ADTRAN Holdings, Inc. Q3 FY2026 earnings call

• Strategic Focus on AI and Connectivity: Management emphasized that AI is reshaping network requirements, driving demand for faster, more secure, and reliable connectivity across service providers, cloud providers, and enterprise markets.
• Growth in Optical and Hyperscalers: Optical remains a primary growth engine with strong U.S. performance. Hyperscaler revenue grew more than 200% year-over-year, driven by Data Center Interconnect solutions and growing demand inside data centers.
• High-Risk Vendor Replacement in Europe: The company is benefiting from ongoing high-risk vendor replacement programs in Europe. The proposed EU Cybersecurity Act II is expected to accelerate this trend once finalized.
• Product Innovation and Automation: ADTRAN introduced Mosaic One agents for AI-driven automation to help operators manage traffic and resolve issues. New products like LightWave 800 (trials starting H1 next year) and MicroMux Quattro (release H1 2027) are progressing well with positive customer engagement.
• Supply Chain Challenges: The supply environment remains challenging, impacting shipping capabilities. Specific components such as optics, lasers, pump lasers, and PC boards face tightness and extended lead times. Component cost inflation continues to pressure margins.
• Margin Pressure and Mitigation: Non-GAAP gross margin benefited ~200 basis points from IEPA tariff refunds. Excluding this benefit, margins were pressured by higher component costs and product mix. Management is implementing price increases covering ~70% of customers and redesigning products to offset these pressures.

• Optical Networking Solutions: Revenue was $114.5 million, representing 41% of total revenue. This reflects an 11% year-over-year increase and a 4% sequential increase.
• Access and Aggregation Solutions: Revenue was $78.5 million, representing approximately 28% of total revenue. This reflects a 5% year-over-year increase but a 10% sequential decrease due to timing adjustments with a major customer.
• Subscriber Solutions: Revenue was $88.1 million, representing 31% of total revenue. This reflects a 13% year-over-year decrease but a 4% sequential increase.

• Fourth Quarter 2026 Revenue Guidance: Expected to be between $272 million and $292 million.
• Fourth Quarter 2026 Non-GAAP Operating Margin Guidance: Expected to be between 1% and 5%, reflecting historical seasonality and supply constraints.
• Outlook for 2027: BEAD program impact expected to strengthen in 2027 compared to 2026. EU Cybersecurity Act II legislation is anticipated to be finalized in the first half of next year, further driving vendor replacement activity. LightWave 800 shipments are expected to gain meaningful traction toward the tail end of next year.

• Supply Chain Constraints: Continued inability to secure sufficient supply of critical components (optics, lasers, PC boards) limits shipment volumes and creates headwinds for future quarters.
• Margin Compression: Structural and temporary pressures from rising component costs and unfavorable product/customer mix continue to challenge gross margins, making it difficult to achieve long-term targets without successful mitigation strategies.
• Regulatory Uncertainty: While beneficial in the long run, the timeline for the finalization of the EU Cybersecurity Act II involves multi-government negotiations, creating uncertainty regarding the immediate acceleration of replacement programs.
• Customer Concentration and Timing: Reliance on large customers for significant revenue portions can lead to volatility if project timings shift or if specific customers reduce buying activity, as seen in the Access segment.

Q: Irvin Liu asked if the supply environment impacted Q3 shipments beyond just costs and sought preliminary thoughts on 2027 drivers like BEAD, vendor replacement, and new products. / A: Tom Stanton confirmed supply constraints prevented tens of millions in potential shipments. For 2027, he noted BEAD will be stronger, EU vendor replacement will accelerate post-legislation (expected early next year), and LightWave/MicroMux will contribute positively as supply normalizes later next year.

Q: Christian Schwab requested clarity on how ADTRAN plans to reach its 10% non-GAAP operating margin target given current gross margin pressures. / A: Stanton explained that while they control operating expenses, gross margins are heavily influenced by uncontrollable supply chain costs. Mitigation strategies include rolling out price increases (covering 70% of customers) and implementing product redesigns early next year, though forecasting remains difficult due to supply volatility.

Q: Bill Dezellem asked for details on the EU high-risk vendor replacement legislation's timeline, the magnitude of the opportunity, and the scale of hyperscaler data center opportunities. / A: Stanton stated the legislation aims to stop new purchases immediately and mandate full replacement by ~2035, potentially unlocking $10 billion in replacement equipment. He highlighted that hyperscaler deals typically range from tens to hundreds of millions, with strong broad-based interest in both LPO and Quattro products.

Q: Dave Kang inquired about the sequential performance of the hyperscaler segment and the status of trials for LightWave and MicroMux Quattro. / A: CFO Timothy Santo clarified that hyperscaler revenue grew ~20% sequentially in Q3, up from ~100% YoY last quarter, implying it now constitutes slightly over 10% of revenue. Stanton added that Quattro has early units in testing with OEMs and hyperscalers, while LightWave trials are expected to begin in Q1 next year.