Prepared remarks
Ladies and gentlemen, welcome to the ADTRAN Holdings, Inc. Second Quarter 2026 Earnings Conference Call. Please note that this call is being recorded. Operator provided instructions. Now I would like to turn the call over to Tom Stanton, Chairman and CEO of ADTRAN Holdings, Inc. Tom, you may begin.
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, the 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, but 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, and 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 LiteWave 800 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's 1 Giga alongside growing demand stemming 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 remain 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 an unfavorable product mix as our ability to ship higher-margin products was impacted and ultimately lowered gross margins. As 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% to 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, while down 5% year-over-year and 4% sequentially, U.S. Access & 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 expense related costs 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 continue 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 3 days sequentially. Trade accounts receivable were $205.8 million with DSO of 67 days, down 1 day sequentially. Accounts payable were $169.3 million with DPO of 65 days, also down 1 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 31, 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 and 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 will be participating in the Rosenblatt Virtual Technology Summit on August 17 and the B. Riley TMT Conference in New York on September 10. We hope to see many of you there. And 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.
Questions and answers
Operator provided instructions. And our first question comes from the line of Irvin Liu with Evercore ISI.
Tom, can you help us understand the nature of the project delay at the single large customer? Is this more of a financial or strategic decision on their end? And what gives you assurance that this is demand deferred and not demand destroyed?
Well, the biggest assurance that we have, and of course, we do talk to them on a very, very regular basis. But the biggest assurance that we have is they've come out and recommitted to their plan. So including the timing of their plan. And it's a very visible, very easy to check on number. Those plans haven't changed. So I think really what—maybe a high-level way to look at it is they have multiple plans now in flight. Some of them include the normal footprint expansion that we have been involved in for a few years now. Some of it has to do with Huawei replacement or vendor replacement, which is kicking off. Some of it has to do with upgrades and speed. And then some of it has to do with expanding that footprint expansion to even a greater extent than they had initially planned. All of those are in flight. But what we're seeing right now is kind of a repositioning of priorities within those different buckets. And we may see one of the other ones kick in. We expect to see one of the other ones kick in sooner than originally planned. This is all just getting all the plans in place before they move forward, and they have enough inventory to continue to deploy at their committed rate as they reposition these plans. Does that add some color? Does that make sense? So I know it's a long drawn-out answer, but...
That did, Tom. And then for my follow-up, I guess it's good to see your commitment to your 10% operating margin target, and you're currently at low to mid-single digits due to product mix headwinds in addition to component and freight cost headwinds. But can you discuss any sort of margin mitigation strategies you might have and walk us through the path from low to mid-single-digit operating margins currently to perhaps low double-digit margins longer term?
Sure. Maybe the easiest way to think about that: of course, the bigger driver in all of this is revenue. So we had envisioned on our historical profile getting into that double digits right around the low-300s, say, somewhere between $310 million and $320 million. And that assumes a gross margin in the 42% to 43% that gross margin this quarter, and I will say it was this quarter. I don't want to minimize the fact that it was low. But we've had over two years, almost three years now of raising gross margins pretty much every quarter over any significant length of time. You can just see the trend moving upwards. And that's benefited us. Of course, that allows that revenue number to be lower when I think about $310 million, $320 million—that's kind of in the midpoint of where our margin has been. But the environment is tougher. The way that it impacted us this last quarter was it got rid of some of our flexibility. We saw the decline with our large customer, and we had plenty of demand. The problem is the pluggables are really hot right now. Those are not high-margin products. We shipped a significant amount of those. We could have shipped a whole lot more if we had access to them. And some of the higher gross margin products were also just limited in supply. So our flexibility got impacted this quarter. I don't think that flexibility problem is a fixed next-quarter problem. So we've kind of factored that into our numbers. Now what we're doing: one is we can, of course, raise prices. I don't want to over-rotate on that, knowing that there was a mix problem more so than anything else. But we have already executed on our price increases, and we continue to keep our pricing in check with what we think the supply environment is going to be when those products ship. So we'll continue to execute on that. We have started doing some redesigns, and that's just to give us more supplier flexibility. I think the gross margin piece is not the thing I worry about most because I don't think we're in a really bad place. I think we do have a mix issue. But we need to make sure that we can continue to supply no matter what happens. So we have kicked off redesigns in order to effectively mitigate supply issues, which ultimately will improve gross margins. And then, as we had talked about maybe a year ago or so, we continue to move on reducing our OpEx in our COGS-related areas. So we're seeing some benefit in gross margin, although it was hard to actually see through that this quarter.
And our next question comes from the line of Ryan Koontz with Needham & Company.
Maybe just following up on the last question and your comment about supply impacts on higher gross margin products. I think we've all been assuming that memory has been a big concern, mostly impacting the CPE side of the business and maybe we saw some of that in the quarter with customers running inventory hotter or maybe even some pull forward before price increases that drove the big uptick in Q1. So maybe you can kind of unpack the customer-premise gross margin trend as well as your comment around higher gross margin products being impacted on supply?
Yes, sure. So it is more than memory. I'm not the first one to tell you that, but it has gotten tighter in other areas. Optical amplifiers are definitely tight. There are certain pieces of silicon that are getting very tight. So it is a broader base set of problems. There are some areas where even PC boards are getting tight. What's really important—the way that it impacts us is we still tend to book a lot of what we ship within the quarter. That ability to flex up for incremental demand, which we definitely saw this quarter, especially in optical, has really diminished. So our forecasting is more important. I would say the hardest thing at this point: memory was one of those things. I wasn't so much worried about the pricing of memory. I could pass a lot of that on. What I couldn't do was make supply that wasn't there. At least in our supply chain, memory today is not the biggest issue. There are issues that have eclipsed that, and memory, although still important, isn't as problematic as it was six months ago or three months ago.
Got it. That's helpful. And maybe as a follow-up, your comment around optical and the strength you're seeing in enterprise and cloud. What sort of use cases are you seeing there? Is this mostly for your line systems? You talked about pluggables. Can you give any color on product mix there within the enterprise and cloud use cases? That would be really helpful.
Yes. So definitely on OLSs as well as standard pluggables. I would say across the board, it was strong. OLSs or our line systems were a little more difficult to ship because of the constraints that we just talked about. Pluggables are generally about upgrading bandwidth. We have some hyperscaler content there, and we're seeing a significant uptick in that activity as people are trying to upgrade their networks. So I think it's all about bandwidth increases, not so much footprint expansion, but just bandwidth increases.
Our next question comes from the line of George Notter with Wolfe Research.
I was just trying to get a better sense for where you guys are on the balance sheet. I know there was some talk about the real estate transactions. Kind of wondering where you are on those. Any update would be great.
Tim, do you want to grab that?
Yes, will do. The best news there is Huntsville is very hot. The first 600 or so individuals for Space Command will have seats in housing by the end of this year. We've seen a large uptick in military defense and other contracts being awarded to the Huntsville area, and that has driven up significantly the interest in our property. Beyond that, George, when we have something to announce, we will announce it. But we're continuing to hold out for the best deal and the best opportunity for the company.
Let me just add a little because I also am very nervous about trying to pre-forecast something. Our showings on that property have gone up substantially over the last couple of months.
And our next question comes from the line of Bill Dezellem with Tieton Capital.
You put out a press release this morning relative to TOHKnet and then beginning the trial. Would you talk a little bit about that? In the spirit of which I asked this is I don't recall ADTRAN being in Japan historically. So provide some backdrop there, if you would, please.
Yes. To be honest with you, I don't have that press release in front of me. But we do sell into Japan, and this was in the optical space that we have sold for some period of time. I wish I did have that press release in front of me, Bill, but I don't have it momentarily.
Okay. Yes. So that is—Japan is an interesting area because they were one of the first to build out GPON. The population base is pretty much covered. They are, I would say, leading the charge in moving to 50 gig. We have a lot of people trialing 50 gig and wanting marketing capabilities around 50 gig. From a country perspective, Japan is probably at the forefront of literally looking at making that transition more wholesale.
Great. And then relative to the supply issues and the customer schedule adjustment, how does all of this affect 2027? I guess another way to ask that is the second half of '26, is that a long enough period to adjust component supply chain and make these various adjustments that you need to be back on track? Or is this a longer sort of adjustment period?
Let me answer that a couple of different ways, and I'll try to be as direct as I can. One is the root cause of the situation was really born from a dynamic within a particular customer, which we think will be worked out before the end of the year. If it weren't for that route, we would not be talking about this. But it did highlight that flexibility within the rest of the product set is getting tighter and tighter. I want to first put it in the right frame. I don't see that tightness going away in the near term. There is talk about additional capacity, especially in the higher nanometer process, which is where our products are—let's say 12 nanometer and up—coming online next year, which would alleviate some of these issues. But I think we're in a tighter supply chain environment. The best way for us to mitigate that tightness is literally better forecast and more order coverage. I preach that to our customers every time I can: you need to get your orders in. We need visibility to secure supply. Customers are getting it; it's taken a long time, but I do think customers are getting it. We can mitigate a particular chip today, but a different chip or problem could emerge in six months. So we're living in a tight period right now. I can't tell you it's going to disappear next year or in which quarter it would disappear. It's all about discipline internally. We've gotten some more key components into our inventories to mitigate known problems. But like this quarter, there were issues that were not an issue last quarter, so we have to get better at forecasting future issues, not just the current ones. That's not a great answer, but that's the environment we're in.
That is helpful. So I'll ask one more question before I hop off, Tom. Does that imply that we should anticipate you all building extra inventory in certain areas so that you can adjust that flexibility, not with your supply chain—the product mix flexibility—not through the supply chain as much as just through your own warehouse, for lack of a better phrase?
Yes, it does imply that. And I will tell you that has been happening already. You just haven't seen it so much. The reason is we've been able to draw down old inventory from the supply chain crisis down to a point where we're mitigating that increase. But you can think about old inventory versus new inventory and that new inventory is directly related. Our inventories would be going down more if we weren't adding these key components. At some point that old inventory is going to not be so old anymore, and you'll see an uptick in that inventory. I don't think that's going to be material to the numbers.
Our next question comes from the line of Dave Kang with B. Riley Securities.
First question is wondering if you can provide what the book-to-bill was and more interest in optical book-to-bill, if you can provide those?
We really don't do book-to-bill as a metric that we actually publish. I will tell you optical was probably the strongest area, and it was—let's just say, all the numbers were either at 1 or above 1.
Got it. And then regarding the revenue miss, obviously, it was a project delay, but it sounds like if you had enough components that you would have made up that revenue. Was that the message? Basically, you're saying that demand is so strong that it would have made up that $12 million revenue shortfall if you had enough components?
Yes, without a doubt. I mean, no hesitation at all. If we had plenty of material, we would not be talking about the downtick.
And what about the current third quarter? Can you talk about that project delay where you are? And also how that's going to play out in third quarter? Obviously, you're looking for sort of a flattish quarter sequentially.
Yes. So we don't see an uptick in the customer that we're talking about right now. To be honest, we just don't see a change in the procurement environment. So we think things are going to stay in the status quo that they're in right now, maybe even get a little bit tighter in certain areas. We are fighting for more supply—calling people every day trying to get more of whatever it is that we have on order or don't have on order. So forecasting what's going to be available and what's not has become central to our process. The guide assumes the environment doesn't change.
I was juggling a couple of things. Obviously, you've seen that the FCC is planning to ban Chinese transceivers. Just wondering if you were sourcing transceivers or pluggables from Chinese vendors? And if so, how quickly can you pivot to American vendors?
We do source some pluggables and transceivers from China. We also source from other places. I'm not versed enough to give you a direct, specific answer on timelines to pivot to U.S. vendors on this call. That's something we can cover in follow-up—please call in and we can discuss further.
My last question: any update on LPO activities? Any qualification or status update?
It's still on track. We would get units in around mid-year or second quarter and get them to customers. We do have a significant amount of interest in the Quattro as well. We've got multiple customers, including multiple hyperscalers that are very interested in that product. The Quattro actually delivers earlier. I would expect to see trial units before, let's say, sometime in the first quarter. We have people trialing alpha units right now, and that seems to be going well. Both the Quattro and the LiteWave efforts are on track and getting traction.
Our next question comes from the line of Tim Savageaux with Northland Capital Markets.
You mentioned a growth metric around the cloud portion, talked about 25% of revenue being from government and enterprise. I think it was something in the 90s in terms of cloud growth. I just want to go back and confirm that and also try to get a sense of within that 25% of revenue, how large is the cloud piece. I'll follow up from there.
Let me see if I have that. The specific number we gave was 97% growth in hyperscalers. We look at cloud as broader than hyperscalers because that would include large content cloud providers. Hyperscalers specifically was 97%. We signaled on our last call that we expected that area to be solid this year and to continue to grow, and that seems to be the case. Regarding the size within the 25% segment, my sense is it's somewhere between 30% and 50% of that category. It's getting to be a big piece of that pie.
Of that 25%. Okay, I got it. And just a quick one, any 10% customers in the quarter? And also, as you look out to the Q3 guide, what's happening from a segment perspective? It sounds like you don't expect Access & Aggregation to rebound given the customer push, and will optical continue to grow?
Direct answer: absolutely yes, we expect optical to continue to grow. I talked a little bit about the order flow there. Subscriber is the most difficult to forecast because it is very demand driven—people manage inventory and then go away for a while, so that segment is more volatile. Access & Aggregation: we don't expect a rebound because that single customer is such a large piece of that content. Access & Agg in Europe, notwithstanding that customer, was actually pretty strong, and we continue to expect that strength in the third quarter. But optical will be the biggest driver. Tim (Santo) can confirm the 10% customer question.
I can confirm there were no 10% customers this quarter.
Our next question comes from the line of Michael Genovese with Rosenblatt Securities.
Tom, I want to ask more about pluggables. I want to clarify a couple of things. When you mentioned the mix shift earlier and that you were selling more pluggables, could you just talk about what business specifically that was in and which were kind of pluggables and selling more pluggables as opposed to embedded systems in optical? Is that for DCI and long haul and metro? Is that what you were talking about?
Yes. More specifically, we probably had the strongest 100ZR quarter we've ever had. That should tell you what we're talking about.
Okay. That makes sense. And then you mentioned earlier the Quad and the LPO product, which I think has a different name. Could you talk more about the difference between those two products?
Yes. The other product we've discussed is the LiteWave 800. The Quad is actually a 4x100 that's in the MicroMux family. So it's a 4x100 Mux that's very, very efficient. It plugs right into a router and gives you multiplexing capability at a very low cost. I don't know if there's anything out on the market today that's like that.
The LiteWave 800 is different because it's a new market inside the data center for you as opposed to between data centers where most of your business is now. Is that a correct understanding?
Yes. The LiteWave 800 is intra-data center, which we have not played in before. We don't have a MicroMux product either. Both of these are incremental to the products we have traditionally done, but the LiteWave is a further reach.
The timing: MicroMux is earlier in '27 and the LiteWave is mid-'27. Is that correct?
The MicroMux will be out earlier. We should be trialing units at the end of this year or early next year. The current schedule for the LiteWave is trialing in the middle of next year—Q2—and then production towards the end of the year or the first part of the following year.
Okay, great. And then a final question: the transceivers for inside the data center is a very large market. Larger deal sizes make sense there. The ability to sell into that market and have a sales force that interacts with that side of the customer—are you confident ADTRAN can execute in that market from a sales and scale perspective?
Yes. We already sell to most of these customers, albeit different products. Most of them know who we are. Hyperscaler was the fastest-growing area in our enterprise segment and a significant contributor. We've even sold access products to hyperscalers in the past. I don't think there's a trust problem about our ability to scale or build quality products. We have increased our sales force into that area to make sure we're covering all bases. It's not that these customers haven't heard of us; I doubt there would be any issue with worries about scalability. Regarding large deal sizes, you are correct that deals can be much larger in this market. My job is to make sure we're not overcommitting; we need to be able to deliver. But the typical deal sizes in that market are larger than the numbers we currently discuss. All right. At best, I see that we're at the end of the call list. So I appreciate everybody for joining us today, and we look forward to talking to you next quarter.
This concludes today's call. You may now disconnect.