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ADTRAN Holdings, Inc. (ADTN)·Q2 2024 Earnings Summary

Executive Summary

  • Revenue was $226.0M, roughly flat QoQ and down 31% YoY; non-GAAP operating margin reached 0.7%, above the midpoint of guidance, driven by gross margin gains and lower OpEx .
  • Non-GAAP gross margin expanded to 41.9%, up +334 bps YoY and +37 bps QoQ, reflecting supply chain optimization and mix improvements .
  • Working capital improved materially: inventory decreased $34.2M QoQ, net working capital fell $35.1M, operating cash flow was $19.9M and free cash flow was $3.9M .
  • Q3 2024 guidance maintained revenue at $215–$235M, while non-GAAP operating margin range was raised to -1% to +3% from -3% to +2% in Q2 guidance; focus remains on leaner operations amid optical inventory digestion .
  • Catalysts: sequential domestic growth across all categories, ongoing shift from high-risk vendors in Europe, and U.S. BEAD funding tailwinds; optical inventory overhang at large customers persists near-term .

What Went Well and What Went Wrong

What Went Well

  • “We realized a non-GAAP operating profit driven by gross margin improvements and substantially lower operating expenses. Working capital was significantly reduced…” .
  • Product momentum: Subscriber Solutions up 18% QoQ; 12 new Fiber-to-the-Prem wins; 16 new SDG in-home customers; cross-selling optical gear to 11 existing U.S. broadband customers .
  • Software adoption: Mosaic One now has >400 customers; Intellifi is the fastest-growing application, supporting SaaS-led differentiation in U.S. Tier 2/3 operators .

What Went Wrong

  • Topline pressure: revenue -31% YoY; Optical Networking Solutions -48.5% YoY; Access & Aggregation -31.9% YoY .
  • Europe Access & Aggregation shipments fell sequentially due to two large customers’ lumpier buying patterns; this masks underlying strength in connecting subscribers .
  • Earnings still negative: non-GAAP net loss of $18.8M and non-GAAP diluted loss per share of $(0.24), worsened from $(0.02) in Q1; non-GAAP tax expense was ~$10M .

Financial Results

Headline metrics (GAAP and non-GAAP)

MetricQ2 2023Q1 2024Q2 2024
Revenue ($USD Millions)$327.4 $226.2 $226.0
GAAP Gross Margin %28.3% 31.9% 36.1%
Non-GAAP Gross Margin %38.6% 41.6% 41.9%
Non-GAAP Operating Margin %1.1% -3.9% 0.7%
GAAP Diluted EPS ($)$(0.50) $(4.12) $(0.63)
Non-GAAP Diluted EPS ($)$(0.07) $(0.02) $(0.24)

Segment revenue split (reported)

Segment ($USD Millions)Q2 2023Q2 2024
Network Solutions$283.0 $179.2
Services & Support$44.4 $46.8
Total$327.4 $226.0

Category mix (% of revenue)

CategoryQ1 2024Q2 2024
Subscriber Solutions (% of revenue)30.8% 36.5%
Access & Aggregation (% of revenue)36.0% 30.9%
Optical Networking Solutions (% of revenue)33.2% 32.6%

Notes: Q2 2024 category YoY/QoQ changes disclosed by management: Access & Aggregation -31.9% YoY and -14% QoQ; Optical -48.5% YoY and -1.9% QoQ; Subscriber +0.9% YoY and +18.1% QoQ .

KPIs and balance sheet/cash flow

KPIQ1 2024Q2 2024
Accounts Receivable ($M)$187.6 $186.2
Inventory ($M)$322.1 $287.9
Net Working Capital ($M)$350.6 $315.5
Cash & Cash Equivalents ($M)$106.8 $111.2
Operating Cash Flow ($M)$36.6 $19.9
Free Cash Flow ($M)$23.2 $3.9
DSO (days)75 75

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueQ3 2024$215M – $235M (from Q2 call) $215M – $235M Maintained
Non-GAAP Operating MarginQ3 2024-3% – +2% (Q2 guidance range) -1% – +3% Raised (both ends +200 bps)

Management does not provide GAAP reconciliations for non-GAAP margin guidance due to inability to reasonably estimate certain restructuring/integration items .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4’23, Q1’24)Current Period (Q2’24)Trend
Software/Mosaic One, Intellifi~380 Mosaic One customers; Intellifi launched and driving RG growth >400 Mosaic One customers; Intellifi is highest-growth app; SaaS focus centered on U.S. Tier 2/3 Positive adoption, U.S.-centric
U.S. broadband cycle/BEAD80% of summit attendees engaged in stimulus; BEAD rollout uneven but interest high Continued U.S. momentum; domestic revenue up sequentially across all categories Improving visibility, broadening demand
Europe/high-risk vendor replacementTier-1 fiber access and optical wins progressing toward deployments Well positioned; aspiration to top-2 optical supplier as industry consolidates Structural tailwind; timing late ’24/’25
Supply chain/marginsGross margin improvement from customer/product mix and lower costs Non-GAAP GM +334 bps YoY; improvement reflects supply chain optimization Continued improvement
Product performance mixQ1: Access & Aggregation up 27% QoQ; Subscriber down 7% QoQ; Optical down Q2: Subscriber +18% QoQ; Access offset by Europe large-customer lumpy buying; Optical flattish Subscriber strength; Optical bottoming
Inventory digestionOptical inventory correction expected to improve in H2 Optical inventory at U.S./EU large customers seen depleting by year-end Nearing resolution (optical)
Real estate/asset actionsConsolidating Huntsville footprint; marketing assets; proceeds potential Multiple interested buyers; process advancing; difficult to time close Ongoing optimization

Management Commentary

  • “We had a strong quarter in the U.S. with revenue up across all 3 categories… Subscriber Solutions up 18% QoQ; residential solutions up 47% QoQ” .
  • “We added 12 new Fiber-to-the-Prem customers in Q2… 16 new customers adopted our SDG in-home platforms… a material percentage were competitive takeaways” .
  • “We now have more than 400 customers… adopted our Mosaic One platform” .
  • “Non-GAAP gross margin was 41.9%… non-GAAP operating profit was $1.5M or 0.7% of revenues” .
  • “We reduced our inventories by $34.2M compared to Q1 2024… generated $3.9M of free cash flow” .

Q&A Highlights

  • Europe Access weakness tied to two large customers’ lumpy purchasing; subscriber activity remains solid (connecting customers even when infrastructure orders pause) .
  • Optical inventory remains the main overhang; management expects depletion by year-end at large U.S. and European customers .
  • Non-GAAP tax modeling guidance: ~15–20% non-GAAP tax rate; GAAP ~3–5% for the year .
  • Estimated revenue impact from optical inventory digestion at large customers is “tens of millions” in aggregate (not fully zero purchases) .
  • Strategic opportunity: aim to be top-2 optical supplier in Europe; industry consolidation (e.g., Nokia–Infinera) could create share shifts; potential U.S. cross-sell continues .

Estimates Context

  • Wall Street consensus (S&P Global) for Q2 2024 was not available due to data access limitations at the time of retrieval. Values retrieved from S&P Global were unavailable.
  • Directionally, results were slightly above the midpoint of company revenue guidance and achieved positive non-GAAP operating margin, which may drive revisions to near-term margin expectations despite continued non-GAAP losses .

Key Takeaways for Investors

  • Mix improvement and cost actions are sustaining margin recovery; non-GAAP operating profitability returned even with optical headwinds .
  • Domestic demand is broadening, led by Tier 2/3 operators adopting integrated fiber access, in-home platforms, and Mosaic One; this supports sequential stability and potential H2 uplift .
  • Europe remains a strategic growth vector: high-risk vendor displacement and Tier-1 deployments position ADTRAN for share gains; timing skews late ’24/’25 .
  • Near-term overhang is concentrated in optical inventory digestion at large customers; management targets year-end normalization, a key inflection for revenue/mix .
  • Cash discipline is evident: inventory down $34.2M QoQ; working capital down $35.1M; FCF positive, albeit modest in Q2 .
  • Q3 guidance implies continued operational improvement: margin range raised with revenues maintained, signaling confidence in execution amid cautious forecasting .
  • Tactical focus: watch for BEAD awards and European displacement wins; incremental confirmation of optical demand recovery should be a stock catalyst .

Additional Relevant Press Releases (Q2 timeframe)

  • Investor meetings announced (Rosenblatt Aug 19; Jefferies Aug 28) .
  • Customer deployments highlighting SaaS and fiber access (PhireLink in LA using Mosaic One/Intellifi; telMAX using Mosaic CP with GLDS) .
  • EMEA ecosystem expansion (LU-CIX Gold Member; FSP 3000 and ALM in infrastructure) .