ADTRAN Holdings, Inc. Q1 2026 earnings call

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, 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 Solutions 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 two important tailwinds. First, the expansion of AI workloads across secure enterprise environments is driving demand for higher capacity interconnects between private enterprise data centers. Second, growing awareness of the limitations of traditional security mechanisms is accelerating interest in quantum-safe optical and Ethernet communications.

Building on our long-standing 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 clustered 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 margin, 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 2025 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 2025.

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 2025 and 6.4% in Q4 2025. 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. Networking 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 four days sequentially. Trade accounts receivable were $215.5 million with DSO of 68 days, up two 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, 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%-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 20th in Marina del Rey and the Evercore Technology, Media, and Telecom Conference on June 2nd and 3rd in San Francisco.

We look forward to seeing many of you there. 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.