ADTRAN, Inc. Stock

Ladies and gentlemen, thank you for standing by, and welcome to the ADTRAN Holdings, Inc. Third Quarter 2026 Earnings Release Conference Call. [Operator Instructions]

During the course of the conference call, ADTRAN representatives expect to make forward-looking statements that reflect management's best judgment based on factors currently known. However, these statements involve risks and uncertainties, including the successful development and market acceptance of our products; the ability of our third-party suppliers to supply components and products, our ability to convert our backlog into revenue, our ability to maintain current expected delivery schedules, competitive pricing and acceptance of our products intellectual property matters, the effect of economic conditions, the impact of tariffs and trade policy and other risk factors described in our most recent annual report on Form 10-K and in our quarterly filings with the Securities and Exchange Commission.

ADTRAN Holdings assumes no obligation to update any such forward-looking statements. During today's call, management will refer to certain non-GAAP financial measures. Reconciliations of GAAP to non-GAAP measures and certain additional information are also included in our investor presentation and our earnings release. ADTRAN Holdings has not provided reconciliations of its second quarter 2026 outlook with regard to non-GAAP operating margins because it cannot predict and quantify without unreasonable effort all the adjustments that may occur during the period. The investor presentation has been updated and is available for download on the ADTRAN Investor Relations website.

Hosting today's call is Tom Stanton, ADTRAN Holdings' Chief Executive Officer and Chairman of the Board; and Timothy Santo, Senior Vice President and Chief Financial Officer. It is now my pleasure to turn the call over to Tom Stanton, Chief Executive Officer of ADTRAN Holdings. Sir, please go ahead.

Thank you, Kara. Good morning, everyone. ADTRAN delivered third quarter results slightly below the midpoint of our guidance range while navigating a challenging supply environment. Importantly, the underlying trends of our business remain encouraging. We continue to see strength in optical, growing momentum with hyperscalers and progress in Europe. Together, these growth drivers are expanding our reach across service provider, cloud providers and enterprise markets, helping us build a broader and more diversified customer base. Optical remained a primary growth engine with revenue increasing 11% year-over-year and 4% sequentially, supported by particularly strong performance in the U.S. These results are consistent with our expectations entering the year for growth to build throughout 2026.

In Access & Aggregation, revenue grew 5% year-over-year, led by strength in Europe despite a slowdown with one of our largest customers due to adjustments in timing of ongoing projects as we have previously discussed. We are pleased with where we are with that customer and still expect orders to return to normalized levels in Q1 of next year. In Subscriber Solutions, revenue increased 4% sequentially, led by carrier Ethernet. Demand remains strong as operators continue to expand fiber connectivity to homes, businesses and critical infrastructure sites and as expectations for speed and reliability keep rising. Taken together, these results reflect a demand environment that remains solid across our core markets, even as supply availability continues to influence timing.

At the same time, AI is reshaping network requirements, driving the need for faster, more secure and more reliable connectivity. Our strategy remains focused on 3 key areas: helping service providers build high-speed fiber networks with AI-driven automation, growing our business with cloud providers as they build out AI infrastructure and expanding our position in enterprise and critical infrastructure. Each represents an important growth opportunity for ADTRAN. I'll start with service providers.

AI is driving growing bandwidth demand as operators connect cloud and AI infrastructure and carry increasing network traffic, leading them to expand network capacity and translating into stronger demand for our optical solutions. That AI build-out is led by hyperscalers, and it's easy to understand why some are increasingly their focus and resources there. We are participating in that growth as well, and as you'll hear in a moment, but hyperscaler networks don't exist in isolation. The growth in and between data centers ultimately extends into the carrier networks that connect them to enterprises, homes and each other. And that growth can't reach its full potential unless those networks are upgraded to carry it. So while we are growing with cloud providers, we are deliberately staying focused on the service providers that connect them, where our deep customer relationships and differentiated technology give us a strong position. And as some competitors turn their attention elsewhere, we intend to capture the opportunity that they create.

Higher bandwidth alone, however, is not enough. Networks also need to be secure, resilient and trusted. This is continuing to increase pressure on high-risk vendor replacement, which remains a key growth driver for the company. Although operators across Europe are already moving away from high-risk vendors, particularly in new deployments, the proposed EU Cybersecurity Act 2, which would establish a stronger framework for securing Europe's technology supply chains and would accelerate the replacement of high-risk equipment already in networks. Our success in Europe demonstrates the strength of our position, and we believe we can benefit as these replacement programs expand.

We are also seeing continued investment in access network upgrades to support multi-gigabit services as connected homes require greater speed, reliability and security. As AI applications move into homes and businesses, the access network increasingly determines the user's experience. Across the U.S. and Europe, demand for higher-speed broadband continues to drive investment in higher capacity access networks and CPE, supported in part by broadband programs such as BEAD. AI is also reshaping how these networks are operated. We introduced AI-driven automation with Mosaic One Clarity and have since augmented those capabilities with Mosaic One Fabric and an expanded suite of Mosaic One agents.

These agents are designed to automate routine traffic management tasks and proactively identify and resolve issues. Fabric also gives operators the unique ability to build and deploy their own agents, providing greater autonomy and helping them automate across complex multi-vendor network environments. The response from operators of all sizes has been extremely positive, and we believe Mosaic One Fabric positions operators to lead this transition.

Turning to our second growth area, cloud and AI infrastructure. Here, our opportunity goes beyond connecting AI infrastructure with carriers. We are positioning ADTRAN to participate directly in its build-out with solutions at 3 critical points in the cloud network architecture. Data center interconnect is where we have long served cloud providers, and we are starting to see the benefits of our investments in this area. Revenue from hyperscaler customers grew more than 200% year-over-year. Inside the data center, AI is creating unprecedented bandwidth demand as increasingly large custom clusters of GPUs must be connected to support AI workloads. Building on our innovation in low-power, high-performance optics, we are extending our technology to address this growing opportunity.

Our Lightwave 800 development remains on track with customer trials expected to begin in the first half of next year and production scaling in the second. Customer engagement remains very positive. At the cloud handoff, where cloud providers connect to service providers or other cloud providers, our MicroMux Quattro solution is scheduled for release in the first half of 2027. It is generating significant interest from hyperscalers, content providers and wholesale network providers.

Moving to enterprise and critical infrastructure. This remains a higher growth area for us. Enterprise continues to deliver double-digit year-over-year growth, and we see good momentum as customers invest in higher-speed networks with a growing focus on security and resiliency. We believe we have one of the most competitive portfolios in the market with advanced quantum-safe networking capabilities embedded into our optical and Ethernet solutions. We see this level of security increasingly becoming a fundamental requirement for networks supporting the AI-driven economy.

Shifting to product cost and pricing. We continue to operate in a dynamic environment. Reported gross margins benefited from IEPA tariff refunds this quarter. On a more normalized basis, higher component costs, combined with product and customer mix continued to pressure margins. We continue to work actively with suppliers, implement product redesigns and pursue pricing adjustments to help offset these pressures. Looking ahead, we continue to see strength in optical across both service provider and cloud markets, solid growth in enterprise and additional opportunities in broadband as high-risk vendor replacement programs gain momentum. We remain focused on addressing gross margin pressures, maintaining disciplined expense management and achieving our long-term target of 10% non-GAAP operating margin.

To close, this was a quarter of continued progress across several of our strategic objectives. Our priorities are unchanged, maintaining tight expense control, generating cash and converting our strong pipeline into revenue. With that, I'll turn the call over to Tim to review our financial results in greater detail. Tim?

Thank you, Tom, and thank you for all joining us today. Revenue for the quarter was $281.2 million, up approximately 1% from the prior year and in line with the prior quarter. Geographically, U.S. revenue was $128 million, representing approximately 46% of total revenue, up 6% year-over-year. Non-U.S. revenue was $153.2 million, representing approximately 54% of total revenue and down 4% year-over-year. By product category, Optical Networking Solutions revenue was $114.5 million or 41% of total revenue, increasing 11% year-over-year and 4% sequentially. Access and Aggregation Solutions revenue was $78.5 million or approximately 28% of total revenue, up 5% year-over-year, but down 10% sequentially. Subscriber Solutions revenue was $88.1 million or 31% of total revenue, down 13% year-over-year and up 4% sequentially.

Turning to margins. Non-GAAP gross margin was 42.1%, a sequential increase from 40.7% in the second quarter of 2026. Gross margin benefited approximately 200 basis points from IEFA tariff refunds received during the quarter. Non-GAAP operating expenses were $104.2 million compared to $103.9 million in the second quarter of 2026 and $102.4 million in the third quarter of 2025. We continue to take proactive measures to maintain cost discipline and offset inflationary pressures. Non-GAAP operating income was $14.1 million, resulting in a non-GAAP operating margin of 5%. This is compared to $15.1 million and 5.4% on a year-over-year basis and $10.6 million and 3.8% on a sequential basis.

Non-GAAP tax expense during the quarter was $3.8 million, reflecting an effective non-GAAP tax rate of 31.4%. Non-GAAP net income attributable to ADTRAN Holdings was $7.1 million or $0.09 per diluted share compared to $0.05 in the third quarter of 2025 and $0.04 in the prior quarter. Turning now to the balance sheet and cash flow. Working capital increased during the quarter, resulting from higher accounts receivable and inventory, partially offset by increased accounts payable. DSO increased to 77 days, reflecting higher billings and the timing of collections. Inventory increased to $227.4 million and accounts payable increased to $179 million, reflecting purchasing activity in the current supply environment. Operating cash flow was negative $24.5 million during the quarter, resulting from negative free cash flow of $39.4 million.

During the quarter, we repurchased approximately $18 million of ADTRAN Networks SE shares, further reducing the minority ownership and increasing ADTRAN Holdings ownership to 73.4%. We ended the quarter with $71.7 million of cash, cash equivalents and restricted cash compared to $79.2 million at June 30, 2026. We expect collections to increase and working capital levels to return to a more normalized level in the fourth quarter.

Turning to the fourth quarter outlook. We expect revenue to be between $272 million and $292 million and non-GAAP operating margin to be between 1% and 5%, overcoming historical seasonality, availability of supply and timing of large customer projects. I'd like to note that we'll be participating in the Craig-Hallum Alpha Select Conference in New York on November 17 and plan to attend the 29th Annual Needham Growth Conference in January. We hope to see many of you there. And with that, I will turn the call back to Tom.

All right. Thanks very much, Tim. Kara, I'd like to go ahead and open up to any questions people may have. .

[Operator Instructions] Your first question comes from the line of Irvin Liu from Evercore ISI.

I have one and a follow-up. First, Tom, are you able to quantify the revenue impact, if any, related to the current supply environment for Q3? Just in other words, has the availability of supply impacted your ability to ship product? Or has supply been mostly a cost headwind so far?

No, it definitely impacted our ability to ship product. It did -- last couple of quarters, it has, and we continue to see it be something that we're having to manage around. But I would say there was tens of millions of dollars we could have shipped if we had more supply.

And then for my follow-up, I understand you typically guide one quarter at a time. But to the extent that you can, are you able to provide any sort of preliminary thoughts into 2027? Should we still expect high-risk vendor replacement to be a tailwind? And does the BEAD program become more meaningful? And just how are you thinking about supply and perhaps contribution from the Lightwave 800 or MicroMux Quattro?

Sure. That's a bunch of questions. So let me start with just kind of BEAD will be stronger next year than this year. That's -- we're just kind of getting started, and we expect that to be kind of a multiyear program. The vendor replacement in Europe is just an ongoing continual thing. I think there's a general belief -- and when I say that, that's not just ADTRAN speaking, there's a general belief that activity around vendor replacement will pick up. And that's because of the legislation, CSA2 that's being right now negotiated in Europe, and we -- current thoughts are that, that will be finalized probably early next year. That itself kind of puts some specific laws in place that continue to drive positive pressure towards getting that vendor replacement done.

As far as lightweight, I mentioned it in my comments, we expect to be able to ship it. It will be towards the tail end of next year where we expect really meaningful supply availability, and we will be trialing that in the first half. Quattro is about 6 months ahead of that, so we should be in production right around the turn of the year. So those should be positive -- they will be because they're all incremental positive contributors to us. I see right now the environment we're in which is very much a supply-constrained environment continuing on. So I think our biggest hurdles for next year, our biggest headwind for next year is just going to be continuing to get enough supply.

Your next call comes from the line of Ryan Koontz with Needham.

This is Jeff Hopson on for Ryan. Just trying to understand, is there any specific component that's hard to get a hold of? And has that been changing over the past couple of quarters? Or it's the same of component?

I'd say generally the same ones that were very problematic coming into the year or last quarter continue to be problematic, and that's typically optics lasers, pump lasers, just many pieces of our optics solution. There are some semiconductor shortages or tightness. And of course, we're seeing price inflation in semiconductor as well. Memory continues to be a problem. I had mentioned, I believe, on the last call that although that's been problematic, at least it seems stable and that you can get supply. And I would still say that, that's true. I would say the only change from, let's say, now versus 6 months ago is those components are difficult. But at the same time, you're seeing a new base of components that are just lead times are extending. PC boards is a good example of that, where we've traditionally never seen PC boards even in the downturn, the supply crisis, we didn't see this kind of tightness in PC boards. So us being able to forecast better and continue to reach out with POs farther into the cycle is becoming more important.

And maybe just on the -- in Europe, any update on just general RFP activity that you expect to translate to ADTRAN revenue over the next 6 to 12 months?

Yes. We've got ongoing. In fact, we just had one submitted yesterday a fairly good size. So yes, I mean, this each -- there are multiple components that have to be replaced or that have to be first resourced and then replaced. And there are actually, if I think about just the one yesterday, that was a full out replacement over 4 years. So that activity is just ongoing.

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

This is Amoljit Dhaliwal on for Mike Genovese. So touching on what you said earlier, excluding the 200 basis point benefit from refunds, the gross margin was roughly about 40%. I was wondering if you could double-click on that number and share how much of the pressure was component cost versus change in product mix? And once the supply conditions begin to normalize, how much of the pressure is temporary headwinds versus structural or mix based?

Yes, good question. I think without a doubt, the overarching thing is supply cost and increases in our supply cost. We did get hurt some by mix. As some of you know, we've gotten some of our European businesses doesn't kick back on into Q1. There's a particular mix associated with that. But I'm going to tell you, just generally speaking, I mean, it's 80%, 90% supply cost. We wouldn't be having this discussion if we didn't have the acceleration in supply cost.

Your next question comes from the line of Christian Schwab with Craig-Hallum.

Tom, I just would like an explanation of the -- with some of clarity, if you can provide it on attaining eventually your 10% non-GAAP operating margin target. It sounds like maybe that's passing on supply cost or mix or -- et cetera. I'm just wondering if you can elaborate on we haven't operated at that in quite some time. Just the steps that we can take that are under your control to get there, I guess, is what I'm asking.

Yes, good. A fair question. So I -- the thing that's hurting us now that's kind of out of what our plan was is the impact on gross margins. We are stepping through price increases, and we have new redesigns that are coming online. In fact, we have some of them that will be coming online early next year, both in the optics space and in the CPE space. Those will help. The question is what does the supply chain do between now and then? And are we able to continue to actually make up ground or just continue in the position that we're in today. We are also passing on price increases. We have a price increase that has been put in effect just a recent increase that covers about 70% of our customers. And the rest of them will be coming online in early next year.

So we're continuing to make those movements. And the real answer to your question is it's very difficult to forecast that gross margin. We do think mix shift will be better next year. We think that our optical sales and access will benefit from increased sales next year, which is typically positive to gross margins. But yes, that's really the question. I mean our levers are 2. We have operating expense to the extent that we control that and then we have gross margins. And gross margins, we continue to do the pieces we can do on our side, but there's a piece that is out of our control, which is the supply chain cost itself or the component cost itself. I'm not really ready to forecast next year, but we have 2 pieces that are within our control.

Your next question comes from the line of Dave Kang with B. Riley.

First question is on the hyperscaler segment. It was up 20% year-over-year. Just wondering how it performed sequentially? And what is that in terms of percentage of revenue?

I don't think we actually break that out as a percentage of revenue. I think last quarter, Tim, can you help me here last quarter it was up. I think it was up about 100% year-over-year last quarter. You keep growing 100% and 200%, it's going to be meaningful no matter what. Yes, we can take that offline then Tim will answer it.

Just on the MicroMux and LPO activities, just wondering how those trials are progressing? And have you added any new customers trialing your products, data center products?

Yes. We have some OEMs as well as some hyperscalers themselves. Some of them have pushed OEMs to come our way for both of those products. The Quattro right now, we have some units that are kind of very early units that are out in testing and the lightweight not yet. So I would expect that though early in Q1.

Hyperscaler quarter-over-quarter was about 20%.

Up 20%. Got it. So it's -- I think last quarter, you said it was about 10% of revenue. So it should be a little bit higher than 10% for third quarter. It sounds like.

That's right. Yes.

And my last question is on the Access segment. Just can you talk about seasonality? I mean, should we -- for next year, should we expect a typical first half stronger than second half? Is that how we should think about seasonality?

Yes, I'm going to have to take a little bit out of our norm. So first of all, seasonality in the fourth quarter is access is typically down, then it typically comes back up in first quarter. It is -- there is -- we have a couple of customers that drive that number pretty significantly. Being as one of those customers is really not buying a lot in access and ag through the end of this year, we would expect the first half of next year to be fairly strong. It's too early for me to talk about the second half of next year.

Your next question comes from the line of George Notter with Wolfe Research.

I just have one question about securing supply. So it sounded like on the lightly product, you'd start to ramp really second half next year. Are you securing supply for that today? Because I know some lead times on some products or components can be a year plus. I was just wondering how you're navigating the environment from that perspective.

Yes. We're securing supply commitments. So we're trying to secure capacity. But -- and to be very honest here, it's the tail end of next year. So it's not -- don't expect a whole lot of shipments in Q3 for Lightwave, but we are securing commitments for capacity.

Your next question comes from the line of Bill Dezellem with Tieton Capital Management.

Let me start if I may with the high-risk vendor. Would you please discuss in more detail the legislation that's taking place in Europe and the timing of that legislation coming to fruition and the implications of it, not only in terms of the replacement that would need to be done, but the time frame at which it would need to be accomplished by?

Yes. So the legislation does a few things. First of all, it's been in the works now for well over a year. So hopefully, we're coming to the end of the process. There is some proposed language that you can find. I think if you do a search on the Internet right now, you can see some of the proposed language that's currently contemplated. There are a few things that are still yet undetermined that aren't agreed upon. But in general, the concept is you stop buying and then you have a period of time by which you have to remove and replace all of the offending vendor equipment in your network. The legislation itself and getting that put into law, I think, of course, is a positive catalyst just for ongoing business. The dates associated with full replacement, like I said, aren't decided yet. But right now, I think it's generally contemplated to be around 2035 to actually have all the equipment ripped out. But no new equipment, it would be effectively right away.

And given the pace of legislation can move, even though it's a year into the process, is the implication that there may be another year or more? Or do you see momentum behind this? And apologies if I haven't close of attention to just how this is picking up or not.

Yes. No problem. I would tell you all of our investors that this is important legislation for ADTRAN. I mean we are the biggest beneficiary of this legislation being approved. You're right about the -- it being a -- it is an EU rule, right? So it's not just one country. So there are multiple countries that have a vote. The current thought is, and I would say that that's kind of the way that the participants are viewing it is that it will be done early next year. But having said that, this is multi-government legislation. So it's not -- it's something you wouldn't want to bet on. That's kind of -- but that is literally the current time frame is actually first half of next year.

And taking this one step further, the stop buying the high-risk vendors, how much revenue do the high-risk vendors currently earn each year? And really the spirit of that question is trying to understand the magnitude that we're talking about here at this point in, I guess, in 2026 and '27.

Yes. So we actually commissioned an independent study to actually look at that. And I think it was -- yes, in 2025, that number was somewhere in the mid-$800 million directly related to our equipment on an annual basis. And I don't think that, that's -- I would still have to think we're in the same ballpark at this point. And the bigger piece, of course, is if they do get this legislation or when they do get this legislation approved, there's a solid $10 billion worth of equipment that's got to be replaced.

And then given that we're only 35 minutes into the call, I am going to ask you to dive into more detail, if you would, on the data center activity in terms of what you all are doing today and then the magnitude of the opportunity that your new products could lead to if they are as successful as you think they will be?

Yes. So what we're doing today is mainly data center interconnect, right? So it's actually connecting data centers to data centers. So I guess that would be interconnect. And that's using our ongoing optical products. I will say that it's being -- it's also impacting our carrier sales. So we're seeing some really good activity here in the U.S. and in some portions of Europe, where you have carriers that are really trying to make sure that they upgrade their network to be able to meet data center traffic requirements and one of them here in the U.S. is very vocal. And our business is definitely picking up because of that. But we also are in data center upgrades where the hyperscalers themselves are upgrading, and we have one customer that, of course, is materially larger than the rest.

That's ongoing. We expect that actually -- that business to continue to grow meaningfully. The new intersection point for us is these 2 chips. The LPO is huge. We have strong interest in that product. And I'm trying not to overhang myself here, but we have strong interest in that product. And that product is not singular. We have different versions of that product that will be coming out over the next probably 3 years or so. But we've got very good interest on our very first. So it's anything that has to do with hyperscalers typically -- it's typically tens to hundred millions of dollars. So it's -- it would be very beneficial for the company when we're successful there.

And one additional question, and I do promise I'll step away. The interest that you said is very strong. Is that coming from 1 or 2 potential customers? Or is it much more broad-based than that?

On the lightweight, it is really large data center owners. So there's a finite number of them. On the Quattro, it is pretty much across the board. It's carriers, it is hyperscalers, it's neoscalers, it's MOPHY-type customers. So it's across the board. It's a much broader product. It's a much broader customer set.

I think we are -- I see the question queue is empty at this point. So thank you very much for everybody joining us, and we look forward to talking to you next quarter.

Ladies and gentlemen, welcome to the ADTRAN Holdings, Inc. Second Quarter 2026 Earnings Conference Call. Please note that this call is being recorded. [Operator 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 markets -- 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 EU Networks 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 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 past -- the last 3 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. And as we continue to actively manage operating expenses 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.

[Operator 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.

So -- and those plans haven't changed. So I think really what -- maybe a high -- 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. And this is all just kind of 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 kind of reposition these plans.

Is that answer the 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 basically historical profile of 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.

And I don't want to at all minimize the fact that it was low. But we've had over 2 years, almost 3 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. And of course, that allows that revenue number to be lower when the numbers -- 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. And really what that -- the way that it impacted us this last quarter was it got rid of some of our flexibility. So we saw the decline with our large customer which has got -- it's in the -- it's -- well, we saw the decline at a 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 -- I think that flexibility problem is not 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 kind of rotate on that, knowing that the -- 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 -- I don't worry so much about gross margin 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 kind of the customer prem side gross margin trend as well as your comment around higher gross margin products were impacted on supply?

Yes, sure. So it is more than memory. I'm not the first one to tell you guys that, but it is definitely -- it has gotten tighter in other areas. Optical amplifiers are definitely tight. There are kind of certain pieces of silicon that are fairly nebulous 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.

So 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. And that ability to flex up for incremental demand, which we definitely saw this quarter, especially in optical, our ability to flex up has really diminished. And so our forecasting is more important.

But I would say the hardest thing at this point, so sure we've talked about in the past. 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, though, is make supply that wasn't there. So it was all about getting memory.

At least in our supply chain, memory today is not the biggest issue, right? There are issues that are -- that have eclipsed that and memory is although incredibly expensive, that supply isn't as problematic as it was, let's say, 6 months ago or 3 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 kind of enterprise and cloud use cases would be really helpful.

Yes. So definitely on OLSs as well as just standard pluggables. I would say across the board, it was high. I will tell you, OLSs or our line systems were a little more difficult to ship because of the constraints that we just talked about.

Pluggables is, generally speaking, upgrading of bandwidth. And as you know, we have some hyperscaler content there, and we're seeing kind of a significant uptick in that activity as people are trying to upgrade their networks. So I think it's all just about bandwidth increases, not so much footprint, 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. But our showings on that property have gone up substantially over the last couple of months.

That's right.

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? And 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. And 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 -- there is also -- Japan is an interesting area because they were one of the first to build out GPON. And there are -- so the population base is pretty much covered. And they are, I would say, leading the charge as in moving to 50 gig.

They're not -- we have a lot of people that are trialing 50 gig and want to have kind of marketing capabilities around 50 gig. I would say from a country perspective, Japan is probably at the forefront of literally looking at making that transition more wholesale. So -- and this is just that.

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. So 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.

So if it weren't for that route, we would not be talking about this. But then it did highlight in going through the quarter, once that effect kind of permeated through the company, it did highlight the fact that flexibility within the rest of the product set is getting tighter and tighter. So I want to first put it in the right frame.

I don't see that tightness going away in the near term. I do know and probably many people on this call know that there's talk about additional capacity, especially in the higher nanometer process, which is kind of where our products are, let's say, 12 and up coming online next year, which would alleviate some of these issues that we're talking about. But I think we're just in the tighter supply chain environment.

And the best way for us to be able to mitigate that tightness is literally just better forecast, more order coverage. And I preach that to our customers every time I can. You need to get your orders in, right? We need to be able to have visibility to it. We need to secure supply. And I do think the customers are getting -- it's amazing. It's taken a long time, but I do think customers are getting it. But I can tell you would mitigate a particular chip today, but I can tell you it will be a different chip or a different problem 6 months from now.

So I just think we're living in a tight period right now. And I can't tell you it's going to disappear next year or what quarter it would disappear if it does disappear next year. I think it's all about discipline internally. We have -- as we've talked about, we've gotten some more key components in our inventories now to make sure that we can mitigate the problems that are known.

But like this quarter, there was issues that were not an issue last quarter, right? So we have to get better at forecasting where those future issues will be, not just the ones that we're currently facing. So that's not a good answer, but that's kind of the environment we're in.

That is helpful. And 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, that has been happening already. You just haven't seen it so much. And the reason is we've been able to draw down old inventory back from the supply chain crisis down to a point to where we're kind of mitigating that increase. But you can think about it as old inventory versus new inventory and that new inventory is directly related.

Our inventories will be going down more if we weren't adding these kind of key components. So -- but at some point in time, that old inventory is going to not be so old anymore, and you'll see an uptick in that inventory. But I don't think that's -- I don't think it will 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 published. It was -- I will tell you, optical was probably the -- I'm guessing here, but 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, that 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 -- I mean, you talked quite a bit about supply situation, but 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. And to be honest with you, we just don't see a change in the procurement environment. So we think things are going to stay in the kind of status quo that they're in right now, maybe even get a little bit tighter in certain areas.

We are fighting for more supply. I mean, literally, calling -- we have people calling every day trying to get more of whatever it is that we have on order or don't have on order. So that's just kind of seeing through that mix of what's going to be available and what's not going to be available is kind of what our forecasting process has turned into. And so yes, it's just assuming the environment doesn't change.

Well, I think I was juggling a couple of things. Obviously, you've seen that this FCC 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, do some pluggables from China, let's say, transceivers from China. We also source from other places. And I don't know I'm not versed enough to give you a direct answer to that. So that's something that we can cover -- you can call in and talk more about it, but call back...

Yes. That's clearly a fluid situation. I'm sure there will be a lot of questions there. My last question is any update on LPO activities? Any qualification or -- yes.

Well, it's still -- we're not talking about qualification yet. It is still on track. As I talked about before, right, we would get units in right around the half or second quarter and get them to customers.

We do have a significant -- I will tell you another piece of this, which we haven't really talked much about, which is the Quattro. And we've got multiple customers, including multiple hyperscalers that are very interested in that product as well. That one actually delivers earlier. So I would expect to see trial units before, let's say, sometime in the first quarter.

We have people right now that are trialing kind of alpha units, and that seems to be going well. So I think both of those -- both of them are on track, but both of those are getting some traction. So that seems to be going well.

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 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 -- I don't think I have the number, but I do kind of generally know where we are in that space. So the specific number that we gave was, I think it was 97% growth in hyperscalers. And so we look at cloud as being broader than hyperscalers because that would include typically large content cloud providers.

So hyperscalers specifically was 97%. And that's not a surprise. I mean we -- I think we kind of signaled in our last call that, that area we expected to be solid this year and continue to grow, and it seems to be -- that seems to be the case. And what was the second part of your question, Tim?

I was just trying to get a sense of within that category, however you want to describe it, how significant is that? I assume it's a relatively small percent of that 25% of the broader category, but...

It's -- my sense and just from remembering is it's somewhere between 30% and 50%. It's getting to be a big piece of that pie.

Of that 25%. Okay, 25%. Yes. I got it. And just a quick one, any 10% customers in the quarter? And also, as you look out to the Q3 guide, I'd be interested in what's happening there from a segment perspective. It sounds like you don't expect Access & Aggregation to rebound given the customer push, then you got a little sequential growth there. I mean, I guess the overall question is, do you expect to see optical continue to grow?

Yes. Direct answer is absolutely yes. I talked a little bit about the order flow there. And yes. So I mean that's -- we expect that to grow. Subscriber is one of those that's probably the most difficult thing to forecast because it is very much demand driven and people [indiscernible] in terms of inventory and then they go away for a while. So you'll see -- you'll always see more volatility. I'll say, typically see more volatility in that subscriber piece. So that one is less firm in our numbers and knowing exactly where it's going to end up.

Access & Agg, you're right. We don't expect a rebound because that single customer is such a large piece of that content. I will tell you that Access & Agg in Europe, notwithstanding that customer was actually pretty strong, and we continue to expect that strength in the third quarter. But optical is going to be the biggest.

And 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. So I want to clarify a couple of things on the call. 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, I guess, embedded systems in optical? Is that for DCI and long haul and metro? Is that what you were talking about?

Yes. But more specifically, I would tell you we probably have the strongest 100ZR quarter we've ever had. So that should tell you kind of what we're talking about.

Okay. That makes sense. And then you've just mentioned earlier the Quad because we're, I guess, asking about the LTO product, which I think has a different name. And then the Quad, could you talk more about the difference between those 2 products?

Yes. So the other product that we've talked about that got a lot of press was 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. I don't know if there's anything out on the market today that's like that. So it plugs right into a router and gives you multiplexing capability at a very low cost. So...

Okay. Sorry. If I'm not mistaken, though, the LiteWave 800 is different from these products because it's a new market of 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 that space. We don't have a MicroMux product either, by the way. I mean, so both of these are kind of incremental to the piece that we have traditionally done. But I would say the LiteWave is a further reach, yes.

Okay. And the timing though, is the MicroMux is earlier in '27 and the LiteWave is mid-'27. Is that correct?

The MicroMux is going to be out earlier. So I would -- we should be trialing units end of this year or early next year. And then the current schedule for the LiteWave is getting units trialing middle of next year, we're saying into Q2 and then production towards the end of the year or the first part of the following year.

Okay. Great. And then just a final question for me. I guess, maybe it's a 2-part question. But with the transceivers for inside the data center. This is a very large market, right? It's a new TAM that you're going into. And I'm kind of used to seeing deals there being -- like you don't get $25 million or even $50 million deals. Every time I see somebody win a transceiver deal, it's at least $100 million and it could be $1 billion.

I'm just wondering if the larger deal sizes as you start to work on that market make sense to you, if that sounds reasonable. And then just your ability to sell into that market and to have a sales force that interacts with that side of the customer and to kind of -- it's a big TAM, but basically your -- the confidence of ADTRAN that they can execute in that market from a sales -- I mean the product specs look great. But if we can assume you can make your product, can you -- are you confident that you can sell the product?

Yes. So Michael, you may not -- we sell to most of these customers already. Now we sell different products. But most of them have -- for instance, like I mentioned before, hyperscaler was the fastest-growing area in our enterprise segment, and it was a significant contributor. So they know who we are. I would say, without a doubt, we've even sold access products to one of the hyperscalers that was really in access.

So they know who we are. I think -- I don't think there's a trust problem with thinking that we can scale and that we build quality products. We have increased our sales force into that area to make sure that we're covering all of the bases. We've already done that. We're trying to get all the pieces in the right place. It's not like they won't have hurt us, and I doubt if there'd be any issue with worries about scalability with us.

In relation to the numbers that you're talking about, you are correct. I think my job is to not get us too overhung out there. We need to be able to deliver what we need to be able to deliver, but the numbers are typically bigger than the numbers that we're talking about.

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.

Ladies and gentlemen, thank you for standing by, and welcome to the ADTRAN Holdings, Inc. First Quarter 2026 Earnings Release Conference Call. [Operators Instructions]

During the course of the conference call, ADTRAN representatives expect to make forward-looking statements that reflect management's best judgment based on factors currently known. However, these statements involve risks and uncertainties, including the successful development and market acceptance of our products, the ability of our third-party suppliers to supply components and products, our ability to convert our backlog into revenue, our ability to maintain current expected delivery schedules, competitive pricing and acceptance of our products, intellectual property matters, the effect of economic conditions, the impact of tariffs and trade policy, and other risk factors described in our most recent annual report on Form 10-K and in our quarterly filings with the Securities and Exchange Commission. ADTRAN Holdings assumes no obligation to update any such forward-looking statements.

During today's call, management will refer to certain non-GAAP financial measures. Reconciliations of GAAP to non-GAAP measures and certain additional information are also included in our investor presentation and our earnings release. ADTRAN Holdings has not provided reconciliations of its second quarter 2026 outlook with regard to non-GAAP operating margins because it cannot predict and quantify without unreasonable effort of all the adjustments that may occur during the period.

The investor presentation has been updated and is available for download on the ADTRAN Investor Relations website.

Hosting today's call is Tom Stanton, ADTRAN Holdings' Chief Executive Officer and Chairman of the Board; and Timothy Santo, Senior Vice President and Chief Financial Officer.

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

Thank you, Kayla. Good morning, everyone. ADTRAN delivered solid first quarter results with revenue of $286.1 million, up 15.5% year-over-year, and non-GAAP operating margin of 6.9%, up 3% year-over-year. These results reflect the continued strength of our core markets and the operating leverage we have now firmly established across the business.

The demand drivers underpinning our business continue to strengthen. In the U.S., broadband expansion is gaining traction and BEAD deployment funds are beginning to reach operators in a growing number of states.

In Europe, high-risk vendor displacement continues to progress with momentum reinforced by legislation such as the proposed Cybersecurity Act 2.0, which would mandate the removal of high-risk vendors from critical network infrastructure.

This quarter also marked a meaningful step in our growth strategy as we showcased our expanding portfolio addressing cloud and AI infrastructure connectivity. This included the introduction of the LiteWave800, a solution purpose-built for high-performance and low-power intra-data center connectivity.

Optical networking solutions revenue was $97.3 million in the first quarter, up 24% year-over-year. On a sequential basis, strength from our larger customers and hyperscalers was offset by seasonal declines with smaller customers and government sales.

Across our service provider base, demand remains healthy. Operators across all geographies are expanding wholesale optical capacity to support growing demand for cloud connectivity and higher bandwidth services, reflecting a broad-based trend.

In Europe, high-risk vendor replacement initiatives continue to add to that demand with growing strength among our cloud and hyperscaler customers, and a positive outlook across our service provider base. We expect our optical networking revenue to build throughout the year.

Access and aggregation solutions revenue was $90.5 million in the first quarter, up 2% year-over-year and 14% sequentially, driven by broad-based strength across the U.S. and Europe. We expect steady progress across our European business through the remainder of the year.

In the U.S., BEAD deployment funding is beginning to reach operators in select states. And while we are seeing early orders from several customers, we expect the impact to become more meaningful as we move towards the back half of the year.

Subscriber solutions revenue was $98.2 million in the first quarter, up 22% year-over-year. Demand remains healthy, supported by continued investment in fiber-to-the-home, multi-gig Wi-Fi 7 and carrier Ethernet applications. In recent weeks, our award-winning SDG Wi-Fi 7 portfolio received conditional FCC approval, exempting our platforms from covered list restrictions. We are among the first vendors to achieve this designation. And while the broader industry works through the approval process, we are already seeing service providers engage with us on competitive opportunities that this creates.

Stepping back from the details for the quarter, I want to take a moment to talk about our business and the market dynamics that continue to drive demand for our solutions. Service providers are investing across transport, access and subscriber platforms to scale their networks for long-term demand and improved reliability. These investments are being reinforced by several important tailwinds, including high-risk vendor replacement initiatives in Europe, the expansion of managed optical fiber networks or MOFN to address surging demand for wholesale services from cloud providers, and continued upgrades across access and subscriber networks to support multi-gig service delivery.

In addition to these network upgrade catalysts, operators are in the early stages of transforming how they operate their networks and engage subscribers through agentic AI. With the launch of Mosaic One Clarity, which recently received the FTTH Europe award for AI innovation, we are addressing the shift towards proactive and increasingly autonomous network operations. Early deployments have provided strong validation of these capabilities across both small and large operators, particularly in the areas of predictive maintenance and improving the in-home subscriber experience.

Beyond our core service provider business, we continue to see meaningful opportunities to further accelerate growth by expanding our presence in both cloud providers and enterprise customers. These segments benefit from many of the same underlying trends shaping service provider networks, but they are growing at a faster pace and are driving new network architectures and requirements.

In the enterprise space, we have a long history of providing secure optical and Ethernet connectivity to some of the world's largest enterprise and government customers. Demand in this customer segment is increasingly shaped by 2 important tailwinds. First, the expansion of AI workloads across secure enterprise environments is driving demand for higher capacity interconnects between private enterprise data centers. And second, growing awareness of the limitations of traditional security mechanisms is accelerating interest in quantum-safe, optical and Ethernet communications.

Building on our longstanding presence in these markets, we have developed a comprehensive portfolio of quantum-safe communication solutions. While still early, we are seeing increasing engagement across a broadening base of enterprise, government and utility customers, positioning us well for longer term growth as these initiatives mature.

In our cloud provider customer segment, the rapid expansion of AI compute infrastructure and the networking required to connect large-scale cluster GPU deployments is driving a surge in networking investment, making this the fastest-growing segment in our industry.

Data center operators are scaling capacity to support AI workloads where power efficiency, thermal constraints and network density have become defining design considerations. We have long served data center customers through our interconnect solutions and as evidenced by last quarter's results, that business continues to benefit from growing demand for data center connectivity. Our strategy is to build on that foundation and extend our portfolio to address surging bandwidth demands from inside the data center as well.

LiteWave800 is the first clear example of this strategy in action. It is purpose-built for intra-data center connectivity and high-density AI compute environments, and is designed to reduce power consumption by over 90% compared to existing alternatives. We are still in the early stages of this product family, but initial market engagement and feedback have been very encouraging.

Shifting from our market opportunities to operations. Memory pricing has remained elevated industry-wide and freight costs are adding an additional layer of pressure, headwinds that are affecting the entire sector. Despite these pressures, our non-GAAP operating margin of 43% reached its highest level since the beginning of the supply chain disruption in 2020. This was achieved through a combination of disciplined cost management, pricing adjustments across the portfolio and a revenue mix that has less reliance on lower-margin CPE where memory cost pressure is the most acute.

Consumer CPE represents a relatively small portion of our overall revenue. Although memory costs remain elevated and could deteriorate further, our current visibility supports gross margins in the near term, remaining broadly consistent with what we have delivered over the past several quarters.

We entered the second quarter with a positive demand outlook. Fiber infrastructure investment remains active across our core business, and we continue to advance our initiatives in AI infrastructure and enterprise networks, expanding our business opportunities. Our priorities remain consistent: expanding operating margins, generating cash and converting the strong customer pipeline into revenue.

With that, I'll turn the call over to Tim to review our financial results in more detail. Tim?

Thank you, Tom, and thank you all for joining us today. We delivered solid results for Q1 2026 led by continued and consistent execution. We had operating margin expansion to a new level despite a seasonal reduction in revenues that remained above the midpoint of our previously issued guidance, driven by continued cost discipline and scale in the business.

Our first quarter revenue was $286.1 million, up 15.5% year-over-year and returning to a more normalized seasonal pattern. Geographically, U.S. revenue was $146.2 million, representing 51% of total revenue, up 42% year-over-year and 7% sequentially. Non-U.S. revenue was $139.9 million or 49% of total revenue.

Access and aggregation solutions revenue was $90.5 million or approximately 32% of total revenue, up 2% year-over-year and 14% sequentially. Subscriber solutions revenue was $98.2 million or 34% of total revenue, up 22% year-over-year. Optical networking solutions revenue was $97.3 million or 34% of total revenue, up 24% year-over-year.

Turning to gross margin. Non-GAAP gross margin was 43%, up 55 basis points year-over-year from 42.5% in Q1 '25 and up 54 basis points sequentially from 42.5% in Q4 2025, driven by favorable product mix and continued progress on cost efficiency.

Non-GAAP operating expenses for the first quarter were $103.3 million compared to $95.5 million in Q1 2025 and $105.1 million in Q4 '25. The year-over-year increase largely resulted from the impact of foreign currency fluctuations on our European cost base, which has had minimal impact on operating leverage due to natural hedging and continued investment in R&D and go-to-market activities.

Non-GAAP operating income was $19.9 million or 6.9% of revenue. On a sequential basis, operating income increased from $18.8 million or 6.4% in Q4 2025. Year-over-year, non-GAAP operating margin expanded 300 basis points from 3.9% in Q1 2025, continuing the progression from 5.4% in Q3 '25 and 6.4% in Q4 '25.

Non-GAAP tax expense in the first quarter was $4.4 million, reflecting an effective non-GAAP tax rate of 25.5%. Non-GAAP net income attributable to ADTRAN Holdings was $11 million or $0.14 per diluted share compared to $0.03 in Q1 2025.

Turning to the balance sheet and cash flow. Net working capital was $253.9 million at quarter end compared to $259 million at December 31, 2025. During the quarter, inventory was $209 million with days inventory outstanding of 110 days, down 4 days sequentially.

Trade accounts receivable were $215.5 million with DSO of 68 days, up 2 days sequentially due to the timing of quarter end invoicing. Accounts payable was $170.6 million with days payable outstanding of 66 days, which is flat sequentially. As revenue scales, our focus remains on improving working capital efficiency.

Operating cash flow was $12.7 million for the quarter and free cash flow was a negative $3.3 million, reflecting timing of cash receipts and higher purchases of inventory. We ended the quarter with $88.3 million in cash and cash equivalents compared to $95.7 million at December 31, 2025.

Turning to our outlook for the second quarter of 2026. We expect revenue to be between $283 million and $303 million, and non-GAAP operating margin within a range of 5% to 9%.

This concludes our prepared remarks. Before turning the call over to Tom, I'd like to highlight that we will be participating at the B. Riley Conference on May 20 in Marina Del Rey and the Evercore Technology Media and Telecom Conference on June 2 and 3 in San Francisco. We look forward to seeing many of you there.

And now I will turn the call back to Tom.

Great. Thanks very much, Tim. All right. Kayla, at this time, we'd like to turn it over to people that may have some questions.

[Operator Instructions] Your first question comes from the line of Mike Genovese with Rosenblatt Securities.

Tom, I'd like to hear about the LiteWave800 more about basically the strategy of launching this product, maybe bigger thoughts on getting into the data center. But more specifically, any timing or size or margin expectations for the new product that you could share would be helpful.

Yes. I probably -- I'm going to shy a little bit away from pricing on the product, although there is a lot of IP in that product and IP typically gains better gross margins. The reason I mentioned it upfront in my remarks is the market reaction to it has been fantastic. We've had some very large, very well-known customers that have been very encouraging for us to get the product out as quickly as possible.

But unfortunately, there is a lot of work to be done. And I would expect that to be sometime about a year from now before we really kind of hit production level type numbers. We did show -- we do have prototypes now. We did show operating models at the recent OFC. It is a real product. It does work. It's a matter of getting it -- finalizing and then getting it to scale, which will take some time just because it's very -- it's a semiconductor type product. That is one of the products we have.

We also have the Quattro, which will be coming out at the end of this year, which is a 4 by 100 product versus the 8 by 100 product. It is also a very, very power-saving product. I think it's better than anything out there on the market today. The real thing about the 800 though is it's ridiculously low power. I mean it's -- I think, 1 picojoule per bit, which is an industry first, and that's what's driven the excitement around it.

Interesting. Now, when you say there's a lot of IP in it, I mean, is it fair to say that it would not be significantly dilutive to company gross margins?

It will not be dilutive to company gross margins.

Okay. That's good to hear. I guess, maybe just something similar on any other new products. I mean we saw something about an announcement of an AI edge platform I'd like to hear more about. And then if I go back to OFC, I also think there was an announcement, at least where you were demoing 800 and 400ZR. So is that a product that you have, ZR? And could you talk more about the AI sort of edge platform?

Yes. The AI edge platform, I think you're talking about is still an offshoot of Clarity. So I'm not sure if there's anything else out there that we've -- at least I've seen that we announced. I'm not telling you it couldn't happen. But all of our AI products are in the Clarity family. We have an edge product that we are trialing right now, and then we have the core product for network operations that we have been trialing for some time. I will tell you the feedback here also is fantastic. I just recently had a bunch of customers in. We had 150 or so customers here in Huntsville and the feedback there just overwhelmingly positive. So good things there.

On the 400ZR, we do have products coming out towards the end of this year, I think, for 400. And those are just ongoing pieces. The AI piece, now that I think about it, the AI piece you may be talking about it on Ensemble, which is the product that we were highlighting that has started to implement AI -- agentic AI in this product line.

And your next question comes from the line of Irvin Liu with Evercore.

I also had a question related to AI infrastructure. As you target this opportunity, can you talk about any sort of R&D and go-to-market investments needed to serve this customer segment?

There is some shifting that we'll be doing throughout the year where we make sure that we have the right R&D resources and sales resources to be able to do that. But all of that is within the current operating budget that we have today. So I don't think there's going to be any significant increase.

We're kind of committed to and believe that we can grow the business fairly meaningful within the budgets that we have today. Once we get north of our targeted 10% -- or excuse me, we said low-single-digit, but 10% operating income, then we'll take a look at that as well and make sure that we're investing in the right places. But right now, we don't see any problems.

Got it. And then for my follow-up, you've been seeing strong demand in the regional service provider customer segment. So can you talk about any sort of momentum you're seeing as it relates to your suite of software products such as Mosaic One and Intellifi? Just any color on upsell efforts and attach rates here would be helpful.

Yes. We don't have those numbers broken out, but I will tell you the uptick on Intellifi has been fantastic. Mosaic got a very good launch. We have probably close to 500 customers right now on Mosaic One. And all of those are in different levels of subscription base. But Intellifi is doing really well. I think last time we reported on, it was over 100 customers and it was -- it's been a real highlight. So we don't have those numbers broken out. Hopefully next quarter, I'll be able to talk about them.

And your next question comes from the line of George Notter with Wolfe Research.

I wanted to -- you mentioned cloud revenue in your cloud business. Can you remind us what percentage of sales comes from cloud operators? Do you have a sense for that?

Yes. We don't break that out. As you know, George, we don't break out specific customer segments like that. But just to give you some color, hyperscalers actually did really good in the fourth quarter. They were, as I mentioned, a real positive in the quarter, and we would expect that to continue on through this year. I mean we've got a fairly good backlog with some of our hyperscaler customers right now that's building. So that's pretty much it.

Got it. Okay. And I assume these are -- can you just walk through maybe the product sets that you sell in there and just kind of get us for your point on what is -- what you're leading with customers. Obviously, the LiteWave product is going to come on. But is it optical? What pieces are you selling?

Yes. The biggest piece is optical, and it's -- a lot of the momentum we're seeing right now is around our 100ZR plug.

Got it. Okay. I guess I would have assumed the 100-gig ZR plug was a little bit more of a telecom application rather than a cloud application.

As you know, maybe you do know, I think you do know, George, that we have a fairly large footprint. So when you look at large data center connectivity, not in the sweet spot. That's where the 400 and 800 will play more. In the smaller data center interconnectivity spot, which some of the hyperscalers have as an architecture, it plays very well.

Okay. Super. And then the other one I had was just on the LiteWave800. Obviously, laser datacom chips are really hard to come by in the industry. And I hear what you say about the business ramping a year from now. I guess I'm just curious about where you guys are getting laser datacom chip supply. Is that difficult to come by? Is it easy to come by? Is there anything you can tell us about where you're sourcing those?

I probably won't get into direct sourcing on that. We do have some partners that we're working with on this. They do know what the supply needs are right now. We see -- depending on how aggressive that launch is, we don't see any issues in being able to supply it as we launch it.

And your next question comes from the line of Ryan Koontz with Needham & Company.

I want to ask about optical demand, kind of that maybe step it up to a higher level. You talked about MOFN demand here. Can you maybe characterize where you are, where you see the biggest drivers specifically within Europe for your optical product lines and which products you're seeing the greatest success with in terms of demand? You just talked about 100ZR. I assume that's a big piece, but maybe any more color beyond that would be great.

Yes, I do think 100ZR also -- I think that the -- especially in Europe, I think that our 400 and 800-gig products are going to play very well in that upgrade path as well. The customer base that we're talking about is the customer base that you already know. It's ones that we've been doing business with for a very long period of time. And they're trying to situate their networks to be able to do more basically wholesale services. That customer is active. And then there's one here in the U.S. that you're already aware of that's also making a lot of noise around it.

Helpful. And are you seeing -- within that, are you seeing a shift away from traditional chassis-based transponders over to ZR pluggables in the telecom side as well?

It's a mix. That is dependent on the carrier size. And it also depends on whether or not they already have installed chassis. Where there's already an installed chassis there, they're going to upgrade that chassis. Where it's a footprint, even in footprint on some of the larger carriers, the operational ease that the current systems provide is actually very beneficial to them, but it's definitely a mix.

Got it. And then maybe hitting the gross margin here. Obviously, great results on the quarter. Congrats. And you talked about a lower mix of consumer CPE within your subscriber solutions. Can you maybe -- is consumer CPE, would it approach half of that number? Or you think it's maybe less than half of your total subscriber business? Just sort of quantify.

It's probably -- to be fair, it's probably -- I think it's definitely not less than a half, but it's not substantially more. And I think the reason that I was bringing it out is we have gotten feedback that customers were unclear about kind of how much the CPE margin problem is affecting us, and it does affect us. I mean there's no doubt about it. But the impact is substantially less when you take a look at it in the overall perspective of the entire company, but it is north of 50% of just the subscriber segment.

Makes sense. And maybe one last one, if I can squeeze it in. You talked about some better visibility on BEAD projects here. What sort of milestones should we look for before we start to see your revenues start to inflect for BEAD? Are we talking about permits and design and forecasts and orders? Can you maybe walk us through how we should think about the milestones that lets BEAD unfold and start to contribute for ADTRAN?

Yes. So funding is starting to flow or could flow for the -- by far, the majority of the states now. So a lot of that has been worked itself through. Now what you're seeing is kind of individual customers deciding how they want to roll out. We have some customers that have already placed purchase orders and they're rolling out and/or at least making sure that they've got supply to be able to not be a hamstrung. The smaller the customer, the easier that is.

On the larger customers, the biggest pull -- long pull is going to be actually deploying the fiber itself, which is why we've been saying end of this year is probably where you start seeing that. On a local level, I mean, you can look at permitting and kind of where that is, that's kind of hard to actually get a good grasp of. At the end of the day, I'm looking for purchase orders. We're starting to see some today, but it's a trickle.

It's not a lot. But we expect that -- I mean, this whole unlocking of the approval process really has accelerated. We went from, what, maybe 2 states a quarter ago, I think 3 states a quarter ago to pretty much all of the states now being able to send out funding. So I think the best visibility is actually seen in the numbers though because every carrier is going to be a little different.

And you think you'll just see nice steady improvements and '27 starts to feel like a more material number for you from being...

Absolutely. Yes.

And your next question comes from the line of Christian Schwab with Craig-Hallum.

Just a quick clarity on that, Tom. With '27 orders picking up indeed more materially, would you anticipate '28 being potential peak revenue for that program? Or do you think it extends beyond that? And would you be willing to quantify a revenue range of opportunity over a multiyear time frame that this program could offer you guys?

I think we've given a range before, and that math changes depending on ultimately which carrier actually is deploying where. But Tim, do you remember what that range was?

We had said of that market size, there's about $1 billion to go to the industry over multi years.

So it's a 5-year program. The timing of this, we've seen programs like this in the past. I think if you pick the middle of the window, that's typically where you see the majority of the spend. And then you'll see some kind of cleanup at the very tail end when people try to make sure that they get all the funding they can get. So my guess would be the middle of the program, which would be probably towards the tail end of '27. And then you'll probably see some cleanup from that point forward. And as you get towards the end of the program, you'll typically see some kind of flush as people try to make sure they did all the work they need to do.

Great. That's great clarity. And then my last question just as your largest -- one of your competitors spent a significant amount of time on their conference call talking about memory cost headwinds. I'm just wondering how you guys are navigating through that.

Yes, sure. Right now, we're doing good. So I do think that we are helped by the fact that we have a fairly diverse product portfolio. When you get into some of our larger products like some of our larger access and ag platforms, which handle thousands of customers, or you get into optical for that matter, the memory content on those products is just less of the total bill of material. So the impact is significantly less. If you get into some of the lower-end residential CPE, that memory can be a large percentage of the total bill of material. And I think that's the direct impact.

If you take a look at our -- that maybe that's the direct tie through to your question. If you take a look at our CPE for residential, which is the most materially impacted, it is also the lowest cost products we sell and the lowest inherent gross margins to begin with that we sell. There's a bigger impact. When you get to some of the larger 100-gigabit platforms, 400 gigabit platforms, that memory impact is just substantially less. And I think that's the difference.

And your next question comes from the line of Dave Kang with B. Riley.

Just the first question is regarding the Middle East conflict. Just wondering if you can talk about the impact from that.

Yes. So I think it impacts us in a couple of different ways. One is, without a doubt, it hurt us on the freight line. There are some disruptions. Our freight expense this quarter was higher than I would like it to be. Probably be higher this quarter as well, so last quarter and this quarter. And that's just a matter of being able to get capacity in the right planes. And it was a little messy last quarter, freight line. I think that's the biggest -- that's the biggest headline impact.

We absolutely saw an impact though in our Middle East revenues as well. Some of that was disrupted last quarter. I don't know when that gets better. I would expect it to be a little better this quarter, but I think it hurt us both on the revenue and the cost line.

Are we talking like maybe 1%, 2% revenue impact?

Revenue, yes, less than 5%, yes.

So it's definitely meaningful. I mean, material, right?

Well, especially if you talk on a -- we tend to -- we really look at EMEA as one big bucket, and that's how we manage it. And for the EMEA area, yes, it definitely hurt. But on the overall company, it was -- it was not as meaningful. I think on the freight side, it probably hurt more to be honest with you.

And should we expect that to be better this quarter, the...

I don't want to tell our operations guys, but I don't expect our freight to be materially better this quarter. I think it's going to be messy this quarter as well. I can't project. Go ahead.

Yes. Got it. So that leads me to my second question, is your operating margin guide for 2Q, 5% to 9%. Just wondering if you can go over some of your assumptions of 5% versus 9%.

Yes. So we continue to think that -- I mean, if you think about it, basically we're assuming a similar freight environment in this quarter as last quarter and a similar memory impact in this quarter as last quarter.

Got it. And then my last question is, were you able to raise prices or any plans to raise prices to counter elevated freight as well as component costs?

Freight, we're not pushing so much on. I mean we're still very hopeful that that's transitory. Component prices on the memory prices, we have raised prices to customers to reflect the current challenges in that supply chain.

[Operator Instructions] Your next question comes from the line of Tim Savageaux with Northland Capital Markets.

I want to come back to a comment you made about optical, mainly kind of building throughout the year, which makes sense. Typically, in access and aggregation, you see kind of the opposite pattern, which is a stronger first half driven by Europe and then maybe a weaker second half. My question is, I wonder if BEAD can serve to offset that this year. So you might be able to have a similar type profile building throughout the year. And at least let's just focus on access and aggregation here as a result of that. And at this point, are you able to make an estimate for what the annual incremental contribution of BEAD might be in the second half or this year in general?

I really -- yes, unfortunately, I really can't give an estimate on BEAD because there's too many customers and too many unknowns. But your question is, do I think you would also see the typical access and ag. I think a couple of things can play into that. BEAD definitely will be helpful.

I think the other thing that we expect to see, and this is still relatively early in the year, but I think Europe is going to be stronger than what we saw the last couple of years seasonally. So I think that we're -- you won't see -- the current expectations is that we won't see the same kind of falloff in the second half versus first half that we saw last year. Did that answer your question, Tim?

Sure guys.

And your next question comes from the line of Bill Dezellem with Tieton Capital.

Relative to the LiteWave800 and your engineering knowledge set that you have gained to reduce that power consumption by 90%, is there a carryover or an opportunity to take that knowledge and apply to other products throughout your catalog that could be materially impactful to the business? And if so, what's the timeline that it would take to have that technology or those capabilities infiltrate the rest of the product line?

I think it's relatively unique to the product sets that we're talking about. It is because of particular speeds and particular distances that we're able to actually get the power savings that we're talking about. I think the -- but I did call it a family. And I consider Quattro to be part of that same family, which is in our multi Mux family, which is very, very power savings as well.

But I think the proliferation you'll see of that technology is in that pluggable space. So you're going to see first product is QSFP. We do have other products that are, let's say, I'll just say more integrated that will be coming out over time. So I think you're going to see different members of the family and similar application sets where this technology will actually play itself out.

And Tom, those applications are all within the data center? Or are there other short distance opportunities that are outside of the data center that I'm not thinking about right now?

There could be, but I can tell you that demand with inside the data center is worth focusing on. It is very large.

At this, I think we are out of questions. So I want to thank everybody for joining us on the conference call, and we look forward to talking to you next quarter. Thanks, everyone.

Good morning. My name is Julianne, and I will be your conference operator. At this time, I would like to welcome everyone to ADTRAN Holdings Fourth Quarter and Full Year 2025 Financial Results Conference Call. [Operator Instructions]

Thank you. Mr. Peter Schuman, Vice President, Investor Relations, you may begin your conference.

Thank you, Julianne. Welcome, and thank you for joining us today, and welcome to all those joining by webcast. During the conference call, ADTRAN representatives will make forward-looking statements that reflect management's best judgment based on factors currently known. However, these statements involve risks and uncertainties, including those detailed in our earnings release, our annual report on Form 10-K as amended and our other filings with the SEC. These risks and uncertainties could cause actual results to differ materially from those in our forward-looking statements, which may be made during the call. We undertake no obligation to update any statements to reflect events that occur after this call.

During today's call, we will refer to certain non-GAAP financial measures. Reconciliations of GAAP to non-GAAP measures and certain additional information are also included in our investor presentation and our earnings release. We have not provided reconciliations of our first quarter 2026 outlook with regard to non-GAAP operating margin because we cannot predict and quantify without unreasonable effort, all of the adjustments that may occur during the period. The investor presentation has been updated and is available for download on the ADTRAN Investor Relations website.

Turning to the agenda. Tom Stanton, ADTRAN Holdings' CEO and Chairman of the Board, will provide key highlights for the fourth quarter and full year 2025. Tim Santo, our Senior Vice President and CFO, will review the quarterly and full year financial performance in detail and provide our first quarter 2026 outlook, and then we will take questions that you may have. I would now like to turn the call over to Tom Stanton.

Operator, we are receiving notification that the line is bad and that recipients are not hearing us correctly. Is there a way to improve the line before we proceed?

Thank you very much.

Thank you Peter, and good morning, everyone. ADTRAN delivered a strong fourth quarter and finished 2025 with solid momentum. Our quarterly results reflected higher demand and strong execution with revenue above the high end of our original outlook, overcoming typical year-end seasonality. Operating leverage continued to improve and earnings came in above expectations, with all 3 business categories achieving sequential and year-over-year growth.

In the fourth quarter, ADTRAN generated revenue of $291.6 million, reflecting a strong year-over-year growth of 20% and sequential growth of over 4%. This marks the sixth consecutive quarter of sequential growth and the fifth consecutive quarter of year-over-year improvement, reinforcing the strength of our company and our key markets. Our U.S. business led the quarterly growth, with revenue up 31% year-over-year and 14% sequentially. Non-U.S. revenue grew 12% year-over-year and declined 3% sequentially as expected and consistent with recent ordering patterns among some of our larger European customers.

Optical Networking Solutions grew 33% year-over-year, driven by strong sales to cloud providers and enterprise customers. This increase also drove the contribution of enterprise and cloud providers to 25% of our revenue in Q4 and 21% for the full year of 2025. These results reinforce a trend we are seeing: cloud providers expanding data center capacity and large enterprises upgrading their optical networks. During the quarter, we continued to broaden our optical customer base. We saw solid activity across service providers, cloud providers, enterprises and public networks, reflecting the flexibility of our optical platforms across different use cases.

Access & Aggregation revenue grew 9% year-over-year and 6% sequentially, supported by continued fiber access investment across U.S. and European operators. During the quarter, customer activity reflected a mix of expansion projects and network upgrades as operators advanced deployments. In Subscriber Solutions, revenue grew 17% year-over-year and 3% sequentially, driven by demand for our residential fiber CPE as customers continue to connect more subscribers. The revenue in this category continues to be generated by a diverse mix of residential, enterprise and wholesale service offerings.

Today, our software solutions serve over 1,000 carrier customers across 3 of our product categories, automating everything from optical networks to in-home subscribers' experiences. These customers include nearly 500 service providers adopting our Mosaic One platform and more than 100 service providers deploying our recently introduced Intellifi cloud-managed Wi-Fi solutions. We are also advancing our Agentic AI platform with numerous Mosaic One Clarity customer trials underway before an official launch later this year. As demand for AI-driven automation grows, we see this application suite as an important addition to our software capabilities.

Looking at the broader environment, we continue to see sustained fiber investment across our core markets, and the U.S. broadband programs and ongoing investments in data centers are supporting ongoing network expansion. In Europe, increased focus on network security and vendor diversification away from higher-risk suppliers is reinforcing upgrade activity across the region. These trends are supporting continued demand for upgrades across all 3 product categories.

At the same time, network requirements continue to evolve. Across data centers, between the data center and out to the customer edge, capacity demands are increasing. Service providers, cloud providers and enterprises are pairing high-capacity fiber networks with automation and software to streamline operations. While this is still an emergency contributor to our revenue, it reinforces the market's longer-term direction towards more intelligence and more automation. With our broadband fiber network portfolio, software assets and regional strength, we are well positioned to support both the current infrastructure cycle and the longer-term evolution towards these more intelligent fiber networks.

We delivered a strong Q4 with solid financial results and execution and healthy core -- and healthy cash flows. For the full year 2025, we delivered double-digit revenue growth, with each of our 3 revenue categories also growing at double-digit rates. We achieved this while expanding gross margins and returning to positive non-GAAP operating margin and EPS.

Also during the year, we strengthened our balance sheet by issuing approximately $200 million of convertible notes at an interest rate meaningfully lower than our revolving credit facility. We were able to purchase $27.2 million of ADTRAN Networks shares during Q4 and $46.6 million worth of shares during the calendar 2025, reducing the minority interest to less than 30% as we closed the year.

As we move into 2026, our priorities remain continued improvement in our leverage model, expanding operating margin, cash generation and converting the customer momentum that we have been seeing. We continue to operate in a dynamic cost environment, including variability in components such as memory. We are managing that variability through disciplined procurement and price mechanisms that are already embedded in our model. At this time, we are not seeing conditions that change our demand outlook or execution priorities.

In summary, we entered 2026 with a positive outlook. Customer trends are favorable in the U.S. and Europe, customer acceptance of products has been strong, and our product offerings and competitive position has never been better. We have several multiyear tailwinds in our key market segments.

With that, I'll turn the call over for Tim to review the financial results in more detail. Tim?

Thank you, Tom, and thank you all for joining us this morning. We delivered strong results for the fourth quarter and full year 2025, driven by solid execution and healthy revenue growth. As scale improved, we delivered higher margins, and operating efficiency increased across the business. We remain focused on disciplined cost management as we continue to grow.

Over the quarter, we continued to operate with tight financial processes and consistent execution. These remain embedded in how we run the business, improving visibility and planning rigors and supporting structured capital allocation. While the mix between gross margin and operating expenses can shift from quarter-to-quarter as revenue moves, our objective remains focused on steady margin expansion as the business scales.

As we noted on our previous earnings call, the capital actions we took last year improved our financial flexibility and added optionality. Broadly, our focus remains on simplifying the capital structure and maintaining flexibility to support the business and create value. We will continue to deploy cash thoughtfully to reduce the minority interest over time while maintaining balance sheet strength and evaluating noncore asset monetization opportunities as appropriate.

Turning to the financial results for the fourth quarter of 2025. Revenue was $291.6 million, up 20% year-over-year and 4% sequentially, above the high end of our original guidance. Year-over-year growth was driven by all 3 product categories with Optical Networking the largest and fastest contributor, with revenue increasing by $26.9 million or 33% from the prior year. Geographically, non-U.S. revenue accounted for 53% of total revenue, while U.S. revenue accounted for 47%.

Non-GAAP gross margin increased to 42.5%, up 44 basis points sequentially and 122 basis points year-over-year, driven by scale efficiencies, product mix and cost discipline. We remain focused on sustaining gross margin in the 42% to 43% range over the long term. Non-GAAP operating profits rose to $18.8 million or 6.4% of revenue, exceeding the midpoint of our original outlook, and up 103 basis points sequentially and 406 basis points year-over-year. Non-GAAP tax expense in Q4 2025 was $3.8 million or an effective rate of 22.6%. Non-GAAP EPS was $0.16 compared to $0.05 in Q3 2025 and a loss of $0.02 a year ago. EPS benefited by $0.03 from the acquisition of shares from minority holders in the fourth quarter.

We continued to strengthen our financial position during the year. Year-over-year, net working capital improved by $8.7 million due to meaningful inventory reductions, largely offset by increases in accounts receivable due to increased sales. During the year, inventory declined by almost $50 million, including $8 million during the fourth quarter. Days inventory outstanding improved by 47 days year-over-year and 10 days in the fourth quarter to 114. DSO increased to 66 days, down by 1 day year-over-year and up 7 days sequentially due to increased sales and the timing of Q4 invoicing.

As revenue scales, our focus remains on improving working capital efficiency. Operating cash flow was $42.2 million for the quarter, and free cash flow was $22.5 million. For the full year, we generated $129.8 million in operating cash flow and $60.5 million in free cash flow, representing healthy increases of 25% and 58%, respectively, compared to 2024. We ended Q4 with $95.7 million in cash and cash equivalents after purchasing $27.2 million or 1.2 million shares of ADTRAN Networks stock. For calendar year 2025, we purchased $46.6 million or 2 million shares of ADTRAN Networks stock and now own just over 70% and meaningfully reduced the interest rate on our outstanding debt as a result of the convertible note offering.

Turning to our operational performance for the year. We made meaningful progress across key financial metrics during 2025. Revenue increased 17.5% year-over-year, totaling $1.084 billion. We expanded full year non-GAAP gross margin by approximately 90 basis points to 42.1%, reflecting increased scale, higher efficiency and favorable product mix. Non-GAAP operating margin increased to 4.8% in 2025 from negative 0.3% in 2024. And non-GAAP diluted EPS returned to a positive $0.23 per share. We delivered a strong year of cash flow generation, with net cash provided by operating activities increasing by $26.2 million to $129.8 million.

We remain disciplined on cost structure while positioning the company to convert revenue into sustained earnings growth. Looking ahead at our outlook for the first quarter of '26, we expect revenue to be between $275 million and $295 million and non-GAAP operating margin of 4% to 8%, reflecting traditional seasonality and current supply chain dynamics.

I will now turn the call back over to Tom.

All right. Thanks very much, Tim. Julianne, I think at this point, we're ready to open it up for any questions people may have.

[Operator Instructions] Our first question comes from Michael Genovese from Rosenblatt Securities.

Great conference call, clearly upbeat messaging. Tom, can you just talk a little bit more, I guess, specifically about the demand picture in U.S. and Europe and sort of what you're seeing from your clients on the optical side and on the fiber-to-the-home side? And just talk a little bit more about the drivers of the revenue growth. And I guess related to that, like do you think -- obviously, you're not giving full year revenue guidance, but coming off a year where you grew 20%, do you think double-digit growth is -- top line growth is in the cards for '26?

Yes. So let me start on a little down, which is we don't give full year guidance for a reason, and that's because our outlook is -- typically are still our book-to-ship period is relatively small. So it's a little difficult.

Let me speak a little bit more about the kind of the environment that we're in right now. I would say it's kind of the same tone and kind of building momentum that we saw throughout last year. And we expected that to continue on, and that's exactly what's happening. So we -- on the fiber-to-the-prem side, nothing has slowed down. Programs are still going well. We're still adding new customers to those product areas, and we're continuing to operationalize carriers in Europe. So all of that is just a continuation of the same type of activity we saw last year.

On the fiber front, the dynamic is a little bit different because we were still at the very beginning of the year, kind of crawling out of the revenue inventory uptick that we had seen in our customer base. That cleared itself up last year. We started seeing that real progress in the second half of the year. We also -- as you may be aware that we had won some additional customers, both here in the U.S. with wider scale kind of Tier 2 deployments as well as in Europe, where we won some Tier 1s, and that momentum is just continuing on.

I would say that is driven not just by the Huawei replacement which is going on in Europe, but just in general, I just think activity, we just saw customers starting to unleash capital, and they're trying to increase their bandwidth for obvious reasons. I mean, I think all of them are trying to figure out how they're going to play in a new AI-driven world. I think MoFi is a driver. We definitely -- I mentioned it on the call, we saw some real positive momentum on the enterprise side, which includes ICP carriers, right? So yes, it's just generally a good environment.

Great. And then my second and last question will just be on pretty wide operating margin outlook of 4% to 8% for the quarter. So is that because of things like memory prices, that the range is that wide? Or is that kind of maybe more of a normal range and I'm just reading it as being wide?

To us, I don't think there's any difference in the range that we get than what we typically do. There is tightening supply, as everybody is aware of, on memory. There's some tightening supply in optics. But I would say that that's not overly impacting the guidance range. Our kind of operating model is still what we fully expect it to be, what we've communicated, which is operating expenses in the low 100 range and gross margins in the 42%, 43% range. I don't see we see a deviation from that. Tim, any comments?

No, I would reiterate, as Tom said, the guidance range is about 4 points, which if you look historically is where we've been. And it's actually up a little bit from last quarter. But the leverage model would remain up from what we guided last quarter.

You mean midpoint, yes.

Our next question comes from Ryan Koontz from Needham & Company.

I want to ask about optical, maybe if you can unpack a little bit. You talked about enterprise ICPs, I assume that's a big driver of optical. Do you have any ideas, like how much of that is really hyperscale and AI data center cloud-related versus what I would call like traditional SP and enterprise networking? Can you maybe help us understand some of those dynamics there within the optical strength?

Sure. So there was actually a good contribution on both of those fronts in the quarter. And I'm trying to think if it was -- I would say -- and this is not having the note in front of me -- that the mix on traditional enterprise, including the banking sector and all of the larger enterprise that we play into is a portion of that. And then ICP did come in stronger in the quarter than what we had historically seen, and we expect that momentum to continue on through this year.

Great. And I recall a conversation from OFC last year about this opportunity in MOFN where the hyperscalers are contracting with traditional SPs or maybe some of the Tier 2s like Colt, et cetera, to build for them. Are you seeing some benefit there as well? And would that show up in your SP business as opposed to your enterprise business if it was a MOFN-type deal?

No, that would show up in our carrier. We would consider that to be a carrier customer. And we're definitely seeing that. We talked about that in the last maybe couple of conference calls, how we were starting to see some of the carriers position themselves to be able to do MOFN. That's just a continuing ongoing kind of upgrade cyclical thing that's adding positive momentum to that business. So -- but that is separate and apart from the enterprise piece that we're talking about.

Great. And maybe just one last, if I could, on the fiber-to-the-home side. Relative to new footprint, it seems like the U.S. has been a little bit hit-and-miss where some segments do better than others. Any update there on how Q4 turned out in terms of new greenfield footprint and how you're thinking about '26 going forward for U.S. fiber-to-the-home greenfield builds?

Yes. I think it was -- I'd call it a solid quarter, kind of consistent with what we had seen in the year. I mentioned that the -- in general, the U.S. business was definitely stronger on a sequential and year-over-year basis.

I think we're expecting good things this year. We finally -- I probably shouldn't say the word, but BEAD dollars are actually starting to flow. We got a customer in Louisiana that is expecting BEAD dollars hopefully next week. So -- and I don't want to over-rotate on that guide because the build-out is going to consistently be driven for most carriers by kind of fiber deployment for this year and then equipment next year.

But the fact that, that's actually flowing is real positive. I think there's 6 other states that are -- expect money any day now. So the fact that those dollars are starting to flow, I think, is a positive thing. And it's just as positive, not just the BEAD dollars, but from a planning perspective and knowing that it's going to happen and giving carriers surety as to how they plan their capital budgets is very important.

Right. So the planning, engineering and maybe the fiber optic cable spending this year from BEAD sees an earlier uptick, you're saying than your equipment would see this year that would follow within quarter 2 behind...

Yes, you've got to be able to deploy that fiber. But I think the positive thing for us, which we don't know how that will impact, and it may just be just a kind of positive influence is the fact that you get surety in your budget planning cycle. But not just your BEAD funding, but your normal capital spend as well. And I think that, that's been missing for some time.

Our next question comes from Christian Schwab from Craig-Hallum.

Great execution in the quarter, guys. Tom, I know -- so we're sitting here at the end of February, noncore asset sales and potential building sales and leaseback activity. Would you be disappointed if we didn't have resolution on both by the end of calendar 2026?

Well, leaseback activity, more than likely, that is not going to happen with the North Tower -- excuse me, the East Tower. So let me be clear on where we are with that. I think we've been trying to talk about this now for a couple of quarters.

We did get several lease offers on the building. Financially, it didn't make sense for us because of where we are with our cash position right now and what we use for the cash and what that lease would ultimately cost us. So we have put that on hold. We can always revisit that if we want to. Then on the North/South Tower, which is the thing that's up for sale, I'm going to let Tim jump in here and give you an update on that.

A lot of activity in the Huntsville market. We're not currently under contract, but we have activity. So we continue to work that, and when the right deal comes along, we will close that. As we had hoped it would happen in 2025, we are very optimistic it will happen in 2026, but the market will dictate.

Great. And then on the noncore asset side, Tom, do you think that can get resolved this year? Or is that a fluid situation?

Yes. So we -- let me try and do this in a proper way. We have taken a look at the noncore assets. We've gotten values on what we think the noncore assets that we think are not strategic, right, to our business. We have -- we are doing things right now that we think will increase the value of those assets, and we'll reevaluate that in the second half of this year.

Perfect. And then my last question, as we go throughout calendar 2026, is there one area -- we spoke positively, obviously, about finally loosening up after many years of seeing some progress as speed is concerned. But as we look at equipment replacement in Europe, the strength in optical, geographical strength in Europe, et cetera, is there one thing more than another that you're most excited about as we go through 2026 that we can monitor?

Yes. So I think -- let me just hit on a couple. One is I think enterprise is doing really well. And as I mentioned earlier on the Q&A, there are multiple drivers for that. We expect that to be strong this year. And so that strength is above whatever the company is doing on a corporate average perspective. So that's really good to see.

The other is there is some legislation going on. I don't know how much success it's going to have. It's good that it's going on, but in the EU right now to accelerate the Huawei replacement piece. It's not so much whether or not that actually happens, which there is a high likelihood it happens. But just the focus on that is positive for our business.

And I'll remind people, we think that's a near $1 billion a year type opportunity that Huawei is selling into the European market that we think we have a very good chance of being able to capitalize on. So as that pressure continues on, and it is -- there was legislation that was sent out in the EU in early of last year that is positive, right? So that addresses this issue. So yes, so I think both of those things are real positive catalysts.

Our next question comes from George Notter from Wolfe Research.

I guess I just want to keep going on the question of Huawei replacement in the EU. I think the regulatory stance currently basically has it not compulsory to replace Huawei, but I guess, suggested would be kind of the idea in terms of the current regulatory environment. And I know the stuff that's coming down the pike is going to mandate Huawei replacement, and it sounds like it could be a few years away until that legislation actually requires companies to -- or carriers to replace Huawei.

But I guess I'm just curious, like what has the inflection happening right now? Is there something you're seeing with your customers that allows them to move more quickly? Is it funding? Is it more pressure from a political perspective? I guess I'm just trying to understand what's driving this.

Yes, sure. Yes, I agree. Well, let me just make one caveat to that. Although the EU's directive is more of a recommendation, the country-by-country and carrier-by-carrier requirements or legislative actions are different, right? So we do have some countries in the EU that have explicitly been stronger on that.

And it's not so much that -- I think that legislation and the talk about legislation and the fact that we're even talking about it here is exactly the point, which is if you're a carrier and you're doing a new award, you're kind of crazy to be deploying Huawei at this point. Or if there's a new region, a new footprint that has to be built out, even if they're an approved vendor, you know you're going to have a problem. So what that's doing is putting on -- increasing the braking pressure on continuing to deploy them on an ongoing basis.

I would agree that pulling them out is a different thing, and that will take years. And we've characterized that north of -- and it's an easy math, George, for you to do, right? It's a north of $10 billion opportunity for the pull out. But what we're talking about is just on the annual spend, where they're going in and filling in new [ cars ], building out new footprint. That kind of activity is going to continue to slow down.

If I look at that $1 billion annual spend, how well positioned do you think you are on that? I mean, obviously, that's across a number of product categories. It's across a large number of specific operators, maybe some you're in, some you're not. I mean, is there a way to kind of pin down that $1 billion in annual spend in terms of what's like reasonable for you?

Yes, please. Let me not be so sloppy on that number. The last time we looked at it -- and we do have another -- we have an outside firm trying to take a look at exactly what that number is at this point. But that number is derived from about an $800 million, I think it was $850 million or $860 million number for EMEA in our target product areas, and that was in '24. We think that, that number is going to continue to slow down. It was north of $1 billion not that long ago. So that number will continue to slow down as we actually pick up that market share.

Now that's for products that are specifically in our product sweet spot, which is kind of mid-mile, regional network optical, access and aggregation. It is those products that we're actually talking about. So it's really what we believe the TAM is for our products. But like I'm trying to say, it's a rough number right now, and it's just based off of the earnings results of Huawei.

Our last question comes from Dave Kang from B. Riley.

First, regarding European telcos, you talked about them being front-loaded. Just wondering if you can kind of quantify whether it's 55:45 or is it more exaggerated?

I'm sorry, your question broke up for me. Can you rephrase it or restate it?

Yes. Regarding your European telcos, Tier 1s. In the previous calls, you said they tend to be front-loaded. Just wondering if they're like 55:45 or more like 60:40. Any color?

As far as in the year, is that what you're talking about?

Yes.

I don't know if I've seen that actual breakout. I would say it's definitely -- last year, it was probably 60-ish, 40-ish, and this is just off the cuff. And this is predominantly in the access and agg product category.

So you'll see that -- last year -- you could see that last year in our Access & Agg number. You actually saw that kind of big bump in the first half of the year, and then it kind of tailed down. It's not as prominent in the rest of the product areas. They kind of -- they're just not on the same cycle.

And are you kind of expecting similar dynamics this year or any changes from last year?

Really good question. I will tell you, we weren't happy with that bump because of what that does operationally. Bumpy is never as good as smooth. So we have been talking to them about that and trying to get that to be more even flowed this year. So I don't know how successful we've been with it at this point. So hopefully, you won't see that same type of kind of waterfall.

And my second question is regarding the same European telcos. Just where are we in terms of their broadband deployment cycle? Are we still early stages or mid or getting towards the late innings?

Good -- well, if you take Europe as a whole, there's no way to characterize it other than early. We've brought just recently, some new carriers on that haven't been deploying with us, and then they all kind of have this Huawei issue as well.

If you take specific areas, there are countries that are farther along. The U.K. is, I would say, kind of more towards the middle. Germany is probably -- definitely within the first half. So it depends on the carrier. Some of them are -- haven't started yet.

Got it. Thank you.

Okay. At this point, I think we are -- no more questions in the queue. So I'd like to thank everybody for their participation today, and we look forward to talking to you next quarter.

Ladies and gentlemen, that concludes today's call. Thank you for your participation. You may now log off.

Good morning. My name is Carly, and I will be your conference operator today. At this time, I would like to welcome everyone to the ADTRAN Holdings Third Quarter 2025 Financial Results Conference Call.

[Operator Instructions] I would now like to turn the call over to Mr. Peter Schuman, Vice President, Investor Relations. Please go ahead.

Thank you, Carly. Welcome, and thank you for joining us today, and welcome to all those joining by webcast. During the conference call, ADTRAN representatives will make forward-looking statements that reflect management's best judgment based on factors currently known. However, these statements involve risks and uncertainties, including those detailed in our earnings release, our annual report on Form 10-K as amended and other filings with the SEC.

These risks and uncertainties could cause actual results to differ materially from those in our forward-looking statements, which may be made during the call. We undertake no obligation to update any statements to reflect events that occur after this call.

During today's call, we will refer to certain non-GAAP financial measures. Reconciliations of GAAP to non-GAAP measures and certain additional information are included in our investor presentation and our earnings release. We have not provided reconciliations of our fourth quarter 2025 outlook with regard to non-GAAP operating margin because we cannot predict and quantify without unreasonable effort, all of the adjustments that may occur during the period. The investor presentation has been updated and is available for download on the ADTRAN Investor Relations website.

Turning to the agenda. Tom Stanton, ADTRAN Holdings' CEO and Chairman of the Board, will provide key highlights of the third quarter of 2025. Tim Santo, our Senior Vice President and CFO, will review the quarterly financial performance in detail and provide our fourth quarter 2025 outlook, and then we will take any questions you may have.

I'd like to now turn the call over to Tom Stanton.

Thank you, Peter. Good morning, everyone. ADTRAN delivered solid third quarter results with revenue near the upper end of our guidance and higher operating margins. All 3 business categories achieved double-digit year-over-year growth, reflecting disciplined execution, new customer wins and healthy demand for fiber networking solutions.

Operating profit exceeded the midpoint of our outlook, underscoring the solid execution and our focus on leveraging financial performance as a driver of longer-term value creation. The quarter was led by strong results in Optical Networking and Subscriber Solutions, while Access & Aggregation reflected anticipated buying patterns of 2 large European customers. We expect those customers to come back online either early -- late in the fourth quarter or early next year. We remain confident on the overall market for the remainder of this year, however.

During the quarter, we closed on a $201 million financing transaction that lowered our borrowing cost and increased financial flexibility, important steps that strengthen our capital structure and position us to execute confidently on longer-term strategic objectives.

Turning to the quarterly results. ADTRAN reported $279.4 million, reflecting strong year-over-year growth across all 3 revenue categories. This marks the fifth consecutive quarter of sequential growth and fourth consecutive quarter of year-over-year improvement, proof points that our portfolio strategy and market positioning are driving sustainable momentum. This consistency underscores the health of our business, continued improvement in market conditions and the progress we are making in strengthening our foundation for the longer-term growth.

From our customers' perspective, engagement across our portfolio continues to strengthen as we broaden our technology reach. We're making it easier to choose ADTRAN, not just because of what we build, but because of how seamlessly our solutions work together. Our integrated portfolio means fewer handoffs, faster time to value and one accountable partner across optical, access, subscriber and software. Our technology is the enabler, but the outcome is what matters; simpler operations, greater efficiency and a trusted relationship that continues to open new opportunities for collaboration.

Our Optical Networking solutions grew 47% year-over-year and 15% sequentially, driven by strong momentum in Europe, including deployments with a new large service provider. We added 15 new optical customers in the quarter, reflecting continued share gains and the expanding reach of our portfolio. Demand remains robust and geographically diverse, supporting a wide range -- array of applications. These include national networks throughout Europe, secure connectivity for major enterprises and government clients worldwide with high-capacity interconnects for large-scale content providers.

Access & Aggregation revenue grew 12% year-over-year, supported by ongoing fiber access investments among regional operators in the U.S. and Europe. While revenues from our small and medium service providers in the U.S. were substantially up, this increase was offset by the seasonal buying pattern of 2 major European customers. We added 14 new customers for our fiber access and Ethernet aggregation platforms, demonstrating continued traction across both new and existing markets.

In Subscriber Solutions, revenue grew 12% year-over-year and 21% sequentially, driven by demand for both residential and wholesale applications. We added 18 new customers during the quarter as service providers continued expanding fiber reach and upgrading Wi-Fi capabilities.

This quarter, we introduced Mosaic One Clarity, a new application built on our carrier-grade Agentic AI platform that enables predictive maintenance, guided issue resolution and proactive network optimization. Early results from customer pilots are promising, demonstrating a reduction of up to 75% in network-related trouble tickets.

This is a strong validation of our AI-driven approach to network intelligence and a clear example of how innovation within Mosaic One is helping operators improve performance and efficiency.

Structural shifts across our industry from core to edge computing and the advent of intelligent networks are reshaping connectivity worldwide. AI isn't just transforming data centers; it's redefining the entire network. The rise of distributed computing and edge processing is driving new requirements for bandwidth, latency and reliability, fueling demand for high-capacity optical solutions, next-generation access platforms and intelligent software to automate operations.

ADTRAN is uniquely positioned at the intersection with our differentiated portfolio and our Mosaic One operating platform. As investment accelerates in AI and cloud computing, upgrades will follow across the network through metro transport, access and aggregation, and ultimately, the subscriber edge. Our Optical Networking, Access & Aggregation, Subscriber Solutions and Mosaic One software are built for that cascade, delivering higher throughput, lower latency and smarter, more efficient operations at scale.

In summary, Q3 was another quarter of solid execution and strategic progress, marking a clear step forward in both performance and positioning. We delivered top line momentum and profitability improvements while enhancing our ability to invest and operate with greater financial flexibility, all of which reflects the disciplined way our teams are executing across the business. More importantly, we are setting the foundation for sustained value creation.

The actions we've taken to enhance efficiency, strengthen our balance sheet and sharpen our focus are enabling us to operate from a position of greater agility and confidence. As Tim will discuss in more detail during the financial review, our scale efficiencies are creating meaningful operating leverage across the business. With disciplined cost control and strengthened balance sheet, we see line of sight to continued margin expansion and earnings growth as we move through 2026, all while maintaining the same financial discipline that has guided our progress.

With that, I will turn the call over to Tim to review the financial results in more detail. Tim?

Thank you, Tom, and thank you all for joining us this morning. We delivered solid results in the third quarter, reflecting strong discipline and consistent execution across the business. As Tom shared, we achieved broad-based revenue growth, higher margins and improved operational efficiency as benefits from increased scale began to take hold.

Demand was strong in optical networking and subscriber solutions, supported by healthy customer activity and continued broadband investment globally. Over the past quarter, we've reinforced the operational fundamentals of the business and enhanced our financial controls and processes to support growth. These actions strengthen reliability and transparency of our published results and position us to deploy capital effectively, aligning operational execution with long-term value creation.

As Tom shared, the third quarter also marked a significant step in strengthening our capital structure. The $201 million transaction that we completed has lowered borrowing costs, improved liquidity and substantially reduced risk. While it also unlocks significant availability under our revolving credit facility, it does not change the strategic priorities we've outlined to monetize our non-core assets.

As many of you know, we recently engaged new partners to represent the sale of our Huntsville campus. Together, we have relaunched a targeted marketing process and are actively speaking with interested parties. We will remain disciplined on terms and timing, and we'll provide updates as appropriate. Simply put, we are moving forward the process with focus and intent.

Maintaining a healthy balance sheet remains a top priority. We've made tangible progress this year, and our balance sheet today is more resilient, flexible and better aligned to support long-term growth.

Turning to the financial results for the third quarter of 2025. Revenue was $279.4 million, up 23% year-over-year and 5% sequentially, finishing at the high end of our guidance. Growth was broad-based, led by Optical Networking, which increased 47% year-over-year. Geographically, non-U.S. revenue accounted for 57% of total revenue, while the U.S. represented 43%. One customer contributed more than 10% of total revenue during the third quarter.

Non-GAAP gross margin improved to 42.1%, up both sequentially and year-over-year, driven by scale efficiencies, product mix and component cost reductions. We remain focused on sustaining gross margin in the 42% to 43% range over the long term. Non-GAAP operating profit rose to $15.1 million or 5.4% of revenue, exceeding the midpoint of our outlook.

On a sequential basis, operating profit increased by $7.1 million or 89% compared to $14.6 million from approximately 0 in the prior year. Operating income during the same period has increased to 5.4% in Q3 2025 from 3% in Q2 2025 and 0.2% in Q3 2024. Currency had a minimal impact on our earnings this quarter.

While volatility persists across both revenue and expenses, our natural hedging framework continues to mitigate risk. Building on the stronger forecasting, reporting and treasury processes established this year, we are now expanding our FX strategies to further protect our balance sheet and working capital.

Non-GAAP tax expense in Q3 2025 was $3.5 million or an effective rate of 38.3%. Non-GAAP EPS was $0.05 compared to breakeven in Q2 2025 and compared to a loss of $0.07, 1 year ago. We continue to strengthen our financial position with working capital improving by $13.2 million. Accounts receivable increased by $13.9 million, resulting from increased sales with DSO remaining relatively flat at 59 days.

Inventory declined by $16.3 million sequentially, reducing days inventory outstanding by 11 days to 124. Accounts payable totaled $188.9 million with days payable outstanding remaining flat at 70 days. We remain focused on maintaining a healthy balance sheet with our objective of achieving a net positive cash position. Operating cash flow was $12.2 million, and year-to-date, we've generated $38 million in free cash flow. We ended Q3 2025 with $101.2 million in cash, cash equivalents and restricted cash and importantly, a stronger liquidity position.

In summary, Q3 reflects disciplined execution, profitability improvement and continued financial progress. We entered the fourth quarter with confidence, despite typical seasonal factors, fewer shipping days, holiday-related customer acceptances and budget timing. While those dynamics remain, we expect solid demand and our execution to offset the usual headwinds.

We expect revenue between $275 million and $285 million and anticipate a non-GAAP operating margin of 3.5% to 7.5%. We expect OpEx to remain relatively flat compared to Q3. We look forward to a strong finish to the year and remain focused on driving sustainable growth and maximizing long-term stockholder value.

I now turn the call back to Tom for some concluding remarks.

Thanks, Tim. I think we'll open up to some questions first. Carly, at this point, we can open up the question queue for any questions people may have.

[Operator Instructions] Your first question comes from Michael Genovese with Rosenblatt Securities.

I guess my first question is, looking at the Access & Aggregation and the comments on the European customers there as well as the information put out by ADTRAN Networks in Europe talking about, I think, a little bit of a timing change. So my question is, is there -- was there like a pushout of some things? I mean I know the first half of the year tends to be seasonally stronger than the second half in that Access & Aggregation European business. But versus prior expectations, was there some kind of push out in the timing of some of those shipments?

There has been -- there's been, let's say, I don't -- push out alludes to the fact that there may be some risk in that. I don't think there's any risk, but there has been some changing in some of the timing. We have 2 big customers that tend to be front-end loaded. In fact, they're 2 of our biggest customers in the year. And then one of the customers has a calendar that is offset from typical -- their financial calendar is different. So that means budget cycles are different. But yes, there's always some puts and takes. So the answer is yes.

Okay. And I'm sorry, I just -- in terms of what you said, I think you gave us an update on the real estate, but I was a little bit -- just I couldn't follow exactly what you said about. So could you talk about that again?

Sure. Basically, what Tim mentioned was, we have put the both buildings back on to the market. We are actually receiving -- we've got multiple offers coming in, right, Tim? Let me let you cover that. Go ahead.

We've -- in this past quarter, where we left off, we are under an exclusivity agreement, and we pulled the buildings down while we were working through that. As we disclosed last quarter, they're back on the market and very actively being marketed. Both the parts of the campus, we have interests from multiple parties and are having regular conversations.

Okay. And then finally, I'm just going to -- kind of a bigger picture question, which is, traditionally, telecom has not been a super-fast growth market, right? It's the telecom in general is a single-digit growth market. So, if ADTRAN is going to grow higher than that on the top line and be more of like a high single or double-digit growth company, is it because there's fundamental acceleration in what you're doing in fiber and access or you're gaining share? Or is there some repositioning to higher growth markets like more data center exposure? Like what -- just how do we think about 2026 and sort of what the drivers of the business are from a high level?

Yes. So I kind of agree with everything you're saying. I mean you typically see the telecom market in the single digits, kind of mid-to-high single digits and it kind of varies year-to-year from there. Our premise has been, there is that typical growth. We do believe markets in general are that -- effectively that the focus right now on data center -- speeds and data center capacity is starting to affect the overall market, although I don't think that's really in numbers today.

But the premise is, there's a significant market share disruption that's happening in Europe right now, and we are the #1 winner in that market share grab that's going on in Europe. I mean the largest player in Europe is being displaced.

Last follow-up on that. Is there anything incrementally in Germany happening where -- I believe that Germany had already decided to kind of cap Huawei, but I'm not sure if they ripped and replaced yet. Could that become something incremental actual rip and replacing of Huawei?

Yes, they could. I think over time, rip and replace is going to have to happen everywhere just because you have to maintain the network and you can't be getting new drops of code all the time. There are -- as you know, there's been a lot of talk over the last few weeks about trying to accelerate that process in Germany. I don't think there's been any material rip and replace at this point in time. I think what they've been trying to do is effectively cap utilization on an ongoing basis.

Your next question comes from Ryan Koontz with Needham & Company.

I want to ask about Optical. It looks like the best quarter you've had there in a couple of years. Tom, any color you can give us in terms of trends in terms of product mix, geo mix within the Optical domain would be helpful because Optical is obviously gaining a lot of momentum with regard to cloud and AI spend really starting to ramp up.

Yes. I would agree with you on what the outcome of the quarter was, and I would tell you that the momentum there is strong. It's both in the U.S. and in Europe. The quarter was definitely helped though by us picking up a larger Tier 1 in Europe, and we started initial shipments into that carrier. But we've kind of seen a dethaw kind of across the market, most notably in Europe though. So, we're expecting a good year next year as well.

Great. And as Mike mentioned about the Huawei displacement opportunities, I mean, how would you broadly characterize those today with regards to deals you've won as well as prospective deals you hope to like win in the next 12 months, relative to revenue opportunity?

Yes. So, it has been a significant positive influence even going through the downturn with what we've won. But if you look at the number of carriers that have actually converted, like there's some discussion here on Germany, they've been slow. And that momentum continues to build quarter-over-quarter. It definitely is impacting our numbers now, and that impact will grow over the next 2 to 3 years. So, it's definitely a positive mover.

I -- let me add a little because I think there are different dynamics in the access versus optical space. I think there's a good chance that optical will probably -- we will see an increase in momentum earlier on in the optical space. Access has been a constant just move, but there's millions of customers that are involved versus -- and because of that widespread infrastructure versus kind of optical moves on a project-by-project basis.

Got it. Great. And maybe one on margins, if I could sneak it in around -- are you guys happy with where you're at here at 42% non-GAAP? And do you think this is where you got it pegged or is there further upside we can aim for?

No, our longer-term goal is 43%, and I think we're within line of sight to that. I think we'll be bumping up against that next year.

Your next question comes from Christian Schwab with Craig-Hallum.

Great. Some other players in the space have started mentioning that they've got their first BEAD orders. Would you anticipate an improved BEAD spending environment possibly impact you in calendar '26?

Yes. That's an easy bar, but yes. I mean it's starting to -- it's been dead now for a while, but it's definitely going to -- there's a whole lot more activity going on there. So the answer is yes.

Is that something that you guys would anticipate seeing orders in the first half of calendar '26? Or is that yet to be determined?

I think we'll see orders in the first half of '26.

Great. And then, you guys talked about operating margin expansion in 2026. I know you've outlined the goal of getting to double digits eventually. But what should we think about the potential for operating margin expansion in calendar '26?

We expect to have expansion in '26. I mean, I think the key to us -- so gross margins have been fairly consistent and have been, I would say, over time, upwardly moving. The whole key to us is the operating expense line. That, of course, is impacted by FX, but the operating expense line on a kind of constant currency basis, were -- if you look at year-over-year, were at high 90s, which equates to kind of where we are right now. So we've been holding it firm.

I think the real question is, how long can you hold it firm? Our belief at this point in time is that we have enough R&D firepower and the right product set to not have to substantially increase the R&D spend. We will be -- we'll continue to -- we have sales expense that is variable depending on the revenue to some extent. But structurally-wise, we don't see big movements right now required to get us to that kind of $300-ish north of $300 million level, which kind of gets us to our target. So I would expect expansion through next year. But Tim, let me let you answer it. Any comments on that?

I think as we continue the expansion, you'll see $300 million in second half of next year or late -- or early 2027. And I think on a constant currency basis, you get to the double-digits once you get somewhere around $315 million in revenue.

Your next question comes from George Notter with Wolfe Research.

I guess I'm just curious about the minority interest in the business with the old ADVA shareholders. Any new perspectives there? Would you -- did you redeem any shares in the quarter? Any new thoughts in terms of how you deal with that obligation going forward would be great.

Well, we're happy if they redeem at this point. So, we would like to see some. I think there was one redemption in the quarter, will, Tim?

It's in the subsequent events. It happened early this quarter. But yes, we continue to see nominal activity and expect there to be some level of run rate.

Yes. But nothing worth sharing. And like I said, it's -- well, that stock is trading up right now, if you take a look at over the last 6 months. But redemptions are a good thing at this point.

Got it. Would you look to do anything proactive? I mean, obviously, you did the financing this quarter. Would you look to get more proactive with those shareholders? Is that something that's in the cards at this point or does it hinge on selling the buildings in Huntsville? Like how do you think about that?

Without a doubt, selling that building does give us substantially more headroom. My sense is, we'd be getting more actively on that base towards the tail end of next year. We're probably still a little -- a few quarters away from that. Having said that, redemptions are a good thing.

Your next question comes from Tim Savageaux with Northland Capital Markets.

A non-core asset question to start with, and that centers on the old ADVA kind of sync and timing business. I assume you capture that in Optical, although I really don't know. That's one question. And I wonder if you can give us a sense of the dynamics around the business, kind of overall size, growth rate, profitability? Anything you can share along those lines? And I have a follow-up.

Yes, it is in the Access & Agg business. We really don't break that out separately, but it's in the Access & Agg category. It is growing. As you know, we're doing kind of a relook at that business and segmenting that business to be able to -- that is a different business. It is a different selling rhythm, different sales type of, I'll say, people, but it's really different contacts within the different customer bases. So we are in the midst right now of, let's say, readjusting how that business operates.

Okay. And can you hear me?

Yes. Yes, go ahead.

Okay. Sorry. The second question was going to be on any impact from memory prices, especially on the subscriber side of the business and what you're seeing there?

There has been some -- well, that's been over some period of time, but nothing that's -- I would say the gross margin in that business, we've been able to keep -- let me think about the proper answer. The gross margin of that business, we've been able to keep at a fairly constant level over the last few quarters and think we'll be able to do that on a going-forward basis.

A lot of that is just churn on different -- that business churns, we have new generations of subscriber product. We have more new generation of subscriber product than any other product in our portfolio.

Got it. Maybe one more for me. You mentioned starting to ramp with one of the Tier 1 European wins, I guess, on the Optical side. And I think that win included Access as well. So, do you expect that to start ramping soon? And anything else to call out in terms of upcoming Tier 1 ramps here in the next quarter or 2?

Yes. I think that one will -- it will take longer. The optical thing was incredibly quick. And there was a lot of work that went in front of that in order to make that happen so quick. I think all the access portion will take longer, but we'd expect to see movement of that next year.

And in general, everything is moving forward, not at the same -- at the pace that we would like, but everything in Europe is moving forward. We haven't lost any pieces. The other ones that we've talked about in the past with very specific -- there is some rip and replace going on in different parts of Europe. That is moving forward. So I think all of that would just be kind of a positive tailwind next year.

There are no further questions at this time. I'll now turn the call back over to Tom Stanton for closing remarks.

Okay. Thanks very much for joining us on our conference call. And I really would like to extend my appreciation to our teams around the world. Thank you for everything that you do. I also want to thank our stockholders and our customers and partners for the confidence and the collaboration that you've shown us over the last year. So thanks very much, everyone.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.