ADTRAN, Inc. (ADTN) on Q1 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by. And welcome to ADTRAN’s First Quarter 2021 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. During the course of the conference call, ADTRAN representatives expect to make forward-looking statements, which reflect management’s best judgments based on factors currently known. However, these statements involve risks and uncertainties, including the continued spread and expense of the impact of COVID-19 global pandemic, the ability of component supplies to align with customer demand, the successful development and market acceptance of our products; competition in the market for such products, the product and channel mix, component costs, manufacturing efficiencies and other risks detailed in our annual report on Form 10-K for the year ending December 31, 2020. These risks and uncertainties could cause actual results to differ materially from those in the forward-looking statements, which may be made during the call.
Tom Stanton: Thank you, Christine. Good morning, everyone. We appreciate you joining us for our first quarter 2021 conference call. With me today is ADTRAN’s CFO, Mike Foliano. Following my opening remarks, Mike will review the quarterly financial performance in detail and then we will take any questions that you may have. We had a strong first quarter and we expect this to be an exciting year for ADTRAN. We grew revenue 11% year-over-year, increased non-GAAP EPS by $0.18 year-over-year and recorded the highest product bookings for any quarter in our history. This success was primarily driven by the demand for our fiber-based broadband solutions, continuing the positive momentum from the second half of last year. If we look at the market, there are several key indicators that provide a positive outlook for our business. On the consumer side, we continue to see increased demand for fiber-based broadband access paired with premium cloud-managed Wi-Fi in the home. From a funding perspective, governments are prioritizing high-speed broadband connectivity to all residents more than ever. In the U.S., President Biden has proposed $100 billion to future proof broadband as part of an eight year infrastructure plan. He referred to high speed broadband as the new electricity that’s a necessity for all Americans. The U.K. Government has also pledged $7 billion in funding for gigabit capable broadband for hard-to-reach areas. Similar multibillion dollar investments are being committed in the EU to accelerate high-speed broadband connectivity across its member countries. In addition to government spending, we continue to see increased investment from private equity, municipalities, utilities and others to fund the build out of fiber access networks for high speed broadband and future 5G connectivity. From a technology standpoint, refresh cycles around 10 gig fiber access, mesh Wi-Fi 6 and cloud-based services are driving increased investment in our growth products. Finally, supply chain diversification and vendor risk mitigation initiatives are also being -- are also accelerating vendor selection programs across our target customer base. With our strong presence in key growth markets, including the U.S. and Europe, along with our trusted vendor status and differentiated portfolio, we are well-positioned to take advantage of the major investment cycles that we see ahead of us.
Mike Foliano: Thank you, Tom, and good morning to all. I’ll review our first quarter 2021 results and provide our expectations for the second quarter. During my report, I’ll be referencing both GAAP and non-GAAP results with reconciliations presented in our press release and supplemental financial schedules on our Investor Relations webpage at www.adtran.com/investor. The supplemental financial schedules on our web page also present certain revenue information by segment and category, which I’ll be discussing today. ADTRAN’s first quarter 2021 revenue came in at $127.5 million, compared to $130.1 million in the prior quarter and $114.5 million in the first quarter of 2020. Subdividing this across our operating segments, our Network Solutions revenue for the first quarter was $113.8 million versus $114.1 million reported for Q4 of 2020 and $97.4 million in Q1 2020. Our Services and Support revenue in Q1 of this year was $13.7 million, compared to $16 million reported in the fourth quarter of 2020 and $17.2 million in the first quarter of 2020. Across our revenue categories, Access & Aggregation revenue for the first quarter of 2021 was $69.1 million, compared to $79 million in the prior quarter and $66 million in Q1 of 2020. The revenue for our Subscriber Solutions & Experience category was $54.6 million for the quarter versus $45.4 million for quarter four of 2020 and $42.2 million for quarter one of 2020. Traditional and other products revenue for the quarter was $3.9 million, compared to $5.8 million for quarter four of 2020 and $6.4 million for quarter one of 2020. Looking at our revenues geographically, domestic revenue for Q1 2021 was $86.5 million versus $95.8 million reported in quarter four of 2020 and $79 million in quarter one of 2020. Our international revenue for quarter one of 2021 was $41 million, compared to $34.3 million in Q4 of 2020 and $35.5 million in the first quarter of 2020. As Tom stated, in the first quarter, we had two 10% of revenue customers, both of these were domestic.
Tom Stanton: Great. Thank you, Mike. Christina, at this point, we’re ready to open up for any questions people may have.
Operator: Thank you. Your first question comes from the line of Rod Hall from Goldman Sachs. Your line is open.
Rod Hall: Hey, guys. Thank you for picking my question. I just wanted to dig into the Tier 1s in the U.S. a little bit on visibility. We’re hearing from some other suppliers that visibility is starting to improve a little bit as people get worried about supply chain disruptions or supply chain shortages and I am just curious whether you guys are seeing that? And what -- how you feel about Tier 1 visibility as you look into the second half of the year. Then I’ve got a follow-up to that.
Tom Stanton: I think we’re feeling pretty good about it. I do think that some of the carriers understand the supply constraints better than others. And typically, the larger ones are really coming on Board and trying to at least if not place purchase orders, at least place serious forecasts that are things that have been maybe a little more sure than they have been in the past. So I would say, visibility across the Board is better and that’s not just with Tier 1, that’s pretty much across the Board.
Rod Hall: Okay. Thank you, Tom. And then the other thing that is coming up more and more is inflation on all sorts of different -- not just semiconductors, but steel and freight and so on. I am just curious if you guys could comment on what you’re seeing in that respect? Do you see upward pressure on underlying costs and do you think you could pass that through to customers for the most part or do you think it will pressure margin? Just kind of what’s your take on inflation here?
Tom Stanton: Well, if I take a look at the -- let’s take semiconductors out. I mean, we’re still having the ability to drive overall purchasing costs down. So were able to do that and to some respects, I consider this to be a semiconductor tariff. But my guess would be to the things -- to the extent that these things continue on or actually accelerate that we would be passing some of those costs off onto the customer base?
Rod Hall: Okay. All right. Thanks a lot.
Tom Stanton: Okay.
Operator: Your next question comes from the line of George Notter from Jefferies. Your line is open.
George Notter: Hi, guys. Thanks very much. I guess maybe to start, I think, Tom you mentioned record bookings at the start of the call, is there -- could you give us a book-to-bill number or a backlog number or give us some sense for where bookings are right now? And then also, I guess, kind of extending on a question earlier, is it simply customers just giving you more visibility or longer dated POs and do you think the rate of consumption in the end market is going up? Thanks.
Tom Stanton: Yeah. We don’t -- I don’t -- the answer about the booking, anyways, but we typically don’t give that. I was going to give you something that you can manage off of that, which is, I don’t know how to say it, Mike, but without giving a book-to-bill number. Let me just say it was a strong booking quarter. So and this is including -- we had kind of this booking uptick at the first part of last year when COVID was coming in line and it was actually stronger than that. So bookings wise we’re feeling good. Now as far as how much is in this quarter versus people buying out, I will tell you, we try to do that analysis and if we take out the things that are scheduled far into the future, which is really those customers trying to buy typically commit our shipments to them further into the year. If you remove that, it was still a very strong booking quarter. Now the only thing that I can’t explicitly tell you is, well, are they trying to put the inventory on their shelves versus keeping it in our shelf effectively and I can’t -- there’s really no way to gauge that. Although, I didn’t -- if we look at the demand increase that we’ve been seeing over the last, let’s say, three quarters, it’s not atypical. It’s really -- a lot of that growth is coming from Tier 3s and what we’re seeing in order demand out of those is very typical to what we have been seeing. I mean, we just -- that segment is growing very strong.
George Notter: Got it. And I think last quarter you guys gave us percentage of sales coming from that Tier 3 customer set. Is there a percentage of sales number you could give us here for Q1?
Tom Stanton: I don’t know if we gave a percentage of sales. I think we gave -- it was over $50 million or $60 million and it grew sequentially and year-over-year. So it’s over that number now, of course.
George Notter: Great. Okay. Thank you very much.
Tom Stanton: Okay. Hey. And one other thing, just -- I know you’re not on the phone anymore, but one thing, we did talk about the growth in that segment too. So you can -- you may be able to come up with a number from that perspective.
George Notter: Okay.
Tom Stanton: Okay, Christine.
George Notter: Thank you.
Tom Stanton: Okay.
Operator: Your next question comes from the line of Michael Genovese from West Capital Park. Your line is open.
Michael Genovese: Great. Thanks. Hi, Tom. Hi, Mike. It’s WestPark Capital. So my question -- my first question is just the nature of the business, has it completely changed, I mean, you used to always talk about being a book-and-ship business. But is there no room now for book-and-ship orders to come in and is it now a plan a year in ahead business completely? So that’s my first question.
Tom Stanton: No. I would -- no, in some ways it would be nice if it was, but no. So we still have a large amount, I mean, the majority of our orders come in and they want us to ship them within a two week period of time. But the highest runner pieces and selected parts are things where if you’re not placing orders right now for six months from now or even a year from now, you’re liable to run into a real supply constraint. So I would say it’s more of a -- it’s definitely shifted more toward longer term perspective, but we -- but it’s still -- the majority of our orders still come in and they want us to ship them within the quarter definitely and typically within the month.
Michael Genovese: Great. When you look at your Tier 1 business for the second half of the year, do you feel like you’re managing to supply and demand for those projects being in balance or is there a supply shortage or is there demand -- potential demand shortage, how are you thinking about that?
Tom Stanton: Tier 1s, I think, we’re by and large good at, if you look at it from an infrastructure perspective. So you almost have to go by product type. If you look at the Tier 1 business that’s coming on in Europe, that’s been forecast for some time. So we’ve already got the supply chain lined up for that increase that we’re expecting in the second half. In the U.S., I would say, the same is predominantly true. Where we run into issues is where there’s variability in the forecast from the customer and that’s typically with things like RGs and O&Ts. So on end user devices, we can run into problems, because the demand for those products is through the roof. I think combined it was up like 94% year-over-year. It’s just going through the roof. We did not forecast that because our customers weren’t forecasting that. We’ve been able to keep up, but, yes, it’s -- that’s the type of product that’s more problematic.
Michael Genovese: Does that include Wi-Fi 6 devices, is that a meaningful piece of your business, like, how many -- what percent of your customers buy Wi-Fi from you?
Tom Stanton: A large percentage of our customers buy Wi-Fi from us. It’s not -- Wi-Fi 6 itself is relatively new for us, so it’s just now starting up. Future course we got to drive demand. We think we’ve got a handle on the forecast for the chips required for that. But here, again, so far everything that we forecasted we’ve been out-stripping on the O&T and RG side. The real thing that hurts us is we do have some of our vendors de-committing, right? So when you’ve got orders in place and all of a sudden they’re not -- you can’t count on anymore, that causes material repercussion. So we’re continuing to fight that challenge.
Michael Genovese: Is the Wi-Fi stuff growing at a similar or faster rate than the O&T stuff?
Tom Stanton: I would say it’s -- yeah, I don’t have the actual breakout of those SKUs. But I would say, it’s probably leading the charge, okay…
Michael Genovese: And my final question is just -- I appreciate all this color. My final question is just -- is this a point of gross margin outperformance in the quarter? You guided in line but -- than the quarter you beat, so where do you attribute the better performance in 1Q too?
Tom Stanton: Mix. It was a mix.
Michael Genovese: You mean domestic mixed or mix or mix or that would be domestic mix?
Tom Stanton: No. No. It probably, well, it could be. There was definitely -- the answer to your question is yes. Because if you think of the growth that we saw, I mean, Tier 3s are going through the roof and a lot of that is infrastructure business, right? So it was just a good mix.
Michael Genovese: Thank you.
Tom Stanton: Okay.
Operator: Your next question comes from the line of Tim Savageaux from Northland Capital. Your line is open.
Tim Savageaux: Hi. Good morning and congrats especially on the bookings. One question and then a follow-up, I think it’s been a while, maybe a very long while, since you’ve had a quarter without any 10% service provider customers, I think, last year you had two or three. And I wonder if you could characterize your U.S. business in terms of the growth, assuming your historic Tier 1 was over 10% last year and was under this year. I wonder if you have any comments on U.S. growth, excluding that customer. And then more broadly speaking, do you expect some of your historic Tier 1s to re-attain 10% customer status as we move on in the year?
Tom Stanton: Yeah. So that’s a good question. So let’s talk about Tier 1s in the U.S. So the Tier 1s in the U.S. -- and I could actually just say kind of North America. So let’s include what has happened in Mexico. You’re seeing two things happen. One is we are growing the PON market share in those Tier 1s and let’s say, PON shipments in those Tier 1s. But we are also seeing a decline in our copper business and I think a lot of people lose sight of that. So we have, you could call it today definitely a legacy business, but copper, that if we did not have that legacy business, our number -- our growth numbers would be through the roof, right, so you’re seeing copper decline. I think and I don’t know if I have -- that is in statement . At this point in time, fiber is over 70% of our business. If you can look back a year ago, it was less than 50% of our business. So you’re seeing that decline in copper, while you’re seeing huge growth in the fiber business and some of that is of course affecting the Tier 1s. And so I don’t know if that answers your question or not, so. And…
Tim Savageaux: Yeah. That’s great. Just to follow-up, with regard to the booking strength. I don’t know if there’s any, if we could just assume that’s similar to what you saw in revenue-wise in overall broadband and what’s or whether there’s any sort of different character to what you saw from a booking standpoint? And can you comment on whether that booking strength has continued into Q2 and whether perhaps adjusting for some CAF II services we might reasonably expect a record revenue quarter at some point fairly soon after seeing a record bookings quarter?
Tom Stanton: Yeah. So, by the way, I didn’t finish the answer to your last question. So let me just kind of finish that. So as you know, we did won a Tier 1 award, which is a sole source award for XGS here in the U.S. That is one of those things that we expect to start shipping in the second half of the year. So I think you’ll see the Tier 1 business trajectory change after that point. On the bookings strength, yeah, that’s what -- our biggest problem right now is supply. Our problem is not bookings. So I think it has to do, where that record falls is largely dependent upon when we can actually, I mean, we walked out of Q1 with a significant amount of orders that the customers wanted to take in Q1. And the same thing is going to happen this quarter and the same thing will happen in the third quarter. And I don’t have line of sight to a real cure for that as to when it actually gets better. So I think it’s highly dependent on our ability to supply product.
Tim Savageaux: Okay. Thanks very much.
Tom Stanton: Okay.
Operator: Your next question comes from the line of Paul Silverstein from Cowen. Your line is open.
Paul Silverstein: Thanks guys. Tom, first off, and I apologize if you already said this, but did you address when you expect RDOF to have an impact and to what extent?
Tom Stanton: No. We didn’t. I would -- I think there’s a good chance we’ll start seeing some RDOF in the second half of this year. I don’t have a good line of sight to the ramp of that. But I would be surprised if we didn’t start seeing -- I am not -- by the way, not so sure we haven’t seen it already in some of the smaller customers. But the bigger customers and there’s, of course, a really large customer in the U.S. that we’re an incumbent to that we’ll hopefully start seeing some shipments in the second half of this year.
Paul Silverstein: So do you think -- is it too much to say it’s a given that will have a meaningful impact next year or do you have a confidence level as to what…
Tom Stanton: Yeah. It should have a meaningful impact. Yeah. It should have a meaningful impact next year. They have a longer time to build, of course, as you know, but it should be a nice tailwind next year, yes.
Paul Silverstein: All right. And then, Mike, I think, I ask you this question every quarter, so I do apologize, but I’ll ask it again, which is longer term from a margin standpoint on the gross margin line, you’ve been very candid about this. I think historically you’ve said consistently you expect model to remain in the low 40s. But as you look out to the prospective impacts of these large projects of these large Tier 1s, assuming they come in as advertised in terms of volumes? All the things being equal, will that -- should that drive margin lower given that some of those projects at least the non-U.S. ones probably have lower margin structure as has been the case historically or does it -- do you think long-term at least model one for us?
Mike Foliano: No. Paul, I think, it’s still the same as what I’ve said in the past. It’s low-to-mid 40s. So I can take the middle of that range. And if you start looking at those Tier 1s, I think, the additional volume that it’s driving through gives us a little bit of a tailwind as well. So I think there’s really no change to our plans going forward, still in that same model.
Tom Stanton: I would also add, Paul, I think -- there’s two other things that affect us. One is there was predatory, I mean, to put it lightly, predatory pricing going on in Europe, that has somewhat been mitigated. So I think the types of margins that you, I mean, I think, we have sustainable business type margins out of Europe today where that wasn’t the case historically. And then we have a positive draw that we haven’t yet tried to put numbers around. But our SaaS customer base, which is predominantly in the Tier 3s here in the U.S., that customer is basically 60% -- 66% year-over-year and that will, at some point, really start kicking up and being very positive gross margins, but we haven’t really forecasted that impact at this point.
Paul Silverstein: Got it. And one last quick question, if I may. It’s only 90 days further on. But Tom, is there any incremental insight with respect to these large projects in terms of them panning out to the extent that the particular customers have projected to you? I mean…
Tom Stanton: Yeah. Yeah.
Paul Silverstein: … you have 90 days more?
Tom Stanton: Right. Yeah. Yeah. There’s still no real changes there. I mean everything is still, we’re planning on getting to start shipping in the second half of this year and then seeing them ramp from there. So there’s no material change.
Paul Silverstein: I appreciate it. Thanks, guys.
Tom Stanton: Okay. All right. At this point, we’re going to end the call. I appreciate everybody for joining us and I look forward to talking to you next quarter at this time.
Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.
