Good morning and welcome to Needham's 20th Annual Growth Conference. I'm Ryan Koontz. I cover the communications and networking sector here. I'm really happy to be joined today by ADTRAN. ADTRAN is a leading provider of open disaggregated networking and communication solutions that enable voice, data, and video and internet communications across any network infrastructure. We're joined today by Chairperson and CEO Tom Stanton and CFO Tim Santo. How are you guys doing? Hey, Ryan. Doing very good. Great. Nice to see you. Let's start off with your results through your last print in third quarter 2025. You made some real good progress in your optical networking solutions. It was a real bright spot up 24% year over year year to date. What have been the real sales execution focus in 2025 for the year overall? And how does that leave you feeling entering 2026? I'll start with the second part, which is good. We feel much better than where we were as we were going through the supply chain readjustment. I think that's some of what happened in optical in 2025. The first half of it, you did see kind of a return to more normal spending as people earlier in the year started really relieving all their inventory that had been hung over for a couple of years. I think the other thing that happened is we just saw better momentum in that segment in general. There was an increase in activity, which we had noticed late in the prior year in RFPs and just people starting to do more planning. Those plans started to come to fruition. We saw that in the third quarter. Yeah, we left the third quarter feeling we had really good momentum for the rest of the year and for. Yeah, numbers are really showing that, Tom. Tim, you guys have made some steady progress on profitability metrics, operating margin, and now about 5%. What can you tell us about some of the progress you've made there in profitability? I think a lot of it comes back to cost discipline and us continuing to leverage our scale as we continue to grow the business. We came together as two very complementary companies and largely have been able to leverage across. So continue to operate with cost discipline. We continue to work on our purchasing volume and managing our supply chain costs. And the goal is to leverage our scale and continue to leverage the business as we grow. That's great, and Tom, you said you're feeling pretty good about entering 2026 here. Are there specific product lines or geos that have you excited about 2026? Yeah, it's fairly broad, but without a doubt, I mean, optical has got some really strong momentum. As you probably are aware, Ryan, we also tend to see a real strength in the access business in the first half of the year. Our European carriers start coming online. We have some new wins that will, of course, weigh into that. The biggest single opportunity, I would say, still probably is just Europe and the Huawei replacement in general. So characterize that the best we can as somewhere around $800 million annually. That is over time shifting towards somebody else and where the logical probably the biggest winner in that. So that's always a bright spot. That'll continue to be a bright spot for some period of time. US, that market had started getting better. Tier 3s had started picking up, of course. We went into third quarter, or actually coming into third quarter. So they had started to see some increase in activity. And I don't have any reason to think that'll be any different. We, of course, have B that'll come on sometime next year and maybe, and should be, excuse me, this year, and should be moving towards tail end of this year. But the biggest opportunity we have is just the $800 million annually. That's the Huawei replacement. Yeah, that's phenomenal. It's been a long time coming. You guys have been working hard on it, making good progress. It's measurable. It's really nice to see. Let's unpack BEAD there a little bit. What are your expectations around timing and how much of that business do you think you can participate in? It looks like the awards, when the new set of BEAD or whatever they call it awards, a little less fiber, but still a real strong component, north of 60%, I think, and a majority of the funds, I think maybe north of 70% of the funds overall going into fiber. So how do you think about that opportunity for you guys in that market, and it's maybe a little bit, it's pretty spread out across Tier 1s, Tier 2s, and Tier 3s, it looks like as well, huh? Yeah, I think that's right, and that's kind of what we were expecting, so we have some customers, as you know, that really will be participating in the buildouts. I think the biggest thing was just kind of seeing the activity. Well, just getting certainty in the awards or getting certainty in the program has already been a benefit to us as we've seen customers really start unlocking some of the plans that have been pent up for the year and a half or so. I would fully expect us to. It's going to be a ramp. It is kind of difficult to say what's a B dollar versus not a B dollar because it doesn't look like an OLT or a fiber product. But we do know that customers that are in those awards are actually ordering equipment. As to how much, I don't expect a big uptick in the first half of the year. I expect it to kind of come on in the second half as money starts to flow and programs get initiated. Of course, have to deploy fiber. For the most part, they deploy the fiber first. So that'll have to be done. But yeah, I don't think. All that stuff has to happen. Continue to build over the next two to three years. Yeah, the network planning, permitting, fiber install, that's phase one and two probably. Are you seeing activity around quotes for BABA compliant products at all picking up? Yeah, yeah, but those happen ongoing. People have been even in the kind of unknown period, we're still pinging us about those. I don't know if I've seen a significant pickup. I would just say there's been an ongoing activity. Now, as you know, the C portion of this is typically the last piece, which is kind of in flux. On the infrastructure, I think everybody knows we're BABA compliant and all of the quotes that we're sending out are BABA compliant anyways. Oh, that's great. And so you're thinking some early revenue in the second half, but a material pickup in 2027? Yes. Yeah, I think we'll see early revenue in the first half, but it's going to be immaterial. It's just not going to be material to go to all numbers. Hey, $1. We're just begging for $1 here, man. We've been waiting five years. Put it on a picture frame. Yeah. Sorry. Let's talk about the European market. That's a lot of excitement there. The Huawei displacement opportunities, you said $800 million. That's in access and the optical addressable products as well that you estimate. Is that? To be fair, that's in a EMEA number, and trying to figure out the EMEA versus E part of that is a little bit. It's majority in Europe, and that was a 2024 number, so it's not like that's at the peak. That is a compressed period of time as well, right, so yeah, but regardless, it's a big number, and activity there continues to be strong. A lot of increased activity around strategy on what to do about the installed base, so that continues to move. Great. Yeah, and we've seen some countries, I think, be a little more aggressive than others in that and probably some laggards in Eastern and Southern Europe. You guys had the big win in Italy. That was a real game changer, I think, just a tectonic shift in that entire market because you had some laggards like Italy that we never knew if they were really going to make that move. You're absolutely right. I mean, Italy is not typically a first mover in something like this. So the fact that they did do that, and I'll remind you, it wasn't just the optical piece, which we won kind of middle of last year. We've also now been under contract on the access piece as well, which is you have to start shipping. So that was a good movement to see. On the regulatory front, I think there was some news in the last couple of months about the actual EU member states' government maybe taking a firmer stance on this and turning up the heat a little more. That's correct. And there was even talk about how to pay for it and the EU itself, subsidize some of these bills. That is one of the problems. So the way to think about it, or the way that at least I think about it, there are a couple of different phases to this. The most important phase to us at this point in time is to quit deploying. That makes a big difference, right? And quit deploying has two pieces to it. One is quit deploying new chassis and new footprint. Everybody's kind of to that point at this point. Nobody wants to put in a chassis that they know they're going to have to take out. Then there's quit deploying line cards. That's a little more difficult, especially if you have inventory. And I would say not everybody's there. Everybody wants to get there. But you really can't get there until you have the RFPs done and the awards made. So there is a time lag. And then there's the, what do I do about that $10 billion-plus worth of installed base? And that's really what the EU legislation and the talk in Germany is all about is how do I pay to actually remove old stuff and then replace it? Yeah, it's a nice, it's a sizable long-term opportunity. Wow. Yeah, that's incredible. And cross access and optical, would you call them kind of roughly equal in magnitude in terms of the opportunity there? I'm going to, at a really high level, say yes. They will come in different ways, but I would say at a high level, yes. I mean, and of course, Huawei dominated both segments of that business. Oh yeah, for sure. Shifting gears to customer inventory. We've been through some cycles here over the last decade or two, and it runs its course. How are you feeling about customer located inventory right now relative to the past couple of years coming in? You kind of touched on it in the beginning, but talk to me about your confidence. Yeah, yeah, yeah. I am not aware of any inventory situation. I'm not aware of any inventory stores at this point. People are buying what they need right now. We will always have some customers. As you know, we have a couple of European customers that buy up front, and that's just their operating plan. We have people that have different methodologies on how they want to deploy and their tolerance for having outages or whatever because they didn't stock the right amount. But that's not inventory. That's the way they operate. And other than that. Lumpy orders can be a little lumpy. Just the lumpiness in the buying. That's just fine. We have some that do it towards the tail end of the year, so I'm not aware of any inventory situations at this point. Great. How about the topic of AI? What are you hearing from your customers about their optimal infrastructure, their broadband infrastructure? For us as consumers, I mean, it's obviously a shifting kind of use case for browsing the internet and apps and all that. But what are you hearing from your customers about the impact of AI and their network planning and their network requirements? I'd say you can tackle that from multiple different facets. First of all, AI as a network tool for us, of course, we did launch Clarity, which is our agentic AI tool. We are in beta testing right now. That's been very, very good. But from a use and kind of how it affects our sales, you hear again, there's multiple facets. One is we do have an installed base, a fairly large installed base of optical gear that needs to be upgraded as hyperscalers upgrade their entire network. We have some hyperscalers that have our equipment. Fully expect that to be upgraded as well. And that's a real opportunity for us. From a carrier perspective, the larger carriers are trying to figure out how, I don't want to be derogatory, let's say they have figured out how they want to, they're working on plans on how they're going to plug into a hyperscaler network. The things that all of these carriers have and own is access, right? At the end of the day, they have the access to the customer that nobody wants to rebuild, right? So those themselves are being upgraded, and they're in different phases. I would say we're early on, but upgrading it with the mindset of being able to point to a higher bandwidth IP-based network that will feed into whatever the kind of larger ends are, and that is one that a lot of people are talking about here in the U.S., as you're aware, and in Europe. There's been some activity, as you're aware, and some awards made in those veins. So that whole upgrading of the carrier network will happen as well. And then we have a longer-term ambition of getting in more and more products into the more mainstream hyperscaler, but that's still a long-term ambition. That's not anything new. We do have products that will be coming out in the next year to year and a half that will be more directly addressed to those markets. Got it. And the business you've had in the past is more open line system kind of related? Yeah, very much OLS system. We have plugins and cards as well, but our real differentiator here is the OLS system. So we think the world's best OLS system. If you're a mid-tail, let's say not a super large hyperscaler, but kind of that tier two, we're great. We are a great system that you can utilize, and it's just much easier to manage, and we can custom tailor that. And of course, that's what made us so popular with the carriers to begin with. Yeah. There's a whole concept around MOFN, right, where you have the hyperscalers that are essentially tasking, placing orders with an incumbent carrier, sometimes like an IP wholesaler, like a Colt or these sorts of guys that are building hyperscale networks for them, but then operating it and procuring it. Are you seeing some of that activity in Europe as well? Yeah. And that's exactly when I was talking about how you have these larger carriers, and Colt is just one of them, right? That are really trying to figure out how they can plug in and play and sell their portion of the network to these hyperscalers. And I think everybody is interested in that. I think some people are actually acting on it. Is Colt one example of a customer? Do you have other examples of customers that you work with that would be in that area? I'm trying to think. Nothing that I would announce, but. Yeah, okay. No worries. Maybe shifting over to profitability metrics, Tim, on gross margin. How are you thinking about gross margin trends carrying forward? And what are your expectations of margin by the segment of the business? I think the 42%-43% that we have been saying is beyond achievable. I think we're already trending within that range and will continue to notch higher. We remain focused on maintaining and continuing to grow. I think as we look into the next couple of years, there will obviously be tailwinds and headwinds that we'll continue to work through, but we think net across our product base will continue to trend positively. Any concerns in the supply chain around costs, whether it's memory has been on a lot of hardware folks' minds of late and optical components kind of getting tighter? I mean, it's probably not a huge part of your BOM, but is that something you guys are able to navigate effectively at this point? It's not material. We've been largely navigating. Like I said, there's points and things across the board, and we've largely offset the impact, and of course, there's some pressure, but we still continue to feel confident with the guidance that we published. Good. And tracking margins down through profitability there on the EBIT line and op margin, which your goal is still to get to double-digit op margins here? That is our goal. Absolutely. Yeah. That's fantastic. Let's talk about the balance sheet here. We've discussed some non-core asset dispositions and some real estate. How should investors think about the value of those non-core businesses and any update on timing you can share? I think as we've been messaging probably for a couple of quarters now, we're looking at the property separately. We are absolutely working on the sale of our North South Tower, which is into and available. We're working on a number of transactions, potential transactions. The great news is, if you followed the news at all, and not that Huntsville, Alabama is an area that hits the press often, but U.S. Space Command is moving here. Eli Lilly has announced a $6 billion investment. There's a lot of service providers to those businesses looking at this space, and we're having a lot of traction in terms of activity. We're the only fairly large Class A office space for sale. That means it's a challenge because we're a large Class A office space, and it takes the right buyer, so this takes time. We're continuing to work on that and certainly maintaining diligence. I think on the sale-leaseback transaction for our current corporate headquarters, we continue to evaluate. We tested the market. We're looking at pricing. But right now, since our convertible transaction, there's not a solid need for the cash, and it would be increased OpEx pressure. So I think we're continuing to evaluate whether that's a needed transaction, and we'll update the market if that becomes a transaction we plan to undertake. Got it. Yeah. So it was a converter you guys did. Can you walk us through the financials there and how that really boosted the balance sheet specifically? Yes, of course. So it was about a $200 million capital raise. We used that. It's 3.5% or 375 coupon to pay down what was approximately 9% debt. So it's a significant reduction in cost of funds. And what it largely does is reopen our credit facility to allow us to, over time, continue to reduce the minority interest share on our German business. Great. And Tom, on the competitive landscape, let's go there. Let's talk about Europe and North America. How would you characterize it? Any changes? It seems to me that new management at Nokia, very focused on cloud and hyperscale and trying to really build up their business there. Their traditional telecom side of the business probably has the potential to take their eyes off the ball a bit. They probably wouldn't think that. I feel good about the competitive landscape. That's not typically I feel that way. I feel good about where we are right now. On the access front, they're just less competitors, so it's easier anyways. We have a better product where we have a next-generation product where everybody else is pretty much still selling chassis-based products. On the optical front, I think we're doing well. I think some of it is we have a really good name recognition in Europe. It's hard to say when the fact that everybody is focused on hyperscalers, our competitors, I think is a plus. It's hard to actually nail that down to a specific thing. The way that comes across is they're maybe not as compliant on RFPs, maybe not as trying on inventory or trying to get shipments. And that tends to lead itself to new opportunities opening up. Without a doubt, we've seen some of that. So yeah, I feel good where we are right now. That's great. Just the merger with Nokia and Infinera, is that having any effect out there, you think? It did. It did. It had a little. I would say it's probably at this point in time passed, but we did pick up customers both in Europe and in the U.S. where sometimes they had both, or sometimes they knew that their product was going to be discontinued, so they created an opportunity. Usually, customers aren't happy if you discontinue their product, so you kind of got kind of a little bit of a tailwind there, but I'd say that's played itself out at this point. I don't see anything going forward. I think it's more about focus on the customer base. Your strength kind of at the metro edge there and DMARC, is that the same sorts of players you bump into? Or are there other smaller players in that space? There's some really small players, but it's in the noise. For us, the biggest thing in Europe is Nokia. Secondarily, Ciena, but definitely Nokia, and in the U.S., the optical side, of course, it's Ciena, and then secondarily, Nokia. Yeah, and on the broadband front, has there been much share shift going on there outside of Huawei displacement? Been pretty static in your view? Good and bad is no. I think we had somewhere in the U.S. around 10-12, let's say 10-20 customers a quarter on the broadband front. We do about the same. There's hundreds of customers. So I would say no. It's been fairly relatively stable now for a few years. Pretty sticky business, right? It's just about how much they can spend. Yeah. We tried to disrupt that. And I think, in fact, we have disrupted that to some extent, but it's with larger carriers. When we brought the SDX platform here into the U.S., which we did about a year and a half, maybe two years ago, to really bring in a different technology capability than what was being sold in the U.S., that has seen some traction. But I wouldn't say it's really more of a larger carrier market than it is a small carrier. Sure. And you mentioned earlier in the chat your new Agentic AI product. Can you maybe walk us through what that is and what kind of value it brings to your customers? It's really all about maintenance and capability and troubleshooting and finding issues that are latent in the network that you may not see. We take a look at all of the trouble logs. We, of course, have a database across multiple customers where we can actually steer the end user, let's say the carrier, towards a solution on a problem that they're not even aware of. That's just really starting to grapple. It's been fantastic. I know there's going to be some things that we still have to work through, but I will tell you the beta testing that we've done so far has been just across the board fantastic. Great. Great. No, that's super. And Tim, how's the pricing environment? It's been pretty static as well with the competitive landscape, relatively static? Yes. I think we're continuing to see improvements in that area. We've been largely able to, throughout the year, leverage our supply chain to maintain our internal costs, to pass that along to customers as appropriate. So I think we're feeling very positive. Ryan, I will add one other thing that I think maybe gets missed, which is Europe forever was a very difficult place to do business. And we've done a couple of acquisitions of European companies. And there was always this huge delta between the rest of the world and Europe and gross margins and really U.S. and Europe and gross margins. And that was driven by Huawei. And so with Huawei exiting the space, we do expect gross margins in Europe to continue to finally recover and get to a healthy point. And that's something that's going to be beneficial for us longer term. That's great. You mentioned M&A there. How about on the M&A front? I mean, do you think there's still room for smaller players to consolidate that are out there in North America or Europe? There's probably a handful. Yeah, there just aren't many. It's on both axes. Optical has been through some consolidations now, which has been going on for years. And yeah, there's just a real small handful of people now. So I mean, yeah, there is room for it, but I don't, but it's not the way it was 10 years ago. Yeah. And on the sales front, Tom, you feel happy with where you guys are in your sales resourcing and? Yeah, I am happy right now, but I will tell you we will continue to have to grow that. So what you're going to see us going forward, our operating model, our focus on expenses and gross margins doesn't change a bit, but you'll see us. We're really trying to optimize our operating, let me call it COGS line right now. And then as we operate that COGS line, we'll continue to shift. We'll shift a little bit more towards our sales expense because I do want to get some more salespeople out there, but we're committed to the overall model. Yeah. Yeah, that's great. Yeah. Just in wrapping up here, anything you think investors are missing about ADTRAN? I know you're pretty pleased with your results last quarter and didn't see quite the reaction in the stock that I think a lot of us anticipated, but in terms of execution and your ability to continue to deliver? We're doing what we said we were going to do two years ago. We've been pretty consistent in hitting or beating our numbers. Do I think the street is missing something? If you look at the stock price, I think the street is missing a heck of a lot. But I also know I've been in this long enough that'll work itself out over time. We just need to continue to perform. Great. Well, super guys. Really appreciate your time this morning. Great chat. And we'll look forward to hearing from your results in another couple of weeks, I imagine. Yep. Well. All right. Thanks, guys. Okay. Thank you all.