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ADTRAN Holdings, Inc. reports first quarter 2024 financial results
GAAP gross margin for the first quarter was 31.9%, compared to 34.8% in Q4 2023 and 27.1% in the year-ago quarter, representing an improvement of 484 basis points ("bps") year-over-year but a decrease of 285 bps quarter-over-quarter. The year-over-year improvement primarily resulted from lower purchasing and transportation costs, as well as lower acquisition-related expenses, amortizations and adjustments. The sequential margin decline is primarily due to $8.8 million of inventory charges related to a strategy shift as part of our Business Efficiency Program.
Non-GAAP gross margin for the first quarter was 41.6% compared to 41.9% in Q4 2023 and 37.3% in the year-ago quarter representing a decline of 33 bps sequentially and an improvement of 429 bps year-over-year.
GAAP operating margin for the first quarter was negative 150.2%, primarily driven by a non-cash goodwill impairment charge.
Non-GAAP operating margin for the first quarter was negative 3.9%, which was within the guidance range of between -7% and 0% of revenues. Non-GAAP operating margin was negatively impacted by an unfavorable currency rate development and seasonal effects in the first quarter.
GAAP net loss attributable to the Company for the first quarter of 2024, including the above mentioned impairment charge, was $324.6 million. Diluted loss per share attributable to the Company for the first quarter was $4.12.
Non-GAAP net loss attributable to the Company for the first quarter of 2024 was $1.7 million. Non-GAAP diluted loss per share attributable to the Company for the first quarter was $0.02.
ADTRAN Holdings' Chairman and Chief Executive Officer Tom Stanton stated, "First quarter revenue and profitability came in as expected, with the weakness still impacting our results. However, we were pleased with the continued momentum in our customer win rate which was bolstered by the ongoing expansion of our Mosaic One platform. As we continued to execute on our business efficiency program, we were able to reduce inventory and significantly improve our operating cashflow while maintaining our diligence in gaining market share during this pivotal time in our industry. We believe that as markets return to normal, our continued focus on these measures, will lead to sustainable margin expansions and shareholder value creation in the mid-term."
The Company will hold a conference call to discuss its first quarter results on Tuesday, May 07, 2024, at 9:30 a.m. Central Time, or 4:30 p.m. Central European Summer Time. The Company will webcast this conference call. To listen, simply visit our Investor Relations site at investors.adtran.com approximately 10 minutes prior to the start of the call, click on the event "ADTRAN Holdings Releases 1st Quarter 2024 Financial Results and Earnings Call", and click on the webcast link.
An online replay of the Company's conference call, as well as the transcript of the Company's conference call, will be available on the Investor Relations site approximately 24 hours following the call and will remain available for at least 12 months. For more information, visit investors.adtran.com or email investor.relations@adtran.com.
Cautionary Note Regarding Forward-Looking Statements
Statements contained in this press release which are not historical facts, such as those relating to expectations regarding future revenues; ADTRAN Holdings' expected future customer win rate and expansion of its Mosaic One platform; the ability of ADTRAN Holdings' ability to continue to effectively implement the Business Efficiency Program; the impact of the foregoing measures on margin expansion and shareholder value creation; and ADTRAN Holdings' strategy and outlook, outlook and financial guidance, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can also generally be identified by the use of words such as "believe," "expect," "intend," "estimate," "anticipate," "will," "may," "could" and similar expressions. In addition, ADTRAN Holdings, through its senior management, may from time to time make forward-looking public statements concerning the matters described herein. All such projections and other forward-looking information speak only as of the date hereof, and ADTRAN Holdings undertakes no duty to publicly update or revise such forward-looking information, whether as a result of new information, future events, or otherwise, except to the extent as may be required by law. All such forward-looking statements are necessarily estimates and reflect management's best judgment based upon current information. Actual events or results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors which have caused and may in the future cause actual events or results to differ materially from those estimated by ADTRAN Holdings include, but are not limited to: (i) risks and uncertainties relating to ADTRAN Holdings' ability to reduce expenditures and the impact of such reductions on its financial results and financial condition; (ii) the risk of fluctuations in revenue due to lengthy sales and approval processes required by major and other service providers for new products, as well as ongoing tighter inventory management of ADTRAN Holdings' customers ; (iii) risks and uncertainties relating to the recent restatements of our previously issued consolidated financial statements and ongoing material weaknesses in our internal control over financial reporting; (iv) our ability to comply with the covenants set forth in our credit facility; (v) risks posed by potential breaches of information systems and cyber-attacksI 3/4 (vi) the risk that ADTRAN Holdings may not be able to effectively compete, including through product improvements and development; and (vii) other risks set forth in ADTRAN Holdings' public filings made with the Securities and Exchange Commission ("SEC"), including its Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 15, 2024, and risks to be disclosed in its Form 10-Q for the quarterly period ended March 31, 2024.
Explanation of Use of Non-GAAP Financial Measures
Set forth in the tables below are reconciliations of gross profit, gross margin, operating expenses, operating loss, other expense, net loss inclusive of the non-controlling interest, net loss attributable to the Company, net income (loss) attributable to the non-controlling interest, and loss per share - basic and diluted, attributable to the Company, in each case as reported based on generally accepted accounting principles in the United States ("GAAP"), to non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating loss, non-GAAP other expense, non-GAAP net loss inclusive of the non-controlling interest, non-GAAP net loss attributable to the Company, non-GAAP net income attributable to the non-controlling interest, non-GAAP loss per share - basic and diluted, attributable to the Company, respectively, and non-GAAP free cash flow. Such non-GAAP measures exclude acquisition related expenses, amortization and adjustments (consisting of intangible amortization of backlog, developed technology, customer relationships, and trade names acquired in connection with business combinations and amortization of inventory fair value adjustments), stock-based compensation expense, amortization of pension actuarial losses, deferred compensation adjustments, integration expenses, restructuring expenses, goodwill impairments, and the tax effect of these adjustments to net income. These measures are used by management in our ongoing planning and annual budgeting processes. Additionally, we believe the presentation of these non-GAAP measures when combined with the presentation of the most directly comparable GAAP financial measure, is beneficial to the overall understanding of ongoing operating performance of the Company.
These non-GAAP financial measures are not prepared in accordance with, or an alternative for, GAAP and therefore should not be considered in isolation or as a substitution for analysis of our results as reported under GAAP. Additionally, our calculation of non-GAAP measures may not be comparable to similar measures calculated by other companies.
About Adtran
ADTRAN Holdings, Inc. (NASDAQ: ADTN and FSE: QH9) is the parent company of Adtran, Inc., a leading global provider of open, disaggregated networking and communications solutions that enable voice, data, video and internet communications across any network infrastructure. From the cloud edge to the subscriber edge, Adtran empowers communications service providers around the world to manage and scale services that connect people, places and things. Adtran solutions are used by service providers, private enterprises, government organizations and millions of individual users worldwide. ADTRAN Holdings, Inc. is also the largest shareholder of Adtran Networks SE, formerly ADVA Optical Networking SE. Find more at Adtran, LinkedIn and Twitter.
Published by ADTRAN Holdings, Inc. www.adtran.com
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands)
March 31, December 31,
2024 2023
------------------------------ ------------------------------
Assets
Current Assets
Cash and cash equivalents $ 106,757 $ 87,167
Accounts receivable, net 187,554 216,445
Other receivables 12,116 17,450
Income tax receivable 8,717 7,933
Inventory, net 322,147 362,295
Prepaid expenses and other current assets 59,667 45,566
-------------------- ---------- -------------------- ----------
Total Current Assets 696,958 736,856
Property, plant and equipment, net 126,969 123,020
Deferred tax assets 25,421 25,787
Goodwill 55,129 353,415
Intangibles, net 306,448 327,985
Other non-current assets 87,729 87,706
Long-term investments 29,252 27,743
-------------------- ---------- -------------------- ----------
Total Assets $ 1,327,906 $ 1,682,512
==================== ========== ==================== ==========
Liabilities, Redeemable Non-Controlling Interest and Equity
Current Liabilities
Accounts payable $ 159,083 $ 162,922
Unearned revenue 55,124 46,731
Accrued expenses and other liabilities 36,404 37,607
Accrued wages and benefits 25,869 27,030
Income tax payable, net 6,266 5,221
-------------------- ---------- -------------------- ----------
Total Current Liabilities 282,746 279,511
Non-current revolving credit agreement outstanding 195,000 195,000
Deferred tax liabilities 15,414 35,655
Non-current unearned revenue 22,884 25,109
Non-current pension liability 11,692 12,543
Deferred compensation liability 29,709 29,039
Non-current lease obligations 27,668 31,420
Other non-current liabilities 35,375 28,657
-------------------- ---------- -------------------- ----------
Total Liabilities 620,488 636,934
Redeemable Non-Controlling Interest 441,635 451,756
Equity
Common stock 791 790
Additional paid-in capital 798,897 795,304
Accumulated other comprehensive income 29,656 47,461
Retained deficit (558,363 ) (243,908 )
Treasury stock (5,198 ) (5,825 )
-------------------- ---------- -------------------- ----------
Total Equity 265,783 593,822
-------------------- ---------- -------------------- ----------
Condensed Consolidated Statements of Loss
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
March 31,
--------------------------------------------------------------------------------------------------------
2024 2023
------------------------------ ----------------------------------
Revenue
Network Solutions $ 181,273 $ 282,418
Services & Support 44,900 41,494
-------------------- ---------- -------------------- --------------
226,173 323,912
Total Revenue
Cost of Revenue
Network Solutions 126,326 219,130
Network Solutions - inventory write-down 8,782 --
Services & Support 18,810 16,974
-------------------- ---------- -------------------- --------------
153,918 236,104
Total Cost of Revenue
72,255 87,808
Gross Profit
Selling, general and administrative expenses 59,100 67,397
Research and development expenses 60,251 70,143
Goodwill impairment 292,583 --
-------------------- ---------- -------------------- --------------
(339,679 ) (49,732 )
Operating Loss
Interest and dividend income 397 304
Interest expense (4,598 ) (3,287 )
Net investment gain 2,253 1,252
Other income (expense), net 1,310 (303 )
-------------------- ---------- -------------------- --------------
(340,317 ) (51,766 )
Loss Before Income Taxes
Income tax benefit 18,647 11,313
-------------------- ---------- -------------------- --------------
$ (321,670 ) $ (40,453 )
Net Loss
2,880 (370 )
Less: Net Income (Loss) attributable to non-controlling interest
-------------------- ---------- -------------------- --------------
$ (324,550 ) $ (40,083 )
Net Loss attributable to ADTRAN Holdings, Inc.
==================== ========== ==================== ==============
Weighted average shares outstanding - basic 78,814 78,358
Weighted average shares outstanding - diluted 78,814 78,358
Loss per common share attributable to ADTRAN Holdings, Inc. - basic $ (4.12 ) $ (0.51 )
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Three Months Ended
March 31,
------------------------------------------------------------------------------------------------------------
2024 2023
---------------------------------- ----------------------------------
Cash flows from operating activities:
$ (321,670 ) $ (40,453 )
Net loss
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
22,528 33,402
Depreciation and amortization
292,583 --
Goodwill impairment
1,013 146
Amortization of debt issuance cost
(2,621 ) (3,154 )
Gain on investments, net
150 --
Net loss on disposal of property, plant and equipment
3,957 3,812
Stock-based compensation expense
(19,738 ) (24,019 )
Deferred income taxes
545 (1 )
Other, net
8,782 --
Inventory write down
(17,247 ) 16,051
Inventory reserves
Changes in operating assets and liabilities:
26,002 17,658
Accounts receivable, net
5,606 1,980
Other receivables
(1,296 ) --
Income taxes receivable, net
49,514 (2,764 )
Inventory
(15,888 ) 1,118
Prepaid expenses, other current assets and other assets
(4,236 ) (40,367 )
Accounts payable
7,459 6,349
Accrued expenses and other liabilities
1,155 10,316
Income taxes payable, net
-------------------- -------------- -------------------- --------------
Net cash provided by (used in) operating activities 36,598 (19,926 )
-------------------- -------------- -------------------- --------------
Cash flows from investing activities:
(13,374 ) (8,439 )
Purchases of property, plant and equipment
873 930
Proceeds from sales and maturities of available-for-sale investments
(44 ) (516 )
Purchases of available-for-sale investments
-- 1,231
Proceeds from beneficial interests in securitized accounts receivable
-------------------- -------------- -------------------- --------------
Net cash used in investing activities (12,545 ) (6,794 )
-------------------- -------------- -------------------- --------------
Cash flows from financing activities:
(176 ) (6,258 )
Tax withholdings related to stock-based compensation settlements
219 58
Proceeds from stock option exercises
-- (7,076 )
Dividend payments
30,231 --
Proceeds from receivables purchase agreement
(32,437 ) --
Repayments on receivables purchase agreement
-- 138,236
Proceeds from draw on revolving credit agreements
-- (43,464 )
Repayment of revolving credit agreements
(5 ) (1,176 )
Payment of redemption of redeemable non-controlling interest
(1,994 ) --
Payment of debt issuance cost
-- (24,692 )
Repayment of notes payable
-------------------- -------------- -------------------- --------------
Net cash (used in) provided by financing activities (4,162 ) 55,628
-------------------- -------------- -------------------- --------------
19,891 28,908
Net increase in cash and cash equivalents
(301 ) (1,095 )
Effect of exchange rate changes
Cash and cash equivalents, beginning of period 87,167 108,644
-------------------- -------------- -------------------- --------------
Cash and cash equivalents, end of period $ 106,757 $ 136,457
==================== ============== ==================== ==============
Supplemental disclosure of cash financing activities:
$ 5,243 $ 1,610
Cash paid for interest
$ 2,315 $ 1,251
Cash paid for income taxes
$ 2,384 $ 4,057
Cash used in operating activities related to operating leases
Supplemental disclosure of non-cash investing activities:
$ 842 $ 486
Right-of-use assets obtained in exchange for lease obligations
Supplemental Information
Reconciliation of Gross Profit and Gross Margin to
Non-GAAP Gross Profit and Non-GAAP Gross Margin
(Unaudited)
(In thousands)
Three Months Ended
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
March 31, December 31, March 31,
2024 2023 2023
------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------
Total Revenue $ 226,173 $ 225,479 $ 323,912
Cost of Revenue $ 153,918 $ 147,014 $ 236,104
Acquisition-related expenses, amortizations and adjustments(1) (10,177 ) (10,048 ) (32,578 )
Stock-based compensation expense (275 ) (440 ) (240 )
Restructuring expenses(2) (11,247 ) (5,517 ) (76 )
Integration expenses(3) (35 ) 39 --
--------------------------------------- --------------------------------------- --------------------------------------- --------------------------------------- --------------------------------------- ---------------------------------------
Non-GAAP Cost of Revenue $ 132,184 $ 131,048 $ 203,210
======================================= ======================================= ======================================= ======================================= ======================================= =======================================
Gross Profit $ 72,255 $ 78,465 $ 87,808
Non-GAAP Gross Profit $ 93,989 $ 94,431 $ 120,702
Gross Margin 31.9 % 34.8 % 27.1 %
Non-GAAP Gross Margin 41.6 % 41.9 % 37.3 %
(1) Includes intangible amortization of backlog, inventory fair value adjustments, developed technology, customer relationships, and trade names acquired in connection with business combinations.
(2) Includes expenses for restructuring program designed to optimize the assets and business processes following the business combination with Adtran Networks SE. These expenses include inventory write down and other charges of $8.8M incurred as a result of a strategic shift in certain product lines in connection with the restructuring program. The restructuring program commenced upon the closing of the business combination with Adtran Networks SE and is expected to be substantially completed in late 2024.
Supplemental Information
Reconciliation of Operating Expenses to Non-GAAP Operating Expenses
(Unaudited)
(In thousands)
Three Months Ended
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
March 31, December 31, March 31,
2024 2023 2023
---------------------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------------
Operating Expenses $ 411,934 $ 116,080 $ 137,540
Acquisition-related expenses, amortizations and adjustments (4,881 ) (1) (4,150 ) (7) (4,584 ) (11)
Stock-based compensation expense (3,447 ) (2) (3,181 ) (8) (3,458 ) (12)
Restructuring expenses (5,862 ) (3) (7,859 ) (9) (2,361 ) (13)
Integration expenses (480 ) (4) (1,928 ) (10) (849 ) (14)
Deferred compensation adjustments(5) (1,940 ) (1,324 ) (394 )
Goodwill impairment (292,583 ) (6) -- --
-------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- --------------------------------------------------------------------
Non-GAAP Operating Expenses $ 102,741 $ 97,638 $ 125,894
==================================================================== ==================================================================== ==================================================================== ==================================================================== ==================================================================== ====================================================================
(1) Includes intangible amortization of developed technology, customer relationships, and trade names acquired in connection with business combinations, of which $4.4 million is included in selling, general and administrative expenses and $0.5 million is included in research and development expenses on the condensed consolidated statements of loss.
(2) $2.5 million is included in selling, general and administrative expenses and $1.0 million is included in research and development expenses on the condensed consolidated statements of loss.
(3) $1.8 million is included in selling, general and administrative expenses and $4.1 million is included in research and development expenses on the condensed consolidated statements of loss.
(4) $0.5 million is included in selling, general and administrative expenses and $0.02 million is included in research and development expenses on the condensed consolidated statements of loss. Includes legal and advisory fees totaling $0.1 million related primarily to the DPLTA proceedings that are recorded in selling, general and administrative expenses. Includes expenses totaling $0.4 million related to the Company's one-time integration bonus program in connection with synergy targets as a result of the business combination with Adtran Networks SE of which $0.4 million are included in selling, general and administrative expenses and $0.02 million are included in research and development expenses. The transformation bonus expense of $0.4 million includes $0.2 million of stock compensation expense.
(5) Includes non-cash change in fair value of equity investments held in the ADTRAN Holdings, Inc. Deferred Compensation Program for Employees, all of which is included in selling, general and administrative expenses on the condensed consolidated statement of loss.
(6) Non-cash impairment of goodwill in our Network Solutions reporting unit, necessitated by factors such as a decrease in the Company's market capitalization, cautious service provider spending due to economic uncertainty and continued customer inventory adjustments.
(7) Includes intangible amortization of developed technology, customer relationships, and trade names acquired in connection with business combinations, of which $3.7 million is included in selling, general and administrative expenses and $0.5 million is included in research and development expenses on the condensed consolidated statements of loss.
(8) $2.3 million is included in selling, general and administrative expenses and $0.9 million is included in research and development expenses on the condensed consolidated statements of loss.
(9) $4.6 million is included in selling, general and administrative expenses and $3.2 million is included in research and development expenses on the condensed consolidated statements of loss.
(10) $1.9 million is included in selling, general and administrative expenses and $0.02 million is included in research and development expenses on the condensed consolidated statements of loss. Includes legal and advisory fees totaling $1.2 million related to a contemplated capital raise transaction that are recorded in selling, general and administrative expenses. Includes expenses totaling $0.4 million related to the Company's one-time integration bonus program in connection with synergy targets as a result of the business combination with Adtran Networks SE of which $0.4 million are included in selling, general and administrative expenses and $0.02 million are included in research and development expenses. The integration bonus expense of $0.4 million includes $0.2 million of stock compensation expense. Additionally, includes fees relating to the expansion of internal controls at Adtran Networks SE and the implementation of the DPLTA.
(11) Includes intangible amortization of backlog, inventory fair value adjustments, developed technology, customer relationships, and trade names acquired in connection with business combinations, of which $4.1 million is included in selling, general and administrative expenses and $0.5 million is included in research and development expenses on the condensed consolidated statements of loss.
(12) $2.5 million is included in selling, general and administrative expenses and $1.0 million is included in research and development expenses on the condensed consolidated statements of loss.
(13) $2.2 million is included in selling, general and administrative expenses and $0.2 million is included in research and development expenses on the condensed consolidated statements of loss.
Supplemental Information
Reconciliation of Operating Loss to Non-GAAP Operating Loss
(Unaudited)
(In th