ADTRAN Holdings, Inc. (ADTN) Earnings Call Transcript & Summary

Good morning, and welcome to the 2021 Annual Meeting of Stockholders of ADTRAN, Inc. I am Tom Stanton, Chairman of the Board and Chief Executive Officer of the company. Welcome, and thank you for attending today's meeting. Before we begin the formal portion of the meeting, I'd like to introduce you to the other directors, executive -- and executive officers of the company and our independent auditors and our corporate legal counsel participating in the meeting today. I will also provide a brief update on the business of the company. With us today, we have Fenwick Huss, who is the Lead Director of ADTRAN, and is the Dean of the Zicklin School of Business, at Baruch College in the City University of New York system. Greg McCray is the Director of ADTRAN, and he is the CEO of FDH, an engineering and science company. He formerly was the CEO of Google Fiber and also served as CEO of Aero Communications and Antenova. Jacqueline Rice is the Director of the company and General Counsel of Herman Miller, Inc. Jacqueline formerly served as Executive Vice President and Chief Risk and Compliance Officer at Target Corporation. Director Kathryn Walker is a Managing Director of OpenAir Equity Partners. Prior to joining OpenAir, Kathy served as the Chief Information and Chief Network Officer at Sprint Nextel Corporation. Many of our executive teams are participating today, too. Mike Foliano, Senior Vice President of Finance and Chief Financial Officer and Secretary; James Wilson, who is our Chief Revenue Officer; Ray Harris, our Chief Information Officer; Ron Centis, Senior Vice President of Global Operations; Robert Conger, Senior Vice President of Technology and Strategy; Marc Kimpe, our Senior Vice President of Research Development. Also with us today is Stephanie Morela, a partner at PricewaterhouseCoopers; and Tim Gregg, our SEC counsel from Maynard Cooper & Gale. Before I share some insight with you on our performance in 2020 and our outlook for 2021, I call your attention to the disclosure on the screen. We encourage you to read these materials, and I'll give you a few seconds to go over that. Okay. I hope you've had a chance to read it by now. As all of you know, 2020 was anything but a normal year. It was filled with many firsts for all of us. COVID touched all of us in some way, and it continued to impact us today. We are hopeful that vaccines will soon be readily available throughout all regions of the world, helping to contain this virus and enabling all of us to return to some normal of -- some level of normalcy to our day-to-day lives. Our employees have been resilient adapting to change like never before. Their desire to meet our customers' needs, enabled us to achieve some great things in 2020 that will provide a firm foundation for us moving forward. Looking at 2020, we delivered on several strategic objectives last year, including further diversification of our customer base through new customer acquisition, growth in our fiber access business, securing key Tier 1 wins and portfolio diversification. From a customer perspective, we saw tremendous growth in new customer acquisition and regional and alternative service providers across North America and Europe, thanks to favorable regulatory and funding environments. We also had great success in the Tier 1 segments with multiple large-scale fiber access awards in the U.S. and Europe. All told, we added 134 new service provider customers last year, and that list continues to grow in 2021 as we announced 26 new customers in Q1 during our earnings call last week. Fiber is a key area for our company, and several years ago, we made a decision to invest heavily in R&D that put the company in a position to take advantage of the industry's shift to next-generation software-defined fiber access platforms. These investments are paying off and have enabled us to successfully transition into a fiber access company. Q4 of 2020 marked the fifth straight quarter of fiber revenue growth. 2020 marked the first year that fiber products revenue eclipsed that of our copper products. A few moments ago, I mentioned that we had great success in the Tier 1 market last year. We saw an increased interest in adopting open, disaggregated and SDN-enabled fiber access systems. Our strong product portfolio includes the market-leading SDX fiber access platform, paired with Mosaic Cloud orchestration software and it enabled us to secure the 2 largest planned fiber access network deployments in our focused markets of North America and Europe. These include BT in the U.K., who plans to pass more than 20 million homes with fiber over the next 5 to 7 years; and DT in Germany, who plans to pass more than 40 million homes with fiber over the next decade. In Europe and around the globe, many global operators are significantly increasing their fiber investment while looking to diversify their vendors and their supply chain. As an established global vendor with a leading fiber access portfolio and global R&D presence, ADTRAN continues to stand out as the best option for future broadband deployments. The shift to gigabit-enabled fiber access networks will also drive demand for gigabit-capable, cloud-managed wireless mesh connectivity in the home and the business. This will provide additional growth opportunities for ADTRAN as we are an end-to-end broadband solution provider. Last year, we expanded our portfolio for in-home service delivery platforms with the SDG series of cloud-managed mesh WiFi 6 gateways. These gateways are complemented by an intuitive mobile app and cloud-based software suite that simplify the deployment of mesh WiFi, IoT and advanced security services. We also enhanced our cloud software suite with the launch of Mosaic One, a SaaS offering that combines network and subscriber analytics with AI-driven algorithms to optimize end-to-end network performance. We secured our largest SaaS contract to date with an award covering hundreds of thousands of subscribers over a multiyear period. These achievements enabled us to strengthen our financial performance and our return to shareholders. This included a year-over-year increase in 2020 gross margin of 160 basis points and 11.4% reduction in operating expenses. This was complemented by a 49% increase in stock price from December 31, 2019, to December 31, 2020, and an increase of shareholder return, including dividends paid of 54%. Looking at 2021, we reported a strong first quarter, accented by record Q1 product bookings. Demand for broadband services has never been higher, and governments around the globe were investing billions of dollars to close the digital divide. In the U.S., Round 1 of the $9.2 billion Rural Development (sic) [ Digital ] Opportunity Fund are complete. We are seeing early success with our offer recipients and expect this to become stronger in the second half of the year and beyond as funding is approved. In addition to the 3 Tier 1 opportunities we previously discussed, we remain on track with several other Tier 1 projects globally. We're also seeing increased interest from Tier 1 MSOs or cable operators as they begin to transition to full fiber networks. From a portfolio perspective, we have introduced several new products that will simplify the deployment of fiber-based gigabit services in rural areas. In the enterprise side of our business, we also recently introduced our first LoRaWAN IoT gateways, which are the latest in our updated enterprise portfolio that includes fiber access routers, business-class Ethernet switches and business WiFi. We are seeing increased demand for our SaaS cloud-based tools that proactively optimize the end-to-end performance of broadband access and in-home networks, while providing actionable insights to service providers at their operating teams and their marketing teams. In Q1, we grew our customer base for SaaS offerings by 66% year-over-year. The second growth area is leading-edge access domain orchestration software that simplifies the programmability of open multi-vendor networks. We have seen an increase in customer additions, including multi-vendor integrations, and this category as service providers begin to modernize their IT and OSS processes. I am encouraged by our increasing number of new customer wins, new additions to our product portfolio and the demand we are seeing in our growth areas of fiber access, connected home and cloud services. Together, these provide a solid foundation for 2021 and beyond. Now let's move to the formal portion of the meeting. To begin the formal portion of the meeting, I'd like to now appoint Mike Foliano, who, as I mentioned, is Secretary of the company, to act as Secretary of the meeting to record the proceedings. The Board has appointed Beth VanDerbeck of Carideo Group as the inspection election services -- excuse me, as the Inspector of the Election for this meeting to resolve issues relating to the shares to be voted or the proxy cards, to count the votes, to certify the vote on each of the proposals. Broadridge Financial Services Solutions is the distributor of meeting records and tabulator of the votes. The agenda for today's meeting as well as the rules of conduct are available on the meeting website. You may submit any questions electronically by following the instructions provided on the meeting website, and the company will post answers to pertinent questions in the Investor Relations section of our website. The questions and answers will be available for 30 days after posting. Please include your name and e-mail address along with the question you submit. The meeting is now formally called to order, and I note the current time is 10:40 on May 12, 2021. The first order of business is to introduce into the minutes the fact that a quorum is present in person or by proxy at this meeting and that the proper notice has been given. All stockholders of record at the close of business on March 15, 2021 were entitled to note -- were entitled to notice and to vote at this annual meeting. I have in my possession an affidavit of distribution executed by Broadridge Financial Solutions, establishing that notice of this meeting was duly given and certifying that the notice and access form or the notice of meeting, proxy statement and annual report as applicable were properly mailed to the stockholders entitled to notice. A copy of the notice of meeting and the affidavit of distribution will be incorporated into the minutes of this meeting and such documents are available for inspection along with a list of stockholders. I have the following information from Mr. Foliano, regarding the presence of a quorum. Represented at the meeting in person or by proxy are at least 45.3 million shares, which is 93.43% of the total number of shares outstanding and entitled to vote. Therefore, a quorum is present, and we can proceed with the business of the meeting as set forth in the notice of the meeting and the proxy statement. We will now proceed to the matters being submitted to a vote. Any stockholder who hasn't yet voted or wishes to change their vote may do so by following the instructions on the meeting website. Stockholders who have already sent in proxies or voted via telephone or Internet do not need to change their vote, do not need -- who do not want to change their vote, do not need to take any further actions. The notice of this meeting and the proxy statement note 3 items of business to be voted on by the stockholders. These are: the election of 6 directors to serve until 2022 -- the 2022 annual meeting; an advisory say-on-pay proposal with regard to the compensation of our named executive officers; and the ratification of the Audit Committee's appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2021. I now formally declare the polls open for a vote on the 3 proposals described in our proxy statement. In the interest of time, we will announce the vote totals at each proposal -- as to each proposal after the voting on all the proposals is completed. The first proposal on the agenda is the election of 6 directors, each of whom is currently a director of the company. Directors elected at this meeting will serve a 1-year term expiring at the 2022 Annual Meeting of Stockholders. You can find more information about the 6 nominees in the proxy statement. The Board recommends that you elect each of the 6 directors nominated to serve as a Director of the company. The second proposal is the consideration by the stockholders of the advisory proposal with respect to compensation of the company's named executive officers. This proposal is being represented -- is being presented in accordance with the provisions of the Dodd-Frank financial reform legislation of 2010 to provide stockholders the opportunity to endorse or not endorse our executive pay program and policies and the compensation of our named executive officers. Because this vote is advisory, it will not be binding upon the Board or the Compensation Committee. However, if there is a significant vote against our named executive officer compensation, the Compensation Committee will evaluate whether any actions are necessary to address the concerns of our stockholders. The Board recommends that you approve the advisory say-on-pay resolution. The third proposal is the ratification by stockholders of the appointment by the Audit Committee of our Board of Directors of an independent registered public accounting firm for the company for fiscal 2021. As set forth in the proxy statement, the Audit Committee in accordance with its charter and authority delegated to by the Board has appointed the firm of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for the year ending December 31, 2021. The Board recommends that you ratify the appointment of PricewaterhouseCoopers LLP. Stephanie Morela, partner with the firm of PricewaterhouseCoopers, is with us today. PwC acknowledges its ability to make a statement but has chosen not to do so. That concludes the statements of the proposals, and I now declare the polls closed. Mr. Foliano, do you have the preliminary vote totals on the 3 proposals?

Yes, I do. The preliminary report of the Inspector is in, and I will announce the preliminary results in the order which the resolutions were proposed. Any votes cast during the meeting will be included in the final report of the Inspector, but will not materially change the outcome of the voting results. A majority of the shareholders of common stock outstanding as of the record date of this meeting have been voted in favor of each of the 6 nominees for director. Accordingly, Thomas R. Stanton, H. Fenwick Huss, Gregory J. McCray, Balan Nair, Jacqueline H. Rice and Kathryn A. Walker have been elected as directors of the company to hold office until the 2022 Annual Meeting of Stockholders and until their successors are duly elected and qualified. The majority of the shares for common stock outstanding as of the record date of this meeting have been voted in favor of the approval of the say-on-pay resolution, approving the compensation of our named executive officers. And finally, a majority of the shares of common stock outstanding as of the record date of this meeting have been voted in favor of the ratification of the Audit Committee's appointment of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for the year ending December 31, 2021. The final report of the Inspector of Election, which contains the vote totals, will be filed with the minutes of this meeting in the company's minute book.

Thank you, Mike. This concludes the formal portion of the meeting and our meeting today. So it is hereby adjourned. I'd like to thank all of you very much for listening to us today, and we look forward to talking to you again in the future. Thank you very much.