Good morning. My name is Rob, and I will be your conference operator. At this time, I would like to welcome everyone to the ADTRAN Holdings Fourth Quarter 2024 Financial Results Conference Call. Thank you. Mr. Peter Schuman, Vice President of Investor Relations, you may begin your conference call.

Thank you, Rob. Welcome, and thank you for joining us today for ADTRAN Holdings Fourth Quarter 2024 Financial Results Conference Call, and welcome to all those joining by webcast. During the course of this conference call, ADTRAN representatives expect to make forward-looking statements that reflects management's best judgment based on factors currently known. However, these statements involve risks and uncertainties, including the risks detailed in our earnings release, our annual report on Form 10-K, and our filings with the SEC. These risks and uncertainties could cause actual results to differ materially from those in our forward-looking statements, which may be made during the course of this call. We undertake no obligation to update any statements to reflect events that occur after this call. During the course of the call, we refer to certain non-GAAP financial measures. Reconciliations of non-GAAP to GAAP measures and certain additional information are also included in our investor presentation and in our earnings release. We have not provided reconciliations of our first quarter 2025 guidance with regards to non-GAAP operating margin because we cannot predict and quantify without unreasonable effort all of the adjustments that may occur during the period. The investor presentation has been updated and is available for download on the ADTRAN Investor Relations website. In addition, financial measures during the course of this conference call are preliminary estimates. They consequently remain subject to the company's internal controls and procedures, and are subject to risks and uncertainties, including, among others, changes in connection with the quarter-end or year-end adjustments. Turning to the agenda. Tom Stanton, ADTRAN Holdings' CEO and Chairman of the Board, will provide the key investment highlights for the fourth quarter 2024, and Uli Dopfer, our Senior Vice President and CFO, will review the quarterly financial performance in detail, and then we'll take any questions that you may have. I'd now like to turn the call over to Tom Stanton.

Thank you, Peter. Good morning, everyone. ADTRAN executed well during Q4 with improvements across several key operating metrics. Revenue increased sequentially, our non-GAAP gross margins remained strong, and our non-GAAP operating profits continued to expand. Revenue was up across all regions with non-U.S. revenue up 10% quarter-over-quarter. Diving deeper into the details, optical networking revenue showed meaningful growth in Q4 with a 16% sequential increase, supporting our belief that revenue bottomed in Q3. Our optical networking solutions growth was up across all regions, led by an uptick in business from a mix of service providers, Internet content providers, and enterprise customers. Optical networking solutions added 18 new customers during the fourth quarter. These new customers included a broad mix of fiber broadband customers, government agencies, utilities, and large-scale enterprises. The growth in our customers matches the diversity in network upgrade catalyst with our optical customer base. In some use cases, it is broadband operators upgrading their backhaul networks to 100 Gig or regional transport networks to 400 Gig or 800 Gig. In other scenarios, it is Internet content providers upgrading capacity between large-scale compute sites, or large enterprises or government institutions upgrading and securing their private networks. Under any of these scenarios, these customers need scalable, secure, and automated optical networks from a vendor that they can trust. We address all of these needs. With continued advancements in our portfolio, improving customer inventory levels, and growing opportunities across multiple verticals in the optical segment, we are optimistic about the growth opportunities moving forward. Our access and aggregation solutions grew 8% sequentially, driven by fiber footprint expansion and network upgrades. The quarter's growth was led by the U.S. customers deploying multi-Gig fiber services. Investment remains strong among service providers in the U.S. and Europe, and we are upgrading and expanding their fiber footprint. We remain the leading vendor option given our portfolio and presence in our target markets. During the quarter, we began shipping infrastructure to 12 new fiber-to-the-premise service providers, continuing our trend of new customer acquisition in this segment. With a strong pipeline of expansion opportunities and network upgrades, we expect meaningful revenue growth in this area. Our subscriber solutions category had another strong quarter, although slightly down sequentially, following 2 strong quarter-over-quarter increases. The strength in CPE is directly attributable to fiber access footprint expansion that we have experienced. We expect meaningful growth in CPE as our customers work to connect more homes, businesses, and critical infrastructure sites with fiber. Within the category, we added 23 new service provider customers during the fourth quarter. Within our product pipeline, we will be introducing several new multi-Gig Wi-Fi 7 products over the next 6 months to help continue to drive new demand for a growing base of large and regional service providers. The direction in our industry is clear. Our customers need fiber networks at scale from optical core to the customer premise while delivering best-in-class subscriber experiences through better insights and automation. We have made major upgrades across all aspects of our portfolio, from our recently introduced industry-leading 800 Gig transport solution, the M-Flex, to the industry's highest density, most power-efficient 10 Gig fiber access platform in our SDX family. We have the leading fiber infrastructure platforms that customers need to build their networks of the future. On the customer premise side, we have the connectivity solutions for nearly any need. Whether it's 10 Gig Wi-Fi platforms for residential services or 100 Gig business services, we have high-performance and cost-effective solutions that offer world-class user experiences. These networking platforms are complemented by our Mosaic software suite that automates and simplifies all aspects of our portfolio, from automating the provisioning and monitoring of complex optical networks, to automating and optimizing the performance of multi-Gig Wi-Fi networks. The breadth and capabilities of these software applications paired with our networking platforms differentiates us from our competition and positions us for additional success moving forward. Turning to our operational performance for the year. We made substantial progress during 2024. Although revenue for the year decreased due to softer end markets, including customers focusing on reducing inventory and higher interest rates, the non-GAAP gross margin for the year expanded to 41.9% on a non-GAAP basis from 39.3% the prior year, reflecting higher efficiency and value realization, directly related to our operational efficiencies and lower overhead costs that were driven by both site and product consolidation. Non-GAAP operating profit also meaningfully improved, turning positive for the full year 2024 compared to the negative figures earlier in the year. This growth underscores our ability to adapt to evolving market conditions and drive profitability. Additionally, we achieved success in optimizing our cash flow. Net cash provided by operating activities improved to $104.3 million during 2024, a significant improvement compared to net cash used in operating activities of $45.6 million during 2023. Our free cash flow of $39.9 million during calendar 2024 improved by $128.7 million from the prior year. This focus on operational efficiency and financial discipline positions us well for substantial future growth. This past quarter's strong performance, combined with our improved outlook, reinforces our confidence in the long-term target operating model of gross margin percentages in the low to mid-40s and an operating profit margin percentage in the double digits. In summary, we had a good quarter of improved financial results, strong bookings, and positive momentum entering 2025. We continue to grow our customer base and invest in our strategic platforms, with major opportunities in the U.S. and Europe still ahead of us. With that, I will turn things over to Uli to provide a few of our financial results.

Thank you, Tom, and thank you, everyone, for joining us on the call this morning. To begin, I will first walk through our preliminary Q4 2024 financial performance, and then I will discuss our expectations for Q1 2025. Q4 revenue was $242.9 million, a sequential increase of $15.1 million or 7%, and above the midpoint of our guidance. Revenue increased $17.4 million year-over-year or 8%. Our network solutions segment delivered $197 million, accounting for approximately 81% of total revenue in Q4 compared to 80% in the prior quarter. Our services and support segment delivered $45.8 million or 19% of total revenue in Q4 compared to 20% in the preceding quarter. From a product category perspective, access and aggregation delivered $72.7 million or approximately 30% of total revenue, and increased 8% sequentially. Our optical networking solution category was $81.6 million or 34% of total revenue. This was up 16% sequentially. Subscriber solutions was $88.5 million or 36% of total revenue. This was down 2% sequentially. Non-U.S. and U.S. revenues were 57% or 43% of total revenue, respectively. We had one customer who represented more than 10% of our Q4 revenue. Non-GAAP gross margin during the quarter was 42.0%, a sequential decline of 11 basis points. Non-GAAP operating expenses in Q4 were $94 million, reflecting a quarter-over-quarter increase due to higher deferred compensation and increased sales commissions. For Q4, our non-GAAP operating profit was $7.9 million or 3.3% of revenue and above the midpoint of our guidance range. This compares to a non-GAAP operating profit of $2.5 million or 1.1% of revenue in Q3 2024 and a loss of $3.2 million in the year ago quarter. The improvement in operating margin and profitability was driven by higher revenue, a healthy gross margin, and effective management of our fixed costs. Non-GAAP tax expense in Q4 was $3.1 million. We generated a small amount of non-GAAP net income during Q4 and were break-even on an earnings per share basis. This compares to a loss of $0.05 per share in Q3 2024. Turning to the balance sheet and cash flow statement. First, I'd like to highlight, for the full year 2024, operating cash flow was over $100 million, a nearly $115 million swing from the prior year. During Q4, net working capital decreased by $4.7 million quarter-over-quarter to $276.9 million. Trade accounts receivables were $178 million at quarter end, resulting in DSO of 67 days. This compares to 70 days in the prior quarter. Our inventories were down to $269.3 million at the end of the quarter. Accounts payable were $170.5 million. DPOs were 72 days versus 67 days the prior quarter. Operating cash flow was $5.8 million compared to $42.0 million in Q3 2024, mainly due to the timing of receivables at year-end. As I shared, cash flow for the year was $103.1 million compared to negative $45.6 million for the full year of 2023. We had free cash flow of negative $10.4 million in Q4 compared to positive $23.2 million of free cash flow in Q3 2024. The lower free cash flow number for the fourth quarter was the result of the lower operating cash flow. For the year, we generated positive free cash flow of $39.9 million, an increase of $128.7 million from the full year 2023. At the end of Q4, cash and cash equivalents were $77.6 million, a quarter-over-quarter decrease of $10.9 million. In 2025, strengthening our balance sheet is a key strategic priority. We have taken several significant actions in this direction. As previously communicated, we are in the process of selling our unused corporate real estate, which is now listed on our balance sheet as assets held for sale. We are also working to monetize other noncore assets. Due diligence by interested parties continues, although we are limited based on NDAs on what we can share. Our intent is to substantially strengthen our financial position during 2025, aiming to exit the year with a positive net cash position. In summary, although 2024 was challenging, we delivered solid operational execution. As we regain scale in our business, we anticipate an expanded operating margin. We do expect moderately higher operating expenses for 2025, in line with normalized payroll and benefit increases. Turning now to our outlook for the first quarter. We expect revenue to range between $237.5 million to $252.5 million and a non-GAAP operating margin between 0% and 4%. Once again, additional financial information is available on ADTRAN's newly updated Investor Relations website at investors.adtran.com. This concludes the prepared remarks portion of the call, and I will now turn the call back over to Rob to begin the Q&A session.

Your first question comes from the line of Michael Genovese from Rosenblatt Securities.

Congratulations on the strong results. I would like to follow up on the balance sheet point. To start, I understand that you finished the quarter with $112 million of net debt, and your goal is to achieve a net cash position by the end of the year. That seems relatively straightforward, given that a real estate sale and cash generated from operations should make that achievable. My question is whether there are other assets in the business that could be sold, such as inventory, and how much of this will be tied up in inventory and working capital as we progress. I'm looking for more detail on how we can reach a net cash position and whether we can exceed the cash break-even point by year-end.

Yes, we do expect inventory to decrease throughout the year. We anticipate generating free cash flow during this time, and the asset sales we're discussing should be manageable. The main challenge lies in the timing of those asset sales, particularly with properties in the market. Some of our properties are quite unique, so we need to find the right buyers who fit well. We have identified some potential customers where we've seen good alignment, but closing those deals is the priority. Regarding other asset sales, we've mentioned considering items that are nonstrategic, and our strategic focus areas are clearly defined. We are involved in subscriber services, fiber-to-the-premises, and optical businesses. Therefore, we will evaluate any assets that do not align with these priorities to see if we can proceed with selling them as we identify suitable buyers. Does that answer your question?

Yes, absolutely. My other question pertains to the sustainability of the telecom recovery. If I had more time, I would ask about visibility in Europe and the U.S. as we progress beyond the first quarter into the rest of the year. How would you describe the visibility and the factors that give you confidence in achieving a sustained recovery throughout the year?

The best indicator we have is the purchase order. Our business usually operates on a book and ship basis rather than a long-term one. Our confidence primarily comes from what we have in backlog, which is tangible, as well as our planning based on the various customer bases we serve. There's definitely been an improvement in the environment. The last six months have been significantly different compared to the six months before that. Bookings have increased, and overall, the outlook appears more positive. However, I can't predict exactly what will happen in Q4 of this year since we are still navigating uncertainties in Q3. As we gain clarity, our confidence strengthens, and the trends suggest that things are looking very encouraging.

Your next question comes from the line of Christian Schwab from Craig-Hallum Capital Group.

Good quarter. Back to the inventory. You've done a significant job of reducing your inventory on your balance sheet over the last 2 quarters. Do you have a stated goal for inventory? And what level do you think that could potentially be reduced to before you would need to maintain it for future growth objectives?

Yes. Do you want to discuss our turnarounds? Go ahead.

Yes. Currently, our inventory turns are 2.2 to 2.1, which is not where we want to be or where we have been in the past. Our goal is to increase our inventory turns back up to around 4x for the year. This process will take some time. As Tom mentioned earlier, we expect our inventory to continue decreasing throughout this year. The extent of the reduction will depend on customer demand and how much additional material we need to purchase to meet that demand. Overall, I anticipate inventory will decline, but possibly not as significantly as it did in the first quarter of last year. We are working through the process and expect a gradual decrease in inventory.

Yes. I think the key is, the way to think about is 4x inventory turns. That's really where we're comfortable. We've been there before. We get much above that. And we start having customer issues. So kind of low 4s is a comfortable place for the company.

And then given the improved business environment that you're seeing, I know you have limited visibility, but we are coming off a pretty challenged industry environment in calendar 2024. Would you expect revenues this year, although quarter-to-quarter volatility, but would you expect 10% plus type of top-line growth this year? Does that seem fair?

Fair. Let me just explicitly say, we really don't give full year guidance. We know that there are numbers that are out there. We're aware of that. But we've had, in the past, struggled to get quarter guidance. So we're comfortable with the guidance range that we've given for the next quarter. And I think I would go back to the first round of questions, which was the environment is definitely improving. So I don't want to mislead anybody there. The trend is definitely positive, but we still have to see how the year plays out.

Your next question comes from the line of Ryan Koontz from Needham & Company.

Nice job here. Uli, around the inventory, do you have much risk there around excess and obsolete? We're have to take any write-downs there on what you have today.

We have a substantial reserve that we built up over the past few years when our inventory levels were high, so I feel confident in our position. Of course, it depends on demand and customer needs. However, our inventory reserve is quite significant, so I'm not worried about it.

Yes, it's been fairly consistent over the last few quarters, and I don't see a big change in that.

And you mentioned noncore assets. Any ballpark you can share on what percent of revenue we're talking about here? You believe it's like 5%, 10%...

We don't consider it a significant part of our revenue. If it were to represent a larger portion, we would need to evaluate whether it aligns with our strategic goals. As it stands, it's not a substantial factor.

And a couple of housekeeping pieces here. On your 10% customer in the quarter, I assume that was an international customer?

That's correct.

Did you have any 10% customers for the year in '24?

Good question. Do you...

For the year? No. We had one for individual quarters, but last quarter, we did not have one, and we did not have a 10% revenue customer for the entire year last year.

And on the optical outlook, do you feel like demand and deployments are kind of finally back in balance here with regards to inventories? Or are we still a little headwind in optical relatively...

We anticipate that one inventory issue will be resolved in Q1. This has been our expectation, and inventory has been improving steadily throughout the year. We do have one outlier that we believe will be addressed in Q1. By the end of Q1, we expect to be in a favorable position.

And then you mentioned kind of cloud operators. Any details you can share there in terms of how meaningful that is to the optical business today?

It's lumpy. So it can be good and then some other quarters, it can be less good. So I wouldn't overweight that. I mean, you know kind of our sense on that. And then I'd say it's good to have, and we're continuing to make inroads, but I would say there's no big inflection point there.

And then last one. On the broadband front, access and ag, what's your thinking around the U.S. market? Obviously, BEAD is not a sure thing this year, but maybe some of these other government state programs and even a couple of other federal programs are still driving some strength there. Any anecdotes you can share around broadband and fiber from the U.S. market?

Yes. I believe there are residual effects from previous stimulus programs, but they are not significant drivers for our business. Recently, we welcomed close to 200 new customers, and regardless of the BEAD issue, there was strong enthusiasm about their plans. This is currently fueling our business. In the Tier 3 sector, many players are preparing for upcoming investments. The BEAD situation is still uncertain, but it is becoming a smaller factor in the immediate plans of our clients. For us, it has never been a major influence on this year's performance. We are more positive about the current developments. Generally, Tier 3 companies have been slower to act, but we foresee them beginning to invest again. Additionally, the Tier 2 sector is showing great promise with the new equity influx. Overall, larger customers are performing better for us. While it would be beneficial to have a decision regarding BEAD to provide clarity to our customers, it is not a significant contributor to our revenue this year.

And then just to clarify what you just said about the Tier 2s. You're seeing more positive momentum, better financial footing for them to continue to ramp up?

Yes, yes. And Tier 2s would be some of these kind of newer footprint expansion people that have private equity and others have invested in. And then if you're an incumbent, even the incumbent Tier 2 carriers, they're worried about being overbuilt, right? So yes, I mean, there's a good kind of competitive dynamic going on there.

Your next question comes from the line of Tim Savageaux from Northland Capital Markets.

And congrats on seeing the top-line inflect higher here. And you're talking about or guiding to a modest increase in Q1 revenue sequentially. I wonder if we can get any more color on what's happening there from either a product or geographic standpoint, what you expect to drive that uptick, or what some of the moving parts might be?

Yes, I agree that the term modest is subjective. For us, we are quite pleased with it because we typically experience a seasonal downturn. We view this as a positive development. Generally, we anticipate stronger growth in access and aggregation. Our European customers often make purchases earlier in the year, as we observed last year, where they bought more in the first half and less in the latter half. More traditional customers follow the usual seasonal pattern with a decline in the first quarter, followed by a rebound in the second and third quarters, while the fourth quarter remains uncertain. I expect we'll see a similar trend this year, with strong European content, followed by a pickup in the U.S. afterward. Does that clarify your question?

It certainly does. Apologies for that. Regarding the optical side, this is somewhat tied to the overall behavior of carriers that you're observing. I, too, found the cloud commentary interesting, particularly if you have any direct exposure there. However, my question focuses more on the indirect effects of AI developments in the network. I heard Cisco mention recently that carriers are possibly enhancing their networks or investing in anticipation of increased bandwidth. I'm curious if you've noticed this among your customers, or if there are any early signs of differing trends between the U.S. and Europe. Overall, outside of any direct connections to cloud providers, are there indirect advantages in the carrier customer base that you're beginning to observe?

Yes, the straightforward answer is yes. In both the U.S. and Europe, there are specific initiatives that companies are working on. This has prompted businesses of all sizes to evaluate their networks for future developments. I believe this analysis will ultimately result in network upgrades. While some companies are further along in this process than others, I certainly agree with the earlier comments made.

And then last question for me. I know you mentioned the early buying in Europe as a potential driver in Q1. I imagine that comment is around your sort of established customers in Germany and the UK. But I wonder if we can get an update on what's happening with some of these newer ramps in Europe on the access side, and whether that might be contributing as well.

It is definitely contributing. We're beginning to see some progress. I mentioned that we started shipping GPON to some customers towards the end of the year, and we have others that we are starting to ship in the first quarter. However, the larger numbers are primarily driven by established players, which is a positive development, but I do not want to mislead you. We have a few customers who significantly impact the larger figures, and it remains to be seen how this will all unfold. My expectations are based on their historical performance and what we anticipate for this year. Yes, those are indeed the customers driving the bigger numbers, although the newer ones will continue to contribute. Some of these newer customers will not ramp up until the end of the year, while we have some larger projects that will begin at the end of this year and others that will start early next year. The customers I previously mentioned as coming online are expected to do so in the first half of the year.

Your next question comes from the line of Amira Manai from Oddo.

I have actually two questions. The first one is regarding the guidance for Q1 2025. You anticipate a non-GAAP operating margin between 0% and 4%. Now if you end up at the lower end of the range, the margin would decline compared to Q4. What factors could drive this decrease? And the second question is, what is the current status of the BEAD program? And how much would this potential impact affect the group's activity in the coming years?

It was about BEAD.

I will start, Amira. If we were to end up at the lower end of our revenue guidance, we would likely shift towards the lower half of our profitability guidance range. There are some uncertainties included in our guidance projections, which relate to factors in other costs of goods sold or gross margin. Additionally, we mentioned during my presentation that we expect a smaller increase in our operating expenses this year due to inflation, payroll adjustments, and benefits adjustments.

Regarding the BEAD situation, any delays will not affect us significantly. We have very little planned for this year anyway, and certainly nothing scheduled for the first quarter.

And that concludes our question-and-answer session. I will now turn the call back over to Tom for closing remarks.

All right. Thanks, everybody. Thanks for joining us this quarter. We look forward to having a robust discussion at the end of Q1. Thanks very much, everybody.

Ladies and gentlemen, that concludes today's quarterly all hands meeting. Thank you for your participation. You may now log off.