Ladies and gentlemen, thank you for standing by and welcome to ADTRAN's First Quarter 2022 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. During the course of the conference call, ADTRAN representatives expect to make forward-looking statements, which reflect management's best judgments based on factors currently unknown. 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 supplies 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 logistic costs, manufacturing efficiencies and other risks detailed in our Annual Report on Form 10-K for the year ended December 31, 2021, and our quarterly report on Form 10-Q for the quarter ended March 31, 2022. 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, Hanna. Good morning, everyone. We appreciate you joining us for our first quarter 2022 earnings conference call. With me today is ADTRAN's CFO, Mike Foliano. After my opening remarks, Mike will provide a detailed review of our quarterly financial performance, and we will then take any questions you may have. Q1 continued our trend of record demand for our fiber broadband solutions, featuring a diverse array of service providers in our key growth markets in the US and Europe. This demand is largely fueled by the substantial expansion of fiber broadband networks, combined with the rollout of mesh Wi-Fi solutions in homes and the use of cloud-based network automation tools. Key highlights for the quarter include an overall revenue increase of 21% year-over-year. Fiber access platforms revenue rose 61% year-over-year, driven by a mix of regional service providers in the US and Europe, as well as an anticipated increase in shipments to Tier 1 customers. Our residential Wi-Fi platforms also saw a 64% year-over-year growth, primarily due to significant shipments of our latest mesh Wi-Fi 6 systems. We experienced rapid growth in our SaaS customer base, which increased by 31% year-over-year, along with a growing backlog of customers following the launch of our Mosaic One platform. According to the latest market share reports from Dell'Oro and Omdia for Q4 of 2021, ADTRAN shipped more 10-gig OLT ports in both North America and EMEA than the next two closest US-based competitors combined, underscoring our continued success in capturing fiber footprint with our 10-gig fiber access platforms. We also secured an additional award from a Tier 1 European service provider using our SDX fiber access platform, bringing our total to six Tier 1 fiber customers in the EMEA region. We noted three significant customers for the quarter: a US distribution partner servicing numerous regional broadband service providers in the US, a Tier 1 European service provider, and a Tier 1 US service provider, demonstrating our ongoing success in geographic and customer diversification. The achievements this quarter were largely driven by increasing demand for our fiber access solutions from a broad base of regional service providers in the US and Europe, alongside growing business with Tier 1 customers. Service providers are opting for ADTRAN due to our extensive range of fiber access platforms, mesh Wi-Fi platforms, and SaaS applications. This selection is, in turn, fostering sustained revenue growth in these strategic segments as we continue to expand our fiber footprint. From a portfolio perspective, our investments in fiber access, connected home, and software solutions have proven beneficial. Our fiber access platform revenue has increased over 140% in the last two years and now dominates our business. This success is attributed to our investment in 10-gig access technology and our leadership in open disaggregated fiber access platforms. Our success in fiber access has also significantly boosted revenue from fiber CPE and mesh Wi-Fi platforms, up 31% year-over-year, as well as SaaS applications, which increased by 32% year-over-year. We anticipate even higher growth rates in these areas in future quarters as more service providers adopt our 10-gig fiber CPE mesh Wi-Fi 6 platforms and our Mosaic One SaaS platform. Despite the supply chain constraints that are limiting our revenue growth potential and negatively affecting our profitability this quarter, we have successfully grown our business in these strategic market segments. We expect these constraints to persist. To mitigate the impact of supply chain challenges on profitability in upcoming quarters, we are focusing on cost optimization, portfolio consolidation, and material purchases. Despite the widespread supply chain challenges in the industry, our outlook remains positive. We continue to experience broad success in capturing fiber footprint with a varied mix of customers across the US and EMEA. Our Tier 1 fiber customer business is ramping up, with existing customers poised for large-scale deployment and additional Tier 1 European operator awards secured during the quarter. Additionally, we have a strong pipeline of further high-scale opportunities. Tier 2 and regional service providers continue to perform well, demonstrating high adoption rates of our complete portfolio of fiber access, connected home, and cloud software solutions, which is driving synergistic growth across these segments. With a promising outlook for our multi-gig mesh Wi-Fi 6 platforms, a robust pipeline of fiber access opportunities, and a healthy backlog of SaaS customers, we expect these customer segments to stay in high-growth mode in the upcoming quarters. Our portfolio advancements and success in customer diversification come at a time when we see a strong environment for funding the deployment of fiber broadband networks. In the US, the $42.5 billion allocated for broadband infrastructure spending as part of the Infrastructure Investment and Jobs Act is expected to create significant future opportunities. Concurrently, billions of dollars have begun to be allocated for RDOF and ARPA. This funding is propelling a generationally significant investment cycle in broadband spending across the US. Similarly, in Europe, there are rising expenditures as growth-oriented countries like the UK and Germany increase their funding efforts to support the deployment of more efficient, sustainable, and scalable all-fiber networks. As these operators transition to next-generation fiber networks, they are increasingly moving away from high-risk vendors. ADTRAN is exceptionally positioned to capitalize on these shifts, owing to our leading fiber access portfolio and a strong and expanding presence in Europe. Regarding that presence, I want to provide an update on the business combination with ADVA. We remain on track and are working diligently with German officials to secure FDI approval, which is the final milestone we need to reach before closing. The process is progressing as anticipated, with closure expected in Q3. We are optimistic about the portfolio synergies that the strategic combination of these two leaders in fiber networking will produce. Both companies are experiencing record demand for their complementary portfolios, and we expect this momentum will continue to accelerate through our proposed combination. In conclusion, despite ongoing supply chain constraints, we are making significant progress, with higher customer funding, record demand, a diversified customer base, and a unique product portfolio. We are on track for additional growth this year. With that background, Mike will now provide details and a review of our financials. After Mike's remarks, I will be happy to address any questions you might have.

Thank you, Tom and good morning to all. I'll cover our first quarter of 2022 results and provide our expectations for the second quarter. I'll be referencing both GAAP and non-GAAP results with reconciliations presented in our press release and the supplemental financial schedules on our Investor Relations page. ADTRAN's first quarter 2022 revenue came in at $154.5 million, slightly up from the prior quarter, driven by higher sales in both our Access & Aggregation and subscriber solutions and experience portfolio categories. First quarter revenue increased 21% year-over-year with increases in all segments and categories. On a regional basis, domestic revenue grew by 15% and international revenue grew by 35% year-over-year. For the first quarter of 2022, as reflected in the supplemental schedules, we had a slight quarter-over-quarter decrease in both our GAAP and non-GAAP gross margin, which is the result of customer and product mix, as we continue to experience abnormally high supply chain and logistics costs. The year-over-year gross margin decreases in both GAAP and non-GAAP gross margin were primarily attributable to increased supply chain expenses, partially offset by higher sales volume and increased manufacturing absorption. While we remain focused on gross margin improvement and are actively managing higher component costs, freight expenses and expedite fees related to the supply chain constraints, we do anticipate continued challenges. To provide context on our first quarter's operating expenses, we decreased spending in our GAAP and non-GAAP quarter-over-quarter and GAAP year-over-year expenses, while the non-GAAP year-over-year increased. The GAAP quarter-over-quarter decrease was the result of lower market-driven deferred compensation expense, acquisition-related expenses and engineering and project expenses, partially offset by higher labor fringe benefits and legal expenses. The decrease quarter-over-quarter in non-GAAP operating expenses was primarily due to market-driven lower deferred compensation and lower engineering project expenses, partially offset by increases in labor, fringe benefits, legal and marketing expense. The year-over-year decrease in operating expenses was a result of lower market-driven deferred compensation expenses, partially offset by higher acquisition-related expenses, variable labor compensation, marketing and travel expenses. The year-over-year increase in non-GAAP operating expenses was driven by higher labor, marketing, travel and insurance expenses. Shifting to operating profitability. The quarter-over-quarter and year-over-year improvements in GAAP operating profitability were mainly attributable to lower operating expenses with higher sales volume also contributing to the year-over-year improvement. The non-GAAP quarter-over-quarter improvement in operating profitability was driven by slightly higher sales volume and lower operating expenses. The non-GAAP year-over-year decrease in operating profitability was the result of higher cost of goods sold due to supply chain constraints. Other income decreased on a GAAP and non-GAAP basis both quarter-over-quarter and year-over-year. The quarter-over-quarter decreases were a result of lower dividend income, market-driven losses in our investments, and realized foreign currency exchange fluctuations. The decreases in GAAP and non-GAAP other expenses on a year-over-year basis were mainly related to market-driven losses in our investment portfolio as compared to gains in the prior year and realized foreign currency exchange fluctuations. The company's tax position for the first quarter of 2022 was a benefit of $2.4 million, primarily driven by the change in our annual estimated rate due to the requirement to capitalize R&D expense in the US beginning in 2022 and its effect on our valuation allowance. Closing out our income statement results. The first quarter of 2022's GAAP net loss was $1.1 million with a loss of $0.02 per share assuming dilution. Non-GAAP net income was $9.9 million or $0.20 non-GAAP earnings per share assuming dilution. On the balance sheet unrestricted cash and marketable securities totaled $96 million at quarter end after paying $4.4 million in dividends during the quarter. For the quarter we generated $4.9 million in cash from operations. Net trade accounts receivable was $150.1 million at quarter end resulting in DSOs of 87 days compared to 95 days in the prior quarter and 73 days at the end of the first quarter of 2021. Net inventories were $171.1 million at the end of the first quarter compared to $139.9 million in the fourth quarter of 2021 and $122.9 million at the end of Q1 2021. We continue to carry a higher level of inventory in raw materials as we work to minimize supply 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 supplies 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 international markets may cause material differences between our expectations and the actual results. Keeping that in mind, we expect that our second quarter 2022 revenue will be between $165 million and $175 million. After considering the projected sales mix and component availability, we expect that our second quarter gross margin on a non-GAAP basis will be in the range of 35% to 37%, still lower than normal due to higher expediting and freight costs. We also expect non-GAAP operating expenses for the second quarter of 2022 will be between $55 million and $56 million. And finally, we anticipate the consolidated tax rate for 2022 on a non-GAAP basis will be in the high teens to low 20s percentage rate. We believe the significant factors impacting revenue and earnings realized in 2022 will be component availability and costs, the macro spending environment for carriers and enterprises, 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. Once again, the additional financial information is available on ADTRAN's Investor Relations web page. Now I'll turn it back over to Tom and we'll take your questions.

All right. Thanks, Mike. Pam, at this point, we're ready to open up for any questions people may have.

Hi. Thanks for taking my questions. This is Rod Hall with Goldman Sachs. Congrats on a good quarter and guidance here, especially in this environment. Tom, maybe you could talk about guidance for the June quarter. And it's better than what you were expecting. And then, what really gives you confidence, that you would see this quarter-on-quarter sequential increase in revenues in this environment? Is this really inventory build or any other thing that you want to maybe provide more color on?

Yes, certainly. As you know, our inventory levels have increased, and we've been focusing on boosting our inventory of both raw materials and finished goods. Our finished goods are moving quickly, so the main issue is securing more raw materials to improve our position going forward. We feel more optimistic about our situation. We will certainly ship more next quarter than we did this quarter. It's important to note that we've not faced constraints from demand, but rather from supply. Some of the purchase orders we placed at the start of last year are beginning to solidify, and we’re experiencing fewer issues with de-committed orders. The complicated silicon problems we encountered earlier on have eased somewhat, and we've introduced secondary suppliers. Our teams are continuously working on redesigns and have been doing an excellent job, for which I want to express my gratitude. Overall, I believe we are adapting well to the current environment and are effectively executing within it.

Got it. So lower de-commits. Now that's interesting because we have had many companies reporting that they've seen a sharp increase in de-commits in the month of March, but it looks like you're not really seeing that. That's good. As a follow-up, maybe could you talk about your Tier 1 customer wins clearly that is strong momentum especially in Europe, for the past year to 18 months if you had like a bunch of wins. As you think about the next step from here onwards for you, is it more you're focusing on really ramping those projects and then capturing the revenue scale that you are expecting to, or are you also thinking maybe there are more RFPs or more structure you are waiting for? Any color on there that would be helpful.

Yes, certainly. The projects we previously announced are generally aligned with our expectations, which is not always the case, but this environment is distinct. We are now beginning to drive shipments for several of these projects. Many of them placed purchase orders last year to address the supply constraints we faced, and they are now coming online without any significant issues during the launch phase. There are still several large opportunities available, although a few have been delayed for various reasons. However, those will eventually require decisions, as all major carriers in Europe are facing similar needs related to technology, vendor positioning, and ensuring they have the right lineup of vendors. We are not experiencing any slowdowns in that area. It's important to note that this is not our only focus; we are also targeting the Tier 2 and Tier 3 markets, which have consistently grown at over 30% without any signs of deceleration. We remain optimistic about that segment, and additional stimulus funding is still on the horizon.

Right, makes sense. Last question for me, gross margins for nearly flat quarter-over-quarter or maybe slightly down from a product and customer mix. But it doesn't sound like you are seeing a worsening situation at least in supply chain terms. In that context, how should we think about gross margins in second half of the year? Obviously revenue scale is improving. Any color there would be helpful. Thank you.

Yeah, there's probably some factory efficiencies that will come in at some point in the second half, but really trying to nail those down is kind of difficult in this environment. So the best way to think about it is, we're managing in the environment we have by paying what we're paying in expedite fees and whatever and able to keep customers happy and continue to grow. And I don't see a deviation from that. I mean, you may see a tick-up as revenue continues to grow through this year which we fully expect. But that's something that we're not going to be too ahead of our headlights on trying to forecast.

Great. Thank you very much. Just a couple of questions. I guess first we've been talking a lot about the gross margins and I know it's dangerous to make guesses like this. But I mean I think in the past you've talked about when you might get back to the 40% range, or what your current thoughts on that are. So, could I ask for an update there?

Let me get Mike to just step in on this.

Yes, I think in the past we said as we get through these supply issues we should be able to return to that more normalized rate. The hard part is really just figuring out when that is going to happen. I know that a lot of folks have been modeling it as a minor improvement quarter-over-quarter as we go through the year. And then I'm hearing some say that these issues last through the end of the year through the middle of next year. It is just really hard to tell. So, I'm in agreement that we should see minor improvement each quarter as we just get better in navigating this environment assuming there are no other big changes that happen. But when we actually get back to that low 40s is really a little bit hard to tell at this point.

I agree. I think the environmental issue is the volatility in the environment. It's not something we're managing well now. I believe our management of the situation is actually going to improve. However, COVID in Shenzhen can complicate things. Those are the concerns that are likely more troubling.

Okay. From a customer perspective, it seems that your long-time copper customer has transitioned to a fiber customer in the US, and it looks like they represent about 10% of your business. Additionally, there's a relatively new customer in Europe also contributing around 10%. Is that correct? Furthermore, regarding your recent wins in fiber, should we consider these as potential 10% customers, and are there any other candidates for that status this year or next?

I think there are several European customers that could be on the 10% list. I also think we have distribution partners the growth rate here in the US and the Tier 2 and Tier 3 has been phenomenal. And I think that there's always a couple that are right there near that 10% watermark. So, I think you'll see some variability. We're hoping not to get to where we have like a 40% customer because that hurts and we've had that in the past. And the key to that is not to turn down orders is just to make sure the rest of your business has got the right focus. So, the answer to your question is yes, I think that you'll see that continue to kind of change from quarter-to-quarter.

Great. And then last one for me. I guess one of your competitors recently made a WiFi in-home SaaS software acquisition. My question is, is that a direction you would consider, or do you plan to pursue it organically, or could you explore M&A opportunities in that area? Are there other companies out there that fit that description?

We currently have the best in-home WiFi solution available. We've already made significant progress in this area and continue to develop further. Therefore, it's not a gap in our portfolio.

Okay. If I could ask a follow-up there then. Is that an ADTRAN solution, or is that an ADTRAN plus Plume solution when you say you have the best?

We have multiple solutions. Let's just say our portfolio is the strongest available.

Thank you. A couple of questions. First of all, relative to the supply chain, you did reference a couple of factors. And I'm wondering which from your perspective is the bigger one relative to the second quarter revenues ramping up from the first quarter? Is it the supply like the decommits are improving, or is it more a result of the ordering that you did months ago? So, the planning has now finally had enough months to have an impact?

They both have an impact. The ordering has definitely helped with securing the major silicon components. Additionally, there are smaller ancillary silicon pieces that have been challenging to obtain. As I mentioned earlier, we are actively working on many redesigns. If we can't acquire the chip we've been using for five years, we'll find a new alternative and we're committed to that effort. We are currently heavily focused on redesigning to ensure we position ourselves correctly. However, this does not eliminate the possibility of decommits, which did occur last quarter. There are two aspects to consider: first, there has been an ongoing challenge with securing commitments in general, which has improved recently. More of our pipeline now has confirmed dates compared to two or three quarters ago. We have received commitment dates from our vendors. Still, we encounter issues, and we are allocating as much manpower as possible to expedite the redesign process. Our customers are very understanding and are facilitating these redesigns through an expedited process to integrate them into their networks. I believe we have made progress, but it’s important to recognize that both sides—us and our customers—have adapted to the situation.

That's helpful Tom. And then secondarily, would you either highlight the large projects that are going to be ramping meaningfully over the remainder of this year? And/or kind of in aggregate the projects that are going to be ramping that are meaningful. What the differential in revenue or incremental revenue on a quarterly basis is that you would expect from them?

That's a challenging question, and I understand that. There are several factors to consider. First, there's the supply chain ease, which is significant but not seeing much movement. We have a lot of backlog, and any improvement in supply chain constraints will greatly impact our results. Second, we're experiencing consistent growth in Tier 2 and Tier 3 bookings, which continue to increase at an impressive rate. Year-over-year, this growth remains strong, around 30%. Then we have Tier 1 projects that have just started and will continue to ramp up. Additionally, new Tier 1 projects will be introduced throughout the year, with some likely continuing into next year. These new projects can be hard to predict due to lab cycles, so they are the least certain. However, the growth from other projects overshadows these uncertainties, as they take more time to reach significant revenue levels. Our potential is what we are forecasting this year, centered on supply chain availability rather than the ramps.

Taking that last comment into account, my question is somewhat misplaced in trying to pinpoint the anticipated Tier 1 ramps for the remainder of the year and whether that will contribute an additional $5 million or $50 million in incremental revenue in the upcoming quarters. You’re indicating that this is not the right question to ask. The real question is what will happen with the supply chain, as that is the limiting factor.

Yes, absolutely. And it will be for some time. That's a great question to ask if you're inquiring about what the middle or end of next year might look like, but I can't provide an answer for that. However, if you're referring to this year, it's all about supply chain availability.

Thank you very much for taking my question. I wanted to follow-up on the pay as you go the residential SaaS, six months ago you told us you had about one million end users. Not service providers but end users. And based on your growth rates of these platforms, it would seem to me you'd be about 1.3 million end users at this point. Is that a fair number?

That's probably a fair number. But I'll be really honest with you, I don't have that number right in front of me, but that sounds in the ballpark though. Yeah.

Okay. Yeah. And then given the supply chain situation, where do you think you could have been at this point in time? Are we maybe pushing two million? Can you give us some sense of that how much that slowed you down?

The 1.3 million isn't as directly hampered, right? So people that are signing up for SaaS services – it is and it isn't. It isn't as directly correlated, because they're signing up for SaaS services, there are supply chain constraints everywhere constraints everywhere. And they're really signing up for the kind of capabilities that you have knowing that getting material is going to be low. So, when you just talk about subscribers you're not necessarily talking about volume of what you're actually shipping right at any point in time. So, but the net answer is that, I don't know. I really don't know. I've never done that analysis. I know that the backlog on BPG that's associated with our SaaS service is huge.

Good. Okay. And you would expect to – what type of penetration rate on that backlog going forward for the SaaS?

That's all about – here again, product penetration rate of the SaaS piece. I know, you're – let's just say both of them are very large. I mean, so that's – I mean, we have there are some customers. Let me just give you a little bit of color on that. For instance, our newest European customer a very large customer buys a significant amount of CPE and has on order a significant amount of CPE, which dilutes that number because they won't do that. So when you're really talking about SaaS services, you really got to bring it down to the Tier 2, Tier 3 space and most predominantly the Tier 3 space. And that has got a very high attachment rate. But I just don't have that number in front of me.

Okay. That's fair. And did I hear you say, you're expecting that to accelerate? Is that due to the Tier 1s, or is that due to the Tier 3s, or both?

Predominantly Tier 3s. There's some Tier 1 in that as well, but predominantly Tier 3s.

Okay. So we could see this 30% or 60% growth rate accelerate going forward?

Yes. I think I said 30%, right? But yes. The answer is yes.

Okay. And last question on this subject. When do you guys feel you'll be comfortable enough to disclose more information on this page as you go SaaS?

It will be when we have some two things. It's got to be material and it's going to be predictable. And supply chain is hurting us a little bit on that predictability to your point before on what you could sell versus what you can – what you are selling. So I don't have a direct time frame on that, but I would hope it'd be fairly soon.

Okay. Thank you very much.

Okay.

That's all I have.

All right. Okay. Thank you. Thank you very much for joining us. We look forward to a positive call next quarter. Thank you everyone.

That concludes today's call. Thank you for your participation. You may now disconnect your lines.