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ADTRAN Holdings, Inc. (ADTN)·Q3 2024 Earnings Summary

Executive Summary

  • Q3 revenue of $227.7M with sequential growth, non-GAAP gross margin expansion to 42.1%, positive non-GAAP operating profit ($2.5M), and third consecutive quarter of positive free cash flow ($23.2M) .
  • Mix stabilized: Subscriber Solutions +9% q/q; non-U.S. revenue 55% as EMEA/APAC improved; large service provider sales +10% sequentially; one >10% customer in-quarter .
  • Optical likely bottomed in Q3; bookings accelerated; management expects all segments up in Q4 and guided Q4 revenue to $230–$245M and non-GAAP op margin to 0–4% (sequential growth inflection) .
  • Cost program traction: non-GAAP GM up ~320 bps vs Q3’23 (42.1% vs 40.3%); OpEx held flat q/q; working capital improved (DSO 70 days, inventory reduced), underpinning FCF .
  • Consensus estimates (S&P Global) were unavailable due to vendor rate limits; thus, beat/miss vs Street cannot be determined at this time (values from S&P Global unavailable).

What Went Well and What Went Wrong

  • What Went Well
    • Mix and profitability: Non-GAAP gross margin rose to 42.1% (+17 bps q/q) with non-GAAP operating profit of $2.5M; FCF of $23.2M on $42.0M operating cash flow .
    • Demand signals: Bookings accelerated; non-U.S. revenue 55% with strength in EMEA/APAC; large service provider sales +10% sequentially .
    • Portfolio momentum: 13 new optical customers; 12 new Access & Aggregation customers; Subscriber Solutions +9% q/q driven by ONTs/RGs (+25% q/q, +102% y/y) .
  • What Went Wrong
    • Optical revenue still down q/q (-4%); lingering European customer inventory overhang likely to clear early Q1 next year; management still seeing cautious carrier capex .
    • U.S. softness in Access & Aggregation led to slight aggregate decline despite international strength .
    • GAAP profitability remains pressured: GAAP gross margin 37.4% and GAAP operating margin -10.5%; GAAP diluted EPS -$0.36 in Q3 .

Financial Results

Overall performance vs prior periods (oldest → newest):

MetricQ3 2023Q2 2024Q3 2024
Revenue ($M)$272.3 $226.0 $227.7
GAAP Gross Margin %27.3% 36.1% 37.4%
Non-GAAP Gross Margin %40.3% 41.9% 42.1%
GAAP Operating Margin %n/a-17.0% -10.5%
Non-GAAP Operating Margin %n/a0.7% 1.1%
GAAP Diluted EPS$(1.00) $(0.63) $(0.36)
Non-GAAP Diluted EPS$(0.18) $(0.24) $(0.05)

Segment revenue (Network Solutions, Services & Support):

Segment ($M)Q2 2024Q3 2024
Network Solutions$179.2 $181.5
Services & Support$46.8 $46.2

Product category mix and dollars:

CategoryQ2 2024 Mix (% of rev)Q3 2024 ($M)Q3 2024 Mix (% of rev)
Access & Aggregation30.9% $67.1 29%
Optical Networking Solutions32.6% $70.5 31%
Subscriber Solutions36.5% $90.1 40%

Geography mix:

Geography MixQ1 2024Q2 2024Q3 2024
International (% of revenue)63.2% 52.4% 55%

Operating and cash metrics:

KPIQ2 2024Q3 2024
Non-GAAP Operating Expenses ($M)$93.2 $93.3
DSO (days)75 70
Inventory ($M)$287.9 $282.9
Operating Cash Flow ($M)$19.9 $42.0
Free Cash Flow ($M)$3.9 $23.2
Cash & Equivalents ($M)$111.2 $88.5
Revolving Credit Outstanding ($M)$190.3 $189.8

Non-GAAP vs GAAP reconciliation highlights:

  • Non-GAAP gross margin excludes acquisition-related amortization/adjustments, stock comp, restructuring, and integration, driving 42.1% vs 37.4% GAAP in Q3 .
  • Non-GAAP operating income $2.5M vs GAAP operating loss $(24.0)M in Q3; reconciliation driven by amortization, restructuring (incl. Greifswald closure), and other items .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueQ3 2024$215M–$235M (issued Aug 6) n/a (actual reported)n/a
Non-GAAP Operating MarginQ3 2024-1% to +3% n/a (actual reported)n/a
RevenueQ4 2024n/a$230M–$245M Introduced
Non-GAAP Operating MarginQ4 2024n/a0%–4% Introduced

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1, Q2 2024)Current Period (Q3 2024)Trend
Customer inventory digestionOptical still in digestion; expected to improve in 2H’24 One large European optical customer still overhang; likely resolved early Q1; bookings improved Improving
Bookings/visibilityTightening ranges; cautious on optical bottom; better H2 visibility Bookings accelerated; guidance implies broad-based Q4 growth Improving
Geographic mix63% Intl (Q1); stable U.S. small/mid providers 55% Intl; Europe/APAC strength; large carrier sales +10% q/q Mixed to better ex-U.S.
BEAD impactFunding ramp anticipated; some planning delays, but majority participating BEAD not sole driver; fiber demand durable; potential delays but underlying demand persists Neutral (timing risk)
Optical share dynamics/consolidationTarget top-2 in Europe; watch Nokia/Infinera effects 13 new optical customers; metro edge strength; consolidation may help future RFPs Improving medium term
Cost/efficiency programTarget -$90M 2024 OpEx vs 2023; inventory reductions Non-GAAP GM +17 bps q/q; OpEx flat; positive FCF Executing
Product innovationLaunches in optical, Wi-Fi 7, Mosaic SaaS 50G PON trials; broader open/disaggregated portfolio positioning Advancing

Management Commentary

  • “We executed according to plan in Q3… continued to grow our non-GAAP operating profit and generated positive free cash flow for the third consecutive quarter… improved non-GAAP gross margin as we maintained our reduced cost structure and grew revenue.” — CEO Tom Stanton .
  • “We had expected our optical networking revenue to bottom in Q3… bookings continue to accelerate, supporting our optimism.” — CEO Tom Stanton .
  • “Non-GAAP gross margin during the quarter was 42.1%… Non-GAAP operating profit was $2.5M or 1.1% of revenues… Operating cash flow of $42M… free cash flow of $23.2M.” — CFO Uli Dopfer .
  • “We expect revenues to range between $230M and $245M and non-GAAP operating margin between 0 and 4% of revenues” (Q4 outlook). — CFO Uli Dopfer .

Q&A Highlights

  • Inventory/optical: One notable European optical customer inventory overhang likely clears early Q1; CPE inventory largely resolved; Access mostly normal buying patterns; bookings improving .
  • Growth breadth: Expect all segments up in Q4; stronger internationally (Europe) for optical; U.S. also improving with cross-sell .
  • BEAD: If delayed or reduced, secular fiber demand and alternative funding/capital structures should sustain buildouts; BEAD seen as additive rather than sole driver .
  • 2025 ramps: Multiple Tier 1/multinational deployments progressing (e.g., Sweden final country, a Spain-first rollout), expected to materially contribute in 2025 .
  • Real estate/capital: Monetization of non-strategic assets progressing; evaluating sale-leaseback options; capital priority is debt reduction .

Estimates Context

  • S&P Global consensus (EPS, revenue) for ADTN Q3 2024 could not be retrieved due to vendor rate limits at query time; therefore, we cannot quantify a beat/miss vs Street this quarter. Values would be retrieved from S&P Global if available.
  • As context, management reported revenue above the midpoint of guidance and non-GAAP operating margin above midpoint, and guided to further sequential growth in Q4 .

Key Takeaways for Investors

  • Sequential inflection with improving bookings, expanding non-GAAP margins, and positive FCF suggests the operating bottom is in; near-term catalyst is Q4 guide execution across all segments .
  • Optical appears at/near trough with bookings acceleration; European inventory overhang narrowing—optical recovery is a 2025 upside driver, along with multiple Tier 1/multinational ramps .
  • Mix shift toward Subscriber Solutions and non-U.S. exposure (55%) is supporting gross margins; cost discipline and working capital improvement underpin cash generation .
  • BEAD optionality: Even with potential timing variability, secular fiber demand and diversified customer funding support U.S. buildouts; BEAD remains additive rather than foundational .
  • Watch execution on non-strategic asset monetization and debt reduction to further de-risk the balance sheet while maintaining investment in high-velocity platforms (SDX/SDG, Mosaic, metro-edge optical) .
  • Stock narrative hinges on evidence of broad-based Q4 growth, confirmation of optical bottoming, and continued FCF—positive surprises here could reset estimates higher, while slippage in optical or BEAD timing would temper near-term upside .

Supporting Detail (Additional Press Releases During Q3 Window)

  • Q3 release/IR logistics and preliminary results confirmation (Nov 7, 2024) .
  • 50G PON ecosystem momentum and product launches throughout the period (e.g., UK first 50G PON services; various tech launches in Oct-Nov) .