ADTRAN Holdings, Inc. Q2 2026 earnings call

Thank you, operator. Good morning, everyone. Although we are disappointed with the reported results of this past quarter, we believe they were driven by a specific set of factors. As we communicated in our preliminary results press release, a project delay from a single customer, combined with unfavorable impacts from product and customer mix, caused our results to fall short of our guidance. Despite these factors, demand across our end markets remains healthy. Our strategic priorities remain on track, and our customer base continues to diversify. We believe those underlying fundamentals position us well as we look ahead into 2027. As we shared in our pre-announcement, one of our customers adjusted the timing of a project, which affected our results for the quarter. This customer remains committed to its deployment objectives, and we view this as a timing adjustment rather than a change in demand.

Overall customer demand remained strong during the quarter, a challenging supply environment limited our ability to fulfill that demand, constraining shipments and resulting in an unfavorable mix. To be clear, absent these incremental supply constraints, we would have met our original revenue guidance. Against this backdrop, ADTRAN delivered second quarter revenue of $281.1 million, consistent with our preliminary results, and non-GAAP operating margin of approximately 3.8%, also in line with our pre-announcement. While these results reflected the items I just discussed, several indicators of our strategic progress continued to strengthen during the quarter. Our optical business continued to serve as a key growth engine, our growth was broad-based across service provider, enterprise, government, and cloud customers, and reflects continued demand for higher capacity optical infrastructure, AI-driven networking expansion, and secure connectivity. We are also generating tangible benefits from our diversification strategy.

Revenue from enterprise, government, and cloud customers grew a strong 47% year-over-year and 19% sequentially, accounting for 25% of total company revenue in the quarter. Within this customer segment, revenue from hyperscalers increased 97% year-over-year, underscoring the strength of our diversification strategy. This momentum is being driven primarily by our data center interconnect business. In parallel, we continue to expand engagements with hyperscalers and large-scale content providers for our upcoming MicroMux Quattro and the LiteWave800 pluggable optics solutions. The results highlight our growing participation in attractive end markets beyond our traditional service provider base and reflect the opportunities created by continued investment in cloud and AI infrastructure. As we broaden our customer adoption and expand our solutions footprint, we believe we are well positioned to benefit from these longer-term growth trends. Secure connectivity is another area where we continue to drive increasing customer demand.

Our recently announced collaboration with euNetworks highlights growing demand for quantum-safe networking solutions and validates the strength of our multilayer encryption portfolio and integrated cryptographic management capabilities as service providers and enterprises place greater urgency on addressing quantum secure vulnerabilities. Within our service provider segment, we continue to unlock opportunities driven by vendor replacement programs, network modernization initiatives, broadband expansion efforts, and increasing security requirements. These trends are driving investment across transport and access networks and position us to benefit from large-scale broadband initiatives such as BEAD in the U.S., Project Gigabit in the U.K., Germany's Gigabit Strategy 2030, and Italia 1 Giga, alongside growing demand streaming from European network security and trusted vendor initiatives, including the proposed EU Cybersecurity Act 2, or CSA 2. Now some specifics of our product categories. Optical networking revenue was $109.7 million, up 22% year-over-year and 13% sequentially.

Access & Aggregation Solutions revenue was $86.9 million and was directly impacted by the customer timing dynamics I discussed earlier. Subscriber Solutions revenue was $84.5 million, reflecting normal variability following a very strong first quarter. Subsequent to quarter end, we strengthened our financial foundation through the completion of a senior secured credit facility. This refinancing lowers borrowing costs and extends maturities, providing additional financial flexibility as we execute our long-term strategy. In summary, the underlying drivers of our business remains intact, and demand for our products is strong. Although the company's gross margin performance has continued to improve over the last three years, including being able to overcome the product and freight cost increases we have experienced over the last few quarters, Q2 results reflected a tightening of supply, which resulted in unfavorable product mix as our ability to ship higher margin products was impacted, and ultimately lowered gross margins.

The supply chain outlook remains uncertain, we continue to advance actions that will strengthen our margins and better align our performance with our long-term operating objectives of 42%-43% gross margin. Amidst the current supply environment, we are maintaining strong operating expense control and remain committed to our 10% non-GAAP operating margin target. We continue to gain momentum in optical networking, further diversifying our customer base and see a clear path forward towards improving profitability. We remain confident in our strategy and our ability to create long-term shareholder value. With that, I'll turn the call over to Tim to review our financial results in greater detail and follow up with questions. Tim?

Thank you, Tom, and thank you all for joining us today. Revenue for the quarter was $281.1 million, representing growth of 6.1% compared to the second quarter of 2025. Geographically, U.S. revenue was $134.4 million, representing approximately 48% of total revenue, up 12% year-over-year. Non-U.S. revenue was $146.7 million, representing approximately 52% of total revenue and up 1% year-over-year. By product category, Optical Networking Solutions revenue was $109.7 million or 39% of total revenue, increasing 22% year-over-year and 13% sequentially. Access & Aggregation Solutions revenue was $86.9 million or approximately 31% of total revenue. Wel down 5% year-over-year and 4% sequentially, U.S. access and aggregation revenues were up a healthy 13% year-over-year, partially offsetting the non-U.S. customer order timing described earlier.

Subscriber Solutions revenue was $84.5 million, or 30% of total revenue, up 1% year-over-year and down 14% sequentially following a strong first quarter. Turning to margins. non-GAAP gross margin was 40.7% compared to 41.4% in the second quarter of 2025 and 43% in the first quarter of 2026. Gross margin reflected the factors Tom discussed earlier, primarily the combination of product mix, customer mix, and higher product costs. non-GAAP operating expenses were $103.9 million compared to $103.3 million in the first quarter of 2026 and $101.7 million in the second quarter of 2025. As we continue to actively manage operating expenses related cost against inflationary pressures. non-GAAP operating income was $10.6 million, resulting in non-GAAP operating margin of 3.8% compared to $8 million and 3% on a year-over-year basis, however, down from $19.9 million and 6.9% on a sequential basis.

Non-GAAP tax expense during the quarter was $2.6 million, reflecting an effective non-GAAP tax rate of 33.7%. non-GAAP net income attributable to ADTRAN Holdings was $3.4 million, or $0.04 per diluted share compared to breakeven results in the second quarter of 2025 and $11 million and $0.14 in the prior quarter. Turning now to the balance sheet and cash flow. We continued to make progress improving our working capital metrics during the quarter with $245.2 million of net working capital at quarter end. Inventory was $208.8 million, with days' inventory outstanding of 107 days, down three days sequentially. Trade accounts receivable were $205.8 million with DSO of 67 days, down one day sequentially. Accounts payable were $169.3 million, with DPO of 65 days, also down one day sequentially. These improvements contributed to operating cash flow of $25.9 million during the quarter, and free cash flow of $8.7 million.

We ended the quarter with $79.2 million of cash and cash equivalents, net repurchases of ADTRAN Networks SE shares and dividend payments made during the quarter of $22.6 million. This compared to $88.3 million at March 31st, 2026. Also of note, we recently completed the refinancing of our credit facility led by JPMorgan. This new facility replaces our prior credit agreement while maintaining total revolver capacity, reducing borrower costs by 200 basis points, and extending our maturity to 2031. Turning our outlook to the third quarter. We expect revenue to be between $275 million and $295 million, and non-GAAP operating margin to be between 1.5% and 5.5%. Our outlook reflects the current expectations regarding customer deployment timing, supported by continued strength in the Optical Networking Solutions business, healthy demand across cloud, enterprise, and government markets. This concludes our prepared remarks.

However, before turning the call back to Tom, I'd like to note that we'll be participating in the Rosenblatt Virtual Technology Summit on August 17th and the B. Riley TMT Conference in New York on September 10th. We hope to see many of you there. With that, I'll turn the call back to Tom.

Thanks very much, Tim. Okay, at this point, we're ready to open up for any questions people may have.