ADTRAN Holdings, Inc. (ADTN)·Q1 2024 Earnings Summary

Executive Summary

• Q1 2024 revenue was $226.2M, above the midpoint of guidance ($210–$240M); GAAP gross margin was 31.9% and non-GAAP gross margin was 41.6%. Non-GAAP operating margin was -3.9%, within guidance, while GAAP results were impacted by a non-cash goodwill impairment .
• GAAP net loss was $324.6M (GAAP diluted EPS -$4.12), driven primarily by a $292.6M goodwill impairment; non-GAAP diluted EPS was -$0.02 .
• Working capital execution improved: operating cash flow rose by $52.9M QoQ to $36.6M, free cash flow was $23.2M, cash increased 22% QoQ to $106.8M, and inventories fell by ~$40M QoQ .
• Q2 2024 guidance: revenue $215–$235M and non-GAAP operating margin -3% to +2%; management expects OpEx to decline in Q2 and gross margin to “come down slightly” at the midpoint given mix .

What Went Well and What Went Wrong

What Went Well

• Access & Aggregation revenue grew ~26.6% QoQ (36% of total), led by fiber access deployments with both U.S. regional and large European customers; international revenue was 63% of total .
• Strong SaaS and platform engagement: 36 new Mosaic One customers added, totaling ~400; Intellifi adoption accelerated; continued deployments of SDX 6330 with Tier 1s in the U.K. and Germany .
• Material cash/working capital progress: DSO improved from 88 to 75 days QoQ; inventories reduced by ~$40M; operating cash flow +$52.9M QoQ to $36.6M; free cash flow $23.2M .
  • CEO: “We were able to reduce inventory and significantly improve our operating cashflow while maintaining our diligence in gaining market share” .

What Went Wrong

• Optical Networking Solutions declined 12.7% QoQ and 49% YoY as customers continued inventory reduction; subscriber solutions declined 7.3% QoQ and 12.1% YoY, with legacy carrier products weak .
• GAAP results were dominated by a $292.6M goodwill impairment in Network Solutions, yielding GAAP operating margin of -150.2% and GAAP diluted EPS of -$4.12 .
• Non-GAAP operating margin fell sequentially to -3.9% (from -1.4% in Q4) due to unfavorable FX and seasonality; management reiterated cautious service provider spending and optical digestion extending into H2 .

Financial Results

Segment revenue (Q1 2024):

Category mix (% of revenue):

Geographic mix (% of revenue):

Working capital and cash KPIs:

Non-GAAP adjustments (Q1 2024 key items): inventory write-down $8.8M in cost of revenue; goodwill impairment $292.6M in operating loss .

Guidance Changes

Management also indicated gross margin may “come down slightly” at the midpoint given mix as OpEx declines in Q2 .

Earnings Call Themes & Trends

Management Commentary

• CEO opening remarks: “Our first quarter revenue came in as expected… non-GAAP operating margin within guidance. Our focus on managing expenses and reducing inventory levels helped us achieve positive free cash flow… despite the near-term headwinds” .
• On strategic focus: “We believe… our continued focus on these measures will lead to sustainable margin expansions and shareholder value creation in the mid-term” .
• On U.S. regional opportunity: “There is only one vendor that can check all of these boxes and that's ADTRAN… we have launched Intellifi… helped push the total number… adopting Mosaic One to 400. We have added 36 new Mosaic One customers this past quarter” .
• On Europe Tier 1 ramps: “We continue to ramp deployments of our latest high-density 10-gigabit fiber access platform, the SDX 6330… selected as a vendor in the latest Ethernet aggregation service offering… M‑Flex 800 platform… positioned to benefit from the next upgrade cycle from 400 gig to 800 gig” .
• CFO summary: “Q1 2024 revenue… $226.2 million… non-GAAP gross margin was 41.6%… non-GAAP operating loss was $8.8 million… DSO 75 days… inventories reduced by $40.1 million… operating cash flow of $36.6 million… free cash flow $23.2 million” .

Q&A Highlights

• Inventory digestion timing: Optical has “the longest path ahead,” with improvement expected in H2; access/aggregation least impacted; subscriber mixed with legacy carrier inventory still elevated .
• Demand vs inventory: In Europe, large access customers “moving ahead”; in U.S. demand is spotty; inventory is “by far, the bigger hangover” .
• BEAD outlook: Majority of small/midsize operators intend to participate; regulatory requirements a “manageable headache” for many; uneven state implementation .
• OpEx & efficiency: Q2 OpEx to decline; 2024 OpEx -$90M target reiterated; Germany site closure within quarter .
• Real estate monetization: Huntsville properties under consideration; sale/leaseback possible; some proceeds range discussed previously .
• Segment trajectory for Q2: Directionally, access/subscriber modestly up; optical modestly down; not modeling Q1-like sharp moves .
• Customer concentration: Two ≥10% customers in Q1, both international .

Estimates Context

• Wall Street consensus (S&P Global) for Q1 2024 EPS and revenue was unavailable at time of analysis due to data access limits. As a result, beat/miss vs estimates cannot be assessed and estimates columns are marked N/A. Values retrieved from S&P Global.*

Key Takeaways for Investors

• Non-GAAP performance tracked guidance, but GAAP results were dominated by a large goodwill impairment; focus near term should be on cash generation and working capital execution, which improved meaningfully in Q1 .
• Optical digestion remains the principal headwind; management expects improvement in H2 while Access & Aggregation momentum (U.S. regional and Europe Tier 1s) supports sequential stability .
• Software/SaaS attach (Mosaic One/Intellifi) continues to scale, improving mix quality and customer stickiness; watch for incremental monetization and services growth .
• Q2 guide implies modestly negative to slightly positive non-GAAP operating margin; mix and FX are swing factors, with OpEx declining sequentially. Trading setups may center on delivery vs the -3% to +2% margin band .
• Europe high-risk vendor replacements and SDX 6330 ramps are strategic growth vectors; Tier 1 MPLS edge software and 800G optical positioning add optionality into the next upgrade cycle .
• Continued execution of Business Efficiency Program (OpEx reduction, site consolidation) is critical to mid‑term margin expansion; monitor real estate monetization and debt reduction progress .
• With estimates unavailable, model sensitivity should focus on category mix (optical vs access/subscriber), FX, and working capital/cash flow cadence to gauge path back to sustained non‑GAAP profitability .

Appendix: Additional Data Points

• Q1 non-GAAP operating margin negatively impacted by unfavorable currency and seasonal effects; GAAP operating margin -150.2% due to goodwill impairment .
• Inventory write-down of $8.8M tied to strategic shift in product lines as part of restructuring program .
• International revenue share increased to 63.2% in Q1; two ≥10% customers both international .