ADTRAN Holdings, Inc. Q1 FY2026 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the ADTRAN Holdings, Inc. First Quarter 2026 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 successful development and market acceptance of our products, the ability of our third-party suppliers to supply components and products, our ability to convert our backlog into revenue, our ability to maintain current expected delivery schedules, competitive pricing and acceptance of our products, intellectual property matters, the effect of economic conditions, the impact of tariffs and trade policy, and other risk factors described in our most recent annual report on Form 10-K and in our quarterly filings with the Securities and Exchange Commission. ADTRAN Holdings assumes no obligation to update any such forward-looking statements. During today's call, management 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. ADTRAN Holdings has not provided reconciliations of its second quarter 2026 outlook with regard to non-GAAP operating margins because it 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. Hosting today's call is Tom Stanton, ADTRAN Holdings' Chief Executive Officer and Chairman of the Board, and Timothy Santo, Senior Vice President and Chief Financial Officer. It is now my pleasure to turn the call over to Tom Stanton, Chief Executive Officer of ADTRAN Holdings. Tom, please go ahead.

Thank you, Kayla. Good morning, everyone. ADTRAN delivered solid first quarter results with revenue of $286.1 million, up 15.5% year-over-year, and non-GAAP operating margin of 6.9%, up 3% year-over-year. These results reflect the continued strength of our core markets and the operating leverage we have now firmly established across the business. The demand drivers underpinning our business continue to strengthen. In the U.S., broadband expansion is gaining traction and BEAD deployment funds are beginning to reach operators in a growing number of states. In Europe, high-risk vendor displacement continues to progress with momentum reinforced by legislation such as the proposed Cybersecurity Act 2.0, which would mandate the removal of high-risk vendors from critical network infrastructure. This quarter also marked a meaningful step in our growth strategy as we showcased our expanding portfolio addressing cloud and AI infrastructure connectivity. This included the introduction of the LiteWave800, a solution purpose-built for high-performance and low-power intra-data center connectivity. Optical networking solutions revenue was $97.3 million in the first quarter, up 24% year-over-year. On a sequential basis, strength from our larger customers and hyperscalers was offset by seasonal declines with smaller customers and government sales. Across our service provider base, demand remains healthy. Operators across all geographies are expanding wholesale optical capacity to support growing demand for cloud connectivity and higher bandwidth services, reflecting a broad-based trend. In Europe, high-risk vendor replacement initiatives continue to add to that demand with growing strength among our cloud and hyperscaler customers, and a positive outlook across our service provider base. We expect our optical networking revenue to build throughout the year. Access and aggregation solutions revenue was $90.5 million in the first quarter, up 2% year-over-year and 14% sequentially, driven by broad-based strength across the U.S. and Europe. We expect steady progress across our European business through the remainder of the year. In the U.S., BEAD deployment funding is beginning to reach operators in select states. And while we are seeing early orders from several customers, we expect the impact to become more meaningful as we move towards the back half of the year. Subscriber solutions revenue was $98.2 million in the first quarter, up 22% year-over-year. Demand remains healthy, supported by continued investment in fiber-to-the-home, multi-gig Wi-Fi 7 and carrier Ethernet applications. In recent weeks, our award-winning SDG Wi-Fi 7 portfolio received conditional FCC approval, exempting our platforms from covered list restrictions. We are among the first vendors to achieve this designation. And while the broader industry works through the approval process, we are already seeing service providers engage with us on competitive opportunities that this creates. Stepping back from the details for the quarter, I want to take a moment to talk about our business and the market dynamics that continue to drive demand for our solutions. Service providers are investing across transport, access and subscriber platforms to scale their networks for long-term demand and improved reliability. These investments are being reinforced by several important tailwinds, including high-risk vendor replacement initiatives in Europe, the expansion of managed optical fiber networks or MOFN to address surging demand for wholesale services from cloud providers, and continued upgrades across access and subscriber networks to support multi-gig service delivery. In addition to these network upgrade catalysts, operators are in the early stages of transforming how they operate their networks and engage subscribers through agentic AI. With the launch of Mosaic One Clarity, which recently received the FTTH Europe award for AI innovation, we are addressing the shift towards proactive and increasingly autonomous network operations. Early deployments have provided strong validation of these capabilities across both small and large operators, particularly in the areas of predictive maintenance and improving the in-home subscriber experience. Beyond our core service provider business, we continue to see meaningful opportunities to further accelerate growth by expanding our presence in both cloud providers and enterprise customers. These segments benefit from many of the same underlying trends shaping service provider networks, but they are growing at a faster pace and are driving new network architectures and requirements. In the enterprise space, we have a long history of providing secure optical and Ethernet connectivity to some of the world's largest enterprise and government customers. Demand in this customer segment is increasingly shaped by two important tailwinds. First, the expansion of AI workloads across secure enterprise environments is driving demand for higher capacity interconnects between private enterprise data centers. And second, growing awareness of the limitations of traditional security mechanisms is accelerating interest in quantum-safe, optical and Ethernet communications. Building on our longstanding presence in these markets, we have developed a comprehensive portfolio of quantum-safe communication solutions. While still early, we are seeing increasing engagement across a broadening base of enterprise, government and utility customers, positioning us well for longer term growth as these initiatives mature. In our cloud provider customer segment, the rapid expansion of AI compute infrastructure and the networking required to connect large-scale cluster GPU deployments is driving a surge in networking investment, making this the fastest-growing segment in our industry. Data center operators are scaling capacity to support AI workloads where power efficiency, thermal constraints and network density have become defining design considerations. We have long served data center customers through our interconnect solutions and as evidenced by last quarter's results, that business continues to benefit from growing demand for data center connectivity. Our strategy is to build on that foundation and extend our portfolio to address surging bandwidth demands from inside the data center as well. LiteWave800 is the first clear example of this strategy in action. It is purpose-built for intra-data center connectivity and high-density AI compute environments, and is designed to reduce power consumption by over 90% compared to existing alternatives. We are still in the early stages of this product family, but initial market engagement and feedback have been very encouraging. Shifting from our market opportunities to operations. Memory pricing has remained elevated industry-wide and freight costs are adding an additional layer of pressure, headwinds that are affecting the entire sector. Despite these pressures, our non-GAAP operating margin of 43% reached its highest level since the beginning of the supply chain disruption in 2020. This was achieved through a combination of disciplined cost management, pricing adjustments across the portfolio and a revenue mix that has less reliance on lower-margin CPE where memory cost pressure is the most acute. Consumer CPE represents a relatively small portion of our overall revenue. Although memory costs remain elevated and could deteriorate further, our current visibility supports gross margins in the near term, remaining broadly consistent with what we have delivered over the past several quarters. We entered the second quarter with a positive demand outlook. Fiber infrastructure investment remains active across our core business, and we continue to advance our initiatives in AI infrastructure and enterprise networks, expanding our business opportunities. Our priorities remain consistent: expanding operating margins, generating cash and converting the strong customer pipeline into revenue. With that, I'll turn the call over to Tim to review our financial results in more detail. Tim?

Thank you, Tom, and thank you all for joining us today. We delivered solid results for Q1 2026 led by continued and consistent execution. We had operating margin expansion to a new level despite a seasonal reduction in revenues that remained above the midpoint of our previously issued guidance, driven by continued cost discipline and scale in the business. Our first quarter revenue was $286.1 million, up 15.5% year-over-year and returning to a more normalized seasonal pattern. Geographically, U.S. revenue was $146.2 million, representing 51% of total revenue, up 42% year-over-year and 7% sequentially. Non-U.S. revenue was $139.9 million or 49% of total revenue. Access and aggregation solutions revenue was $90.5 million or approximately 32% of total revenue, up 2% year-over-year and 14% sequentially. Subscriber solutions revenue was $98.2 million or 34% of total revenue, up 22% year-over-year. Optical networking solutions revenue was $97.3 million or 34% of total revenue, up 24% year-over-year. Turning to gross margin. Non-GAAP gross margin was 43%, up 55 basis points year-over-year from 42.5% in Q1 '25 and up 54 basis points sequentially from 42.5% in Q4 2025, driven by favorable product mix and continued progress on cost efficiency. Non-GAAP operating expenses for the first quarter were $103.3 million compared to $95.5 million in Q1 2025 and $105.1 million in Q4 '25. The year-over-year increase largely resulted from the impact of foreign currency fluctuations on our European cost base, which has had minimal impact on operating leverage due to natural hedging and continued investment in R&D and go-to-market activities. Non-GAAP operating income was $19.9 million or 6.9% of revenue. On a sequential basis, operating income increased from $18.8 million or 6.4% in Q4 2025. Year-over-year, non-GAAP operating margin expanded 300 basis points from 3.9% in Q1 2025, continuing the progression from 5.4% in Q3 '25 and 6.4% in Q4 '25. Non-GAAP tax expense in the first quarter was $4.4 million, reflecting an effective non-GAAP tax rate of 25.5%. Non-GAAP net income attributable to ADTRAN Holdings was $11 million or $0.14 per diluted share compared to $0.03 in Q1 2025. Turning to the balance sheet and cash flow. Net working capital was $253.9 million at quarter end compared to $259 million at December 31, 2025. During the quarter, inventory was $209 million with days inventory outstanding of 110 days, down 4 days sequentially. Trade accounts receivable were $215.5 million with DSO of 68 days, up 2 days sequentially due to the timing of quarter end invoicing. Accounts payable was $170.6 million with days payable outstanding of 66 days, which is flat sequentially. As revenue scales, our focus remains on improving working capital efficiency. Operating cash flow was $12.7 million for the quarter and free cash flow was a negative $3.3 million, reflecting timing of cash receipts and higher purchases of inventory. We ended the quarter with $88.3 million in cash and cash equivalents compared to $95.7 million at December 31, 2025. Turning to our outlook for the second quarter of 2026. We expect revenue to be between $283 million and $303 million, and non-GAAP operating margin within a range of 5% to 9%. This concludes our prepared remarks. Before turning the call over to Tom, I'd like to highlight that we will be participating at the B. Riley Conference on May 20 in Marina Del Rey and the Evercore Technology Media and Telecom Conference on June 2 and 3 in San Francisco. We look forward to seeing many of you there. And now I will turn the call back to Tom.

Great. Thanks very much, Tim. All right. Kayla, at this time, we'd like to turn it over to people that may have some questions.

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

Tom, I'd like to hear about the LiteWave800, more about basically the strategy of launching this product, maybe bigger thoughts on getting into the data center. But more specifically, any timing or size or margin expectations for the new product that you could share would be helpful.

Yes. I will shy a little bit away from pricing on the product, although there is a lot of IP in that product and IP typically yields better gross margins. The reason I mentioned it upfront in my remarks is the market reaction to it has been fantastic. We've had some very large, very well-known customers that have been very encouraging for us to get the product out as quickly as possible. But unfortunately, there is a lot of work to be done. I would expect that to be sometime about a year from now before we really hit production-level numbers. We do have prototypes now. We showed operating models at the recent OFC. It is a real product. It does work. It's a matter of finalizing and getting it to scale, which will take some time just because it's a semiconductor-type product. That is one of the products we have. We also have the Quattro, which will be coming out at the end of this year, which is a 4 by 100 product versus the 8 by 100 product. It is also a very power-saving product. I think it's better than anything out there on the market today. The real thing about the 800 though is it's extremely low power — I think it's around 1 picojoule per bit, which is an industry first, and that's what's driven the excitement around it.

Interesting. Now, when you say there's a lot of IP in it, is it fair to say that it would not be significantly dilutive to company gross margins?

It will not be dilutive to company gross margins.

Okay. That's good to hear. I guess, maybe just something similar on any other new products. I mean we saw something about an announcement of an AI edge platform — I'd like to hear more about that. And then if I go back to OFC, I also think there was an announcement, at least where you were demoing 800 and 400ZR. So is that a product that you have, 400ZR? And could you talk more about the AI sort of edge platform?

Yes. The AI edge platform you're referring to is part of the Clarity family. All of our AI products are in the Clarity family. We have an edge product that we are trialing right now, and we have the core product for network operations that we have been trialing for some time. The feedback here has also been fantastic. I recently had a group of customers in — about 150 customers here in Huntsville — and the feedback was overwhelmingly positive. On the 400ZR, we do have products coming out towards the end of this year for 400. Those are ongoing pieces. The AI piece you may be thinking of on Ensemble, which is the product we highlighted that has started to implement agentic AI in that product line.

And your next question comes from the line of Irvin Liu with Evercore.

I also had a question related to AI infrastructure. As you target this opportunity, can you talk about any sort of R&D and go-to-market investments needed to serve this customer segment?

There is some shifting that we'll be doing throughout the year to ensure we have the right R&D and sales resources to serve this segment. However, all of that is within the current operating budget. So I don't expect any significant increase in spending. We're committed and believe we can grow the business meaningfully within the budgets we have today. Once we get north of our targeted operating income level — once we exceed that threshold — then we'll take a look and make sure we're investing in the right places. But right now, we don't see any problems.

Got it. And then for my follow-up, you've been seeing strong demand in the regional service provider customer segment. So can you talk about any sort of momentum you're seeing as it relates to your suite of software products such as Mosaic One and Intellifi? Just any color on upsell efforts and attach rates here would be helpful.

We don't have those numbers broken out, but the uptick on Intellifi has been fantastic. Mosaic got a very good launch. We have probably close to 500 customers on Mosaic One at various subscription levels. Intellifi is doing really well as well — last time we reported, it was over 100 customers — and it's been a real highlight. We don't have those metrics broken out in detail today, but hopefully next quarter I'll be able to provide more specifics.

And your next question comes from the line of George Notter with Wolfe Research.

I wanted to ask — you mentioned cloud revenue in your cloud business. Can you remind us what percentage of sales comes from cloud operators? Do you have a sense for that?

We don't break that out by percentage. Hyperscalers did perform well in the fourth quarter and were a positive contributor; we would expect that to continue through the year. We have a fairly good backlog with some hyperscaler customers building right now.

Got it. Okay. And can you just walk through maybe the product sets that you sell into cloud customers? Obviously, the LiteWave product will come on, but what pieces are you selling today?

The biggest piece is optical, and a lot of the momentum right now is around our 100ZR pluggable. For certain data center connectivity use cases, especially smaller data center interconnect architectures that some hyperscalers use, the 100ZR plays very well. The 400 and 800-gig products will play in upgrade paths for larger interconnects.

Got it. Okay. I would have assumed the 100-gig ZR plug was more of a telecom application rather than a cloud application.

We have a fairly large footprint across different customer types. For large data center connectivity, 400 and 800 will be more in the sweet spot. In the smaller data center interconnectivity use cases that some hyperscalers employ as part of their architecture, 100ZR is a very good fit.

Okay. Super. And then on the LiteWave800, laser datacom chips are hard to come by in the industry. I hear what you say about the business ramping a year from now. I'm curious about where you guys are getting laser datacom chip supply. Is that difficult to come by? Is there anything you can tell us about where you're sourcing those?

I won't go into direct sourcing details, but we do have partners we're working with who understand the supply needs. Depending on how aggressive the launch is, we don't see issues in being able to supply it as we launch.

And your next question comes from the line of Ryan Koontz with Needham & Company.

I want to ask about optical demand at a higher level. You talked about MOFN demand. Can you characterize where you see the biggest drivers specifically within Europe for your optical product lines and which products you're seeing the greatest success with in terms of demand? You mentioned 100ZR; any more color beyond that would be great.

100ZR is an important part of the trend. Especially in Europe, I think our 400 and 800-gig products will also play well in the upgrade path. The customer base we're engaging with are carriers we've done business with for a long time; they're positioning networks to provide more wholesale services. That customer base is active, and there are customers in the U.S. that are also making a lot of noise around wholesale initiatives.

Helpful. Within that, are you seeing a shift away from traditional chassis-based transponders to ZR pluggables on the telecom side as well?

It's a mix and depends on carrier size and whether a carrier already has installed chassis. Where there's an installed chassis, they're more likely to upgrade that chassis. Where there's a footprint case, ZR pluggables offer operational ease and can be very beneficial. So it's definitely a mix.

Got it. And then on gross margin, congratulations on the quarter. You mentioned a lower mix of consumer CPE within your subscriber solutions. Is consumer CPE approaching half of that subscriber number, or is it less than half of your total subscriber business? Just trying to quantify.

To be fair, consumer CPE is probably north of 50% of the subscriber segment. It is not substantially more than half, but it is over 50% of that segment. We wanted to clarify because customers were unclear about how much CPE memory cost pressure affects us. It does affect us, but the impact is substantially less when you look at the entire company.

Makes sense. And maybe one last one: you talked about better visibility on BEAD projects. What milestones should we look for before we start to see your revenues inflect for BEAD? Are we talking permits, design, forecasts, orders? Walk us through how BEAD unfolds and starts to contribute for ADTRAN.

Funding is starting to flow to the majority of states now. What you're seeing is individual customers deciding how to roll out. We have some customers that have already placed purchase orders and are rolling out or securing supply. Smaller customers can move faster. Larger customers face a longer deployment timeline for the fiber itself, which is why we expect to start seeing more meaningful revenue toward the end of this year. Permitting is local and hard to generalize; the best visibility will be in actual purchase orders. We're starting to see some today, but it's a trickle rather than a flood. The unlocking of approvals has accelerated — we went from a couple of states a quarter ago to many states now able to send out funding — so visibility will improve as carriers make decisions.

And you think you'll see steady improvements and that 2027 starts to feel like a more material year for you from BEAD?

Absolutely. Yes.

And your next question comes from the line of Christian Schwab with Craig-Hallum.

Just a quick clarity on that, Tom. With 2027 orders picking up more materially, would you anticipate 2028 being potential peak revenue for that program? Or do you think it extends beyond that? And would you be willing to quantify a revenue range of opportunity over a multiyear time frame that this program could offer you guys?

We've provided a market range before. Tim, do you remember what that range was?

We had said of that market size, there's about $1 billion to go to the industry over multiple years.

So it's a five-year program. Historically, the middle of the window is where you see the majority of the spend, so the middle of the program would likely be toward the tail end of 2027. You'll then see cleanup toward the tail end as people finalize spend to use allocated funds.

Great. That's great clarity. And then my last question: one of your competitors spent significant time on their call talking about memory cost headwinds. How are you navigating through that?

We're managing it well. We have a diverse product portfolio, and memory content is a larger percentage of lower-end residential CPE bill of material. In higher-end platforms such as large access and aggregation or optical platforms, memory is a much smaller percentage of total bill of material, so the impact is substantially less. Residential CPE has a larger impact because those are low-cost, low-margin products. That's the main difference.

And your next question comes from the line of Dave Kang with B. Riley.

First question regarding the Middle East conflict: can you talk about the impact from that?

It impacted us in a couple of ways. It hurt our freight line with some disruptions and higher freight expense this quarter and likely this quarter as well, due to challenges getting capacity on the right planes. It also impacted our Middle East revenues last quarter. I don't know the exact timing for when that improves, but I would expect some improvement this quarter. Overall, it hurt us on both revenue and cost lines.

Revenue impact was less than 5%.

So it's meaningful and material?

For EMEA, it was meaningful, but on the overall company basis, it was less so. On the freight side, it probably hurt more than the direct revenue impact.

Should we expect that to be better this quarter?

I don't expect our freight to be materially better this quarter. I think it will be messy again this quarter. I can't make a precise projection.

Your operating margin guide for Q2 is 5% to 9%. Can you go over assumptions that would drive the lower versus the higher end of that range?

We are assuming a similar freight environment this quarter as last quarter and a similar memory impact as last quarter. Those are key drivers in the range.

Were you able to raise prices or are there plans to raise prices to counter elevated freight and component costs?

On freight, we're hopeful it's transitory, so we're not pushing a broad freight surcharge. For memory and component price pressures, we have raised prices to customers to reflect current supply chain challenges.

And your next question comes from the line of Tim Savageaux with Northland Capital Markets.

I want to come back to your comment about optical building throughout the year. Typically, access and aggregation sees a stronger first half driven by Europe and then a weaker second half. Could BEAD offset that this year so access and aggregation also builds throughout the year? At this point, are you able to estimate what the annual incremental contribution of BEAD might be in the second half or this year in general?

I can't give an estimate on BEAD at this time because there are too many customers and unknowns. BEAD will be helpful and we expect Europe to be stronger seasonally than in prior years. The current expectation is that we won't see the same kind of second-half falloff that we saw last year. That said, there's a lot of variability by carrier, so it's difficult to provide a company-level estimate now. Did that answer your question, Tim?

Sure, guys.

And your next question comes from the line of Bill Dezellem with Tieton Capital.

Relative to the LiteWave800 and the engineering knowledge you have gained to reduce power consumption by 90%, is there a carryover opportunity to apply that knowledge to other products throughout your catalog that could be materially impactful to the business? If so, what's the timeline to have that technology infiltrate the rest of the product line?

The power reductions are relatively unique to the product sets we're discussing because of the particular speeds and distances. I did call it a family, and Quattro is part of that same family — it's in our multi-mux family and is very power efficient as well. The proliferation you'll see is in the pluggable space: starting with QSFP pluggables and then other form factors over time. You'll see different members of the family and similar application sets where this technology will play out.

Tom, are those applications all within the data center, or are there other short-distance opportunities outside the data center?

There could be other short-distance opportunities, but demand inside the data center is the primary focus and is very large. At this point, I think we are out of questions. I want to thank everybody for joining us on the conference call, and we look forward to talking to you next quarter. Thanks, everyone.