ADTRAN (NASDAQ:ADTN) reported third-quarter revenue of $281.2 million, up about 1% from a year earlier and roughly flat sequentially, as growth in optical networking and access products was partly offset by supply constraints and lower subscriber-solutions revenue from the prior year.
Management said results came in slightly below the midpoint of its guidance range, but described demand trends as encouraging across optical networking, cloud infrastructure, European markets and enterprise networking. Supply availability remained a significant constraint, with management saying the company could have shipped “tens of millions of dollars” more product during the quarter if components had been available.
Optical Growth Supports Results
Optical Networking Solutions revenue rose 11% year over year and 4% sequentially to $114.5 million, representing 41% of total quarterly revenue. The company cited particularly strong U.S. performance and continuing demand from service providers expanding network capacity to support cloud and artificial-intelligence infrastructure.
Access & Aggregation Solutions revenue increased 5% from a year earlier to $78.5 million, though it declined 10% sequentially. Management said European demand supported year-over-year growth, while project-timing adjustments at one of ADTRAN’s largest customers affected results. The company expects orders from that customer to return to normalized levels in the first quarter of next year.
Subscriber Solutions revenue totaled $88.1 million, down 13% year over year but up 4% from the prior quarter. The sequential improvement was led by Carrier Ethernet, according to the company.
U.S. revenue was $128 million, or 46% of total revenue, increasing 6% from the prior year. International revenue was $153.2 million, or 54% of revenue, down 4% year over year.
Cloud and AI Opportunities Expand
Management said revenue from hyperscaler customers increased more than 200% year over year and about 20% sequentially. The company is pursuing cloud and AI infrastructure opportunities through data-center interconnect products, in-data-center optics and cloud handoff technology.
ADTRAN said its LiteWave 800 product development remains on schedule, with customer trials expected in the first half of next year and production scaling during the second half. Management cautioned that meaningful supply availability for LiteWave is expected toward the end of next year rather than early in the ramp.
The company also expects to release its MicroMux Quattro cloud-handoff solution in the first half of 2027. Management said early Quattro units are already in testing and that the product has drawn interest from hyperscalers, content providers, carriers, wholesale network providers and other customers.
In enterprise and critical infrastructure, management said revenue continued to grow at a double-digit year-over-year rate. The company pointed to demand for higher-speed, secure and resilient networks, including networking products with quantum-safe security capabilities.
Supply Costs Pressure Margins
Third-quarter non-GAAP gross margin was 42.1%, up from 40.7% in the second quarter. However, Chief Financial Officer Tim Santo said the figure benefited by approximately 200 basis points from IEEPA tariff refunds received during the quarter.
Management said higher component costs accounted for roughly 80% to 90% of the underlying margin pressure, with product and customer mix also contributing. Components affected by shortages or extended lead times include optics, lasers, pump lasers, certain semiconductors, memory and printed circuit boards.
The company said it is pursuing supplier discussions, product redesigns and price increases to offset cost pressures. Management said a recently implemented price increase covers roughly 70% of customers, with the remaining customers expected to be addressed early next year. It also expects product redesigns in optical and customer-premises equipment to begin coming online early next year.
Non-GAAP operating expenses were $104.2 million, compared with $103.9 million in the preceding quarter. Non-GAAP operating income was $14.1 million, producing a 5% operating margin, compared with 3.8% in the second quarter. ADTRAN reiterated its longer-term target of a 10% non-GAAP operating margin, while noting that component costs remain an important variable outside of its control.
Cash Flow and Outlook
Non-GAAP net income attributable to ADTRAN Holdings was $7.1 million, or $0.09 per diluted share, compared with $0.05 per diluted share a year earlier and $0.04 in the prior quarter.
Operating cash flow was negative $24.5 million, while free cash flow was negative $39.4 million, driven by increased working capital. Days sales outstanding rose to 77 days, inventory increased to $227.4 million and accounts payable rose to $179 million. Santo said the company expects collections to increase and working capital to normalize during the fourth quarter.
ADTRAN ended the quarter with $71.7 million in cash equivalents and restricted cash, down from $79.2 million at June 30. During the quarter, it repurchased about $18 million of ADTRAN Networks SE shares, increasing ADTRAN Holdings’ ownership stake to 73.4%.
For the fourth quarter, the company forecast revenue between $272 million and $292 million and non-GAAP operating margin between 1% and 5%. Management said the outlook reflects historical seasonality, supply availability and the timing of large customer projects.
Looking ahead, the company expects broadband funding through the BEAD program to become more meaningful next year and described European high-risk-vendor replacement as an ongoing opportunity. Management said proposed European cybersecurity legislation could accelerate equipment replacement, though the timing of final legislation remains uncertain.
About ADTRAN (NASDAQ:ADTN)
ADTRAN Holdings, Inc (NASDAQ: ADTN) is a global telecommunications equipment and networking company that provides communications infrastructure for service providers, enterprises and other organizations. The company develops solutions that help network operators deliver broadband, voice, data and cloud-connected services over fiber, copper, wireless and other access technologies.
Its portfolio includes fiber access systems, passive optical networking equipment, broadband access platforms, Ethernet and data networking products, routers, switches, Wi-Fi solutions, fixed wireless access equipment and software for network management and automation.
