Executives from ADTRAN (NASDAQ:ADTN) spoke at Needham's 20th Annual Growth Conference, detailing current business conditions and future expectations. Chairperson and CEO Tom Stanton and CFO Tim Santo participated in the discussion.
Tom Stanton said the company feels much better entering 2026 compared to the period of supply chain readjustments. He noted that optical performance in 2025 benefited from a return to more normal customer spending and increased planning activity. Those plans began translating into results in the third quarter, giving the company good momentum for the rest of the year and beyond.
Looking to 2026, Stanton described the opportunity as broad-based. He cited continued optical momentum and typical seasonal strength in the access business during the first half of the year as European carriers start coming online. He added that ADTRAN has new wins expected to contribute in that period.
A major focus was the ongoing replacement of Huawei equipment in Europe. Stanton characterized the overall opportunity as somewhere around $800 million annually. He said activity remains strong, with increased strategy discussions around the installed base.
Stanton described the replacement process in phases. The near-term phase involves quitting deployment of new Huawei gear until competitive processes are complete. A later phase involves funding the removal and replacement of what he described as a $10 billion-plus worth of installed base, referencing policy discussions in the EU and Germany about payment mechanisms.
Italy was cited as a notable example. Stanton said ADTRAN won an optical piece around the middle of the prior year and is now also under contract on the access portion, which requires the company to begin shipping.
When asked whether the Huawei displacement opportunity is roughly balanced between access and optical, Stanton said that at a high level they are roughly equal in magnitude, though they will materialize in different ways.
On the U.S. broadband buildout supported by BEAD, Stanton said added certainty around awards has already helped because customers have started unlocking plans that were pent up. However, he expects any revenue contribution to ramp gradually.
Stanton said he does not expect a big uptick in the first half of the year, with activity coming on more in the second half as money starts to flow. He said early revenue could appear in the first half but would be immaterial, with deployment building over the next two to three years.
On customer inventory conditions more broadly, Stanton said he is not aware of any current inventory overhang, stating that customers are buying what they need right now. He acknowledged some European customers purchase upfront as part of their operating plans and that order timing can be lumpy, but he did not characterize that as an inventory problem.
CFO Tim Santo said improvements in profitability metrics have been driven by cost discipline, leveraging scale, and managing purchasing volume and supply chain costs. On gross margin, he reiterated the company's previously discussed range, saying the 42% to 43% level is beyond achievable, and that ADTRAN is already trending within that range and expects to continue to notch higher.
Addressing supply chain cost concerns such as memory and optical components, Santo said the issue is not material for ADTRAN and that the company has largely navigated the environment. Both executives reiterated that the company's goal remains to reach double-digit operating margins.
On balance sheet moves, Santo discussed a convertible financing, describing it as about a $200 million capital raise. He said proceeds were used to pay down approximately 9% debt with a 3.5% coupon instrument, calling it a significant reduction in the cost of funds. He added that the transaction also reopened the company's credit facility.
Regarding asset dispositions and real estate, Santo said ADTRAN is separately pursuing the sale of its North South Tower property and is working on multiple potential transactions. He cited increased local activity in Huntsville, Alabama as contributing to interest. He said a sale-leaseback of the current corporate headquarters is still being evaluated, but following the convertible transaction there is not a solid need for the cash.
Stanton outlined several ways AI intersects with ADTRAN's business. He said the company has launched Clarity, an agentic AI tool now in beta testing, describing early results as very, very good. He said the tool is designed to improve maintenance, troubleshooting, and identifying latent network issues.
Stanton also linked AI-driven demand to optical upgrades, stating that ADTRAN has an installed base of optical gear that will need upgrades as hyperscalers upgrade their networks. He added that carriers are developing plans to connect into hyperscaler networks and that access networks will be upgraded.
In competitive terms, Stanton said he feels good about the current landscape, noting fewer competitors in access and arguing ADTRAN has a next-generation product. In optical, he said ADTRAN benefits from strong name recognition in Europe and suggested competitors' focus on hyperscalers can create openings.
In closing remarks, Stanton said the company has been doing what we said we were going to do two years ago, adding that ADTRAN has been consistent in hitting or beating its numbers and that continued execution is the key factor going forward.