Ladies and gentlemen, thank you for standing by and welcome to ADTRAN Holdings’ Second Quarter 2022 Earnings Release Conference Call. [Operator Instructions] During the course of the conference call, ADTRAN representatives expect to make forward-looking statements, which reflect management’s best judgment based on the factors currently known.

However, these statements involve risks and uncertainties, including the continued spread and extent of the impact of the 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 cost, freight and logistic costs, manufacturing efficiencies, our ability to effectively integrate mergers and acquisitions, and other risks detailed in our annual report on Form 10-K for the year ended December 31, 2021, and our quarterly report on Form 10-Q for the quarter ending March 31, 2022.

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. It is now my pleasure to turn the call over to Tom Stanton, Chief Executive Officer of ADTRAN. Sir, please go ahead..

Thank you, Chantelle. Good morning everyone. We appreciate you joining us for our second quarter 2022 earnings 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 you may have.

First, I am pleased to report that we successfully closed the business combination agreement with ADVA Optical Network on July 15. This is a very important milestone in creating a global leader in fiber networking solutions.

The combination of ADTRAN and ADVA created a $1.3 billion revenue company with a substantially larger addressable market and the tools, technologies and scale to materially improve our competitive position as we enter a period of historically intense investment as companies and countries around the world move to fiber.

By combining these companies with complementary fiber networking portfolios and regional coverage, we believe we will be even more successful in the large investment cycle that we are now entering.

Taking a closer look at the two portfolios, ADVA has strengthened optical transport, Ethernet aggregation and network synchronization, targeting a diverse mix of communication service providers, Internet content providers and large-scale enterprise customer.

ADVA has driven innovation in this segment emphasizing network security, optics development and new SaaS offerings targeting virtualization at the edge. ADTRAN’s strengths are in fiber access platforms, residential and business networking solutions and software platforms focused on network automation and services.

By combining the two companies’ complementary portfolios, integrating their software platforms, we will offer end-to-end fiber networking solutions with a broader suite of high-value SaaS applications.

This solution set will help service providers and enterprise customers simplify the deployment of high-scale secure programmable fiber networks while expanding addressable markets. Integration planning for the two companies is well underway.

We are very excited about the progress we have made thus far, and we look forward to the broader and more differentiated portfolio enabled through this business combination.

In terms of the quarter, Q2 2022 continued the trend of strong demand for our fiber broadband solutions with a diverse mix of service providers across our key growth markets in the U.S. and Europe.

This demand continues to be driven by the build-out of fiber broadband networks paired with mesh WiFi solutions in the home and the adoption of cloud-based networking automation tools. Some of the key highlights for the quarter included the following. Overall revenue was up 20% year-over-year and 11% quarter-over-quarter.

Bookings were up 60% compared to a strong year-ago quarter led by our fiber access platforms, fiber CPE and mesh WiFi platforms. Combined fiber CPE and residential WiFi revenue was up 108% compared to Q2 of 2021, driven by the increased adoption of 10-gig fiber CPE and mesh WiFi platforms that complement our fiber access portfolio.

We saw continued rapid growth in our SaaS customer base, up 34% year-over-year with a growing backlog of customers of our Mosaic One service offerings.

Consistent with previous quarters and the latest market share report from Del’Oro and Omdia for Q1 2022, ADTRAN shipped more 10-gig OLT ports into North America and EMEA than the next 2 closest U.S.-based vendors combined. This highlights our continued success in fiber footprint capture with our fiber access platforms.

We also saw well-balanced growth across customers of all sizes with increased revenue from Tier 1, Tier 2 and regional service providers globally on both a quarter-over-quarter and year-over-year basis.

The success in the quarter was driven by the increasing demand for our fiber broadband solutions across a broad base of Tier 1, Tier 2 and regional service providers in the U.S. and Europe.

Our growth continued across these market segments despite ongoing supply chain constraints that have limited our ability to achieve our full growth potential and have negatively impacted our profitability. We expect these supply chain constraints to continue throughout this year.

Taking a closer look at what is driving our growth, we see an ongoing trend towards service providers adopting ADTRAN’s full portfolio solutions, including fiber access platforms, mesh WiFi platforms and SaaS applications. Looking back at the last couple of years, ADTRAN has been the fastest-growing vendor in capturing new fiber footprint.

This is especially true with 10-gig fiber access platforms that operators have shifted to for new buildings. As service providers are not connecting many of these homes previously passed with our fiber access platforms, we are starting to see a sharp ramp in our complementary fiber CPE and mesh WiFi platforms, as well as our SaaS applications.

We expect this trend to continue, resulting in sustained revenue growth in the strategic portfolio segments. Taking a closer look at our portfolio, investments in leading-edge platforms continue to pay off. These investments are focused on 3 key areas.

First is fiber access, where ADTRAN is the market share leader in open disaggregated platforms with our SDX Series. These platforms have led to many new customer wins, especially with Tier 1 and Tier 2 incumbent operators and MSOs.

The second is in-home service to library platforms where ramping deployments of 10-gig fiber CPE and multi-gig mesh WiFi 6 drove sizable growth in our revenue for the quarter. Finally, our software platforms are focused on network automation, service automation – optimization and improving customer experience.

This is led by AI-driven SaaS applications in our Mosaic One platform. Sustained SaaS customer growth over the past year, the introduction of the Mosaic One platform and the expansion of our SaaS offerings have this segment poised for continued growth moving forward.

The progress we have made in driving innovation and scale deployments for these focused platforms comes at a time when we continue to see a strong environment for funding fiber broadband networks. In the U.S., it is estimated that there will be about a $100 million in federal stimulus targeted for broadband over the next 5 to 7 years.

These funds have started to flow and will pick up momentum in the years ahead. In Europe, similar trends are occurring, with tens of billions in public stimulus funds paired with private investments driving a sizable increase in deployment of fiber networks.

The importance of full fiber networks as critical infrastructure for the modern economy is well understood by both the public and private sectors. This is driving ongoing investment into these areas despite the headwinds facing global economies. The growth trends we see in broadband solutions aligned with industry reports.

A newly published report by Del’Oro Group last week forecasted that the broadband spending will push the overall broadband access and home networking market from $15.9 billion in 2021 to $23.4 billion in 2026. And the PON equipment growth will be driven largely by XGS-PON deployment in North America, EMEA and CALA.

The lead analyst went on to say that we have made significant upward revisions to our long-term broadband and home networking forecast as fiber access infrastructure build-outs are resulting in more new subscribers and more CPE with advanced WiFi technology.

This view on both the regional market growth as well as the key technology shifts are very much aligned with our portfolio and sales strategy. In summary, despite continuing supply chain constraints, we are making great progress.

With increased customer funding, record demand, a diversified customer base, a differentiated product portfolio and the ADVA combination, we expect a very bright future. With that background, I will turn things over to Mike to provide a review of our financials. And then following Mike’s remarks, we will answer any questions you may have.

Mike?.

Thanks, Tom and good morning to all. I will cover our second quarter of 2022 results and provide our expectations for the third quarter. I’ll be referencing non-GAAP information with reconciliations to GAAP presented in our press release and supplemental financial schedules on our Investor Relations webpage at investors.adtran.com.

The supplemental financial schedules on our webpage also present certain revenue information by segment and category, which I will also be discussing today. ADTRAN’s second quarter 2022 revenue came in at a $172 million, up 20% year-over-year, led by a 24% increase in our Network Solutions segment.

Looking at a sequential quarter comparison, revenue was up 11%, primarily driven by higher sales in our subscriber solutions and experience portfolio. On a regional basis year-over-year, U.S. revenue grew by 12% and international revenue increased by 36%.

Our growth was attributable to increased sales to customers of all sizes, partially offset by unfavorable foreign currency fluctuations. Our customer diversity continues to be a focus with three 10% of revenue customers, two domestic distribution partners covering hundreds of broadband service providers in the U.S. and one domestic Tier 2 customer.

Our gross margins continue to be impacted by constrained component supplies and the associated increased supply chain expenses, and decreased by 7.4 percentage points compared to the year-ago quarter.

Compared to the previous quarter, gross margins improved by 1.2 percentage points due to the higher volume manufacturing efficiencies and some improvements in select component prices as well as fewer expedite fees.

While we anticipate continued supply chain challenges, we remain focused on managing higher component costs, freight expenses and expedite fees. Our non-GAAP operating expenses increased by 3% year-over-year and 2.4% quarter-over-quarter.

The increase compared to the year-ago quarter was driven by higher labor, travel and trade show expenses, partially offset by lower contract services and legal expenses. The quarter-over-quarter increase was primarily due to higher labor, travel and professional services expenses, partially offset by a decrease in legal expenses.

Moving to our operating profitability, the year-over-year decrease of 17% was the result of abnormally high cost of goods expense driven by supply chain constraints. The significant quarter-over-quarter improvement in operating profitability was driven by higher sales volume and more favorable gross margins.

Other income on a non-GAAP basis decreased year-over-year and increased quarter-over-quarter. The decrease on a year-over-year basis was mainly related to market-driven losses in our investment portfolio as compared to gains in the prior year, and realized foreign currency exchange fluctuations.

The quarter-over-quarter improvement was mainly due to higher realized foreign currency exchange fluctuations. The company’s non-GAAP tax provision for the second quarter of 2022 was a benefit of $1.5 million, primarily driven by the change in our annual estimated effective tax rate due to the requirement to capitalize R&D expense in the U.S.

beginning in 2022 and its effect on our valuation allowance. Closing out our income statement results, net income was $9.7 million on a non-GAAP basis with $0.19 per share earnings, assuming dilution compared to a net income of $8.1 million and a diluted EPS of $0.16 in Q2 of 2021. Turning to the balance sheet and cash flow statement.

Unrestricted cash and marketable securities totaled $74.9 million at the end of the quarter. For the quarter, we used $10.8 million of cash for operations, mainly due to an increase in working capital.

Net trade accounts receivable was $172.1 million at quarter end, resulting in a DSO of 91 days compared to 87 days in the prior quarter, and 78 at the end of the second quarter of 2021.

Net inventories were at $196.9 million at the end of the second quarter compared to $171.1 million in the first quarter of 2022 and $119 million at the end of Q2 of 2021.

We continue to carry a higher level of inventory and raw materials as we build supply to minimize further disruptions given the ongoing and extremely challenging electronic component market and the extended lead times for components. Revenues in the first half of 2022 were up 21% year-over-year.

And our order book remains strong with robust demand drivers. Our biggest challenge continues to be the ability to secure supply while managing higher procurement and logistics costs.

Looking ahead to the next quarter, the continuing effects of the COVID-19 pandemic, the ability of component supplies to align with our customer demand, the book and ship nature of our business, the timing of revenue associated with large projects, the variability of ordering patterns from our customer base, as well as fluctuations in currency exchange rates.

And any required purchase accounting adjustments related to the ADVA merger may cause material differences between our expectations and actual results.

This will be the first guidance provided for ADTRAN Holdings, which will include the consolidation of the ADVA financials for a partial quarter, beginning at the finalization of the business combination, which was on July 15.

We expect that the business combination will be accounted for using the acquisition method of accounting under ASC 805 with ADTRAN Holdings representing the accounting acquirer. With that in mind, we expect that our third quarter 2022 revenue will be between $320 million and $340 million.

After considering the projected sales mix and component availability, we expect that our third quarter gross margin on a non-GAAP basis will be in the range of 35.5% to 38.5%, still lower than normal due to higher expediting and freight costs.

We also expect non-GAAP operating expenses for the third quarter of 2022 will be between $103 million and $108 million. And finally, we anticipate the consolidated tax rate for 2022 on a non-GAAP basis will be in the low to mid-20s percentage rate.

Once again, additional financial information is available at ADTRAN’s Investor Relations web page at investors.adtran.com. Now I will turn it back over to Tom and we will take your questions..

Alright. Great. Chantelle, at this point we are ready to open up any questions people may have..

[Operator Instructions] Our first question comes from Rod Hall with Goldman Sachs. Your line is open..

Hi, this is [indiscernible]. Thanks for taking my questions. First of all, congratulations on the combination. I want to kick off, Tom, on access and aggregation revenue, it declined quarter-over-quarter subscription revenue growth. You mentioned the strong momentum in CPE deployment, broadband CPE deployments etcetera.

I am wondering is it more a function of supply than mix change in the quarter or why is access aggregation revenue are declining if product momentum is strong there?.

Yes, it is 100%. First of all, the mix that we do in any one quarter at this point is largely driven by availability, and then secondarily, driven by need, right? So if we have availability and components, then we really are trying to make sure that we keep customers operating.

So any – I hate to say it, but the mix right now is driven by availability, not just necessarily demand. But I don’t think it was really down. I think we were really talking about flattish, maybe slightly down, but flattish. But I will – that is a 100% driven by component availability..

Got it. That’s makes sense. Follow-up, I want to touch on the acquisition. Since announcing it nearly a year ago at this point, any thoughts whether in terms of addressable market or synergies. Any change really, like compared to your expectations in a year back, for the better or maybe even worse for that matter.

We all know how challenging supply has been, but any thoughts in general on the combination?.

No, no. I will tell you, nothing negative. I mean, there really hasn’t been customer-wise continues to be very positive.

Supply chain-wise, I do think that the combination and just from the kind of planning things that we have been doing with suppliers make us feel that the combination will actually be a stronger – be in a strong position as we go forward and trying to make sure that we get the right supply at the right prices.

Portfolio-wise, I think no real surprises there. I think we understood and did enough due diligence on the portfolio to know where we’re going to be able to plug in and kind of what the priorities were. So really no changes there. I would say, in general, it’s tracking – even timing-wise, right? It’s tracking pretty much the way that we had expected..

Alright. Okay. I assume you talked to customers, Tom. How are the conversations going? Is the bigger scale actually helping? Let me ask it in different way.

When do you expect to start seeing more inroads with new customers or even new projects with existing customers, given the combination of closing out?.

I think – I mean, there is been customer activity. Well, first of all, prior to close, we have to be very careful. And even at this point in time, we do still have minority shareholders that we just need to make sure that we operate in the right mode, which is that we don’t disenfranchise or in any way hurt the minority shareholders.

Having said that, the ability after the close for us to come together and make joint sales presentations and be able to really talk about the benefits of the portfolio is much better. And so those are ongoing right now.

The – I can tell you, I think that we have – I know of a few smaller deals, not necessarily Tier 1 deals, where I think we have actually seen, directly seeing the benefit. And then there are larger deals where we are in the – let’s call it, negotiation stage or kind of longer-term planning stage where I can absolutely see the direct benefit.

I mean, they are explicitly asking for the timing of the combination of the portfolios..

Got it. And I just got one last question for Mike, and then I’ll pass it on. Mike, synergies, I believe it’s about $52 million or in that range for the combination, I believe, by year two of the combination. Maybe any part from the cadence of it or linearity of these cost synergies, or should we think about modeling it? I would appreciate it..

Certainly.

I think we’ve said in the past that you would expect more of it in the second year because there is a large portion of the synergies that’s tied to the consolidation of our IT systems, and if you think about that as improves efficiencies throughout the back office and throughout the company, so I think you should think about the first year being quite a bit smaller than the second year.

So it’s more back-end loaded as we combine our IT systems..

Coming out of the second year, we expect to see that full number though going forward..

Got it. Very helpful. Thanks so much, guys..

Okay, thanks very much..

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

Great. Thanks a lot and congratulations also on the deal. I guess, I want to start with the revenue guide. And if you just say that it’s $25 million, $20 million, $25 million below the two companies’ models put together for the quarter.

Should we attribute that to half a quarter of ADVA revenue not being an interest or is there something else to attribute that deal?.

I’ll leave that to Mike. But maybe not half a quarter, but – go ahead, Mike..

I’m sorry, half a month. Half a month, I mean..

Yes, yes. Half a month..

That’s exactly right. So all the front-end revenue for ADVA will not roll up when we do the combined accounting. It is a little tricky to think through your complete model because you got to go IFRS to GAAP to non-GAAP, and then you have to look at a partial quarter as well.

So I think that is the biggest attribution there is that you don’t have a full quarter of ADVA..

Yes.

And how do you expect to report, do you expect to have – I mean, clearly different segments than you have now when you report next quarter?.

We will have the same segments. Remember, at the top level, our segments are network solutions and then services. So we will still report that way. The categories that we’re using today are three categories will be combined with what’s been shown on their side. So we will have three large categories still.

We will no longer have the smaller one that we have today, that is the traditional and other, which is really our legacy category. So that one would go away, but we will still have an access and aggregation category. We will have a category for subscriber solutions. So think about that as the customer premise equipment.

And then we will a category that really is optical networking fees, which is the most – the biggest piece of their business..

Great, helpful. Okay. Couple more here. I guess, when I look at your margin guidance, gross margin guidance, operating expense guidance for the quarter, it’s about what we would expect. But we’re not seeing the synergies yet. And you were asked about that in the last question, and we got some of that timing of how to expect the synergies.

So I guess, it’s almost a repetitive question, but I would also add the revenue synergy part to that.

Give us a little bit more detail on the timing of how to layer in the expense and the revenue synergies going forward?.

So on the expense side, like I said, you’re going to see most of that happen in the second year. So you got to think about something quite a bit smaller than half of it in the first year.

So I mean, you can come up with what you want there, but I think we’ve been modeling it more like an 80-20 or 70-30 with the back-end, the final year after those information systems, bringing them together and gaining those efficiencies.

And I think we have said on the revenue synergies for a while that we would expect that it’s going to take a while to be able to pull together, combined contracts and make our combined portfolio pitches and bring from one company to the other additional market ads, which I believe we said that we would see somewhere between 5% and 10%.

And at the time, that was $60 million on the bottom end to a $120 million on the top end. And we said that probably would take a couple of years to get into that range as well..

Okay, great. And then last question for me. Maybe, Tom, can you give us just color on all the EMEA wins, right? First of all, just how many are sort of really in shipping and deployment phase? How many are not quite there yet and also, any new RFPs or new wins to update on there? Thank you..

Yes, sure. So as we talked about one-time, we have one in full deployment, we really have two at this point that are really, I would say, either trying to get the full deployment or our infill deployment which are the two larger ones in Europe are only the biggest, the only constraint we really have at this point is a component constraints.

So I’ve got plenty of backlog really for Europe in general, it’s a matter of us trying to make sure that we get the right products. All of the rest of them, I think there were four more are moving forward. I think we actually have POs for two of those Tier 1s now at least in place.

And although, we’re not completely through the lab, with one of them we are, one of them we’re not and it’s just a matter of us getting components and getting started. So I would say they are generally moving along the same time lines that we were talking about before..

And how many are still in the RFP stage or roughly?.

It depends on the tier of customer I mean, honestly, my guess is we have more than 10 in different various stages. If you look at kind of Tier 1, which is what people tend to talk about, I’m thinking there is three or four, but I really don’t have that sheet in front of me for some reason today, so.

But I’m thinking there is three or four that are in different stages right now. There are so many countries there that you don’t realize there is a Tier 1 carrier there that you actually win, unfortunately or fortunately. But yes, but there is – like I said, we’re still fairly early in that cycle..

I appreciate. Thanks for the answers and again congratulations on the quarter and the acquisition..

Alright. Thank you..

Our next question comes from Paul Essi with William K. Woodruff. Your line is open..

Thanks for taking my question. I wanted to maybe drill down a little bit on the middle mile area. This has been getting a lot of attention. Understand ADVA has a solution that’s fairly competitive in the space.

And then on the ADVA call the other day, I guess, last week, the CTO discussed a new offering that they are bringing online at the end of the year.

I was wondering if you could talk a little bit about what your strategy is in the United States now that you’re together and exactly how you can approach these opportunities given the situation that you’re not totally merged and the size of the market in the U.S. and all and then also overseas globally.

The CTO had mentioned that there is a big pent-up demand for upgrading as they upgrade the edge, you need that little mile to build it out. I don’t know if you could expand on both of those things..

Yes. So I mean, what you just said is exactly kind of where our thought process has been all along, which is in the U.S., especially with the smaller carriers. With the larger carriers, it’s a different process.

But with the smaller carriers, I mentioned in my notes that we’re seeing more and more of the carriers, the smaller carriers more especially, really take our complete solution base.

And what they are looking for is somebody is one company that can come in, offer as much of their network as possible and really make sure that the entire thing works and that they can scale, and they are not necessarily trying to pick the cheapest, hopefully, the best, but the cheapest in any particular segment.

They are really looking for the best overall solution and ADVA plays right into that. So our ability to go in there and help them aggregate that portfolio into our Tier 3 and Tier 2 solution base is standing right in front of us. So we do have – the biggest guidance that we have at this point is don’t hurt the stand-alone portion of the company.

That’s a very easy not to do when we’re talking about additive customer bases here in the U.S. So that one is open right now. We still have some alignment to get done, but I think that’s going to happen in a very quick and a quick fashion. But the second pieces of the upgrade piece that were talking about now.

And it’s very straight forward to see that you upgrade the access network first, typically, because you have to bring customers on board. And then as you start bringing customers on board, you upgrade that mid mile.

And our thought has been that mid mile upgrade has typically about a year to a 1.5 year after you start seeing that real big movement in front, and that’s exactly what we’re seeing today.

So the alignment is really good, the pull from larger customers, that’s typically on a customer-by-customer basis where they are trying to see the benefits of us in that space is we have a complete portfolio that now competes with the biggest players in the space, and that’s really what they were looking for, especially in Europe, where they are kind of – it’s much more difficult after you’ve seen them kind of re-rationalize their security positions on certain vendors.

So timing is really good for us. But there is still some sales alignment that we will be doing through the end of this year and trying to make sure that we have the right go-to-market strategy..

Okay.

Would you care to share any numbers on the size of the market? Do you think it might be – how much you guys can carve out over the next couple of years?.

We have – we had some numbers. Those numbers are right – literally right now being upgraded. I mentioned the Del’Oro report. And we were talking about the broadband market 2 years ago about it being underrepresented and what people were forecasting versus what was really going to happen.

And I think the thing that we were seeing is one of us – first of all, serious customer demand. Second of all, announced projects by major carriers here in the U.S. and major carriers in Europe and those numbers just weren’t moving yet. And then we had the third component, which is in Europe, while it was effectively taken out of the market.

And all of that hadn’t filtered through. You’re just not seeing those numbers come to fruition in that broadband report. Some of that $24 billion that increase is an increase in the segment that is in the mid mile, there is a portion of that in that as well.

But – so our total available market, Mike, if you remember, a year ago, we were basically stating the reports and that was somewhere in the – was it $16 billion to $17 billion, which we think right now is realistically has grown two-thirds, if not more..

Okay. Great. Thank you. I’ve got one other question. I wanted to revisit your residential SaaS. Tom, the last quarter conference call, you’d mentioned there is a huge backlog and you’re onboarding a lot of customers. And I’ve seen your subscription solutions and experience was up 44% sequentially.

I know a lot of that probably went into the Tier 1, but I got to believe the Tier 2s and Tier 3s saw some of that growth as well. Last time I think we spoke you mentioned $1.3 million at the end of March.

And I’m thinking my trajectory looks at about a $1.5 million to $1.6 million signed up, but that could be actually a little low now with the acceleration.

Do you care to comment on where you might be on that before signed up to people?.

Yes. So without a doubt that number is growing and that number is growing as we’re able to ship more CPE.

The number of customers itself, which is – I’m not sure what do you mean by growing, so there is subscribers and then there is customer, there is carriers, right?.

The end subscribers, the actual people signing up and paying the service provider..

Yes, the end subscriber itself is really substantially driven by our ability to ship CPE. So we did see a strong uptick this quarter. But the biggest throttling gate on that right now is our ability to ship CPE. So I’m not sure what else to tell you, except that that number is bigger than what it was last quarter..

Okay. Well, if you – I know that you don’t want to open up until it’s material, but if you take a $5 million in terms of number that was given it looks like you’re almost doing $0.20 a share on the $77 million after tax.

So it’s becoming meaningful to the earnings and warning us at what point would you that you still worry about the visibility as far as being able to come out and talk more about it..

Yes, I’m not sure where that math is coming from because I don’t think we’re at $0.20 a share. At this point I’m not sure where that particular piece is coming from.

And I will tell you that there is – one of the things that’s kind of tricky on this is there is a broad base of different SaaS applications, and they all have a different dollar component or sense component to them on a subscription basis. So what we have is we have some that are at the very low end.

As we ship more CPEs, especially the WiFi 6 CPE that we had just a fantastic quarter with. The larger end number tends to grow, right, the bigger numbers because they tend to buy the complete portfolio of solutions including operations management as well as customer experience. So that will continue to grow, but we’re not at $0.20 a share..

Okay, alright. Thank you. I will pass it on..

Okay, thank you..

Our next question comes from Paul Silverstein with Cowen. Your line is open..

Thanks, guys. First on clarification. On the 10% customers, I think I heard you say three to which U.S. distributors one U.S.

T2, did I get that right?.

Yes, two U.S. distributors and one U.S. Tier 2..

Mike, how much is distribution accounted for revenue as a percentage of revenue?.

We usually don’t break out how much goes through disposition. It’s a substantial portion of our....

I think we are really get what we said, Paul, I believe, is that it’s at over 50% – Tier 3 they are over 50% and like 99, I don’t want to be an exact number, but a very, very high percentage, and the 90% go through distribution and none of that has changed. So, it’s still….

Tier 3 is over 50% of revenue and distributions over 90% of the Tier 3.

Is that – I am sorry, is that what you just said?.

Yes. Except I don’t want to give you an exact number on the percentage of Tier 3 that go through distribution because I don’t have that. But my sense is it’s – yes, it’s in the 90-ish percentile..

Alright.

I am sorry, Mike, are you going to say something?.

No, no. I will tell you that’s in the U.S. on....

Understood. And with – I am sorry. Go ahead..

Go ahead..

The New Yorker in me, I apologize. Good.

The Tier 2 10% customer, can you tell us was it just over 10%? Was it meaningfully over 10%? Can you give us some sense if that’s the number?.

There was over 10%. I don’t think it was 20%..

So, it’s 10% to 20%. Alright. I guess, Mike, if deferred revenue – see I was doing about $5 million to $6 million of quarter, just $5 million to $6 million, numbers right at about $5 million to $6 million each for the last several quarters. I know this is a business combination, not technically an outright acquisition.

If it was an acquisition, you lose the benefit of the deferred revenue.

In this case, is it the same thing, or do you – can you still get that benefit?.

I think we still get the benefit. Now some of this is still yet to be worked out with our accountants before we report. But I think what you are going to expect to see is consolidated revenue all the way down to EPS.

And then we will eliminate the minority interests, which pull out all of the profit after tax profit associated with the minority interest, and then we will have a after-tax profit and EPS associated with ADTRAN Holdings. So, we are going to report the whole thing all the way down and then pull the minority interest at the bottom..

When you say eliminate, you mean there will be interest line with the 30% that you don’t own, that will all be accounted for.

It will just be a net, either profit or loss?.

That’s right. But we don’t do anything with revenue or all the rest of the way down. And I do expect that as those deferred revenues come through that we will see those in the combined company..

Alright. I think I heard you say fiber to BMS [ph] WiFi were up 108% driven by 10G. I trust from the numbers of fiber to BMS WiFi is not all of your subscriber solution revenue, that there is probably still some legacy to yourself something as well.

Is that correct?.

Yes. There is also some enterprise business in there as well..

Alright.

That leads me to my real question, which is what is fiber to BMS WiFi in absolute dollars? How big is it? When you talk about up 108%, what’s the revenue base now or wasn’t?.

Mike, do we break out that number? I don’t think we break up that number..

We don’t break it to that level. But I can – of the piece that is subscriber solutions and experience, the lion’s share is in those two pieces..

Alright. So, I mean we are not talking about $5 million, $10 million, $15 million..

No..

It’s $40-plus million or so, the 54%. That’s what it sounds like from what you just said..

Yes. It’s a big number, yes..

Alright. And Mike, I think you made about SaaS customer base, it was up 34% year-over-year.

I trust you are referring to the number of customers as opposed to SaaS revenue or was that a SaaS revenue number?.

That’s the number of customers..

Alright. I have got a similar question..

But that service provider customer is not necessarily just subscribers that’s the number of service provided customers..

Understood.

How many customers have you had for sales?.

Over a 1.5 million..

Over what?.

End subscribers, excuse me, subscribers over 1.5 million, right..

How many service providers are taking your sales offering?.

It’s hundreds. I don’t know the exact number..

Good enough. Alright. I understand. Sorry, I have got a couple more of this measure. In terms of SaaS revenue, Tom, Mike, can you give us any idea where you are at right now? I assume it’s still fairly small because it’s early.

But can you give us any sense for what the departure point is?.

Yes, it’s not at $50 million yet, it’s still in that same range that we have been talking about..

That same range being?.

$5 million to $50 million..

$5 million to $50 million. Okay.

Closer to $5 million or closer to $50 million?.

Probably closer to $5 million, to be honest with you. Yes, of course it’s not….

That’s what I would expect.

Tom, I apologize, you guys have launched the SaaS effort approximately when?.

So, we have had multiple different iterations of this. So, we started off with relatively simple solutions maybe 4 years ago or so. Then we added our managed WiFi roughly a year to a 1.5 year. Then we just brought out Mosaic One in kind of earnest at the maybe beginning of this year.

So, that’s been – and that is really what ties all of our solutions together. We also have – used to be called MNI, which is network operations and maintenance. And those are all now brought together on Mosaic One. So, that’s really the thing that actually we think is a big key driver for us in the future..

And I trust of that relatively small base, understandable it’s early, but I trust the growth is well above the 34% customer growth..

Yes, it is. Yes. And it is somewhat – it is substantially dependent upon our ability to continue to ship CPE as well. Yes..

Understood. On the revenue synergy guidance, I assume it’s stated to be obvious that you guys really don’t know. You hope to drive revenue synergies of $60 million to $120 million in several years. But it’s not like there is some formula and you could identify X, Y and Z. You are talking about it being fairly distinct.

That’s your hope, but that’s not – I assume there is not a ton of empirical data behind that..

No, there is not because there is RFPs that have to be won, and we got to make sure we keep up with the competitive portfolio. I mean there is plenty of variables in that. And for a long time, we didn’t want to really talk about revenue synergies because it is unknown.

We know there is going to be some, but trying to actually nail down what we are going to be able to bring forward in the next 2 years is very difficult. So, that’s why we came up with a range, just to be able to say like, we know there is going to be some, but it’s – I don’t know how you materially, how do you forecast that in any granularity..

Understand. That’s what I thought and I just wanted some more. On the expense side, I know there have been a couple of other questions on it.

But Mike, when you talk about 20-year one, 8-year two, I assume the bulk of the 20-year is not going to be realized in the next quarter, but would be in the latter it would be in the first and second quarters of calendar ‘23..

Yes, that’s a good assumption..

Alright. And finally, Tom, I was a little bit confused on trying to follow you on the EMEA. You said – if I heard you right, there are roughly 10 RFPs, including three to four Tier 1 CSPs that are out there. You mentioned you have got four wins, to which I assume BT and DT are now in full deployment, only constructing components.

But on the other two, I thought you would just say you have got POs for the other two, one of which you are through the lab, but the other which you are not yet through the lab. I want to make sure I read that correctly.

And two, you have POs for both of those, notwithstanding that you are not through the lab with one of them yet?.

Yes. I do have POs for both of them..

Alright. And then you said four more moving forward, and then you referenced those two of the POs.

Are there two additional ones beyond these two?.

No. In total, there are six. That’s what we are talking about. So, it’s really two in full steam. Two are, we get POs for, it’s a matter of us getting things rolling with them and then two that are not yet to that point. We are still in lab work where we have deliverables that we have to give them..

But they are beyond BT and DT, the other two that you have POs, when do you expect initial revenue and when do you expect meaningful revenue?.

Our initial revenue is imminent and it’s really dependent upon supply. So, I would expect to see initial revenue maybe as early as this quarter. Meaningful revenue, honestly, it’s going to be about supply.

It’s all about how many sign and lease switches I can get, how many LTs I can get because it’s – the reason they place these POs early was trying to make sure that we understood how serious they were in moving forward and trying to get their supply requirements in the Q. But it’s really – most of the stuff is the ramp is dependent upon supply..

Supply was not a gating factor.

Could these be in the tens of millions on an annual basis, the two you are talking about?.

Yes..

Alright. My last question, honest. On gross margin, Mike, if I have the numbers correct out of the 33 this past quarter, and I note there may not be apples-to-apples because they do non-IFRS. But it sounds like from your guidance that while you are still being hampered understandably by constraints that at least is turning in the right direction.

If I remember correctly, you bottomed out hard in Q3. There was a little bit of progress in Q4, a little more last quarter, a little bit more this quarter. Now it sounds like from your guidance, that’s not ADVA-enhancing margins because they are even below yours right now.

It sounds like you are just seeing a little bit better from a cost perspective in the lower expedite.

Do I have that right?.

Partially. So, when you are looking at Avis 33, you are looking at IFRS and when you pull out that capitalized R&D piece and the amortization that’s going through COGS, they actually provide a pro forma U.S. GAAP comparison that if you look back at last quarter, they would have been almost 39.

So, I think when you put the two together, now we are still in a pretty uncertain environment here. I think it comes out very close to what our guidance is. So, we are not expecting any real significant improvement in the near-term here.

But like I have said in the past, we expect – in the longer term, we expect incremental improvement to get us back into that range..

So, Mike, all the step up in your guidance in Q3 is the impact of that as opposed to some incremental improvement in costs?.

That’s the largest piece of it..

Alright. I appreciate all the responses. Thank you..

Our next question comes from Ryan Koontz with Needham & Company. Your line is open..

Thanks for the question. Most of mine have been answered, but I wanted to drill into the U.S. business, given the real strength in international, it looks like U.S. was a little light at 12% growth. Any changes in mix there across your different customer segments and then how do you feel about U.S. growth over kind of the balance of this year? Thanks..

Okay. Let me – first of all, we did have a stronger CPE quarter, and that was true pretty much globally and definitely true here in the U.S. But I want to make sure you – that we characterize it properly. U.S. could have seen substantially more growth if we had more material. And that’s both on the OLT side and on the CPE side.

So, here again, we are just hampered by our ability to get components. But that’s where it turned out this quarter, specifically because of the parts that we were able to get and how we are able to allocate those parts. But we have seen demand continue to grow on the CPE side. I mean bookings were very strong and very strong on the CPE side as well..

Is there a big difference, Tom, in the kind of ingredients there, the bomb [ph] between international and U.S.

that kind of led you to be able to ship more international?.

There is some difference in the ingredients. Our European customers are tending to go – so first of all, they tend to be larger, right, larger customers, larger customers tend to go with our disaggregated solution. So, that’s the SDX product platform versus the Total Access 5000 platform.

So, availability of components is somewhat to drive some of that. And then a lot of our decisions right now are based off of very hard commitments that we are giving to different carriers to make sure that we don’t hurt anybody. So, I would say that’s a really big piece of where – and we are really not looking at it.

I hate to say that we are not looking at what makes the quarter look better geographically or whatever. We are really going by how do we make sure we don’t lose any customers..

Yes.

And on the mix shift here in the quarter, any trends there across the Tier 1, 2 and 3, so you can point out in the revenue side?.

Yes, I think the biggest thing, and here again is because it’s still all driven by component availability. But we continue to see strong demand as networks build out. You know about the build-out that’s going on in Europe right now and what that means for OLT demand.

I think the thing that’s really picked up, though is we have enough installed ports now to where we are seeing a very meaningful pickup on the ONT and the RG side. So – and that’s really what we expected. A lot of the revenue associated with the fiber home is in the home, and that follows the deployment of the OLT.

So, I think both of those are going to continue to grow, but we are going to see that bottom one continuing as well as people actually get these networks up and running..

Sure. Makes great sense.

And then on the – any update you can give us on the subsidy programs, the ARPA and [indiscernible] kind of bookings and are you starting to see any impact on revenues there?.

We have and we started actually in the previous quarter, I am not sure if it was the last quarter, maybe as early as the fourth quarter, we started seeing orders. Those have picked up.

We actually have some customers that are – they are definitely on our top, we need to make sure we take care of this because of the commitments we have made, and that’s continuing to flow through now. But back then, it was predominantly we could see it more in the Tier 1s and the MSOs, let’s say, but that’s got a much broader based at this point..

Super helpful. Thanks Tom..

Okay..

Our next question comes from Tim Savageaux with Northland Capital Markets. Your line is open..

Alright. I made it. Thanks for letting me hop on Paul’s follow-up call here. So, a couple of questions, try to keep it tight. First, well, maybe an observation, I think it’s pretty extraordinary, you are able to put up the revenue number you did without any Tier 1 10% customers. But I would ask, first question is you cite the 60% order growth.

Did you see that Tier 1 activity perhaps in the orders? And first quarter out of the box here, I think some more explicit standalone guide is in order. It looks to me like standalone, you are guiding up toward $180 million in Q3. Is that about right and reflective of that strong order growth? And I have one and only one follow-up..

Okay. So, let me tell you that I will start by saying it is not – our guidance is not reflective of our order growth. Our guidance is a 100% reflective of what we think we are going to be able to get in material. So, the two unfortunately are disconnected. And as far as the Tier 1 piece, the demand on the Tier 1 piece hasn’t lightened up a bit.

The order rate in the Tier 1 piece hasn’t lightened up a bit. It’s just a matter of what parts we can get and where we need to ship them. So, we have three customers, Tier 1s that could have easily been 10% customers if we could have shipped what they were asking for. So, just to kind of set the stage there. Mike, what are we doing about the….

Standalone?.

Yes..

So, I think you said $180 million, I would say it’s probably a range between $170 million and $180 million would be the standalone guidance if you were to pull it out from the larger number..

Yes. Okay. Got it. And then if I look at – and there is usually – you are right, in 600 basis point, 700 basis point difference between IFRS and the non-GAAP stuff for ADVA.

Still though, it seems like you are being pretty – unless you are talking about some incremental supply impact, I see OpEx about $10 million higher than I would have thought, standalone combined and prorated for 11 weeks. And so that’s the R&D coming down from the COGS line. But I don’t quite see that amount being put back up.

So a, it seems like we should be biased to the high end of your gross margin range unless you are being incrementally conservative on supply, or b, are there some short-term expenses implied in OpEx around the deal or something else that may not recur?.

Well, the non-recurring stuff, I really have not built in because we are not sure what that’s going to be until we get down deep into the accounting here. And I would expect that probably closer to the midpoint makes more sense than the high end because we are still experiencing issues out there.

Even though we had a little bit less of an impact on a standalone basis this last quarter to our gross margin, we are still experiencing effects of elevated freight and logistics and then component issues pop up all the time. So, I think if you think about the midpoint, you are probably better off than thinking about the high end..

Yes.

I hear that, but are you intending to guide down sequentially, gross margins standalone for either company or like or flat?.

Flattish..

Okay. I think there is a little conflict there, but that’s alright. I will work it out. Thanks very much and congrats, especially on the order book..

Thanks very much. At this point, I think we are out of time. So, I appreciate everybody for joining us, and we look forward to talking to you next quarter..

This concludes today’s conference call. You may now disconnect..