-year led by volume shipments of our latest mesh Wi-Fi 6 systems. We also saw continued additions to our SaaS customer base, which was up 48% year-over-year. We had another record quarter in bookings, up more than 20% quarter-over-quarter and more than 50% year-over-year. These bookings were across a broad base of customers and product segments. In the latest market share report from Omdia for Q3 2021, our 4Q 2021, ADTRAN shipped more than twice the volume of 10 Gig OOP ports in both North America and EMEA than the next two closest US-based vendors combined. This highlights our success in fiber footprint capture with Next Generation fiber access platforms. The success we had in the quarter was a direct result of our improved customer diversification and our approach to providing end-to-end fiber broadband solutions. On the customer side, demand by regional service providers across the US and Europe remains higher than ever. However, Q4 saw a sharp increase in revenue growth from international Tier 1 operators, up 76% year-over-year. The International Tier 1 fiber operators increasing volume deployments included two European operators and initial XGS shipments to one Tier 1 operator for the properties throughout Latin America. On the portfolio side, we continue to have success in bundling our fiber access platforms, host service delivery platforms, and SaaS applications. Our growth in residential mesh Wi-Fi systems and SaaS customers during the quarter directly correlated to our success in fiber access platforms. We continue to outperform the market in fiber footprint capture and expect to see corresponding rapid increases in the deployment of our multi-gig mesh Wi-Fi 6 systems, OMTS, and SaaS applications. While we had success in growing our business, supply chain constraints continue to limit our revenue growth potential and negatively impacted our profitability. We expect these industry-wide supply constraints to continue throughout the remainder of the year, although we expect some improvement in the second half. Despite the supply chain challenges facing our industry and many others, our long-term outlook remains very positive. The Tier 1 fiber operators in both the US and EMEA remain on track for larger scale deployments, with several of them receiving volume shipments in Q4 and further growth expected in the quarters ahead. In addition, we continue with lab approval cycle and have recently awarded Tier 1 fiber businesses. We maintain a healthy funnel of incremental Tier 1 opportunities where we are well positioned for success. Within the software segment of our business, we launched Mosaic One last year. Mosaic One is a SaaS platform that includes care and operate applications tailored toward the needs of marketing, customer support, and operations personnel respectively. The SaaS applications utilize AI-powered intelligence to optimize service performance across both fiber access and in-home environments, reducing operational expenses, improving network quality, and increasing customer satisfaction. As we have migrated more customers to these SaaS offerings, we have received tremendous positive feedback and expect this to further accelerate our growth, not only in SaaS applications, but the associated fiber access and in-home connectivity platforms as well. These portfolio enhancements are timely with the high growth opportunities for fiber broadband solutions in our core markets. In the US, RDOF funds continue to get released. ARPA funding at the state and local level is beginning to impact network planning, and infrastructure build funding is still yet on the horizon. These key programs represent tens of billions of dollars in funding towards fiber-based broadband infrastructure and a rapid acceleration in subsidies versus previous years. In Europe, both incumbent operators and a wide range of net operators backed by a mix of private investment and government stimulus race to upgrade their networks to an all-fiber future while continuing their shift away from high-risk vendors. ADTRAN remains well positioned to benefit from this unprecedented investment cycle in fiber access. To position ADTRAN for further success in fiber networking solutions across the US and Europe, we made a voluntary public takeover offer for ADVA Optical Networking in August 2021. ADVA is a global leader in Optical transport, Carrier Ethernet, and network synchronization solutions that are ideal complements to ADTRAN’s portfolio. I am pleased to inform you that this offer was overwhelmingly approved by ADTRAN stockholders at a special meeting on January 6. On January 26, at the close of the ADVA shareholder tender acceptance period, we received more than the required 60% of outstanding ADVA shares as of the record date, enabling this transaction to move forward. We are awaiting final FDI approvals from the UK and Germany. Once these are received, we will set a closing date and begin the integration process. In summary, we continue to experience record demand for our solutions, especially in our high-growth segments of fiber access, cloud-based software, and residential Wi-Fi solutions. Our fiber access platforms are starting to realize the benefits of our success with Tier 1 operators and complement our rapidly growing base of regional operators. Our SaaS applications are being adopted across a wide range of operators following the launch of our Mosaic One platform. Finally, our residential Wi-Fi platforms are experiencing unprecedented growth due to the demand for multi-gig mesh Wi-Fi 6 in the home to match the speeds enabled by 10-gig fiber access networks. With increased customer funding, record demand, a diversified customer base, and a differentiated product portfolio offering, we are on track to continue growth this year. The proposed combination with ADVA will further improve our competitive position and growth opportunities. With that background, Mike, will you provide some details and a review of our financials? Following Mike's remarks, we'll be happy to open up for any questions you may have.

Thanks, Tom and good morning to all. I'll review our fourth quarter results and provide our expectations for the first quarter of 2022. I will be referencing both GAAP and non-GAAP results with reconciliations presented in our press release and supplemental financial schedules on our Investor Relations webpage @investors.adtran.com. The supplemental financial schedules on our webpage also present certain revenue information by segment and by category, which I will also be discussing. ADTRAN’s fourth quarter 2021 revenue came in at $154.2 million compared to $138.1 million in the prior quarter and $130.1 million in the fourth quarter of 2020. Subdividing across our operating segments, our network solutions revenue for the fourth quarter was $138.8 million versus $120.8 million reported for Q3 of 2021 and $114.1 million in Q4 of 2020. Our services and support revenue in Q4 of 2021 was $15.3 million, compared to $17.3 million reported for the third quarter of 2021 and $16 million for the fourth quarter of 2020. Across our revenue categories, access and aggregation revenue for the fourth quarter of 2021 was $95 million, compared to $89.2 million in the prior quarter, and $79 million in quarter four of 2020. Revenue for our subscriber solutions and experience category was $52.3 million for the quarter, versus $44.9 million for quarter three of 2021 and $45.4 million for quarter four of 2020. Traditional and other products revenue for the quarter was $6.8 million, compared to $4 million for quarter three of 2021 and $5.8 million for quarter four of 2020. Looking at our revenues on a geographic basis, US revenue for Q4 2021 was $101.6 million versus $91.9 million reported in quarter three of 2021 and $95.8 million in quarter four of 2020. Our international revenue for the quarter was $52.6 million, compared to $46.2 million for quarter three of 2021 and $34.3 million in quarter four of 2020. In the fourth quarter, we had two 10% of revenue customers, both domestic distribution partners serving a large number of regional service providers with a mix of broadband access and connected home and enterprise solutions, thus reinforcing our success in both customer and portfolio diversification. Our GAAP gross margin for the fourth quarter was at 35.3% as compared to 34.5% in the prior quarter, and 41.1% in the fourth quarter of 2020. Non-GAAP gross margin for the quarter was 35.4% as compared to 34.6% in the prior quarter, and 41.3% in the fourth quarter of 2020. The quarter-over-quarter improvements in both GAAP and non-GAAP gross margin were attributable to higher sales volume and manufacturing efficiencies and a favorable mix of our network solutions and services and support segments, which were partially offset by increased supply chain expenses including higher component and transportation costs. The year-over-year gross margin decreases in both GAAP and non-GAAP gross margins were attributable to increased supply chain expenses, including higher component and transportation costs and product mix partially offset by the higher sales volumes. As previously mentioned, we continue to experience extreme constraints in the electronic component markets impacting our gross profit during the quarter. This is expected to remain challenging, affecting product availability and our component and logistics costs. Total operating expenses on a GAAP basis were $61.7 million for quarter four of 2021 compared to $57.7 million reported in the prior quarter and $56.8 million for quarter four of 2020. The quarter-over-quarter increase was a result of market-driven higher deferred compensation expense, variable compensation plans, and acquisition-related expenses, partially offset by lower nonrecurring and legal expenses. The year-over-year increase in operating expenses was a result of higher acquisition-related expenses in labor and variable compensation, partially offset by lower restructuring costs and market-driven deferred comp expense. On a non-GAAP basis, our fourth quarter operating expenses were $53.2 million compared to $50.4 million in the prior quarter and $49.5 million in quarter four of 2020. The increase quarter-over-quarter in non-GAAP operating expenses is primarily due to higher market-driven deferred compensation expense and variable compensation, partially offset by decreases in legal and nonrecurring expenses. The increase in year-over-year in non-GAAP operating expenses was a result of market-driven deferred comp expense, variable and labor compensation, engineering project increases, and travel increases, partially offset by lower nonrecurring and legal expenses. Operating loss on a GAAP basis for the fourth quarter of 2021 was $7.2 million, compared to an operating loss of $10.1 million in the prior quarter, and an operating loss of $3.3 million reported in Q4, 2020. Non-GAAP operating income for quarter four of 2021 was $1.4 million, compared to a non-GAAP operating loss of $2.6 million in the prior quarter, and $4.3 million non-GAAP operating income in quarter four of 2020. The quarter-over-quarter improvements in GAAP and non-GAAP operating profitability were attributable to higher sales, partially offset by incremental supply chain constrained expenses and higher operating expenses. The GAAP and non-GAAP year-over-year decreases in operating profitability were the result of higher supply chain constraint-related expenses and higher operating expenses, partially offset by the increased sales volume. Other income on a GAAP basis for the fourth quarter of 2021 was $1.9 million compared to other income of $923,000 in the prior quarter, and $3 million for quarter four 2020. Our non-GAAP other income for the quarter was $2.8 million, compared to non-GAAP other income of $1.4 million in Q3 of '21 and $1.7 million for quarter four of 2020. The quarter-over-quarter increases in both GAAP and non-GAAP other income were a result of higher dividend income and realized foreign currency exchange gains. The decrease in GAAP other income on a year-over-year basis was related to market-driven losses in our investment portfolio as compared to gains in the prior year, partially offset by higher dividend income and realized foreign currency exchange gains. The increase in non-GAAP other income on a year-over-year basis resulted from realized foreign currency exchange gains and higher dividend income. The company's tax provision for the fourth quarter of 2021 was a benefit of $1.1 million as compared to $1.3 million of expense in the prior quarter, and a $6.5 million benefit in the fourth quarter of 2020. The current quarter’s tax benefit was primarily driven by international losses and changes in our uncertain tax position reserves during the quarter as a result of the expiration of certain statutes of limitation. GAAP net loss for quarter four of 2021 was $4.2 million, compared to a $10.4 million net loss in the prior quarter, and $6.1 million of net income in the fourth quarter of 2020. Non-GAAP net income for the fourth quarter of 2021 was $4.7 million as compared to an $815,000 net loss in the prior quarter, and a $5.2 million net income in quarter four of 2020. For the fourth quarter, earnings per share, assuming dilution on a GAAP basis was a loss of $0.09 per share as compared to a $0.21 loss per share in the prior quarter and $0.13 per share earnings in the fourth quarter of 2020. Non-GAAP earnings per share, assuming dilution for the fourth quarter of 2021 was $0.10 per share, compared to a $0.02 per share loss in the prior quarter and $0.11 per share earnings in Q4 of 2020. On the balance sheet, unrestricted cash and marketable securities totaled $100.6 million at quarter end, after paying $4.4 million in dividends during the quarter. For the quarter, we used $25.9 million of cash from operations driven by higher inventories and increased DSO levels. Net trade accounts receivable was $158.7 million at the end of the quarter, resulting in a DSO of 95 days compared to 83 days for the prior quarter and 70 days at the end of the fourth quarter of 2020. The increase in DSOs quarter-over-quarter and year-over-year is mainly attributable to increased sales and the timing of shipments late in the quarter due to supply chain constraints. Net inventories were $139.9 million at the end of the fourth quarter compared to $127.2 million in the third quarter of '21 and $125.5 million at the end of Q4 2020. We continue to carry a higher level of inventory in raw materials as we build up supply to minimize further disruptions given the extremely challenging electronic component market and the associated extended lead times. Looking ahead to the next quarter, the continuing effects of the COVID-19 pandemic, the ability of component suppliers to align with customer demand, the book and ship nature of our business, the timing of revenue associated with large projects, the variability of ordering patterns from our customer base, as well as the fluctuation in currency exchange rates in our international markets may cause material differences between our expectations and the actual results. With that in mind, we expect that our first quarter 2022 revenue will be between $150 million and $158 million. After considering the projected sales mix and component availability, we expect that our first quarter gross margin on a non-GAAP basis will be in the range of 35% to 37%.

Hey, Mike, can I interrupt you? I think you said $100 million and $158 million is the range; it’s really –

It’s $150 million to $158 million, I said $100, it’s wrong; $150 million to $158 million is the range. Sorry about that. On a non-GAAP basis, gross margins would be in the range of 35% to 37%. This is lower than normal due to our higher expediting and freight costs. We also expect non-GAAP operating expenses for the first quarter will be between $53 million and $54 million. Finally, we anticipate that the consolidated tax rate for the first quarter of 2022 on a non-GAAP basis will be in the low to mid-20s percentage rate. We believe that the significant factors impacting revenue and earnings realized in 2022 will be component availability and costs, the macro spending environment for carriers and enterprises, the ongoing effects of the COVID-19 pandemic, the variability of mix and revenue associated with project rollouts, the proportion of international revenue relative to our total revenue, the adoption rate of our broadband access platforms, potential changes in corporate tax laws, currency exchange rate movements, and inventory fluctuations in our distribution channels. Additional financial information is available at ADTRAN’s investor relations webpage @investors.adtran.com. With that, I'll turn it back over to Tom and we'll take your questions.

Right. Great. Thanks, Mike. Elliot, we're ready to open up for any questions people may have.

Our first question comes from Rod Hall from Goldman Sachs.

Hi, thanks for taking my question. This is Bala on for Rod. Congrats on a good set of results, guys. Q1 revenue guidance of $154 million at midpoint so it's flat quarter-over-quarter which is good, I suppose. The supply constraint situation looks like it went better than what you had feared in Q4. It looks like maybe you did not really see too many decommitments, et cetera. But I was just wondering, maybe you could help us pass the supply situation through the quarter. Were there any surprises in what went better, et cetera? And I got a follow up.

Yes, thanks for the question. We did see some de-commit through the quarter. I mean, if I look at Q4 versus Q3, it was kind of hard because you don't know what's going to be the problem from month to month, sometimes even from week to week. So it's different problems. But in general, it's still semiconductor problems. And now we did have de-commit. I think as we went into the quarter and on the call we tried to be as conservative as possible and make sure that we were factoring in those decommits. We're doing the same thing this quarter as well because the environment is just kind of fluid. The direct answer to your question is we did, but we were able to mitigate the impact of those decommits with additional shipments somewhere else.

Got it. On gross margins. Now, clearly they are being impacted by higher costs. And it's not just for you, for most companies too. I am wondering with price increases gradually kicking in, I believe you said the first half of this year, the pricing triggers would kick in. How do you feel about the gross margin trajectory? Do you expect it to jump back up to maybe about 40% range in the second half of this year? Any color that would be helpful?

Let me provide my thoughts and then I'll pass it to Mike. At this moment, it's hard to project because you can only react to the situation. Increasing prices for customers isn't sustainable, and the current prices can be burdensome for them. Given the challenges in purchasing, especially in the latter half of the year, it's difficult to make accurate forecasts. Generally, we anticipate improvements in the environment. Our extended engagement in this process and the closing lead time windows suggest we should see some positive changes in the second half. However, I cannot provide an exact percentage on how this will unfold. Freight costs are also a significant factor; they have a major impact since delays in supplies lead to delays in builds, necessitating expedited shipping. We're working hard to return to ocean shipping, which we expect will improve in the latter half of the year. The uncertainty lies in the potential impact of COVID towards the end of this year, making accurate predictions challenging.

I'm following you.

I guess, Mike. Go ahead.

I was just going to say when you —

Thank you for the excellent insight. I assume that the changes will be implemented immediately, though I might be mistaken. I hope that by passing on those two customers and increasing prices for standard components, you could provide some clarity on the overall direction. That was the basis of my question.

Well, yes, I mean, we look at current expectation, right. And that's all I can say it is, because it’s, there's so many variables. Current expectation is for second half gross margins to be higher than first half gross margins. So we do expect it to be trending, but I can't really at this point in time lay a percentage on that. It would just be a guess. Is that answer your question?

Got it. It helps. One more, follow me, if I may. So you've had a bunch of large Tier 1 customers then especially in Europe for the past year. And it looks like you've seen you already started to see some good traction or momentum with some of them, but could you maybe help remind us the timelines on when you expect these deployments to ramp? I believe some of them you said like maybe in the first half, the other in the second half but in general, like any details that would be helpful, Tom.

Yes. So let me, basically we have tranches. We have two that are basically shipping now in Europe. Then you started shipments in Europe. I wouldn't say they're at their full ramp by any stretch, but they're starting to ship and really started shipping in the fourth quarter, which is kind of where that bump was. We have one MSO that has received orders. I don't know if we shipped anything that's here in the US. But that will be ramping really; it's just material constraints. So we'll be ramping as fast as we can ramp them really. Starting now, it really started shipping in the fourth quarter. We have, I'd say three other — trying to get the number straight here — three other Tier 1s in Europe that a couple of them, my guess would be second half; one of those towards the tail end of the second half, one of those probably right around the half. So right around the end of the second quarter. I think that's kind of where we are right now. And then, of course, here in the US, we're still seeing incredible demand pretty much across the board, including we have a large Tier 1 in the US that is selected STX and Mosaic. That one has started kind of ordering in bulk at this point. So it'd be a matter here against the supply chain thing of us being able to meet the demand. Is that answer your question?

Got it, very helpful, it helps; thank you so much, Mike.

Our next question comes from Paul Silverstein from Cowen.

Sorry, new button. I recognize you've kind of addressed this in the previous response, but I am hoping you could update us on Huawei displacement opportunities in terms of how many RFPs for RFIs, RFQs, whatever are outstanding, and how many have now been awarded? How many more to go?

So we've had a couple that have — this is a fluid list. So we have a couple that are just kind of opening up again, or opening now. We've had, I'm looking at a list here, which is broader than that, because it includes EMEA. As of this current snapshot, right now, we're looking at, say, three or four that are in the pipeline at some stage, maybe a little bit more than that. But it depends on what you call a Tier 1 versus a Tier 2, but three or four seriously Tier 1s, and then a few others that you would or you could argue if they're Tier 1s or Tier 2s.

And how many awards, remind me how many Huawei displacement awards have you already won?

I hate to call them Huawei displacement awards because it depends on the carrier. But if you look at Tier 1s that are now shipping, let me do it this way because it may be easier to look at Tier 1s that we are not shipping PON2 or let's say 10 Gig PON-2, even then the number would be eight.

Eight. Are there any

Yes. So say that we’ve either won or are shipping; that may be accurate on that we’ve either won or shipping, yes.

The difference being there's some new wins that haven't yet shipped?

That's correct.

Alright. So eight that you've won, some of which you've shipped to, but eight that you won in total; got it. Are there any such awards in which Huawei wasn’t coming in the carrier questions moving away from Huawei that you're aware of that you haven't won?

There are; if I look at over the last few months, let's say six months or so, there are two that have delayed their decisions right now. So they're continuing on as they kind of go through their process.

So there have been no carriers to date again which you are aware and what you bid that had been awarded away from you?

That's correct.

Alright. One last question on this line. Sorry, I recognize the wins and wins. But are you getting a material position in these eight wins that you've already secured? Has that been communicated to you? The portion of the opportunity?

None of the win, yes, they typically don't give you a percentage awards, of course. But of all the ones that I've talked about none of those are we expecting it to be immaterial; all of those we're expecting materially greater than 20%, let's say, I mean, they're not immaterial, these aren't material awards.

Alright, I recognize there's a timing factor. But if we took the eight wins to date collectively, any expectation you could share with us in terms of the annual revenue impact? Range, whatever.

I mean we've given a range before though, we have the largest ones are in the micros range of $80 million-ish. So, and then there are many of those, of course, and then they're in general, you can think of them as somewhere between $10 million and $20 million a year.

Okay, one final question for me here, I recognize is no longer just about RDOF in terms of various government funding programs, not just in the US for that matter. But can you give us a sense for what the flow is from RDOF as well as from the other US programs? What type of impact you're seeing now and what you expect for ’22 all-in?

Yes, regarding ARPA, we have seen some awards that we attribute to it, particularly from municipalities. However, I wouldn't say that funding is flowing significantly at this point. For RDOF, we have orders in-house that are linked directly to RDOF and the release of its funding, and that process has begun. From discussions with our customers in the U.S. who are RDOF recipients, we observe two types of RDOF customers. The first are existing carriers expanding their reach to cover RDOF properties, and these companies tend to be more advanced in their progress and expect substantial contributions this year. The second group consists of new entrants establishing their operations for the first time, and they are generally not as far along; I can foresee some of those delays extending into next year.

Our next question comes from Tim Savageaux from Northland Capital Market.

Thanks and good morning, and congrats on the results for Q4. And I hopped on a bit late. I don’t know if you commented on this. And since we're at year-end, I don’t know if you guys talk explicitly about backlog, or whether you could share some color on the extent to which that backlog increased in the quarter or any color on bookings levels. Given that you did appear to be able to address some of the supply challenges in the quarter. I wonder what challenges remained and with no supply issues, kind of what could you have shipped either for Q4 or for Q1 guide. Thanks.

That last part of that question is an interesting way to look at it. Yes, so bookings were I mentioned in my comments that bookings were another record, and that they were up over 20%, quarter-over-quarter, which itself was a record. And over 50% year-over-year, and we were materially over those amounts. It was a really strong quarter for bookings. We weren't able to meet the demand that's out there; hopefully, we're looking forward to being able to get to that point. In relation to your backlog or if we could have shipped literally hundreds of millions of dollars that we haven't backlog that people would take today and would have taken in the fourth quarter. So it's really us getting through that backlog that's important.

Thank you. Regarding the customer base, you indicated strong demand. It appears to be primarily driven by rural areas in the US. Can you share insights on what you're observing from your traditional Tier 2 customers? There are several significant fiber expansions happening, and I've noted some competitive activity, such as Nokia making strides with Frontier. It seems there's been a noticeable increase in that segment. What trends are you seeing with US Tier 2 customers?

Yes. And so that uptick we've seen, Tier 2 people have different definitions of what a Tier 2 and we probably need to start getting more explicit, but let's say large Tier 3s or Tier 2s, however you categorize it, that space is up significantly. The forecast that we have, and in some cases orders that we have placed through this year, we would expect that to grow. Continue to grow, actually pretty strongly this year. So that has gone well; we've also seen movement. And we have one large, let’s say carrier Tier 1 as well, as you know, we also sell to MSOs. But that one is actually coming to life as well. I mentioned that we have gotten some orders in place for shipments through this year from that carrier. And if you talk, if you read what they're saying they're going to do, they're getting very serious about fiber as well. In general, I don't think there's any space in the US that isn't seeing accelerated movement. It’s just a really good environment.

Okay, and last one for me here. With the revenue forecasts flat here in Q1, though at a much higher level and expected, you're looking for some modest gross margin improvement, similar to what you saw here in Q4. But, Mike, I wonder if you could remind us what the impact overall supply impact is on those margins? I mean, would you be in the low 40s ex those cost issues, or maybe an update there in terms of what you're seeing for the guidance?

Sure. Looking back at Q4, the impact that we saw was between seven and eight percentage points, and it’s roughly evenly split between additional components and expedite fees on the components. The other side of the split is freight and logistics costs. So similar to the prior quarter, maybe a little bit worse of an impact during that quarter. If you take that seven to eight percentage points on what we actually printed on a non-GAAP basis, we are solidly in the 42 to 43, which is generally what our expectation is in the normal business environment.

And do you expect that to maintain the Q1 at seven to eight that get a little bit better? And that’s it for me.

If you look at our guidance, and you take the midpoint of that guidance for projecting that it does get a little bit better. But there's still some significant headwinds out there.

We have a follow-up question from Paul Silverstein.

Sorry, Mike, I hate to, I have to get another question about supply chain. I recognize your sarcasm something that's not — ADTRAN and hopefully proves to be largely transitory. But I just want to make sure I understand your commentary. I think it's clear. But, Mike, remind me, I think you hit I'm pretty sure you had indicated confidence that you'd be back to the low 40s by the first-second quarter timeframe previously; that obviously isn't happening, which in turn clearly indicates consistent with other companies that there's been no improvement and let alone meaningful improvement in that perhaps things have gotten worse in terms of cost impacts as it translates into gross margin. I just want to make sure that, in fact, is what's happening, what you're seeing; is that a function of increased decommits which many other companies referenced? Or is it? What exactly is going on?

So let me start with, Paul, I don't think we said in Q1 or Q2 this year, we would get back to 40. I think we said late in the year, right, our previous expectation was we would be extremely challenged through the first half, and then it would start to improve in the back half. I was thinking that we might be able to get back closer to 40 in the latter part of the year, but certainly not in Q1 and Q2. And as you know, this thing just continues to play out. So far, we haven't seen improvement out there in what's going on. So I don't think we're ready to say–

We work to get 40. As far as the environment, I mean, just the environmental service, similar to what it was in Q3, feels very similar right now to what it was in Q3 and Q4. Yes, there have been some decommits, but honestly, we've had decommits throughout that whole period. So I don't see an increase in decommits. I just seen a continuation.

Well, so I'm going to play devil's advocate here because I am pretty sure that and I don't mean to be argumentative, but I'm pretty sure you and Mike previously indicated that you expected improvement early this year. And I think you said meaningful improvement. And it was, I didn't quite understand it at the time. But regardless, again, I'm not sure you get hard time, but I just want to understand if there's been deterioration over the last 90 days.

No. I don't know how far back that comment was made. So if it was made at the beginning of the year, okay. But I think–

No, 90 days.

Last quarter, I was thinking that the impact we would not see a change until the tail end of the second quarter. The environment I did and then I would – I was hoping that the environment would improve there. Because we were some of the large chips versus smaller chips which is still very, very fluid. But if we did say it was going to improve in the first quarter, then we were definitely not correct. We're expecting a constant environment from where we are today through the first half of this year. Hopefully, that'll get better. But right now, that's what we're expecting, expecting some improvement in the second half.

So the answer is that really, I don't think it's any different than it was in third and fourth. So and I don't think our feeling about the quarters has really changed at least since the fourth. And I don't know how far back, I haven't looked at the notes there.

In fact, I think at this point I don’t see any other questions. So I appreciate everybody joining us for our conference call today and I really look forward to talking to you next quarter. Thanks very much.

This concludes today's call. We thank you for joining. You may now disconnect your lines.