Ladies and gentlemen, thank you for standing by and welcome to the ADTRAN Holdings, Inc. Third Quarter 2022 Earnings Release Conference Call. During the course of the conference call, ADTRAN representatives expect to make forward-looking statements that reflect management's best judgment based on factors currently known. However, these statements involve risks and uncertainties, including the continued spread and the extent of the impact of the COVID-19 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 cost, freight and logistics costs, manufacturing efficiencies, our ability to effectively integrate mergers and acquisitions and other risks detailed in our annual report on Form 10-K for the year ending in December 31, 2021, and our quarterly report on Form 10-Q for the quarter ending June 30, 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 Holdings. Sir, please go ahead.

Thank you, Brett. Good morning everyone. We appreciate you joining us for our third quarter 2022 earnings conference call. With me today is ADTRAN Holdings 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. Q3 marked a new era for ADTRAN following the closure of the business combination agreement with ADVA Optical Networking on July 15th. This transition point coincides with our industry continuing to rapidly transition to the fiber everywhere era, especially in ADTRAN's highest growth regions in the U.S. and in Europe. Service providers have aggressive goals to rapidly deploy fiber to homes, businesses, and critical infrastructure sites, while increasing customer satisfaction, streamlining operations, reducing energy consumption, and ensuring network security. Our vision is clear; we want to help service providers achieve these goals by having the most complete portfolio from optical core to the customer premise. This portfolio includes scalable, secure, and efficient networking infrastructure, and customer premise platforms paired with best-in-class software. These solutions maximize subscriber experience while simplifying operations through automation. The combination with ADVA provides us with the most complete portfolio to execute on this vision. Given that this is our first quarter combined results with a full quarter from ADTRAN Inc. and a partial quarter from ADVA, we have adjusted the revenue categories to reflect our broader fiber networking portfolio. The new revenue categories for both products and services are: subscriber solutions, access and aggregation solutions, and optical networking solutions. These categories cover our complete portfolio of fiber networking products and services that span from the optical core to the customer premise. A more detailed breakdown of these categories is provided on our Investors website. As for integration planning, this process is well underway. We are on target, and the two companies remain excited by the customer reactions to the business combination. Looking at the results for the quarter, a few key points stand out. For one, we are very balanced geographically, with our U.S. and non-U.S. business each contributing about 50% of the total revenue in the quarter. Second, each of our product categories, along with our consolidated service offerings, contributed meaningfully from a revenue perspective, highlighting our continued diversification across our combined portfolio. We believe this well-balanced and comprehensive fiber networking portfolio, coupled with our strong global presence, will continue to provide us with higher growth potential in this ongoing investment cycle in fiber networks. Our success in the quarter was driven primarily by a diverse mix of service providers that are upgrading their optical transport networks and deploying new fiber access networks, connecting residential and business subscribers to these fiber networks. Starting with our optical network solutions, we see broad-based demand and a growing backlog for ADVA's optical transport solutions with a mix of service providers, Internet content providers, government agencies, and large-scale enterprise customers. Demand remains strong from large-scale transport systems to internally developed optical modules and pluggable transceivers. This category has several exciting developments, especially in the metro edge, with a mix of optical modules, advanced security solutions, and edge-optimized platforms that are ideal complements to ADTRAN's fiber access and aggregation solutions. Building on our innovations in optical networking, ADVA recently announced the creation of ANS, a wholly-owned, yet separate company to serve the increasing requirements for secure network infrastructure. The new entity specializes in secure transmission technology to protect highly sensitive communication networks from cyber attacks. ANS will collaborate with national security organizations to ensure end-to-end networking protection that meets the highest industry requirements, including safeguarding data against threats from quantum computers. Moving to our fiber access and aggregation solutions, we continue to see great demand for our 10-gig fiber access platforms. According to the latest industry market share report from Del'Oro, ADTRAN held the number two market position in North America and number three market position in EMEA for 10-gig PON aggregation port shipments. We are now pairing these fiber access platforms with industry-leading carrier Ethernet aggregation and network synchronization solutions from ADVA that will further enhance our ability to meet the fiber access and aggregation needs for all subscriber types. In the subscriber solutions category, we saw tremendous growth during the quarter. On the residential side, where growth is highest, we are benefiting from enhancements to our cloud-managed multi-gig mesh WiFi 6 solution and the increasing number of subscribers connecting homes that were previously passed with our fiber access platforms. On the business side, we now offer a much broader solution ranging from carrier Ethernet edge devices and network virtualization solutions to enterprise-class routers and switches. These solutions, which complement our residential offerings in aggregation solutions, help fuel additional growth in our subscriber solution segment. Incorporating into each of these product categories are software solutions led by ADTRAN’s Mosaic One SaaS platform. ADTRAN’s SaaS customer base, which includes hundreds of service providers, is up 31% year-over-year. This includes over 100 service providers that have adopted the latest version of our Mosaic One platform. With a much broader portfolio, larger customer base, and expanding capabilities in ADTRAN's SaaS portfolio, we expect to further accelerate growth in this strategic area. Looking ahead, we have exciting developments in the optical networking space. The recently launched 100ZR pluggable coherent transceiver is an ideal match for ADTRAN’s access and aggregation portfolio, greatly reducing the cost, power, and space needed for deploying 100-gig connectivity deeper into the network for mobile backhaul and fiber access backhaul for large-scale enterprise service delivery. In addition to the 100ZR, we also announced the AccessWave optical module, which simplifies deployment of 25-gig point-to-point services for mobile backhaul, mobile fronthaul, and enterprise service delivery. In the access and aggregation space, ADTRAN is expanding its lead in open disaggregated fiber access platforms with the anticipated launch of the STX 6330. This is the densest, highest capacity, and most energy-efficient 10-gig fiber access platform in the industry and is well ahead of the competition in terms of scale, performance, cost, and expandability. On the subscriber side, ADTRAN is achieving great success with its STG series of platforms for WiFi 6 and is expanding the solutions to incorporate Wi-Fi 6E and business class features for work-from-home and small business users. In the software space, we continue to advance our Mosaic portfolio, helping service providers automate the management of both customer premise and network infrastructure while providing end users with tools needed to maximize their service experience. With the combined company, we will integrate the complete portfolio from the optical core to the customer premise under a seamless management environment with ADTRAN’s Mosaic One platform. This will both improve subscriber experience and increase operational efficiency. The success we are having in the focus platforms along with exciting innovations on our roadmap position us well for further growth during this ongoing investment cycle in fiber networks. Our key regions in the U.S. and Europe view fiber networks as critical infrastructure, and sizeable public investments remain ahead to ensure their deployment. While supply chain issues continue to impact us, the outlook is improving. Given these factors, we remain very optimistic about our future. With this background, I will turn things over to Mike to provide a review of our financials. Then, following Mike's remarks, we will answer any questions you may have.

Thank you, Tom, and good day to all. I'll cover our third quarter 2022 results and provide our expectations for the fourth quarter. Please note that this is the first quarter for ADTRAN Holdings, Inc. which includes the consolidation of the ADVA financials for a partial quarter, beginning at the finalization of the business combination on July 15th, which affects year-over-year and quarter-over-quarter comparisons. Since this is the case, I will refrain from repeating the first time call it, consolidation effects when discussing year-over-year and quarter-over-quarter comparisons of our results. I will be referencing non-GAAP information, with reconciliations to GAAP presented in our press release and supplemental financial schedules on our Investor Relations page at investors.adtran.com. The supplemental financial schedules on our webpage also provide certain information by segment and category, which I'll also be discussing today. ADTRAN's third quarter 2022 revenue came in at $340.7 million, up 147% year-over-year and exceeded the upper end of our guidance range of $320 million to $340 million. Inclusive of ADVA revenues, our network solutions segment makes up 90% of revenues in Q3 2022, compared to 87% in Q3 of '21. Our services and support segment contributed 10% of revenues in Q3 2022, compared to 13% in the year ago quarter. Year-over-year and quarter-over-quarter revenue increases are driven by our subscriber solutions category which makes up 39% of revenues compared to 34% in Q3 of '21 and 46% in the previous quarter. The newly introduced technology category optical networking solutions include the optical networking or cloud interconnect portfolio of ADVA and contributed 35% of revenues. Access and aggregation revenue share was 26% compared to 66% in the year ago quarter and 54% in Q2 of 2022. On a regional basis year-over-year, domestic revenue grew by 85% and international revenue increased by 270%. Domestic and international revenues are split about equally, with about 50% of our revenues each, providing a more balanced business with an expanded portfolio and global footprint. Our customer diversity continues to be a focus with two 10% of revenue customers, one U.S. service provider customer and one international service provider customer. Q3 non-GAAP gross margin was 38.1%, improving by 3.5 percentage points year-over-year and 1.7 percentage points sequentially. Increasing gross margin is due to an improved customer and product mix in the combined company and improvement in supply chain expenses, partially offset by unfavorable currency developments. GAAP gross margin is inclusive of $25.5 million acquisition related expenses, amortization and adjustments due to the business combination with ADVA. While we anticipate continued supply chain challenges, we remain focused on managing higher component costs, freight expenses and expedite fees. Our non-GAAP operating expenses were $109 million increasing by 116% year-over-year, and 101% quarter-over-quarter. Operating expenses were 32% of revenues, compared to 36.5% of revenues in Q3 '21 and 31.5% in Q2 of '22. Non-GAAP operating profitability was $20.9 million, which translates into a non-GAAP operating margin of 6.1%, compared to negative 1.9% in Q3 of '21 and 4.9% in the previous quarter. The improvement in operating profitability was driven by higher revenue volume at more favorable gross margins. Other income on a non-GAAP basis decreased year-over-year and increased quarter-over-quarter. The decrease on a year-over-year basis was mainly driven by market related losses and impairments in our investment portfolio, and higher interest expense related to our credit agreements, partially offset by favorable realized foreign currency exchange fluctuations. Quarter-over-quarter improvement was mainly due to higher favorable realized foreign currency exchange fluctuations that offset higher interest expense and investment losses. The company's non-GAAP tax provision for the third quarter was an expense of $8.8 million or 42% tax rate, primarily driven by the change in our annual estimated effective tax rate related to the closing of the business combination with ADVA during the quarter, and the requirement to capitalize R&D expense in the U.S. beginning in 2022 and the subsequent effect on our valuation allowance. Closing out our income statement results, non-GAAP net income was $12.2 million and $7.7 million after adjusting for minority shareholder interests in ADVA. This results in EPS attributable to the company of $0.11 per share. The significant difference in non-GAAP net income of $12.2 million and GAAP net loss of $44.9 million is mainly due to purchase accounting adjustments, which also explains the significant difference in non-GAAP net income of $7.7 million and GAAP net loss of $41.9 million after eliminating the minority interest. Turning to the balance sheet and cash flow statement, cash and cash equivalents totaled $111.1 million at quarter end. For the quarter, we used $36.8 million of cash for operations mainly due to deal closure expenses, and an increase in working capital. Net trade accounts receivable were $302 million at quarter end, resulting in DSO of 82 days compared to 91 days in the prior quarter. Net inventories were $416 million at the end of the third quarter, resulting in inventory turns of 3.1 compared to 2.4 in the second quarter of 2022. Both companies continue to carry a higher level of inventory and raw materials as we build supply to minimize further disruptions given the challenging electronic component market and extended lead times. Trade account payables were $276 million, resulting in a DPO of 71 compared to 100 in the previous quarter. Once again, Q3 was the first quarter which includes ADVA financials for a partial quarter beginning at the finalization of the business combination on July 15th. The fourth quarter, however, will be the first quarter that fully includes ADVA financials. The integration planning process is progressing well. And we have now aligned our earnings call schedules to coincide on the same day. We've also taken further steps in the integration of our combined IR efforts and will align our key performance indicators as we guide in the future. Going forward, we will provide guidance on revenue and non-GAAP operating margin, similar to the guidance measures provided by ADVA. Looking ahead at the final quarter of the year, 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 rates and any additional required purchase accounting adjustments related to the ADVA merger may cause material differences between our expectations and the actual results. With that in mind, our fourth quarter 2022 revenue is expected to be between $355 million and $375 million. And we expect a non-GAAP operating margin between 5% and 6.5%. Once again, additional financial information is available at ADTRAN's Investor Relations page at investors.adtran.com. Now I'll turn it back over to Tom and we will take any questions that you may have.

Okay, thanks, Mike. All right, Brett, at this point, we're ready to open up to any questions people may have.

Your first question comes from Paul Silverstein with Cowen.

Tom and Mike, last Thursday, Viavi mentioned experiencing weakness, particularly with their field test equipment, which I assume is directly related to FTTP. They indicated that this weakness is quite general. I've heard that offline they were suggesting that AT&T and possibly some others are adjusting their positions. This raises a significant concern. From your comments, it seems to imply that you are not experiencing this weakness. However, let me ask you directly: Are any of your customers, especially the larger ones, indicating a potential pullback or cutback that could negatively affect future revenue?

No, the answer is no. We have hundreds of customers, and at any given time, some may be retracting while others are advancing. Some customers are concerned about their capital, and there are always shifts in capital toward the end of the year, which can be beneficial or detrimental. However, these fluctuations are minor, particularly when considering our backlog. Regarding our large customers, the answer is no.

Mike, if I heard you correctly, I think you said the balance sheet was $111 million of cash, didn’t have any chance to look directly. Was that the number?

That's right $111.1 million.

Let me ask, I believe you mentioned that you plan to buy out the remaining shares of ADVA with cash. I know this won't happen immediately and it may take time to complete the acquisition. However, the question arises, you only have $111 million. If I do a quick calculation, that amounts to about 350. My direct question is, I assume you want to avoid raising debt financing given the current interest rates, so would the only way to proceed be for you to conduct a secondary offering?

Well, that's not the only way to do it. But that is one possibility. We have lined up the debt to do it, the number is a little bit less than what you said; it's closer to 300 right now to take out the rest of them with the current offer price, the put price in the DPLTA agreement that is still working its way through approval by the ADVA's shareholders. So the plan has been to do it with debt, to do it with earnings from the company. But also there are other options that we will explore.

I think we secured the debt just to make sure that we have a backstop that allows us to have flexibility. But as we get closer to those periods of time, we'll make the call as the question comes up.

One more from me. Tom, going back to the quarterly question of how is the ramp at the various Huawei displacement opportunities both ones you've already secured like B2C that are already ramping, as well as any update you can give us on the number of awards that might have converted, or the number of RFPs or other opportunities that might have converted into awards? And the remaining outstanding RFPs that haven't yet been awarded? Any update would be appreciated.

We have secured a few projects that we are in the process of monetizing, although that may be a strong term. It's more about getting them online and then actually generating revenue. This quarter, we allowed ourselves some time to assess our position as we move towards the end of Q1. We expect to see approximately four new Tier 1 customers in Europe begin ordering and deploying, though this process will take some time to build up. Overall, these efforts seem to be progressing well. We are also launching the 6330, which is a new generation of disaggregated fiber platform that enables 10-gig capabilities and offers high density with low power consumption. It's an impressive platform that we plan to start production on by the end of this year as scheduled. We've begun lab testing some of our current products, and the success of the 6330 deployment is crucial as it significantly improves the economics of fiber deployment in larger markets. A few projects will come online between now and the end of Q1, with additional projects likely starting around Q3. Additionally, there are about four major Tier 1 opportunities that are currently under consideration and expected to be resolved in the next three quarters.

Tom, so four options that haven't been decided, four brand new awards, and can you remind us the number of awards previously were how many?

We had six Tier 1s in Europe and one Tier 1 here. Four of them were modified, so that really accounts for those additional four.

So it’s four being new relative to what you previously shared with us?

No, it's not new in terms of what we're shipping. However, four out of the six are coming online between now and the end of Q1.

Coming online being initial revenue.

Initial revenue, yes.

You mentioned they are all different sizes. Are any of those four considered Tier 1 in terms of BT and DT?

At this time, nothing compares to DT and BT because they are managing numerous projects simultaneously. I would categorize them in the tier of larger companies, with some slightly above or below that range, but it's somewhat inconsistent. Some are implementing Huawei replacement projects that will launch soon, while others are scheduled for later next year. The timeline varies by carrier, and there will be periods of activity followed by a return to normal operations. Therefore, it's challenging to classify them. Overall, BT and DT remain the largest players in the market.

But Tom from the way you just described it sounds like in the aggregate those are worth at least in the 10s, I assume collectively $50 million to $100 million type range if not more?

I don't know if I go that far; I would say we think about them in the 10s, yes.

Individually or collectively?

Individually, someone will be 10, someone will be 8, someone will be 15, and someone will pop up to 20 when they do a big replacement.

I appreciate the responses. I'll pass it on. Thank you.

Your next question is from Fahad Najam with Loop Capital.

One, if you look at ADVA as we're trading the full year outlook, then it sounds like for the fourth quarter, your organic guidance is slightly a bit lower than what I would have anticipated given the improving supply chain outlook and the backlog that you're carrying. Can you maybe parse out a bit about what you're seeing in terms of the supply chain dynamics? And regarding your ADTRAN organic guidance of the fourth quarter? And I have a couple follow-up.

Let me address this, and then Mike can add his thoughts. I would be surprised if our internal projections diverge significantly from yours regarding the expected mix. Fourth quarter results are aligning closely with our anticipations. However, I’m uncertain about the discrepancies in your figures compared to ours. We're still expecting improvements in the supply chain, but there are still challenges in the overall environment that we don't anticipate resolving this quarter. Looking ahead, I genuinely believe that by mid-next year, most of these issues will be addressed. That said, while the number of parts may have reduced, the importance of each individual component remains high. Therefore, we expect conditions in the fourth quarter to resemble those we experienced in the third, similar to the second quarter as well. I'm unsure about the specific disappointments you’re referring to, as we feel we are on track with our expectations.

Can you discuss what you’re observing regarding the dynamics between Tier 1, Tier 2, and Tier 3 in North America? Even considering Viavi’s comments, which primarily focus on Tier 1 customers, including one that is not part of your client base, I still believe the CapEx outlook for Tier 2 and Tier 3 is quite strong. Could you elaborate on what you’re seeing in terms of the interactions between Tier 1 and the other tiers in the U.S. and EMEA?

There has been no change in the EMEA region, and similarly, there hasn't been any change in the U.S. I'm not well-acquainted with the Tier 1 mentioned by Paul, as we do not sell to that customer. Our other Tier 1 in the U.S. has not slowed down at all, and in fact, we just began ramping up. We’ve received additional orders beyond the initial ramp, and they have increased their forecast for next year, so I haven't observed any slowdown. In the next tier down, it’s typical to see fluctuations in capital towards the end of the year depending on where they are in their programs. Overall, I do not see any systemic issues. Some customers are performing better while others are doing less, but overall, there has been no significant change. Additionally, I still have a backlog where everyone is requesting shipments, so there is not a significant impact in the near term. Regarding the longer term, we will be aware of the recession like everyone else, but we believe certain segments may be more affected than others. Government spending appears solid, and the large carrier initiatives also seem very strong. Many of these companies define success by how quickly they deploy broadband, and the take rates are exceeding expectations. There has been no real change in the Tier 3 space either. While there may be pockets of change, it’s unclear if they stem from adjustments in long-term capital spending or short-term capital forecasting related to budgets. In general, the environment remains stable. I do have concerns like everyone else about the potential effects of a prolonged recession on the macro economy and our sector, but as of now, I haven't seen any evidence of that.

One last follow-up if I may. Looking at 2023, there are still significant stimulus funds that are yet to be utilized, RDOF is moving slowly, and the cable MSOs are starting their DOCSIS 4.0 upgrade cycle. How are you approaching the calendar year 2023? I know you're considering the recession, but shouldn't your Tier 2, Tier 3, and Tier 4 customer segments, along with the cable segment, be more resilient in the current macroeconomic environment?

Yes. When considering how recessions affect these factors, it's clear that broadband is as essential as electricity. I don't mean to overstate this, and I hope I don't offend anyone, but it is essentially a necessity. Therefore, I view it as a very robust component. However, there are companies that rely on capital markets for funding, and those are the ones to be cautious about. Typically, we see a decline in enterprise spending during these types of economic issues, but the long-term effects on capital budgets for carriers usually take time to materialize. The severity of the recession is crucial. For those who remember the last recession during the financial crisis, our company remained resilient during that time, and I don't anticipate a change now. We will need to monitor the situation, but currently, we don't see significant concerns.

Your next question is from Michael Genovese with Rosenblatt Securities.

Have you given or can you give the total ADVA revenue that was recognized in the quarter?

Yes, we can. I’ll just give you a percentage of the total. So for the total quarter revenue, ADTRAN was 52% and ADVA was 48%.

And now, is the ownership structure pretty set? I mean, ADTRAN is going to continue to have a separate conference call every quarter and the income attributable to non-ADTRAN shareholders is going to stay about the same percentage or will that change going forward?

I think I mentioned the details. Did I mention the details there, Tom?

Yes. I can answer. So, Mike, there is a plan to work our way to a domination agreement. And I think you might have seen some of the releases that came out with that. But it needs to be approved at the shareholder meeting of ADVA, which is now scheduled for the 30th of November. After that agreement, and there's other things that we will be able to do to move the profits away from the ADVA entity and over toward the ADTRAN entities. They will continue to have a conference call as long as they're traded, at some point in the future there would be a delisting offer and would actually delist those shares. But that kind of goes back to the same question that Paul asked earlier about our plan is actually to buy up the rest of those shares. And then that would be a wholly-owned subsidiary of ADTRAN in the longer term.

Okay, great. So you've been asked, am I going to ask again about the macro risk to sort of ADVA's European metro and sort of enterprise optical revenues. I think you've answered that pretty clearly and pretty bullishly I would say. But it looks like overall, out there in the supply chain that optical does seem to be the most supply constrained. I mean, that's the message from Nokia and others who play in multiple areas that some of these analog parts specifically needed for optical are the most supply constrained. Is that what you're seeing? Because I mean the performance there looks pretty good. So do you have any insight on how they're managing that maybe better than some of the larger companies in the optical networking space?

In general, ADTRAN is handling the situation better than some other companies in the optical sector. They still face challenges, but most of these issues aren't unique to optical. There are ongoing concerns with power supplies and analog devices that affect the wider industry. Additionally, both they and we are dealing with critical processor challenges. Previously, my biggest concern has been related to basic logic components, but now I have specific processor issues, just as they do. Therefore, the challenges faced by ADVA are not significantly different from those encountered by ADTRAN.

And in the combined company, they are still affecting our gross margins. I think in the past I've tried to lay out the impact on our gross margins, and although it is improving somewhat, it was still nearly 3.5 percentage points that was due to purchase price variation, expedite fees and freight costs that have been elevated. Now, the bright spot so far is that freight is finally moving in the right direction, but the other ones, there’s still a pretty good amount of flow through of additional costs that we're paying to be able to obtain those components on the timeframes that are needed.

Your next question is from Ryan Koontz with Needham & Company.

Wanted to ask about your different product areas. It sounds like Tom from your remarks that subscriber solutions is the one maybe outperformed where the upside came from is. And is that more demand related or is it kind of alleviating of the supply chain constrictions? Can you make any commentary and kind of put some takes on the quarter and kind of how you think about the products going forward would be helpful?

I don't have my notes in front of me, but I believe I mentioned last quarter that subscriber solutions was likely the area requiring the most effort. We needed to ensure that we could ship the products and focus more on this area. Once customers implement a network, it's crucial for them to activate their users on that network for obvious reasons. We are concentrating on this and saw significant progress this quarter. This was the largest year-over-year increase for the company. We’ve had ample backlog in this area for a while, and while demand remained strong, we needed to address that backlog and move things in the right direction to support our customers. I would classify it more as a product call than anything else shifting in the industry.

And are you seeing any help on the kind of share side where you may be able to execute a little better than some of your peers and able to take share in any cases in this case, able to ship?

Yes, but the share is really the way it has been happening, maybe a little bit different in Europe. But in general, the way the share happens is that share is kind of given to you as you win the OLT business. So as you win the infrastructure piece, then most times they're going to move forward with your ONTs and many times if not most times your RG as well. So this was kind of share that we have been winning, and it's just a matter of us being able to monetize that share.

I just want to clarify Jim's earlier comment, or Mike's earlier mention, about the 350 basis points impact on your quarter due to supply chain issues and expedites. Did that hurt?

That's correct.

Your next question is from line of Paul Essi with William K. Woodruff & Company.

I wanted to discuss ADVA’s competitive position. They've focused on connecting the core to the edge, an area where larger players haven't invested as much, preferring to focus on long-haul solutions. I'm curious about how this focus will influence ADVA’s competitive standing in that space considering their spending. Additionally, how does their encryption and security expertise factor into this? Moreover, could you provide more details about the 100ZR that you developed together, and what its implications might be for revenue in 2023 and 2024? Who are the customers you expect to sell this to? Also, I’d like to hear about AccessWave. I have a follow-up as well.

That's a lot of questions. Let me first address the ANS aspect. ANS stands for ADVA Network Security. When we merged the companies, we needed approval from various governments, including Germany. This was part of our negotiations to ensure that the technology used by the German government meets their security standards. The technology from this group can be utilized throughout the entire company, though there are still clear separations regarding different markets, which is different from the situation in the U.S. This initiative allows us to continue development in Germany, a key customer, and enhances our security level for government clients, ultimately boosting sales. We believe this move is beneficial and profitable, as they provide specialized security solutions. This merger was always a logical step for ADVA, enabling us to access new revenue and technology streams that were previously unavailable. Regarding ADVA's focus, I view them as specializing in the last mile of metro edge, which aligns with our customers' current needs as they expand their last mile networks. They need solutions to collect and efficiently transport traffic as capacity demands grow. We are already observing cross-selling opportunities where our products complement each other well. They offer competitive products, and we are confident about this collaboration. Mike, can you provide details on the 100ZR?

Yes, that product actually is commercially available next year. So I really can't tell you what the revenues are at this point, but it will fit in for service providers, as well as MSOs as the market that it's targeted toward. So we'll have more information to come on that as it's released.

The other follow-up question, again, is on the SaaS subscribers. Is there anything that you can share with us? I think you were at 1.3 million, 1.4 million something like that at the end of June. Can you talk to that at all and give us a little flavor of how that's going, maybe some hard numbers?

When you think about SaaS subscribers, let me put it in the way that we actually have the numbers for it. So you can think about SaaS subscribers as a fallout to SaaS carriers, right? And our SaaS carrier growth was up 31% year-over-year this quarter. And that's been about the rate that it has been ticking along. So SaaS customer growth will typically outpace SaaS carrier growth because in fact, it will outpace, right, because you have new customer carriers coming online, plus you have the older carriers being more mature and adding more subscribers to their network.

I was trying to focus on the actual number that your customers have signed up of their subscribers. Do you have anything available on that? Just the actual paying customers that go up to the list?

I don't have that growth rate on that number, Mike. I know it's well in excess that you mentioned before. And I mentioned before, it's over 1 million and 1.2 million. Actually, it's closer to 2 million at this point but I don't know if I have that, I don't have that number in front of me.

Your next question is from line of Tim Savageaux with Northland Capital Markets.

I want to ensure I mention this: could you provide your expectations for the tax rate moving forward? It seems to be fluctuating. That's not my primary question, though; I just wanted to include it. My main focus is the situation with ADTRAN's organic growth. As previously noted, subscriber growth is driving performance, but access and aggregation have actually decreased slightly both sequentially and year-over-year. Can you explain the dynamics for this quarter? Additionally, in your guidance, it appears you're projecting a slight sequential decline from an ADTRAN perspective. Is this simply a matter of normalizing supply issues on the subscriber side? Also, do you anticipate any growth in access and aggregation for Q4?

Let’s start discussing the tax situation before moving on to other matters. Our tax rate has varied significantly throughout this year's quarters. In the third quarter, we reported a 42% effective tax rate on a non-GAAP basis. Looking ahead, I anticipate that for the year, the effective rate will likely be in the high teens, which is slightly lower than our previous estimates, probably below 20%. However, for the fourth quarter, I expect we will still see a higher tax rate, similar to what we observed in the third quarter. When considering the total year and making adjustments, the overall effective rate may also settle in the low 40s again. As we look into the following years, it would be wise to project a tax rate just below 20%.

In relation to the guidance, I mean the guidance is basically flat, which is as you probably know, if you follow us typically, we see a down Q4. So like I said, it's pretty much in line with what we expected it to be. In relation to aggregation, we have a lot of irons in the fire there. We have backlog that would allow us to actually materially grow that number from this base. We're also trying to still get a lot of CPE out the door, a lot of the subscriber solutions pieces out the door. And then we really have a ramp up of this 6330, which is kind of a critical wrap up for us, which should start at the end of the quarter. So, I mean we have a lot of different ways to get there. But I can't tell you explicitly what that aggregation number is going to look like at this point.

Your next question is from line of Paul Silverstein with Cowen.

Three questions if I may. ADVA, going back to macro concerns, ADVA, correct me if I’m wrong, historically, they have derived about 30% I think of their revenue from enterprise with a bulk of that I believe being in Europe consistent with them being headquartered in Europe, and having done a good job in Europe historically. One would think that European enterprise would be most at risk from macro. Again, it doesn't sound it from your guidance, but I got to ask, any signs of weakness? And then I got two other quick questions.

No, a lot of that is kind of their Ethernet product. And just no, the answer is no, I mean from any way you look at it. I won't tell you that it won't be impacted. But I will tell you, we haven't seen that impact yet.

Regarding the Mosaic SaaS figure you mentioned, was the 31% year-over-year increase referring to the number of service provider customers who have adopted the service?

That's correct. We can’t break this down to subscribers; we just haven't done that.

If we consider revenue, I assume you can't share specifics, but I expect the numbers are quite small at this stage?

If I look at my software and service number, which includes contracts associated with software and maintenance, the growth rate has been solid for the last two years. However, I don't think it's time to start breaking those numbers out so you can see them. I'm aiming for stability and focusing on the long term. The key is that I want to be confident about the growth rate and where we stand with that product line before proceeding, and I don't believe we're quite there yet.

Well, less than $10 million a quarter?

No, no. Of dollars?

Right. It is over $10 million, but that is not just SaaS.

Yes, it includes software.

All right. I will move on to the last question. Mike, on the gross margin progression, you all have seen a more significant recovery than most, but you were also in the more severe in terms of the impact of supply chain, initial impact in getting hit. And my question to you is looking forward, any thoughts on how far how fast you can get back to the low-40s from whence you came? And I understand now there's add in the mix. But their margin structure if I remember on a like for like basis, I’m using U.S. non-GAAP, was actually a little bit better, I think than your margin structure. And one last point in connection with the question, correct me if I'm wrong, but subscriber solutions has got a lot of different products including software in there. But I assume the dominant revenue is from your relatively lower margin for absolutely low margin ONT platforms that you refer to as being a big part of the year-over-year growth, which is counterintuitive, given a nice rebound you saw. I guess another way stated is, you put up strong growth or strong recovering gross margin notwithstanding what I would think would be the negative drag effect of that big increase in ONT revenue, which is encouraging all things being equal. But any insight you could share Mike on what happened to the quarter more importantly…?

Let me make the first half of that, which is on the second part of your question, your first one that is fairly insightful. Yes, we did ship a lot more CPE on purpose. And yes, we were able to come up with pretty decent gross margins on what is typically a very low gross margin mix. I would tell you that has been absolutely helped by the software sales associated with that piece, which was impactful. And then there's a secondary help, which is some of the functionality including things like 10-gig are also helpful. But in general, yes, it was a pretty good quarter from a gross margin perspective for subscriber solutions. Mike, I don't know if you want to cover the first part.

Yes. So while there was some mix involved, I mentioned that we still have about 3.5 percentage points of headwinds. Last quarter, I reported around 4.6 or 4.7. So we’re definitely heading in the right direction. The most notable improvement has been in freight and logistics, where rates are beginning to decrease and availability is improving. Regarding the extra fees for sourcing components, Tom pointed out that while there are fewer issues, significant challenges remain that need to be addressed. Overall, things are improving with fewer broker buys and excessive payments for components. Some of this still affects the balance sheet due to higher costs from previous quarters, but we expect that to gradually resolve. We did see good improvement this quarter, although we are facing a new challenge with FX issues, which impacted our gross margin by almost 2 percentage points, maybe slightly less. This has somewhat stabilized, but we've observed a downward trend in this area as the dollar strengthens. We are learning to manage all these factors better as we progress.

Your next question is from line of Ryan Koontz with Needham & Company.

I wanted to ask about your different product areas. It sounds like Tom from your remarks that subscriber solutions is the one maybe outperformed where the upside came from is. And is that more demand related or is it kind of alleviating of the supply chain constrictions? Can you make any commentary and kind of put some takes on the quarter and kind of how you think about the products going forward would be helpful?

I believe I mentioned in the last quarter that subscriber solutions was the area where we had the most work to do. We needed to ensure we could ship products and concentrate our efforts in that area. Once customers have a network in place, it's crucial for them to activate customers on that network for obvious reasons. We focused heavily on this and observed significant progress this quarter, which I believe represents the largest year-over-year increase for the company. We've had a substantial backlog in that area for quite some time. The demand continues to be strong, but it was essential for us to clear some of that backlog and push those numbers in the right direction to assist our customers. I would describe this more as a product call than anything else significantly changing in the market.

You've already answered the prior question. I apologize.

I appreciate your responses. I'll pass it on. Thank you.

Ladies and gentlemen. thank you for participating. This concludes today's conference call. You may now disconnect.