ADTRAN, Inc. Aktie

Ladies and gentlemen, thank you for standing by, and welcome to the ADTRAN Holdings, Inc. First Quarter 2026 Earnings Release Conference Call. [Operators Instructions]

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 of all 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. Sir, please go ahead. And Tom Stanton, I turn it over to you.

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 2 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.

[Operator Instructions] 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 probably -- I'm going to shy a little bit away from pricing on the product, although there is a lot of IP in that product and IP typically gains 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. And I would expect that to be sometime about a year from now before we really kind of hit production level type numbers. We did show -- we do have prototypes now. We did show operating models at the recent OFC. It is a real product. It does work. It's a matter of getting it -- finalizing and then getting it to scale, which will take some time just because it's very -- 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, 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 ridiculously low power. I mean it's -- I think, 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, I mean, 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. 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, ZR? And could you talk more about the AI sort of edge platform?

Yes. The AI edge platform, I think you're talking about is still an offshoot of Clarity. So I'm not sure if there's anything else out there that we've -- at least I've seen that we announced. I'm not telling you it couldn't happen. But all of our AI products are in the Clarity family. We have an edge product that we are trialing right now, and then we have the core product for network operations that we have been trialing for some time. I will tell you the feedback here also is fantastic. I just recently had a bunch of customers in. We had 150 or so customers here in Huntsville and the feedback there just overwhelmingly positive. So good things there.

On the 400ZR, we do have products coming out towards the end of this year, I think, for 400. And those are just ongoing pieces. The AI piece, now that I think about it, the AI piece you may be talking about it on Ensemble, which is the product that we were highlighting that has started to implement AI -- agentic AI in this 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 where we make sure that we have the right R&D resources and sales resources to be able to do that. But all of that is within the current operating budget that we have today. So I don't think there's going to be any significant increase.

We're kind of committed to and believe that we can grow the business fairly meaningful within the budgets that we have today. Once we get north of our targeted 10% -- or excuse me, we said low-single-digit, but 10% operating income, then we'll take a look at that as well and make sure that 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.

Yes. We don't have those numbers broken out, but I will tell you the uptick on Intellifi has been fantastic. Mosaic got a very good launch. We have probably close to 500 customers right now on Mosaic One. And all of those are in different levels of subscription base. But Intellifi is doing really well. I think last time we reported on, it was over 100 customers and it was -- it's been a real highlight. So we don't have those numbers broken out. Hopefully next quarter, I'll be able to talk about them.

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

I wanted to -- 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?

Yes. We don't break that out. As you know, George, we don't break out specific customer segments like that. But just to give you some color, hyperscalers actually did really good in the fourth quarter. They were, as I mentioned, a real positive in the quarter, and we would expect that to continue on through this year. I mean we've got a fairly good backlog with some of our hyperscaler customers right now that's building. So that's pretty much it.

Got it. Okay. And I assume these are -- can you just walk through maybe the product sets that you sell in there and just kind of get us for your point on what is -- what you're leading with customers. Obviously, the LiteWave product is going to come on. But is it optical? What pieces are you selling?

Yes. The biggest piece is optical, and it's -- a lot of the momentum we're seeing right now is around our 100ZR plug.

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

As you know, maybe you do know, I think you do know, George, that we have a fairly large footprint. So when you look at large data center connectivity, not in the sweet spot. That's where the 400 and 800 will play more. In the smaller data center interconnectivity spot, which some of the hyperscalers have as an architecture, it plays very well.

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

I probably won't get into direct sourcing on that. We do have some partners that we're working with on this. They do know what the supply needs are right now. We see -- depending on how aggressive that launch is, we don't see any issues in being able to supply it as we launch it.

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

I want to ask about optical demand, kind of that maybe step it up to a higher level. You talked about MOFN demand here. Can you maybe characterize where you are, 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 just talked about 100ZR. I assume that's a big piece, but maybe any more color beyond that would be great.

Yes, I do think 100ZR also -- I think that the -- especially in Europe, I think that our 400 and 800-gig products are going to play very well in that upgrade path as well. The customer base that we're talking about is the customer base that you already know. It's ones that we've been doing business with for a very long period of time. And they're trying to situate their networks to be able to do more basically wholesale services. That customer is active. And then there's one here in the U.S. that you're already aware of that's also making a lot of noise around it.

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

It's a mix. That is dependent on the carrier size. And it also depends on whether or not they already have installed chassis. Where there's already an installed chassis there, they're going to upgrade that chassis. Where it's a footprint, even in footprint on some of the larger carriers, the operational ease that the current systems provide is actually very beneficial to them, but it's definitely a mix.

Got it. And then maybe hitting the gross margin here. Obviously, great results on the quarter. Congrats. And you talked about a lower mix of consumer CPE within your subscriber solutions. Can you maybe -- is consumer CPE, would it approach half of that number? Or you think it's maybe less than half of your total subscriber business? Just sort of quantify.

It's probably -- to be fair, it's probably -- I think it's definitely not less than a half, but it's not substantially more. And I think the reason that I was bringing it out is we have gotten feedback that customers were unclear about kind of how much the CPE margin problem is affecting us, and it does affect us. I mean there's no doubt about it. But the impact is substantially less when you take a look at it in the overall perspective of the entire company, but it is north of 50% of just the subscriber segment.

Makes sense. And maybe one last one, if I can squeeze it in. You talked about some better visibility on BEAD projects here. What sort of milestones should we look for before we start to see your revenues start to inflect for BEAD? Are we talking about permits and design and forecasts and orders? Can you maybe walk us through how we should think about the milestones that lets BEAD unfold and start to contribute for ADTRAN?

Yes. So funding is starting to flow or could flow for the -- by far, the majority of the states now. So a lot of that has been worked itself through. Now what you're seeing is kind of individual customers deciding how they want to roll out. We have some customers that have already placed purchase orders and they're rolling out and/or at least making sure that they've got supply to be able to not be a hamstrung. The smaller the customer, the easier that is.

On the larger customers, the biggest pull -- long pull is going to be actually deploying the fiber itself, which is why we've been saying end of this year is probably where you start seeing that. On a local level, I mean, you can look at permitting and kind of where that is, that's kind of hard to actually get a good grasp of. At the end of the day, I'm looking for purchase orders. We're starting to see some today, but it's a trickle.

It's not a lot. But we expect that -- I mean, this whole unlocking of the approval process really has accelerated. We went from, what, maybe 2 states a quarter ago, I think 3 states a quarter ago to pretty much all of the states now being able to send out funding. So I think the best visibility is actually seen in the numbers though because every carrier is going to be a little different.

And you think you'll just see nice steady improvements and '27 starts to feel like a more material number for you from being...

Absolutely. Yes.

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

Just a quick clarity on that, Tom. With '27 orders picking up indeed more materially, would you anticipate '28 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?

I think we've given a range before, and that math changes depending on ultimately which carrier actually is deploying where. But 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 multi years.

So it's a 5-year program. The timing of this, we've seen programs like this in the past. I think if you pick the middle of the window, that's typically where you see the majority of the spend. And then you'll see some kind of cleanup at the very tail end when people try to make sure that they get all the funding they can get. So my guess would be the middle of the program, which would be probably towards the tail end of '27. And then you'll probably see some cleanup from that point forward. And as you get towards the end of the program, you'll typically see some kind of flush as people try to make sure they did all the work they need to do.

Great. That's great clarity. And then my last question just as your largest -- one of your competitors spent a significant amount of time on their conference call talking about memory cost headwinds. I'm just wondering how you guys are navigating through that.

Yes, sure. Right now, we're doing good. So I do think that we are helped by the fact that we have a fairly diverse product portfolio. When you get into some of our larger products like some of our larger access and ag platforms, which handle thousands of customers, or you get into optical for that matter, the memory content on those products is just less of the total bill of material. So the impact is significantly less. If you get into some of the lower-end residential CPE, that memory can be a large percentage of the total bill of material. And I think that's the direct impact.

If you take a look at our -- that maybe that's the direct tie through to your question. If you take a look at our CPE for residential, which is the most materially impacted, it is also the lowest cost products we sell and the lowest inherent gross margins to begin with that we sell. There's a bigger impact. When you get to some of the larger 100-gigabit platforms, 400 gigabit platforms, that memory impact is just substantially less. And I think that's the difference.

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

Just the first question is regarding the Middle East conflict. Just wondering if you can talk about the impact from that.

Yes. So I think it impacts us in a couple of different ways. One is, without a doubt, it hurt us on the freight line. There are some disruptions. Our freight expense this quarter was higher than I would like it to be. Probably be higher this quarter as well, so last quarter and this quarter. And that's just a matter of being able to get capacity in the right planes. And it was a little messy last quarter, freight line. I think that's the biggest -- that's the biggest headline impact.

We absolutely saw an impact though in our Middle East revenues as well. Some of that was disrupted last quarter. I don't know when that gets better. I would expect it to be a little better this quarter, but I think it hurt us both on the revenue and the cost line.

Are we talking like maybe 1%, 2% revenue impact?

Revenue, yes, less than 5%, yes.

So it's definitely meaningful. I mean, material, right?

Well, especially if you talk on a -- we tend to -- we really look at EMEA as one big bucket, and that's how we manage it. And for the EMEA area, yes, it definitely hurt. But on the overall company, it was -- it was not as meaningful. I think on the freight side, it probably hurt more to be honest with you.

And should we expect that to be better this quarter, the...

I don't want to tell our operations guys, but I don't expect our freight to be materially better this quarter. I think it's going to be messy this quarter as well. I can't project. Go ahead.

Yes. Got it. So that leads me to my second question, is your operating margin guide for 2Q, 5% to 9%. Just wondering if you can go over some of your assumptions of 5% versus 9%.

Yes. So we continue to think that -- I mean, if you think about it, basically we're assuming a similar freight environment in this quarter as last quarter and a similar memory impact in this quarter as last quarter.

Got it. And then my last question is, were you able to raise prices or any plans to raise prices to counter elevated freight as well as component costs?

Freight, we're not pushing so much on. I mean we're still very hopeful that that's transitory. Component prices on the memory prices, we have raised prices to customers to reflect the current challenges in that supply chain.

[Operator Instructions] Your next question comes from the line of Tim Savageaux with Northland Capital Markets.

I want to come back to a comment you made about optical, mainly kind of building throughout the year, which makes sense. Typically, in access and aggregation, you see kind of the opposite pattern, which is a stronger first half driven by Europe and then maybe a weaker second half. My question is, I wonder if BEAD can serve to offset that this year. So you might be able to have a similar type profile building throughout the year. And at least let's just focus on access and aggregation here as a result of that. And at this point, are you able to make an estimate for what the annual incremental contribution of BEAD might be in the second half or this year in general?

I really -- yes, unfortunately, I really can't give an estimate on BEAD because there's too many customers and too many unknowns. But your question is, do I think you would also see the typical access and ag. I think a couple of things can play into that. BEAD definitely will be helpful.

I think the other thing that we expect to see, and this is still relatively early in the year, but I think Europe is going to be stronger than what we saw the last couple of years seasonally. So I think that we're -- you won't see -- the current expectations is that we won't see the same kind of falloff in the second half versus first half that we saw last year. 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 your engineering knowledge set that you have gained to reduce that power consumption by 90%, is there a carryover or an opportunity to take that knowledge and apply to other products throughout your catalog that could be materially impactful to the business? And if so, what's the timeline that it would take to have that technology or those capabilities infiltrate the rest of the product line?

I think it's relatively unique to the product sets that we're talking about. It is because of particular speeds and particular distances that we're able to actually get the power savings that we're talking about. I think the -- but I did call it a family. And I consider Quattro to be part of that same family, which is in our multi Mux family, which is very, very power savings as well.

But I think the proliferation you'll see of that technology is in that pluggable space. So you're going to see first product is QSFP. We do have other products that are, let's say, I'll just say more integrated that will be coming out over time. So I think you're going to see different members of the family and similar application sets where this technology will actually play itself out.

And Tom, those applications are all within the data center? Or are there other short distance opportunities that are outside of the data center that I'm not thinking about right now?

There could be, but I can tell you that demand with inside the data center is worth focusing on. It is very large.

At this, I think we are out of questions. So I want to thank everybody for joining us on the conference call, and we look forward to talking to you next quarter. Thanks, everyone.

Good morning. My name is Julianne, and I will be your conference operator. At this time, I would like to welcome everyone to ADTRAN Holdings Fourth Quarter and Full Year 2025 Financial Results Conference Call. [Operator Instructions]

Thank you. Mr. Peter Schuman, Vice President, 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 very much.

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 emergency 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 core -- 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 has never been better. We have several multiyear 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 noncore 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 cost structure while positioning the company to convert revenue into sustained earnings growth. Looking ahead at our outlook for the first quarter of '26, 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.

[Operator Instructions] Our first question comes from Michael Genovese from Rosenblatt Securities.

Great conference call, clearly upbeat messaging. Tom, can you just talk a little bit more, I guess, specifically about the demand picture in U.S. and Europe and sort of what you're seeing from your clients on the optical side and on the fiber-to-the-home side? And just talk a little bit more about the drivers of the revenue growth. And I guess related to that, like do you think -- obviously, you're not giving full year revenue guidance, but coming off a year where you grew 20%, do you think double-digit growth is -- top line growth is in the cards for '26?

Yes. So let me start on a little down, which is we don't give full year guidance for a reason, and that's because our outlook is -- typically are still our book-to-ship period is relatively small. So it's a little difficult.

Let me speak a little bit more about the kind of the environment that we're in right now. I would say it's kind of the same tone and kind of building momentum that we saw throughout last year. And we expected that to continue on, and that's exactly what's happening. So we -- on the fiber-to-the-prem side, nothing has slowed down. Programs are still going well. We're still adding new customers to those product areas, and we're continuing to operationalize carriers in Europe. So all of that is just a continuation of the same type of activity we saw last year.

On the fiber front, the dynamic is a little bit different because we were still at the very beginning of the year, kind of crawling out of the revenue inventory uptick that we had seen in our customer base. That cleared itself up last year. We started seeing that real progress in the second half of the year. We also -- as you may be aware that we had won some additional customers, both here in the U.S. with wider scale kind of Tier 2 deployments as well as in Europe, where we won some Tier 1s, and that momentum is just continuing on.

I would say that is driven not just by the Huawei replacement which is going on in Europe, but just in general, I just think activity, we just saw customers starting to unleash capital, and they're trying to increase their bandwidth for obvious reasons. I mean, I think all of them are trying to figure out how they're going to play in a new AI-driven world. I think MoFi is a driver. We definitely -- I mentioned it on the call, we saw some real positive momentum on the enterprise side, which includes ICP carriers, right? So yes, it's just generally a good environment.

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. So there was actually a good contribution on both of those fronts in the quarter. And I'm trying to think if it was -- I would say -- and this is not having the note in front of me -- that the mix on traditional enterprise, including the banking sector and all of the larger enterprise that we play into is a portion of that. And then ICP did come in stronger in the quarter than what we had historically seen, and we expect that momentum to continue on through 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, et cetera, 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 show up in our carrier. We would consider that to be a carrier customer. And we're definitely seeing that. We talked about that in the last maybe couple of conference calls, how we were starting to see some of the carriers position themselves to be able to do MOFN. That's just a continuing ongoing kind of upgrade cyclical thing that's adding positive momentum to that business. So -- but that is separate and apart from the enterprise piece that we're talking about.

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?

Yes. I think it was -- I'd call it a solid quarter, kind of consistent with what we had seen in the year. I mentioned that the -- in general, the U.S. business was definitely stronger on a sequential and year-over-year basis.

I think we're expecting good things this year. We finally -- I probably shouldn't say the word, but BEAD dollars are actually starting to flow. We got a customer in Louisiana that is expecting BEAD dollars hopefully next week. So -- and I don't want to over-rotate on that guide because the build-out is going to consistently be driven for most carriers by kind of fiber deployment for this year and then equipment next year.

But the fact that, that's actually flowing is real positive. I think there's 6 other states that are -- expect money any day now. So the fact that those dollars are starting to flow, I think, is a positive thing. And it's just as positive, not just the BEAD dollars, but from a planning perspective and knowing that it's going to happen and giving carriers surety as to how they plan their capital budgets is very important.

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, guys. Tom, I know -- so we're sitting here at the end of February, noncore asset sales and potential building sales and leaseback activity. Would you be disappointed if we didn't have resolution on both by the end of calendar 2026?

Well, leaseback activity, more than likely, that is not going to happen with the North Tower -- excuse me, the East Tower. So let me be clear on where we are with that. I think we've been trying to talk about this now for a couple of quarters.

We did get several lease offers on the building. Financially, it didn't make sense for us because of where we are with our cash position right now and what we use for the cash and what that lease would ultimately cost us. So we have put that on hold. We can always revisit that if we want to. Then on the North/South Tower, which is the thing that's up for sale, I'm going to let Tim jump in here and give you 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 noncore asset side, Tom, do you think that can get resolved this year? Or is that a fluid situation?

Yes. So we -- let me try and do this in a proper way. We have taken a look at the noncore assets. We've gotten values on what we think the noncore assets that we think are not strategic, right, to our business. We have -- we are doing things right now that we think will increase the value of those assets, and we'll reevaluate that in the second half of this year.

Perfect. And then my last question, as we go throughout calendar 2026, is there one area -- we spoke positively, obviously, about finally loosening up after many years of seeing some progress as speed is concerned. But as we look at equipment replacement in Europe, the strength in optical, geographical strength in Europe, et cetera, is there one thing more than another that you're most excited about as we go through 2026 that we can monitor?

Yes. So I think -- let me just hit on a couple. One is I think enterprise is doing really well. And as I mentioned earlier on the Q&A, there are multiple drivers for that. We expect that to be strong this year. And so that strength is above whatever the company is doing on a corporate average perspective. So that's really good to see.

The other is there is some legislation going on. I don't know how much success it's going to have. It's good that it's going on, but in the EU right now to accelerate the Huawei replacement piece. It's not so much whether or not that actually happens, which there is a high likelihood it happens. But just the focus on that is positive for our business.

And I'll remind people, we think that's a near $1 billion a year type opportunity that Huawei is selling into the European market that we think we have a very good chance of being able to capitalize on. So as that pressure continues on, and it is -- there was legislation that was sent out in the EU in early of last year that is positive, right? So that addresses this issue. So yes, so I think both of those things are real positive catalysts.

Our next question comes from George Notter from Wolfe Research.

I guess I just want to keep going on the question of Huawei replacement in the EU. I think the regulatory stance currently basically has it not compulsory to replace Huawei, but I guess, suggested would be kind of the idea in terms of the current regulatory environment. And I know the stuff that's coming down the pike is going to mandate Huawei replacement, and it sounds like it could be a few years away until that legislation actually requires companies to -- or carriers to replace Huawei.

But I guess I'm just curious, like what has the inflection happening right now? Is there something you're seeing with your customers that allows them to move more quickly? Is it funding? Is it more pressure from a political perspective? I guess I'm just trying to understand what's driving this.

Yes, sure. Yes, I agree. Well, let me just make one caveat to that. Although the EU's directive is more of a recommendation, the country-by-country and carrier-by-carrier requirements or legislative actions are different, right? So we do have some countries in the EU that have explicitly been stronger on that.

And it's not so much that -- I think that legislation and the talk about legislation and the fact that we're even talking about it here is exactly the point, which is if you're a carrier and you're doing a new award, you're kind of crazy to be deploying Huawei at this point. Or if there's a new region, a new footprint that has to be built out, even if they're an approved vendor, you know you're going to have a problem. So what that's doing is putting on -- increasing the braking pressure on continuing to deploy them on an ongoing basis.

I would agree that pulling them out is a different thing, and that will take years. And we've characterized that north of -- and it's an easy math, George, for you to do, right? It's a north of $10 billion opportunity for the pull out. But what we're talking about is just on the annual spend, where they're going in and filling in new [ cars ], building out new footprint. That kind of activity is going to continue 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, please. Let me not be so sloppy on that number. The last time we looked at it -- and we do have another -- we have an outside firm trying to take a look at exactly what that number is at this point. But that number is derived from about an $800 million, I think it was $850 million or $860 million number for EMEA in our target product areas, and that was in '24. We think that, that number is going to continue to slow down. It was north of $1 billion not that long ago. So that number will continue to slow down as we actually pick up that market share.

Now that's for products that are specifically in our product sweet spot, which is kind of mid-mile, regional network optical, access and aggregation. It is those products that we're actually talking about. So it's really what we believe the TAM is for our products. But like I'm trying to say, it's a rough number right now, and it's just based off of the earnings results of Huawei.

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?

As far as in the year, is that what you're talking about?

Yes.

I don't know if I've seen that actual breakout. I would say it's definitely -- last year, it was probably 60-ish, 40-ish, and this is just off the cuff. And this is predominantly in the access and agg product category.

So you'll see that -- last year -- you could see that last year in our Access & Agg number. You actually saw that kind of big bump in the first half of the year, and then it kind of tailed down. It's not as prominent in the rest of the product areas. They kind of -- they're just not 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?

Good -- well, if you take Europe as a whole, there's no way to characterize it other than early. We've brought just recently, some new carriers on that haven't been deploying with us, and then they all kind of have this Huawei issue as well.

If you take specific areas, there are countries that are farther along. The U.K. is, I would say, kind of more towards the middle. Germany is probably -- definitely within the first half. So it depends on the carrier. Some of them are -- haven't started yet.

Got it. Thank you.

Okay. At this point, I think we are -- 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.

Good morning. My name is Carly, and I will be your conference operator today. At this time, I would like to welcome everyone to the ADTRAN Holdings Third Quarter 2025 Financial Results Conference Call.

[Operator Instructions] I would now like to turn the call over to Mr. Peter Schuman, Vice President, Investor Relations. Please go ahead.

Thank you, Carly. 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 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 included in our investor presentation and our earnings release. We have not provided reconciliations of our fourth quarter 2025 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 of the third quarter of 2025. Tim Santo, our Senior Vice President and CFO, will review the quarterly financial performance in detail and provide our fourth quarter 2025 outlook, and then we will take any questions you may have.

I'd like to now turn the call over to Tom Stanton.

Thank you, Peter. Good morning, everyone. ADTRAN delivered solid third quarter results with revenue near the upper end of our guidance and higher operating margins. All 3 business categories achieved double-digit year-over-year growth, reflecting disciplined execution, new customer wins and healthy demand for fiber networking solutions.

Operating profit exceeded the midpoint of our outlook, underscoring the solid execution and our focus on leveraging financial performance as a driver of longer-term value creation. The quarter was led by strong results in Optical Networking and Subscriber Solutions, while Access & Aggregation reflected anticipated buying patterns of 2 large European customers. We expect those customers to come back online either early -- late in the fourth quarter or early next year. We remain confident on the overall market for the remainder of this year, however.

During the quarter, we closed on a $201 million financing transaction that lowered our borrowing cost and increased financial flexibility, important steps that strengthen our capital structure and position us to execute confidently on longer-term strategic objectives.

Turning to the quarterly results. ADTRAN reported $279.4 million, reflecting strong year-over-year growth across all 3 revenue categories. This marks the fifth consecutive quarter of sequential growth and fourth consecutive quarter of year-over-year improvement, proof points that our portfolio strategy and market positioning are driving sustainable momentum. This consistency underscores the health of our business, continued improvement in market conditions and the progress we are making in strengthening our foundation for the longer-term growth.

From our customers' perspective, engagement across our portfolio continues to strengthen as we broaden our technology reach. We're making it easier to choose ADTRAN, not just because of what we build, but because of how seamlessly our solutions work together. Our integrated portfolio means fewer handoffs, faster time to value and one accountable partner across optical, access, subscriber and software. Our technology is the enabler, but the outcome is what matters; simpler operations, greater efficiency and a trusted relationship that continues to open new opportunities for collaboration.

Our Optical Networking solutions grew 47% year-over-year and 15% sequentially, driven by strong momentum in Europe, including deployments with a new large service provider. We added 15 new optical customers in the quarter, reflecting continued share gains and the expanding reach of our portfolio. Demand remains robust and geographically diverse, supporting a wide range -- array of applications. These include national networks throughout Europe, secure connectivity for major enterprises and government clients worldwide with high-capacity interconnects for large-scale content providers.

Access & Aggregation revenue grew 12% year-over-year, supported by ongoing fiber access investments among regional operators in the U.S. and Europe. While revenues from our small and medium service providers in the U.S. were substantially up, this increase was offset by the seasonal buying pattern of 2 major European customers. We added 14 new customers for our fiber access and Ethernet aggregation platforms, demonstrating continued traction across both new and existing markets.

In Subscriber Solutions, revenue grew 12% year-over-year and 21% sequentially, driven by demand for both residential and wholesale applications. We added 18 new customers during the quarter as service providers continued expanding fiber reach and upgrading Wi-Fi capabilities.

This quarter, we introduced Mosaic One Clarity, a new application built on our carrier-grade Agentic AI platform that enables predictive maintenance, guided issue resolution and proactive network optimization. Early results from customer pilots are promising, demonstrating a reduction of up to 75% in network-related trouble tickets.

This is a strong validation of our AI-driven approach to network intelligence and a clear example of how innovation within Mosaic One is helping operators improve performance and efficiency.

Structural shifts across our industry from core to edge computing and the advent of intelligent networks are reshaping connectivity worldwide. AI isn't just transforming data centers; it's redefining the entire network. The rise of distributed computing and edge processing is driving new requirements for bandwidth, latency and reliability, fueling demand for high-capacity optical solutions, next-generation access platforms and intelligent software to automate operations.

ADTRAN is uniquely positioned at the intersection with our differentiated portfolio and our Mosaic One operating platform. As investment accelerates in AI and cloud computing, upgrades will follow across the network through metro transport, access and aggregation, and ultimately, the subscriber edge. Our Optical Networking, Access & Aggregation, Subscriber Solutions and Mosaic One software are built for that cascade, delivering higher throughput, lower latency and smarter, more efficient operations at scale.

In summary, Q3 was another quarter of solid execution and strategic progress, marking a clear step forward in both performance and positioning. We delivered top line momentum and profitability improvements while enhancing our ability to invest and operate with greater financial flexibility, all of which reflects the disciplined way our teams are executing across the business. More importantly, we are setting the foundation for sustained value creation.

The actions we've taken to enhance efficiency, strengthen our balance sheet and sharpen our focus are enabling us to operate from a position of greater agility and confidence. As Tim will discuss in more detail during the financial review, our scale efficiencies are creating meaningful operating leverage across the business. With disciplined cost control and strengthened balance sheet, we see line of sight to continued margin expansion and earnings growth as we move through 2026, all while maintaining the same financial discipline that has guided our progress.

With that, I will turn the call over to Tim to review the financial results in more detail. Tim?

Thank you, Tom, and thank you all for joining us this morning. We delivered solid results in the third quarter, reflecting strong discipline and consistent execution across the business. As Tom shared, we achieved broad-based revenue growth, higher margins and improved operational efficiency as benefits from increased scale began to take hold.

Demand was strong in optical networking and subscriber solutions, supported by healthy customer activity and continued broadband investment globally. Over the past quarter, we've reinforced the operational fundamentals of the business and enhanced our financial controls and processes to support growth. These actions strengthen reliability and transparency of our published results and position us to deploy capital effectively, aligning operational execution with long-term value creation.

As Tom shared, the third quarter also marked a significant step in strengthening our capital structure. The $201 million transaction that we completed has lowered borrowing costs, improved liquidity and substantially reduced risk. While it also unlocks significant availability under our revolving credit facility, it does not change the strategic priorities we've outlined to monetize our non-core assets.

As many of you know, we recently engaged new partners to represent the sale of our Huntsville campus. Together, we have relaunched a targeted marketing process and are actively speaking with interested parties. We will remain disciplined on terms and timing, and we'll provide updates as appropriate. Simply put, we are moving forward the process with focus and intent.

Maintaining a healthy balance sheet remains a top priority. We've made tangible progress this year, and our balance sheet today is more resilient, flexible and better aligned to support long-term growth.

Turning to the financial results for the third quarter of 2025. Revenue was $279.4 million, up 23% year-over-year and 5% sequentially, finishing at the high end of our guidance. Growth was broad-based, led by Optical Networking, which increased 47% year-over-year. Geographically, non-U.S. revenue accounted for 57% of total revenue, while the U.S. represented 43%. One customer contributed more than 10% of total revenue during the third quarter.

Non-GAAP gross margin improved to 42.1%, up both sequentially and year-over-year, driven by scale efficiencies, product mix and component cost reductions. We remain focused on sustaining gross margin in the 42% to 43% range over the long term. Non-GAAP operating profit rose to $15.1 million or 5.4% of revenue, exceeding the midpoint of our outlook.

On a sequential basis, operating profit increased by $7.1 million or 89% compared to $14.6 million from approximately 0 in the prior year. Operating income during the same period has increased to 5.4% in Q3 2025 from 3% in Q2 2025 and 0.2% in Q3 2024. Currency had a minimal impact on our earnings this quarter.

While volatility persists across both revenue and expenses, our natural hedging framework continues to mitigate risk. Building on the stronger forecasting, reporting and treasury processes established this year, we are now expanding our FX strategies to further protect our balance sheet and working capital.

Non-GAAP tax expense in Q3 2025 was $3.5 million or an effective rate of 38.3%. Non-GAAP EPS was $0.05 compared to breakeven in Q2 2025 and compared to a loss of $0.07, 1 year ago. We continue to strengthen our financial position with working capital improving by $13.2 million. Accounts receivable increased by $13.9 million, resulting from increased sales with DSO remaining relatively flat at 59 days.

Inventory declined by $16.3 million sequentially, reducing days inventory outstanding by 11 days to 124. Accounts payable totaled $188.9 million with days payable outstanding remaining flat at 70 days. We remain focused on maintaining a healthy balance sheet with our objective of achieving a net positive cash position. Operating cash flow was $12.2 million, and year-to-date, we've generated $38 million in free cash flow. We ended Q3 2025 with $101.2 million in cash, cash equivalents and restricted cash and importantly, a stronger liquidity position.

In summary, Q3 reflects disciplined execution, profitability improvement and continued financial progress. We entered the fourth quarter with confidence, despite typical seasonal factors, fewer shipping days, holiday-related customer acceptances and budget timing. While those dynamics remain, we expect solid demand and our execution to offset the usual headwinds.

We expect revenue between $275 million and $285 million and anticipate a non-GAAP operating margin of 3.5% to 7.5%. We expect OpEx to remain relatively flat compared to Q3. We look forward to a strong finish to the year and remain focused on driving sustainable growth and maximizing long-term stockholder value.

I now turn the call back to Tom for some concluding remarks.

Thanks, Tim. I think we'll open up to some questions first. Carly, at this point, we can open up the question queue for any questions people may have.

[Operator Instructions] Your first question comes from Michael Genovese with Rosenblatt Securities.

I guess my first question is, looking at the Access & Aggregation and the comments on the European customers there as well as the information put out by ADTRAN Networks in Europe talking about, I think, a little bit of a timing change. So my question is, is there -- was there like a pushout of some things? I mean I know the first half of the year tends to be seasonally stronger than the second half in that Access & Aggregation European business. But versus prior expectations, was there some kind of push out in the timing of some of those shipments?

There has been -- there's been, let's say, I don't -- push out alludes to the fact that there may be some risk in that. I don't think there's any risk, but there has been some changing in some of the timing. We have 2 big customers that tend to be front-end loaded. In fact, they're 2 of our biggest customers in the year. And then one of the customers has a calendar that is offset from typical -- their financial calendar is different. So that means budget cycles are different. But yes, there's always some puts and takes. So the answer is yes.

Okay. And I'm sorry, I just -- in terms of what you said, I think you gave us an update on the real estate, but I was a little bit -- just I couldn't follow exactly what you said about. So could you talk about that again?

Sure. Basically, what Tim mentioned was, we have put the both buildings back on to the market. We are actually receiving -- we've got multiple offers coming in, right, Tim? Let me let you cover that. Go ahead.

We've -- in this past quarter, where we left off, we are under an exclusivity agreement, and we pulled the buildings down while we were working through that. As we disclosed last quarter, they're back on the market and very actively being marketed. Both the parts of the campus, we have interests from multiple parties and are having regular conversations.

Okay. And then finally, I'm just going to -- kind of a bigger picture question, which is, traditionally, telecom has not been a super-fast growth market, right? It's the telecom in general is a single-digit growth market. So, if ADTRAN is going to grow higher than that on the top line and be more of like a high single or double-digit growth company, is it because there's fundamental acceleration in what you're doing in fiber and access or you're gaining share? Or is there some repositioning to higher growth markets like more data center exposure? Like what -- just how do we think about 2026 and sort of what the drivers of the business are from a high level?

Yes. So I kind of agree with everything you're saying. I mean you typically see the telecom market in the single digits, kind of mid-to-high single digits and it kind of varies year-to-year from there. Our premise has been, there is that typical growth. We do believe markets in general are that -- effectively that the focus right now on data center -- speeds and data center capacity is starting to affect the overall market, although I don't think that's really in numbers today.

But the premise is, there's a significant market share disruption that's happening in Europe right now, and we are the #1 winner in that market share grab that's going on in Europe. I mean the largest player in Europe is being displaced.

Last follow-up on that. Is there anything incrementally in Germany happening where -- I believe that Germany had already decided to kind of cap Huawei, but I'm not sure if they ripped and replaced yet. Could that become something incremental actual rip and replacing of Huawei?

Yes, they could. I think over time, rip and replace is going to have to happen everywhere just because you have to maintain the network and you can't be getting new drops of code all the time. There are -- as you know, there's been a lot of talk over the last few weeks about trying to accelerate that process in Germany. I don't think there's been any material rip and replace at this point in time. I think what they've been trying to do is effectively cap utilization on an ongoing basis.

Your next question comes from Ryan Koontz with Needham & Company.

I want to ask about Optical. It looks like the best quarter you've had there in a couple of years. Tom, any color you can give us in terms of trends in terms of product mix, geo mix within the Optical domain would be helpful because Optical is obviously gaining a lot of momentum with regard to cloud and AI spend really starting to ramp up.

Yes. I would agree with you on what the outcome of the quarter was, and I would tell you that the momentum there is strong. It's both in the U.S. and in Europe. The quarter was definitely helped though by us picking up a larger Tier 1 in Europe, and we started initial shipments into that carrier. But we've kind of seen a dethaw kind of across the market, most notably in Europe though. So, we're expecting a good year next year as well.

Great. And as Mike mentioned about the Huawei displacement opportunities, I mean, how would you broadly characterize those today with regards to deals you've won as well as prospective deals you hope to like win in the next 12 months, relative to revenue opportunity?

Yes. So, it has been a significant positive influence even going through the downturn with what we've won. But if you look at the number of carriers that have actually converted, like there's some discussion here on Germany, they've been slow. And that momentum continues to build quarter-over-quarter. It definitely is impacting our numbers now, and that impact will grow over the next 2 to 3 years. So, it's definitely a positive mover.

I -- let me add a little because I think there are different dynamics in the access versus optical space. I think there's a good chance that optical will probably -- we will see an increase in momentum earlier on in the optical space. Access has been a constant just move, but there's millions of customers that are involved versus -- and because of that widespread infrastructure versus kind of optical moves on a project-by-project basis.

Got it. Great. And maybe one on margins, if I could sneak it in around -- are you guys happy with where you're at here at 42% non-GAAP? And do you think this is where you got it pegged or is there further upside we can aim for?

No, our longer-term goal is 43%, and I think we're within line of sight to that. I think we'll be bumping up against that next year.

Your next question comes from Christian Schwab with Craig-Hallum.

Great. Some other players in the space have started mentioning that they've got their first BEAD orders. Would you anticipate an improved BEAD spending environment possibly impact you in calendar '26?

Yes. That's an easy bar, but yes. I mean it's starting to -- it's been dead now for a while, but it's definitely going to -- there's a whole lot more activity going on there. So the answer is yes.

Is that something that you guys would anticipate seeing orders in the first half of calendar '26? Or is that yet to be determined?

I think we'll see orders in the first half of '26.

Great. And then, you guys talked about operating margin expansion in 2026. I know you've outlined the goal of getting to double digits eventually. But what should we think about the potential for operating margin expansion in calendar '26?

We expect to have expansion in '26. I mean, I think the key to us -- so gross margins have been fairly consistent and have been, I would say, over time, upwardly moving. The whole key to us is the operating expense line. That, of course, is impacted by FX, but the operating expense line on a kind of constant currency basis, were -- if you look at year-over-year, were at high 90s, which equates to kind of where we are right now. So we've been holding it firm.

I think the real question is, how long can you hold it firm? Our belief at this point in time is that we have enough R&D firepower and the right product set to not have to substantially increase the R&D spend. We will be -- we'll continue to -- we have sales expense that is variable depending on the revenue to some extent. But structurally-wise, we don't see big movements right now required to get us to that kind of $300-ish north of $300 million level, which kind of gets us to our target. So I would expect expansion through next year. But Tim, let me let you answer it. Any comments on that?

I think as we continue the expansion, you'll see $300 million in second half of next year or late -- or early 2027. And I think on a constant currency basis, you get to the double-digits once you get somewhere around $315 million in revenue.

Your next question comes from George Notter with Wolfe Research.

I guess I'm just curious about the minority interest in the business with the old ADVA shareholders. Any new perspectives there? Would you -- did you redeem any shares in the quarter? Any new thoughts in terms of how you deal with that obligation going forward would be great.

Well, we're happy if they redeem at this point. So, we would like to see some. I think there was one redemption in the quarter, will, Tim?

It's in the subsequent events. It happened early this quarter. But yes, we continue to see nominal activity and expect there to be some level of run rate.

Yes. But nothing worth sharing. And like I said, it's -- well, that stock is trading up right now, if you take a look at over the last 6 months. But redemptions are a good thing at this point.

Got it. Would you look to do anything proactive? I mean, obviously, you did the financing this quarter. Would you look to get more proactive with those shareholders? Is that something that's in the cards at this point or does it hinge on selling the buildings in Huntsville? Like how do you think about that?

Without a doubt, selling that building does give us substantially more headroom. My sense is, we'd be getting more actively on that base towards the tail end of next year. We're probably still a little -- a few quarters away from that. Having said that, redemptions are a good thing.

Your next question comes from Tim Savageaux with Northland Capital Markets.

A non-core asset question to start with, and that centers on the old ADVA kind of sync and timing business. I assume you capture that in Optical, although I really don't know. That's one question. And I wonder if you can give us a sense of the dynamics around the business, kind of overall size, growth rate, profitability? Anything you can share along those lines? And I have a follow-up.

Yes, it is in the Access & Agg business. We really don't break that out separately, but it's in the Access & Agg category. It is growing. As you know, we're doing kind of a relook at that business and segmenting that business to be able to -- that is a different business. It is a different selling rhythm, different sales type of, I'll say, people, but it's really different contacts within the different customer bases. So we are in the midst right now of, let's say, readjusting how that business operates.

Okay. And can you hear me?

Yes. Yes, go ahead.

Okay. Sorry. The second question was going to be on any impact from memory prices, especially on the subscriber side of the business and what you're seeing there?

There has been some -- well, that's been over some period of time, but nothing that's -- I would say the gross margin in that business, we've been able to keep -- let me think about the proper answer. The gross margin of that business, we've been able to keep at a fairly constant level over the last few quarters and think we'll be able to do that on a going-forward basis.

A lot of that is just churn on different -- that business churns, we have new generations of subscriber product. We have more new generation of subscriber product than any other product in our portfolio.

Got it. Maybe one more for me. You mentioned starting to ramp with one of the Tier 1 European wins, I guess, on the Optical side. And I think that win included Access as well. So, do you expect that to start ramping soon? And anything else to call out in terms of upcoming Tier 1 ramps here in the next quarter or 2?

Yes. I think that one will -- it will take longer. The optical thing was incredibly quick. And there was a lot of work that went in front of that in order to make that happen so quick. I think all the access portion will take longer, but we'd expect to see movement of that next year.

And in general, everything is moving forward, not at the same -- at the pace that we would like, but everything in Europe is moving forward. We haven't lost any pieces. The other ones that we've talked about in the past with very specific -- there is some rip and replace going on in different parts of Europe. That is moving forward. So I think all of that would just be kind of a positive tailwind next year.

There are no further questions at this time. I'll now turn the call back over to Tom Stanton for closing remarks.

Okay. Thanks very much for joining us on our conference call. And I really would like to extend my appreciation to our teams around the world. Thank you for everything that you do. I also want to thank our stockholders and our customers and partners for the confidence and the collaboration that you've shown us over the last year. So thanks very much, everyone.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Good morning. My name is Kate, and I will be your conference operator. At this time, I would like to welcome everyone to ADTRAN Holdings Second Quarter 2025 Financial Results Conference Call.

[Operator Instructions] Mr. Peter Schuman, Vice President, Investor Relations, you may begin your conference call.

Thank you, Kate. Welcome, and thank you for joining us today for ADTRAN Holdings Second Quarter 2025 Financial Results Conference Call, 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 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 third quarter 2025 outlook with regard to non-GAAP operating margin because we cannot predict and quantify without unreasonable effort all the adjustments that may occur during the period.

The Investor Relations 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 the key investment highlights for the second quarter 2025. Tim Santo, our Senior Vice President and CFO, will review the quarterly financial performance in detail and provide our third quarter 2025 outlook, and then we will take any questions that you may have.

I'd now like to turn the call over to Tom Stanton.

Thank you, Peter. Good morning, everyone. ADTRAN delivered solid second quarter results, marked by stronger revenue performance, healthy profitability and continued balance sheet improvements.

As previously disclosed in our pre-announcement, revenue exceeded our expectations with sequential and year-over-year growth across all 3 of our revenue categories. This performance reflects strong execution and market share gains, coupled with an improving industry backdrop driven by renewed infrastructure investment, the normalization of service provider spending and growing demand for advanced fiber and optical solutions.

Importantly, cash generation remained healthy with $32.2 million in cash from operations and $18.3 million in free cash flow. I'm encouraged by the improving demand environment across our key market segments. These demand trends not only supported our strong Q2 performance but also increased our confidence in our outlook for continued growth over the coming quarters.

Turning to the quarterly results. ADTRAN's revenue of $265.1 million was above the high end of our previous guidance range. All 3 revenue categories delivered sequential growth. And for the second straight quarter, each revenue category generated year-over-year gains. This broad-based momentum reinforces the strong competitive positioning of our optical transport, fiber access and subscriber solutions portfolios.

As expected, the highest sequential revenue growth in the quarter came from our optical networking solutions, which grew 22% year-over-year and 15% sequentially. This growth was driven by demand in both the U.S. and non-U.S. regions with the most significant gains coming from our U.S. service provider customers. New customer acquisition also remained strong with 18 new optical customers added during the quarter, including several cross-selling wins, further validating the synergies with our optical transport and fiber access portfolios.

There are multiple application demand drivers fueling the investment in optical networks. These include the build-out of private compute infrastructure, the expansion of wholesale service providers to connect AI infrastructure, ongoing 5G densification and upgrading critical infrastructure. Combining these application demands with new customer wins and a return to more normalized service provider buying patterns, gives us optimism for sustained growth in this category.

In Access and Aggregation, we followed a very strong first quarter with additional growth in the second quarter, growing an impressive 30% year-over-year for the quarter. This category was led by the strength of our large European service providers and small to midsized U.S. service providers, with many of these customers not only expanding their fiber footprint but also expanding their share of business with us.

New customer acquisition with our fiber access platforms also remained healthy. The ongoing success in our Access and Aggregation Solutions is being driven by the technical leadership shown in our SDX portfolio and the corresponding Mosaic Cloud software. In the last 2 years, more than 10 million homes have been passed with fiber using the SDX 6330 alone, highlighting the momentum of the flagship platform in our fiber access portfolio. Demonstrating our ongoing commitment to innovation, we recently connected the first commercial 50 Gig PON customers in the U.K. using our new SDX 6400 series.

These product investments paired with our strong regional presence in the U.S. and Europe, new customer wins and the continued demand for high-speed fiber-based broadband, has us well positioned to sustain this success into the future.

Our subscriber solutions category grew 4% sequentially after a strong first quarter. Within this category, residential solutions performed particularly well, increasing 18% sequentially and 25% year-over-year. Importantly, new customer acquisitions remained strong with 20 new service provider and government customers added for our subscriber solutions category during the quarter.

Subscriber solutions revenue is growing due to expanded fiber connectivity, rising multi-gigabit demand and service providers adopting bundled broadband solutions covering both access and in-home needs. Our broad subscriber solutions portfolio covers residential, enterprise and wholesale fiber services and is being expanded to address the unique needs of SMB, MDUs and community WiFi with the launch of our SDG 9000 series of products. The expanded offering, along with continued demand for high-speed fiber services and large-scale deployments of our complementary fiber access platform is expected to result in further growth in this segment during this quarter.

Our Mosaic software suite integrates our comprehensive fiber networking portfolio, which covers everything from the optical core to the customer premise. Leveraging this extensive range of solutions and advanced software capabilities, we are well positioned to facilitate the industry's transition towards AI-driven network operations.

Live customers are currently in progress, featuring our new suite of AI applications, including advanced generative and Agentic AI tools. That, these complement and enhance our Mosaic One offering. Early results highlight the ability of these applications to transform how networks are operated by substantially lowering network operating costs while improving the subscriber experience.

In summary, we are encouraged by the progress we made during the second quarter, both financially and strategically. We delivered growth across all major revenue categories and advanced our position in key technology domains. Our continued investments in next-generation optical fiber access and subscriber solutions are translating into new customer wins and deeper engagement with existing accounts.

The ongoing expansion of AI infrastructure, especially as it moves closer to the network edge, plays directly to our strengths. Looking ahead, we remain confident in our outlook for the second half of the year. Strong customer demand and disciplined execution position us well to deliver continued improvement in profitability and cash generation, both of which are central to our long-term strategy. With a differentiated portfolio, expanding global presence and increasing relevance in next-generation network architectures, we believe ADTRAN is exceptionally well positioned for sustained success.

With that, I'll turn the call over to Tim, our CFO, to walk you through our financial results for the second quarter. And then following Tim's remarks, we'll open the call to any questions you may have. Tim?

Thank you, Tom, and thank you for joining us this morning. As I shared last quarter, my focus remains on 3 key priorities: strengthening our capital structure, enhancing the capabilities of the finance organization and deepening our engagement with stakeholders.

These are fundamental to delivering long-term sustainable value for our stockholders. We are making solid progress across each of these areas.

First, we are taking meaningful steps to improve our capital structure. We generated $32.2 million in operating cash and $18.3 million in free cash flow this quarter with $106 million of cash available on our balance sheet. We are advancing efforts to raise capital through the sale of noncore assets, including our Huntsville campus, which I will speak further shortly. Meanwhile, availability on our revolving credit facility has more than doubled and will continue to expand as we grow non-GAAP EBIT and accelerate our free cash flow.

Second, we've strengthened our financial organization through strategic additions to my senior leadership team. These hires improve our ability to manage the complexities of our current structure and support execution. We will continue investing in talent to ensure finance remains a strategic asset of our business.

Finally, we've deepened our engagement with external stakeholders. We've expanded participation in investor and industry conferences and are pursuing broader research coverage. We remain committed to transparency, listening and increased accessibility as we execute our strategy, and we will continue to expand over the coming quarters.

With that, let's take a look at the financial results for the second quarter of 2025. ADTRAN's second quarter performance reflects an improving industry environment and our ability to deliver strong operating results. We are adding new customers and expanding our presence with existing ones, driving market share gains, and we are continuing to scale our business.

ADTRAN delivered second quarter revenue of $265.1 million, up 17% year-over-year and 7% sequentially, exceeding the high end of our original guidance range and reinforcing strong execution and momentum.

Our Network Solutions segment contributed revenue of $219.5 million, accounting for approximately 83% of total revenue in Q2 compared to 79% in the prior year.

Our Services & Support segment generated $45.6 million of revenue, representing 17% of revenue in Q2 2025 compared to 21% in Q2 2024, largely resulting from the significant growth and outperformance in Network Solutions.

Moving on to product categories. Our Optical Networking Solutions revenue was $90.1 million or 34% of total revenue. As predicted, Optical Networking Solutions revenue was higher, growing by 22% year-over-year.

Access and Aggregation delivered revenue of $91.2 million or approximately 34% of total revenue and increased 30% year-over-year.

Subscriber Solutions was $83.8 million or 32% of total revenue, increasing 2% year-over-year. Geographically, non-U.S. revenue accounted for 55% of the total, while U.S. revenue comprised 45%. Additionally, one customer represented more than 10% of our Q2 revenue.

This quarter's non-GAAP gross margin was 41.4%. While gross margin was in line with previous trends, the quarter-over-quarter decline was primarily driven by product and customer mix, higher transportation costs as we strategically reposition products to mitigate tariff exposure. We maintain our longer-term target ratio of 42% to 43%.

Non-GAAP operating expenses were $101.7 million, up from $95.5 million in Q1 and $93 million in Q2 last year, mainly due to currency fluctuations and higher sales commissions. Non-GAAP operating profit was $8 million or 3% of revenue, above the midpoint of our 0% to 4% outlook. This compares to $9.8 million or 3.9% of revenue in Q1 2025 and $1.4 million or 0.6% of revenue 1 year ago.

The year-over-year operating margin and profitability improvement was primarily driven by higher revenue. Although we tightly manage our costs, OpEx increased due to fluctuations in European currencies and higher sales-related expenses. Currency fluctuations were a meaningful factor this quarter.

While we are generally well positioned from a natural hedging standpoint on profitability, we believe that looking ahead, currency will continue to play a role in our financial results. Since joining ADTRAN in March, I've prioritized strengthening FX management, taking early steps to build a more robust hedging strategy. These efforts support our broader goal of enhancing transparency and resilience in a more complex global environment.

Non-GAAP tax expense in Q2 2025 was $628,000, reflecting higher taxable income in the U.S. We reported a non-GAAP net loss of $256,000 or $0.00 on an earnings per share basis. This compares to non-GAAP net income of $0.03 per share in Q1 2025 and a net loss of $0.13 per share in Q2 2024.

Turning to the balance sheet and cash flow statement. In the second quarter, we continued to make meaningful progress in strengthening our financial position. Net working capital improved by $21.7 million sequentially, reaching $226.6 million, supported by a continued reduction in inventories and stronger collections.

Trade accounts receivable was $164.8 million at quarter end, resulting in DSO of 57 days, an improvement from 60 days in the prior quarter. Inventory levels declined to $240.1 million at the end of the quarter, a decrease of $13.6 million sequentially. Correspondingly, days inventory outstanding significantly decreased by 17 days to 135 days in Q2 2025.

Accounts payable were $178.3 million with days payable outstanding of 70 days. Strengthening our balance sheet remains a key strategic priority. As mentioned before, operating cash flow was $32.2 million, and we had free cash flow of $18.3 million for Q2 2025. This is compared to $24.5 million in Q1 2025 and $3.9 million during Q2 2024. We ended Q2 with $106.3 million in cash and cash equivalents, a $5 million sequential increase, reflecting solid improvement in our liquidity.

It is worth noting that this increase was achieved net of certain ADTRAN Networks SE share repurchases under our DPLTA agreement, underscoring our disciplined cash management and strong operational execution. We remain focused on materially strengthening our financial position in 2025 with the ultimate goal of achieving a positive net cash position.

As mentioned earlier, we continue to evaluate opportunities to monetize certain noncore assets, including some of our Huntsville properties. Although we were close to closing a deal this past quarter, that deal is not yet finalized, and we continue to work on finding additional purchases for this unique property.

Further, with our improved credit positioning, we are evaluating a sale-leaseback transaction on our East Tower. We are approaching these decisions thoughtfully and increasingly from a position of strength.

We are pleased with our second quarter performance and encouraged by the signs of continued improvement across the industry. We are beginning to experience the benefits of scale and expect that momentum to build in the second half as revenue growth continues. Foreign exchange has generally had a positive impact on our business in Q2, although it contributed to slightly higher operating expenses, largely due to the weaker U.S. dollar relative to the euro. On a constant currency basis, we expect OpEx to remain consistent with prior quarter levels.

As I mentioned since joining in March, I prioritized building stronger FX management and reporting capabilities. Our capital allocation remains focused on deleveraging and continuing to evaluate opportunities to streamline the portfolio.

Before turning to our outlook for the third quarter, I want to briefly address our approach to guidance. A few weeks ago, we issued a press release preannouncing that Q2 revenue would exceed our prior guidance range. While that intraday disclosure update may have seemed atypical, it was required under German disclosure rules we inherited through the ADVA merger. These regulations mandate rapid public disclosure of any material deviation, positive or negative from previously issued guidance.

As such, we provide quarterly guidance rather than annual guidance to remain compliant and avoid unnecessary disclosure burdens.

Looking ahead to the third quarter of 2025, we expect revenue between $270 million and $280 million and anticipate a non-GAAP operating margin of 3% to 7%. This outlook excludes potential tariff impacts due to ongoing uncertainty surrounding global trade policy and broader macroeconomic conditions. Additional financial details are available at investors.adtran.com. This concludes our prepared remarks.

I'll now turn the call back to the operator for Q&A.

[Operator Instructions]

Our first question comes from the line of Ryan Koontz with Needham & Company.

Nice results there. You had some real strength in your large SPs. I assume that's coming from Europe. And Tom, can you kind of maybe lay out kind of the trends you're seeing there, either in some of your larger existing accounts or some of the new ones you're actively ramping in Europe?

Yes, sure. First of all, you're right, there was a lot of strength in Europe. And yes, I mean, the large accounts did well. But we also saw strength specifically in optical in the U.S. large service providers as well. So that was kind of, that was good to see. In general, the strength there is just, the momentum there is just continuing to grow. I mean we really don't see any slowdown. We think that the German carriers are getting, or German customer is getting stronger and more able to deploy. What's going on in the U.K., I think you're aware of is continuing to really kind of beat where we had hoped it to be.

So, it's just continuing to move upward. The market itself is continuing to move towards, let's say, more and more towards making sure that they have the right vendor base, right, and removing Eastern vendors. We announced a win last quarter, and I think we called it a Southern European, it was in Italy. And we actually, that was, that's been quick. So, we've actually started shipping towards the tail end of that quarter, some optical gear to that customer as well. So yes, I would say everything looked positive.

That's great. And maybe another kind of business topic here around data centers, which you talked about in the prepared remarks. When we were at OFC, we heard a little bit about emerging DCI opportunities and this concept of MFA networks where the big cloud providers are contracting local SPs to build. Can you update us on that? Are you seeing that as an important trend? Is it meaningful at this point? And how would you characterize that opportunity for you?

Yes. There is a host of different RFPs out there right now with service providers who are -- and some of these are actually customer-driven. So some of these are, you may have a big ICP come in and saying that they want to be able to cover this. Then there are others that are just kind of more opportunistic and trying to make sure that their network is ready. But there's a ton of activity. I would say we have won some business there, but I would say it's still early that there's just a lot of activity right now.

Got it. Great. And maybe just one last, if I could, on the balance sheet. Look, there were some redemptions of ADVA shares. How should we be, how should investors think about that relative to your expectations?

Yes. Let me touch on that and see if there's anything else to add to it, Tim. But about half of that was actually we disclosed last quarter and then half of that was this quarter disclosure. And in that case, it was the same person. We have been in discussions with them for quarters. And I would say it was very; it was very well managed. And it was, I think we were glad to be able to get those shares back at the price that we were able to get those shares back at. Anything else, Tim?

I'd just say that that was largely an orderly transaction. Again, we're in contact with these investors. And done in an orderly way, it reduces the shares outstanding, which long term is a very positive thing.

Your next question comes from the line of Michael Genovese with Rosenblatt Securities.

Tom, you mentioned a couple of times in the script, you talked about market share gains. So, could we just double-click on that and get some more thoughts on what you're seeing there?

Yes. So, you know what's going on in Europe. And I would say there's probably nothing big there that changed other than the Italian one that we brought on. We picked up market share in the, I'll call it, the Tier 2 space, but the kind of competitive carrier space here in the U.S. as we won some additional optical business. About, I'm going to guess here about 50% of that new business was where we added a customer that was buying either optical or fiber access and then they joined on with buying the other piece that they were not buying.

And that was really good to see because that was kind of the premise of the acquisition that we did 3 quarters ago or 3 years ago. Tier 2, Tier 3s, we added somewhere around 10 or 11 carriers during the quarter just for fiber access alone. And I mentioned we added 20 customers on the subscriber space. The majority of those were carriers. And then the next largest segment was in government municipalities. So that space, as you are aware, continues to be very active.

Great. And then if I go back a couple of quarters ago on your reporting, there was a big emphasis on operating leverage. And then last quarter, we had the ForEx pop up, but it sounds like you're hedging that again or hedging that out now. So, I guess my question is, are we going to start, do you expect to start talking about operating leverage again as being a key part of the story? Because again, we had that thread and it kind of got lost and I've been waiting for it to come back. So, any thoughts on that issue would be helpful.

I think I'll highlight just on the ForEx side; it was generally EPS neutral because we are largely naturally hedged. What I'm working on internally with our bank groups and with some of our advisers is a hedging strategy that keeps it that way. The challenge is you do see some volatility in the individual line items. Again, back to FX, I'm sorry, OpEx. If you back out the impact of currency, we're largely flat.

But at an EPS level, it was neutral to slightly positive for the company. So, what we really want to do is hedge against any changes, further changes in the U.S. dollar, which is active strategy. Ideally, what I have is a constant currency model, which, again, I've been here a quarter. So, we're still working some things internally and building out some additional capabilities within my team. But with a constant currency reporting, there will be more transparency to the true impact of FX and the benefits of our hedging strategies.

And just on a percentage basis, right, we are starting to see that this quarter. If you take a look at the midpoint of our guidance on our EBIT, you'll see that that's moving up from where we ended up and where we were guiding to last quarter. So, I think we're right at that tipping point now to where you'll start seeing that leverage, FX or no FX, you'll see that leverage. So, we're, we don't want to get too ahead on what we're projecting because things happen. But I would say we're right at that point right now.

Your next question comes from the line of Christian Schwab with Craig-Hallum Capital Group.

Just a follow-up on the currency question in the hedging, you've assumed constant currency. Can you just tell us about your assumption for the dollar to euro exchange rate for the quarter, what you're assuming it will be until all your hedge strategies are in place?

Well, again, on an EPS basis, we're largely naturally hedged. So, I expect on an EPS basis, us to remain relatively neutral. We are net positioning a strong improvement in the dollar, but no material movements in the next 3 months.

Great. And then my second question is regarding the U.S. revenue strength. Are you guys benefiting this quarter? And do you anticipate benefiting in the second half of the year due to the bankruptcy of DZS?

Yes. We right off of the bat started getting calls. We've started shipping to multiple customers now in the U.S. predominantly in the U.S. I think we have some international business as well, but that's affected, that will be a positive movement for us, both on the OLT side, on the infrastructure side as well as on the subscriber side. It already has been. It's already started impacting us.

And could you quantify that opportunity over multiple quarters to come or the positive impact that you received this quarter?

I don't really have that number. That's getting pretty granular. I would say across the business, it's probably in the $10-ish million, but that's when it is all rolling. But some of these things are still competitive. They're going out to RFP. Some of them, we have interoperable products. So, we're an easy plug-in. So, where people were really in a bind, they kind of called us. But yes, I mean, I wouldn't, it's, I would say it's probably material, but it's not overly so.

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

Tim, I think you mentioned your efforts on the sale of the East Tower. It sounds like from your comments that, that's, you've had a particular buyer kind of walk away from the process. Is that correct? And what do you think the outlook is for getting a transaction done there?

Yes. Let me start with the first piece, and then I'll turn it back over to Tim. We didn't have a buyer walk away. We had a buyer that has been slow to close. So, they are still actively trying to get their side of the deal done. But based off of the timing differential, we're now looking at offering it to other people. And before that, for a period of time, we were not. We had taken it off and we're trying to close a deal. That's still an active negotiation, but we are now looking at other offers as well. Tim, anything you want to add to that.

I'd just say we're, exactly. We are under an exclusivity period. We were, we have an ink deal, but there's contingencies that have kept us from moving that forward, and those remain in place. We're tired as you are with some of these things moving.

So, it's a unique property. It's a tough property, but it's a gorgeous property. So, we're not willing to give the property away for an amount that's at a fire sale, and we're also very selfishly aware of who's going to be our neighbor. So, we're working with some new parties to help us remarket the facility in parallel. And also, I mentioned, reexploring with our renewed strength and capital position, a sale-leaseback transaction on the East Tower.

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

Congrats on the outlook, in particular, and some of that operating leverage that you're starting to show. And along those lines, I think you mentioned an expectation for subscriber solutions to grow in Q3, but I'd be looking for any other color from a segment or geographic perspective about where you expect that sequential growth to come from?

I can follow up from there. Yes. So, we explicitly, you're right, I explicitly did point out subscriber solutions, and that's just backlog in that area continues to grow. So, we kind of have more visibility as to what we expect there. Optical will probably have a very strong quarter as well. That business and that backlog continues to grow. And Access continues. Backlog is probably not as big because we do have lumpy order patterning, but yes, it's positive.

I mean the business itself is definitely trending positive. I don't, our visibility, as you know, is usually the strongest in the next quarter and then it gets a little weaker and a little weaker. All of the signs that we have right now are looking upwards. So yes, and I would say across all the product segments. Probably the strongest single area right now is optical because they have the most ground to make up. They had the inventory depletion cure itself the latest. At this point in time, I would say it's cured, and we're just seeing strong activity there. Did that answer your question, hopefully?

Sure did. And leads very well into the next one, which is, Tom, you've mentioned or maybe both of you guys have mentioned continued momentum in the second half in terms of revenues and cash flow. I mean, should we take that as implying an expectation for continued sequential growth into Q4? You do, at times, have some seasonal headwinds there. I know it's early, but I want to see if I'm interpreting that positive correctly.

Yes. I'm going to, we don't give, as you know, guidance past the quarter, but I would say the momentum is strong enough to where I would not be surprised if we were to overcome any seasonal patterns at this point.

Great. And maybe last one for me. You did see a good amount of sequential growth in the U.S. this quarter, and I've talked about that to some degree. But should we, I guess, to what extent should we associate that with inventory burning off versus maybe some of the new wins you announced last quarter with the Tier 2s in the U.S. Or what mix of factors would you say is driving that U.S. growth in particular?

Yes. I think you literally hit the mix. I think we did win some Tier 3s as well, but they tend to be smaller buyers. So, you have to really have a big mass. And I would say we don't have a big mass yet. Tier 2s can move the needle. They have started buying our optical products as well. So, it was Tier 2s and the Tier 1s here in the U.S. are probably are what drove the most. Enterprise also did good, but those 2 drove the most, I'm trying to think of the numbers. Those 2 definitely had the biggest impact.

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

Relative to the strength that you were talking about really around the globe, are you able to either rank or kind of highlight what's the true driver between the expanding bandwidth, the AI, the data centers, vendor replacement. There are all these factors that I think you've highlighted are favorable contributors. But are there 1 or 2 that are truly the meaningful drivers?

I would say the biggest driver right now is upgrade of the network, at least for us, right, is upgrade of the network for residential broadband. That's driving the biggest piece of our kind of revenue growth over the last few quarters. The next biggest driver, it gets, optical returning to normality would definitely be the next one. And I would tell you, like I said, we're expecting a strong second half there. That, in that normality, it's not just normality, it's new application wins.

So, I mentioned we won some in Europe. We won some additional projects in Europe that include 5G densification, for instance, which is kind of nice to see. And then we're seeing some of the work and have won some business around kind of getting just general bandwidth upgrades and some of that is AI-driven. So, it's kind of hard, optical is multiple different things affecting optical. But, so if you would just let me just say fiber-to-the-prem plus optical, that would be the right answer because the fiber-to-the-premise is also affecting our subscriber business, of course.

That's helpful. And then in the U.S., do you see any opportunity to crack into any of the Tier 1s that you are not currently a meaningful player with?

We sell to the other, well, let me define Tier 1 for you, if you don't mind. So, we, Tier 1 carrier customers, Telcos customers, we sell to them, but I don't see any real big change in trajectory in the near term there. For MSO customers, I think there's a difference. I think that we have products well positioned and the larger MSOs here, and we could see some movement there. Did that answer your question?

Yes. But it certainly does lead to another, to expand on that last comment about winning additional, it sounds like large MSO business.

Right. We're working at it. We have some approvals that we've gotten, and I think we're well positioned. We won't, until I see that big PO coming in, I'm not going to really cut it, but we're approved and ready to go.

All right. Great. Congratulations on a really nice quarter.

All right. Thank you very much. I think with that, we are out of questions for today. So, I appreciate everybody joining us on the call 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.