ADTRAN Holdings, Inc. Q4 FY2025 Earnings Call

Good morning. My name is Julianne, and I will be your conference operator. I would like to welcome everyone to the ADTRAN Holdings Fourth Quarter and Full Year 2025 Financial Results Conference Call. Thank you. Mr. Peter Schuman, Vice President of Investor Relations, you may begin your conference.

Thank you, Julianne. Welcome, and thank you for joining us today, and welcome to all those joining by webcast. During the conference call, ADTRAN representatives will make forward-looking statements that reflect management's best judgment based on factors currently known. However, these statements involve risks and uncertainties, including those detailed in our earnings release, our annual report on Form 10-K as amended and our other 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 call. We undertake no obligation to update any statements to reflect events that occur after this call. During today's call, we will refer to certain non-GAAP financial measures. Reconciliations of GAAP to non-GAAP measures and certain additional information are also included in our investor presentation and our earnings release. We have not provided reconciliations of our first quarter 2026 outlook with regard 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. Turning to the agenda. Tom Stanton, ADTRAN Holdings' CEO and Chairman of the Board, will provide key highlights for the fourth quarter and full year 2025. Tim Santo, our Senior Vice President and CFO, will review the quarterly and full year financial performance in detail and provide our first quarter 2026 outlook, and then we will take questions that you may have. I would now like to turn the call over to Tom Stanton.

Operator, we are receiving notification that the line is bad and that recipients are not hearing us correctly. Is there a way to improve the line before we proceed?

Thank you, Peter, and good morning, everyone. ADTRAN delivered a strong fourth quarter and finished 2025 with solid momentum. Our quarterly results reflected higher demand and strong execution with revenue above the high end of our original outlook, overcoming typical year-end seasonality. Operating leverage continued to improve and earnings came in above expectations, with all 3 business categories achieving sequential and year-over-year growth. In the fourth quarter, ADTRAN generated revenue of $291.6 million, reflecting a strong year-over-year growth of 20% and sequential growth of over 4%. This marks the sixth consecutive quarter of sequential growth and the fifth consecutive quarter of year-over-year improvement, reinforcing the strength of our company and our key markets. Our U.S. business led the quarterly growth, with revenue up 31% year-over-year and 14% sequentially. Non-U.S. revenue grew 12% year-over-year and declined 3% sequentially as expected and consistent with recent ordering patterns among some of our larger European customers. Optical Networking Solutions grew 33% year-over-year, driven by strong sales to cloud providers and enterprise customers. This increase also drove the contribution of enterprise and cloud providers to 25% of our revenue in Q4 and 21% for the full year of 2025. These results reinforce a trend we are seeing: cloud providers expanding data center capacity and large enterprises upgrading their optical networks. During the quarter, we continued to broaden our optical customer base. We saw solid activity across service providers, cloud providers, enterprises, and public networks, reflecting the flexibility of our optical platforms across different use cases. Access & Aggregation revenue grew 9% year-over-year and 6% sequentially, supported by continued fiber access investment across U.S. and European operators. During the quarter, customer activity reflected a mix of expansion projects and network upgrades as operators advanced deployments. In Subscriber Solutions, revenue grew 17% year-over-year and 3% sequentially, driven by demand for our residential fiber CPE as customers continue to connect more subscribers. The revenue in this category continues to be generated by a diverse mix of residential, enterprise, and wholesale service offerings. Today, our software solutions serve over 1,000 carrier customers across 3 of our product categories, automating everything from optical networks to in-home subscribers' experiences. These customers include nearly 500 service providers adopting our Mosaic One platform and more than 100 service providers deploying our recently introduced Intellifi cloud-managed Wi-Fi solutions. We are also advancing our Agentic AI platform with numerous Mosaic One Clarity customer trials underway before an official launch later this year. As demand for AI-driven automation grows, we see this application suite as an important addition to our software capabilities. Looking at the broader environment, we continue to see sustained fiber investment across our core markets, and the U.S. broadband programs and ongoing investments in data centers are supporting ongoing network expansion. In Europe, increased focus on network security and vendor diversification away from higher-risk suppliers is reinforcing upgrade activity across the region. These trends are supporting continued demand for upgrades across all 3 product categories. At the same time, network requirements continue to evolve. Across data centers, between the data center and out to the customer edge, capacity demands are increasing. Service providers, cloud providers, and enterprises are pairing high-capacity fiber networks with automation and software to streamline operations. While this is still an emerging contributor to our revenue, it reinforces the market's longer-term direction towards more intelligence and more automation. With our broadband fiber network portfolio, software assets, and regional strength, we are well positioned to support both the current infrastructure cycle and the longer-term evolution towards these more intelligent fiber networks. We delivered a strong Q4 with solid financial results and execution and healthy cash flows. For the full year 2025, we delivered double-digit revenue growth, with each of our 3 revenue categories also growing at double-digit rates. We achieved this while expanding gross margins and returning to positive non-GAAP operating margin and EPS. Also during the year, we strengthened our balance sheet by issuing approximately $200 million of convertible notes at an interest rate meaningfully lower than our revolving credit facility. We were able to purchase $27.2 million of ADTRAN Networks shares during Q4 and $46.6 million worth of shares during the calendar 2025, reducing the minority interest to less than 30% as we closed the year. As we move into 2026, our priorities remain continued improvement in our leverage model, expanding operating margin, cash generation, and converting the customer momentum that we have been seeing. We continue to operate in a dynamic cost environment, including variability in components such as memory. We are managing that variability through disciplined procurement and price mechanisms that are already embedded in our model. At this time, we are not seeing conditions that change our demand outlook or execution priorities. In summary, we entered 2026 with a positive outlook. Customer trends are favorable in the U.S. and Europe, customer acceptance of products has been strong, and our product offerings and competitive position have never been better. We have several multi-year tailwinds in our key market segments. With that, I'll turn the call over for Tim to review the financial results in more detail. Tim?

Thank you, Tom, and thank you all for joining us this morning. We delivered strong results for the fourth quarter and full year 2025, driven by solid execution and healthy revenue growth. As scale improved, we delivered higher margins, and operating efficiency increased across the business. We remain focused on disciplined cost management as we continue to grow. Over the quarter, we continued to operate with tight financial processes and consistent execution. These remain embedded in how we run the business, improving visibility and planning rigors and supporting structured capital allocation. While the mix between gross margin and operating expenses can shift from quarter-to-quarter as revenue moves, our objective remains focused on steady margin expansion as the business scales. As we noted on our previous earnings call, the capital actions we took last year improved our financial flexibility and added optionality. Broadly, our focus remains on simplifying the capital structure and maintaining flexibility to support the business and create value. We will continue to deploy cash thoughtfully to reduce the minority interest over time while maintaining balance sheet strength and evaluating non-core asset monetization opportunities as appropriate. Turning to the financial results for the fourth quarter of 2025. Revenue was $291.6 million, up 20% year-over-year and 4% sequentially, above the high end of our original guidance. Year-over-year growth was driven by all 3 product categories with Optical Networking the largest and fastest contributor, with revenue increasing by $26.9 million or 33% from the prior year. Geographically, non-U.S. revenue accounted for 53% of total revenue, while U.S. revenue accounted for 47%. Non-GAAP gross margin increased to 42.5%, up 44 basis points sequentially and 122 basis points year-over-year, driven by scale efficiencies, product mix, and cost discipline. We remain focused on sustaining gross margin in the 42% to 43% range over the long term. Non-GAAP operating profits rose to $18.8 million or 6.4% of revenue, exceeding the midpoint of our original outlook, and up 103 basis points sequentially and 406 basis points year-over-year. Non-GAAP tax expense in Q4 2025 was $3.8 million or an effective rate of 22.6%. Non-GAAP EPS was $0.16 compared to $0.05 in Q3 2025 and a loss of $0.02 a year ago. EPS benefited by $0.03 from the acquisition of shares from minority holders in the fourth quarter. We continued to strengthen our financial position during the year. Year-over-year, net working capital improved by $8.7 million due to meaningful inventory reductions, largely offset by increases in accounts receivable due to increased sales. During the year, inventory declined by almost $50 million, including $8 million during the fourth quarter. Days inventory outstanding improved by 47 days year-over-year and 10 days in the fourth quarter to 114. DSO increased to 66 days, down by 1 day year-over-year and up 7 days sequentially due to increased sales and the timing of Q4 invoicing. As revenue scales, our focus remains on improving working capital efficiency. Operating cash flow was $42.2 million for the quarter, and free cash flow was $22.5 million. For the full year, we generated $129.8 million in operating cash flow and $60.5 million in free cash flow, representing healthy increases of 25% and 58%, respectively, compared to 2024. We ended Q4 with $95.7 million in cash and cash equivalents after purchasing $27.2 million or 1.2 million shares of ADTRAN Networks stock. For calendar year 2025, we purchased $46.6 million or 2 million shares of ADTRAN Networks stock and now own just over 70% and meaningfully reduced the interest rate on our outstanding debt as a result of the convertible note offering. Turning to our operational performance for the year. We made meaningful progress across key financial metrics during 2025. Revenue increased 17.5% year-over-year, totaling $1.084 billion. We expanded full year non-GAAP gross margin by approximately 90 basis points to 42.1%, reflecting increased scale, higher efficiency, and favorable product mix. Non-GAAP operating margin increased to 4.8% in 2025 from negative 0.3% in 2024. And non-GAAP diluted EPS returned to a positive $0.23 per share. We delivered a strong year of cash flow generation, with net cash provided by operating activities increasing by $26.2 million to $129.8 million. We remain disciplined on the cost structure while positioning the company to convert revenue into sustained earnings growth. Looking ahead at our outlook for the first quarter of 2026, we expect revenue to be between $275 million and $295 million and non-GAAP operating margin of 4% to 8%, reflecting traditional seasonality and current supply chain dynamics. I will now turn the call back over to Tom.

All right. Thanks very much, Tim. Julianne, I think at this point, we're ready to open it up for any questions people may have.

Our first question comes from Michael Genovese from Rosenblatt Securities.

Great conference call with positive messaging. Tom, could you elaborate on the demand situation in the U.S. and Europe? What insights are you gaining from your clients regarding optical and fiber-to-the-home? Additionally, could you discuss the factors contributing to revenue growth? Considering your previous year’s 20% growth, do you anticipate that double-digit growth is feasible for 2026, even without full year revenue guidance?

Yes. Let me begin by mentioning that we do not provide full-year guidance for a reason, primarily due to our relatively short book-to-ship period, which makes predictions challenging. I want to talk about the current environment. It feels similar to last year, with a building momentum that we expected to continue, and that is indeed what we're experiencing. On the fiber-to-the-premises side, everything is proceeding as planned. We are still acquiring new customers in these areas, and we are continuing to work with carriers in Europe. This is just a continuation of the activity we witnessed last year. On the fiber front, the situation is somewhat different as we are still emerging from the revenue inventory increase that affected our customer base. That was resolved last year, and we began to see genuine progress in the latter half of the year. Additionally, we have secured new customers in the U.S. with broader Tier 2 deployments and in Europe with some Tier 1 clients, and that momentum persists. This growth is not solely due to the Huawei replacement happening in Europe but also because customers are starting to invest more capital to enhance their bandwidth, especially as they adapt to an AI-driven environment. I believe MoFi is a contributing factor here as well. We have noted significant positive momentum on the enterprise side, including from ICP carriers. Overall, the environment appears to be quite favorable.

Great. And then my second and last question will just be on pretty wide operating margin outlook of 4% to 8% for the quarter. So is that because of things like memory prices, that the range is that wide? Or is that kind of maybe more of a normal range and I'm just reading it as being wide?

To us, I don't think there's any difference in the range that we get than what we typically do. There is tightening supply, as everybody is aware of, on memory. There's some tightening supply in optics. But I would say that that's not overly impacting the guidance range. Our kind of operating model is still what we fully expect it to be, what we've communicated, which is operating expenses in the low 100 range and gross margins in the 42%, 43% range. I don't see we see a deviation from that. Tim, any comments?

No, I would reiterate, as Tom said, the guidance range is about 4 points, which if you look historically is where we've been. And it's actually up a little bit from last quarter. But the leverage model would remain up from what we guided last quarter.

You mean midpoint, yes.

Our next question comes from Ryan Koontz from Needham & Company.

I want to ask about optical, maybe if you can unpack a little bit. You talked about enterprise ICPs, I assume that's a big driver of optical. Do you have any ideas, like how much of that is really hyperscale and AI data center cloud-related versus what I would call like traditional SP and enterprise networking? Can you maybe help us understand some of those dynamics there within the optical strength?

Sure. There was a notable contribution from both sectors during the quarter. I believe the traditional enterprise mix, which includes the banking sector and larger enterprises, played a significant role in that. Additionally, ICP performed better than we have seen historically during the quarter, and we anticipate that momentum continuing throughout this year.

Great. And I recall a conversation from OFC last year about this opportunity in MOFN where the hyperscalers are contracting with traditional SPs or maybe some of the Tier 2s like Colt, etc. to build for them. Are you seeing some benefit there as well? And would that show up in your SP business as opposed to your enterprise business if it was a MOFN-type deal?

No, that would be reflected in our carrier business. We would classify that as a carrier customer, and we are definitely observing this trend. We've mentioned in previous conference calls how some carriers are preparing to engage in MOFN. This ongoing upgrade cycle is adding positive momentum to that segment. However, this is distinct from the enterprise area we are discussing.

Great. And maybe just one last, if I could, on the fiber-to-the-home side. Relative to new footprint, it seems like the U.S. has been a little bit hit-and-miss where some segments do better than others. Any update there on how Q4 turned out in terms of new greenfield footprint and how you're thinking about '26 going forward for U.S. fiber-to-the-home greenfield builds?

I would describe it as a solid quarter, consistent with our performance throughout the year. Overall, the U.S. business has shown significant strength both sequentially and year-over-year. We are optimistic for the upcoming year. I should mention that BEAD funds are starting to come in. We have a customer in Louisiana expecting BEAD funds possibly next week. I don't want to put too much emphasis on that guidance because most carriers will be primarily driven by fiber deployment this year and equipment next year. However, the fact that these funds are beginning to be disbursed is very encouraging. There are six other states that are also anticipating funds any day now. The flow of these dollars is a positive development, and it's equally important, not just because of the BEAD funds, but from a planning perspective as it provides carriers with the certainty they need to plan their capital budgets effectively.

Right. So the planning, engineering, and maybe the fiber optic cable spending this year from BEAD sees an earlier uptick, you're saying than your equipment would see this year that would follow within quarter 2 behind...

Yes, you've got to be able to deploy that fiber. But I think the positive thing for us, which we don't know how that will impact, and it may just be just a kind of positive influence is the fact that you get surety in your budget planning cycle. But not just your BEAD funding, but your normal capital spend as well. And I think that, that's been missing for some time.

Our next question comes from Christian Schwab from Craig-Hallum.

Great execution in the quarter, team. Tom, as we reach the end of February, regarding non-core asset sales and possible building sales and leaseback activity, would you feel let down if we don’t have clarity on both by the end of calendar 2026?

Leaseback activity for the East Tower is unlikely to occur. I want to clarify our current situation regarding this. We have discussed this for a few quarters and received several lease offers for the building. However, it did not make financial sense for us given our current cash position and the intended use of that cash versus the potential cost of the lease. Therefore, we have decided to put this on hold but can revisit it in the future if we choose to. Regarding the North/South Tower, which is currently for sale, I'll let Tim provide you with an update on that.

A lot of activity in the Huntsville market. We're not currently under contract, but we have activity. So we continue to work that, and when the right deal comes along, we will close that. As we had hoped it would happen in 2025, we are very optimistic it will happen in 2026, but the market will dictate.

Great. And then on the non-core asset side, Tom, do you think that can get resolved this year? Or is that a fluid situation?

Yes. We have reviewed the non-core assets and assessed their values. We believe these assets are not strategic to our business. Currently, we are taking steps to enhance their value and plan to reassess this in the second half of the year.

Perfect. And then my last question, as we look towards 2026, is there one area you are particularly excited about? We have discussed the positive developments regarding speed after years of progress. However, when considering equipment replacement in Europe and the strength of the optical market there, is there one specific aspect that stands out as we move through 2026 that we can track?

Yes, I think enterprise is performing very well, and there are several factors contributing to that. We expect strong results this year, which is promising compared to the overall corporate performance. Additionally, there is some ongoing legislation in the EU aimed at accelerating the replacement of Huawei equipment. While I'm uncertain about the extent of its success, the focus on this issue is beneficial for our business. We believe there is an opportunity close to $1 billion annually in the European market that Huawei currently serves, and we have a strong chance to capitalize on it. The pressure for change continues, especially with recent positive legislation from the EU. Overall, I see both of these factors as significant positive drivers.

Our next question comes from George Notter from Wolfe Research.

I want to continue discussing the replacement of Huawei in the EU. Currently, the regulatory approach is not making it mandatory to replace Huawei, but it does suggest that it could become necessary. I understand that future regulations will likely require the replacement of Huawei, although that might not take effect for a few years. I am curious about the current changes. Are you noticing anything from your customers that might expedite this process? Is it related to funding or increased political pressure? I'm trying to grasp what factors are influencing this situation.

Yes, I agree, but I want to add one caveat. While the EU's directive is more of a recommendation, the requirements and legislative actions vary by country and carrier. Some EU countries have taken a stronger stance on this. The key point here is that if you're a carrier considering a new contract, it would be unwise to deploy Huawei at this time. If a new region or footprint needs to be established, even if Huawei is an approved vendor, there will likely be complications. This situation is increasing the pressure against continuing to deploy them. I agree that removing them entirely is a different challenge that will take years, and we've estimated that the cost of doing so could exceed $10 billion. However, what we’re discussing now is the annual spending on deploying new products and expanding new footprints, which is expected to slow down.

If I look at that $1 billion annual spend, how well positioned do you think you are on that? I mean, obviously, that's across a number of product categories. It's across a large number of specific operators, maybe some you're in, some you're not. I mean, is there a way to kind of pin down that $1 billion in annual spend in terms of what's like reasonable for you?

Yes, let me clarify that number. The last time we reviewed it, we engaged an outside firm to assess the current figure. That figure originates from around $800 million, possibly $850 million or $860 million for EMEA in our target product areas for 2024. We anticipate that this number will continue to decrease; it was above $1 billion not too long ago. As we gain market share, this figure will keep slowing down. This pertains specifically to products within our sweet spot, which includes mid-mile, regional network optical, access, and aggregation products. So, what we believe the total addressable market is for our products is represented by this number. However, it’s an approximate figure at this stage, primarily based on Huawei's earnings results.

Our last question comes from Dave Kang from B. Riley.

First, regarding European telcos, you talked about them being front-loaded. Just wondering if you can kind of quantify whether it's 55:45 or is it more exaggerated?

I'm sorry, your question broke up for me. Can you rephrase it or restate it?

Yes. Regarding your European telcos, Tier 1s. In the previous calls, you said they tend to be front-loaded. Just wondering if they're like 55:45 or more like 60:40. Any color?

I don't know if I've seen that actual breakout. I would say it's definitely last year, it was probably around 60 to 40, and this is just off the cuff. This is mainly in the access and aggregation product category. You saw that last year in our Access & Agg number, where there was a noticeable increase in the first half of the year, followed by a decline. It's not as noticeable in the other product areas, which are just not aligned on the same cycle.

And are you kind of expecting similar dynamics this year or any changes from last year?

Really good question. I will tell you, we weren't happy with that bump because of what that does operationally. Bumpy is never as good as smooth. So we have been talking to them about that and trying to get that to be more even flowed this year. So I don't know how successful we've been with it at this point. So hopefully, you won't see that same type of kind of waterfall.

And my second question is regarding the same European telcos. Just where are we in terms of their broadband deployment cycle? Are we still early stages or mid or getting towards the late innings?

If you take Europe as a whole, it's safe to say that we are still in the early stages. We have recently brought on some new carriers who haven't been deploying with us yet, and there are also issues related to Huawei. However, in specific countries, some are further along. The U.K. is around the middle of this process, while Germany is definitely within the first half. It really varies by carrier, as some have not even started yet. Okay. At this point, I think we have no more questions in the queue. So I'd like to thank everybody for their participation today, and we look forward to talking to you next quarter.

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