Ladies and gentlemen, thank you for standing by, and welcome to ADTRAN's fourth quarter 2021 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. During the course of the conference call, ADTRAN's representatives expect to make forward-looking statements which reflect management's best judgment based on factors currently known.
However, these statements involve risks and uncertainties, including the continued spread and extent of the impact of the COVID-19 global pandemic, the ability of component supplies to align with customer demand, the successful development and market acceptance of our products, competition in the market for such products, the product and channel mix, component costs, freight and logistics costs, manufacturing efficiencies and other risks detailed in our annual report on Form 10-K for the year ended December 31, 2020, and our quarterly report on Form 10-Q for the quarter ended October 31, 2021. These risks and uncertainties could cause actual results to differ materially from those in the forward-looking statements which may be made during the call. It's now my pleasure to turn the call over to Tom Stanton, Chief Executive Officer of ADTRAN. Sir, please go ahead.
Thank you, Elliot. Good morning. We appreciate you joining us for our fourth quarter 2021 earnings conference call. With me today is ADTRAN CFO, Mike Foliano. Following my opening remarks, Mike will review the quarterly financial performance in detail, and then we will take any questions that you may have. Q4 was highlighted by record demand for our fiber broadband solutions with a diverse mix of large and small service providers across our key growth markets in the U.S. and Europe. This demand was driven by the accelerated expansion of fiber to the home networks, upgrades to in-home Wi-Fi connectivity, and the adoption of cloud-based automation tools. Some of these key highlights for the quarter included the overall revenue up 18% year-over-year.
Record product revenues for our fiber access platforms were up 48% year-over-year, led by a diverse mix of regional service providers in the U.S. and Europe, along with a significant ramp in shipments to our tier one access customers. Record product revenue for our residential Wi-Fi platforms were up 72% year-over-year, led by volume shipments of our latest Mesh Wi-Fi 6 systems. We also saw a continued addition to our SaaS customer base, which was up 48% year-over-year. We had another record quarter in bookings, up more than 20% quarter-over-quarter and more than 50% year-over-year. These bookings were across a broad base of customers and product segments.
In the latest market share report from Dell'Oro and Omdia, for Q3 2021, ADTRAN shipped more than twice the volume of 10 gig OLT ports in both North America and EMEA than the next two closest U.S.-based vendors combined. This highlights our success in fiber footprint capture with next-generation fiber access platforms. The success we had in the quarter was a direct result of our improved customer diversification and our approach to providing end-to-end fiber broadband solutions. On the customer side, demand by regional service providers across the U.S. and Europe remains higher than ever. However, Q4 saw a sharp increase in revenue growth from international tier one operators, up 76% year-over-year. The international tier one fiber operators' increasing volume deployments included two European operators and initial XGS shipments to one tier one operator with properties throughout Latin America.
On the portfolio side, we continue to have success in bundling our fiber access platforms, in-home service delivery platforms, and SaaS applications. Our growth in residential mesh Wi-Fi systems and SaaS customers during the quarter directly correlated to our success in fiber access platforms. We continue to outperform the market in fiber footprint capture, and we expect to see corresponding rapid increases in the deployment of our multi-gig mesh Wi-Fi 6 systems, ONTs, and SaaS applications. While we had success in growing our business, supply chain constraints continued to limit our revenue growth potential and negatively impacted our profitability. We expect these industry-wide supply constraints to continue throughout the remainder of the year, although we expect some improvement in the second half. Despite the supply chain challenges facing our industry and many others, our long-term outlook remains very positive.
The tier one fiber operators in both the U.S. and EMEA remain on track for larger scale deployments, with several of them receiving volume shipments in Q4 and further growth expected in the quarters ahead. In addition, we continue with lab approval cycles of recently awarded tier one fiber businesses, and we maintain a healthy funnel of incremental tier one opportunities where we are well-positioned for success. Within the software segment of our business, we launched Mosaic One last year, and Mosaic One is a SaaS platform with Promote, Care, and Operate applications tailored toward the needs of marketing, customer support, and operations personnel, respectively. These SaaS applications utilize AI-powered intelligence to optimize service performance across both fiber access and in-home environments, reducing operational expenses, improving network quality, and increasing customer satisfaction.
As we have migrated more customers to these latest SaaS offerings, we have received tremendous positive feedback and expect this to further accelerate our growth, not only in SaaS applications, but the associated fiber access and in-home connectivity platforms as well. These portfolio enhancements are timely with the high growth opportunities for fiber broadband solutions in our core markets. In the U.S., RDOF funds continue to get released. ARPA funding at the state and local level is beginning to impact network planning, and infrastructure bill funding is still yet on the horizon. These key programs represent tens of billions of dollars in funding towards fiber-based broadband infrastructure and a rapid acceleration in subsidies versus previous years.
In Europe, both incumbent operators and a wide range of altnet operators, backed by a mix of private investment and government stimulus, race to upgrade their networks to an all-fiber future while continuing their shift away from high-risk vendors. ADTRAN remains well-positioned to benefit from this unprecedented investment cycle in fiber access. To position ADTRAN for further success in fiber networking solutions across the U.S. and Europe, we made a voluntary public takeover offer for ADVA Optical Networking in August 2021. ADVA is a global leader in optical transport carrier, Ethernet, and network synchronization solutions that are an ideal complement to ADTRAN's portfolio. I am pleased to inform you that this offer was overwhelmingly approved by ADTRAN stockholders at a special meeting of stockholders on January sixth.
On January twenty-sixth, at the close of the ADVA shareholder tender acceptance period, we received more than the required 60% of outstanding ADVA shares of ADVA stock as of the record date, enabling this transaction to move forward. We are awaiting final FDI approvals from the U.K. and Germany. Once these are received, we will set a closing date and begin the integration process. In summary, we continue to experience record demand for our solutions, especially in our high-growth segments of fiber access, cloud software, and residential Wi-Fi solutions. Our fiber access platforms are starting to realize the benefits of our success with tier one operators and complement our rapid-growing base of regional operators. Our SaaS applications are being adopted across a wide range of operators following the launch of our Mosaic One platform.
Finally, our residential Wi-Fi platforms are experiencing unprecedented growth given the demand for multi-gig mesh Wi-Fi 6 in the home to match the speeds enabled by 10-gig fiber access networks. With increased customer funding, record demand, a diversified customer base, a differentiated product portfolio offering, we are on track to continue growth this year. The proposed combination with ADVA will further improve our competitive position and growth opportunities. With that background, Mike, will you provide some details and a review of our financials? Following Mike's remarks, we'll be happy to open up for any questions you may have. Mike?
Thanks, Tom, and good morning to all. I'll review our fourth quarter results and provide our expectations for the first quarter of 2022. I will be referencing both GAAP and non-GAAP results with reconciliations presented in our press release and supplemental financial schedules on our investor relations webpage at investors.adtran.com. The supplemental financial schedules on our webpage also present certain revenue information by segment and by category, which I will also be discussing. ADTRAN's fourth quarter 2021 revenue came in at $154.2 million compared to $138.1 million in the prior quarter and $130.1 million in the fourth quarter of 2020.
Subdividing across our operating segments, our Network Solutions revenue for the fourth quarter was $138.8 million versus $120.8 million reported for Q3 of 2021 and $114.1 million in Q4 of 2020. Our Services and Support revenue in Q4 of 2021 was $15.3 million compared to $17.3 million reported for the third quarter of 2021 and $16 million for the fourth quarter of 2020. Across our revenue categories, Access and Aggregation revenue for the fourth quarter of 2021 was $95 million compared to $89.2 million in the prior quarter and $79 million in quarter four of 2020.
Revenue for our Subscriber Solutions and Experience category was $52.3 million for the quarter versus $44.9 million for quarter three of 2021 and $45.4 million for quarter four of 2020. Traditional and other products revenue for the quarter was $6.8 million compared to $4 million for quarter three of 2021 and $5.8 million for quarter four of 2020. Looking at our revenues on a geographic basis, U.S. revenue for Q4 2021 was $101.6 million versus $91.9 million as reported in quarter three of 2021 and $95.8 million in quarter four of 2020. Our international revenue for the quarter was $52.6 million compared to $46.2 million for quarter three of 2021 and $34.3 million in quarter four of 2020.
In the fourth quarter, we had two 10% of revenue customers, both domestic distribution partners serving a large number of regional service providers with a mix of broadband access and connected home and enterprise solutions, thus reinforcing our success in both customer and portfolio diversification. Our GAAP gross margin for the fourth quarter was at 35.3% as compared to 34.5% in the prior quarter and 41.1% in the fourth quarter of 2020. Non-GAAP gross margin for the quarter was 35.4% as compared to 34.6% in the prior quarter and 41.3% in the fourth quarter of 2020.
The quarter-over-quarter improvements in both GAAP and non-GAAP gross margin were attributable to higher sales volume and manufacturing efficiencies and a favorable mix of our network solutions and services and support segments, which were partially offset by increased supply chain expenses, including higher component and transportation costs. The year-over-year gross margin decreases in both GAAP and non-GAAP gross margins were attributable to increased supply chain expenses, including higher component and transportation costs and product mix, partially offset by the higher sales volumes. As previously mentioned, we continue to experience extreme constraints in the electronic component markets impacting our gross profit during the quarter, and this is expected to remain challenging, affecting product availability and our component and logistics costs.
Total operating expenses on a GAAP basis were $61.7 million for quarter four of 2021, compared to $57.7 million reported in the prior quarter and $56.8 million for quarter four of 2020. The quarter-over-quarter increase was a result of market-driven, higher deferred compensation expense, variable compensation plans, and acquisition-related expenses, partially offset by lower non-recurring and legal expenses. The year-over-year increase in operating expenses was a result of higher acquisition-related expenses in labor and variable compensation, partially offset by lower restructuring costs and market-driven deferred comp expense. On a non-GAAP basis, our fourth quarter operating expenses were $53.2 million compared to $50.4 million in the prior quarter and $49.5 million in quarter four of 2020.
The increase quarter-over-quarter in non-GAAP operating expenses was primarily due to higher market-driven deferred compensation expense and variable compensation, partially offset by decreases in legal and non-recurring expenses. The increase year-over-year in non-GAAP operating expenses was a result of market-driven deferred comp expense, variable and labor comp, engineering projects, and travel increases, partially offset by lower non-recurring and legal expenses. Operating loss on a GAAP basis for the fourth quarter of 2021 was $7.2 million, compared to an operating loss of $10.1 million in the prior quarter and an operating loss of $3.3 million reported in Q4 of 2020.
Non-GAAP operating income for quarter four of 2021 was $1.4 million, compared to a non-GAAP operating loss of $2.6 million in the prior quarter and $4.3 million non-GAAP operating income in quarter four of 2020. The quarter-over-quarter improvements in GAAP and non-GAAP operating profitability were attributable to higher sales, partially offset by incremental supply chain constraint expenses and higher operating expense. The GAAP and non-GAAP year-over-year decreases in operating profitability were the result of higher supply chain constraint-related expenses and higher operating expenses, partially offset by the increased sales volume. Other income on a GAAP basis for the fourth quarter of 2021 was $1.9 million, compared to other income of $923,000 in the prior quarter and $3 million for quarter four of 2020.
Our non-GAAP other income for the quarter was $2.8 million, compared to non-GAAP other income of $1.4 million in Q3 of 2021 and $1.7 million for Q4 of 2020. The quarter-over-quarter increases in both GAAP and non-GAAP other income were a result of higher dividend income and realized foreign currency exchange gains. The decrease in GAAP other income on a year-over-year basis was related to market-driven losses in our investment portfolio as compared to gains in the prior year, partially offset by higher dividend income and realized foreign currency exchange gains. The increase in non-GAAP other income on a year-over-year basis resulted from realized foreign currency exchange gains and higher dividend income.
The company's tax provision for the fourth quarter of 2021 was a benefit of $1.1 million, as compared to $1.3 million of expense in the prior quarter and a $6.5 million benefit in the fourth quarter of 2020. The current quarter's tax benefit was primarily driven by international losses and changes in our uncertain tax position reserves during the quarter as a result of the expiration of certain statutes of limitation.
GAAP net loss for quarter four of 2021 was $4.2 million, compared to $10.4 million net loss in the prior quarter and $6.1 million of net income in the fourth quarter of 2020. Non-GAAP net income for the fourth quarter of 2021 was $4.7 million, as compared to an $815,000 net loss in the prior quarter and a $5.2 million net income in quarter four of 2020. For the fourth quarter, earnings per share, assuming dilution on a GAAP basis, was a loss of $0.09 per share, as compared to $0.21 loss per share in the prior quarter and $0.13 per share earnings in the fourth quarter of 2020.
Non-GAAP earnings per share, assuming dilution for the fourth quarter of 2021 was $0.10 per share, compared to a $0.02 per share loss in the prior quarter and an $0.11 per share earnings in Q4 of 2020. On the balance sheet, unrestricted cash and marketable securities totaled $100.6 million at quarter end, after paying $4.4 million in dividends during the quarter. For the quarter, we used $25.9 million of cash from operations, driven by higher inventories and increased DSO levels. Net trade accounts receivable was $158.7 million at the end of the quarter, resulting in a DSO of 95 days, compared to 83 days for the prior quarter and 70 days at the end of the fourth quarter of 2020.
The increase in DSOs quarter-over-quarter and year-over-year is mainly attributable to increased sales and the timing of shipments late in the quarter, tied to supply chain constraints. Net inventories were $139.9 million at the end of the fourth quarter, compared to $127.2 million in the third quarter of 2021, and $125.5 million at the end of Q4 of 2020. We continue to carry a higher level of inventory in raw materials as we build up supply to minimize further disruptions given the extremely challenging electronic component market and the associated extended lead times.
Looking ahead to the next quarter, the continuing effects of the COVID-19 pandemic, the ability of component supplies to align with customer demand, the book and ship nature of our business, the timing of revenue associated with large projects, the variability of ordering patterns from our customer base, as well as the fluctuation in currency exchange rates in our international markets may cause material differences between our expectations and the actual results. With that in mind, we expect that our first quarter 2022 revenue will be between $100 million and $158 million. After considering the projected sales mix, component availability, we expect that our first quarter gross margin on a non-GAAP basis will be in the range of 35%-37%.
Hey, Mike, can I interrupt you? I think you said 100 and 158 is the range.
I said 150 to 158. If I said 100, I was wrong. $150 million-$158 million is the range. Sorry about that. On a non-GAAP basis, gross margin would be in the range of 35%-37%. This is lower than normal due to our higher expediting and freight costs. We also expect non-GAAP operating expenses for the first quarter will be between $53 million and $54 million. Finally, we anticipate that the consolidated tax rate for the first quarter of 2022 on a non-GAAP basis will be in the low to mid-20s%.
We believe that the significant factors impacting revenue and earnings realized in 2022 will be component availability and costs, the macro spending environment for carriers and enterprises, the ongoing effects of the COVID-19 pandemic, the variability of mix and revenue associated with project rollouts, the proportion of international revenue relative to our total revenue, the adoption rate of our broadband access platforms, potential changes in corporate tax laws, currency exchange rate movements, and inventory fluctuations in our distribution channels. Once again, additional financial information is available at ADTRAN's Investor Relations webpage at investors.adtran.com. With that, I'll turn it back over to Tom, and we'll take your questions.
All right. Great. Thanks, Mike. Elliot, we're ready to open up for any questions people may have.
Thank you. For our Q&A, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask a question, please ensure your phone is unmuted locally. Our first question comes from Rod Hall from Goldman Sachs. Rod, please go ahead.
Hi, thanks for taking my question. This is Bala on for Rod. Congrats on a good set of results, guys. Q1, there are new guidance of $154 million at midpoint, so it's flat quarter over quarter, which is good, I suppose. Supply constraint situation, it looks like it went better than what you had feared, in Q4. It looks like maybe you did not really see too many decommitments, et cetera. I just wondering, maybe you could help us walk us through the supply situation through the quarter. Were there any surprises, or was it what went better, et cetera? I got a follow-up.
Yeah. Thanks for the question. We did see some decommits through the quarter. I mean, if I look at Q4 versus Q3, you know, it's kinda hard because, you know, you don't know what's gonna be the problem, you know, from a month to month, sometimes even from a week to week basis, so it's different problems. In general, it's still semiconductor problems. You know, we did have decommits. I think, you know, as we went into the quarter and on the call, we tried to be as conservative as possible in trying to make sure that we are factoring in those decommits. The direct answer to your question is we did, but we were able to mitigate the impact of those decommits with additional shipments somewhere else.
Got it. On gross margins, now, clearly, they are being impacted by higher costs, and it's not just for you, for most companies too. I want to hear the pricing, the full kick in. How do you feel about the gross margin trajectory? Do you expect it to jump back up to maybe about 40% range in the second half of this year? Any color there would be helpful.
Let me take a stab and then I'll turn it over to Mike. I don't know how you can project that at this point because, you know, you really only get. You can't continue to go and increment pricing to customers as you see price. It's untenable for them as well. Knowing what's gonna be, you know, difficult to purchase and the amount of that difficulty in the second half is. I just don't know how you can forecast that. We do, in general, expect the environment to improve. We do think that, you know, the fact that we're kind of long into this and the lead times that we have been, lead time windows are typically. Let's say, lead times aren't necessarily closing, but we're farther into those lead times.
We expect things to get generally better in the second half. I really can't tell you on a percentage basis, you know, exactly how that's gonna come to fruition. Of course, freight is a big piece of this as well. You know, freight is a large percentage we're, you know, because, supplies are late, then builds are late, and you're flying everything. You know, needless to say, we have a big push on trying to get things back onto the ocean. That's an impact. You know, you would think that that would get better in the second half of this year.
You know, the real unknown is, you know, is there some COVID impact that may or may not hit us in the tail end of this year, and it's just really difficult to forecast that.
Following you,
I guess, Mike.
Sorry, go ahead. Go ahead.
I was just gonna say when you look at this.
Just one thing, like expiration dates, I was assuming that they would be passed through, like, immediately. Maybe I'm wrong, but I just hoping that with them, you know, with you passing on those to customers and then also increasing prices for the, you know, standard components, you know, et cetera, like, maybe that would help the margin trajectory. I guess that was the genesis of the question.
Well, yeah. I mean, our current expectation, all right? That's all I can say it is 'cause it's, there's so many variables. Current expectation is for second half gross margins to be higher than first half gross margins. We do expect it to be trending, but I can't really, at this point in time, really lay a percentage on that. It would be just a guess. Does that answer your question?
Got it. It helps. One more follow-up, if I may. You've had a bunch of large tier one customer wins, especially in Europe. You started to see some good traction or momentum with some of them. Could you maybe help remind us the timelines on when you expect these deployments to ramp? I believe some of them you said, like, maybe in first half, the other in second half. In general, like, any details there would be helpful, Tom.
Yeah. Let me. We have, you know, we have two that are basically shipping now in Europe, that, you know, have started shipments in Europe. I wouldn't say they're at their full ramp by any stretch, but they're starting to ship, and really started to ship in the fourth quarter, which is kind of where that bump was. We have one MS that will be ramping, really, it's gonna be. It's just material constraints. It'll be ramping as fast as we can ramp them, really, starting now. It's really already started. We have a, let's say three other. Trying to get the numbers straight here. Three other tier ones in Europe, that, a couple of them, my guess would be second half.
One of those towards the tail end of the second half, one of those probably right around the half, so right around the end of the second quarter. I think that's kind of where we are right now. Then, of course, here in the U.S., we're still seeing incredible demand pretty much across the board, including, you know, we have a large tier one in the U.S. that has selected SDX and Mosaic. That one has started kind of ordering in bulk at this point. It'll be a matter here, again, it's a supply chain thing of us being able to meet the demand. Does that answer your question?
Got it. Very helpful. It does. Thanks so much.
Okay.
Tom, Mike.
Okay. Sure.
Our next question comes from Paul Silverstein from Cowen. Paul, please go ahead. Paul, your line is now open.
Sorry, mute button. I recognize you kind of addressed this in the previous response, but I'm hoping you could update us on Huawei displacement opportunities in terms of how many RFPs, RFI, RFQ, whatever, are outstanding, how many have now been awarded, how many more to go?
We've had a couple that have, you know. This is a fluid list. We have a couple that are just kinda opening up again or opening now. We've got a. I'm looking at a list here which is broader than that because it includes EMEA. As of this current snapshot right now, we're looking at, let's say three or four that are in the pipeline, in some stage. Maybe a little bit more than that, but it depends on what you count a tier one versus a tier two. three or four that, you know, seriously tier ones and then, you know, a few others that are, you would or you could argue if they're tier ones or tier twos.
How many Huawei displacement awards have you already won?
I hate to call them Huawei displacement awards because it depends on the carrier. If you look at tier ones that we're now shipping. Well, let me do it this way because it may be easier. Tier ones that we're now shipping NG-PON2, or let's say 10G NG-PON2 even, then it would be one, three, eight.
Eight. Are there any-
Yeah. Say that we've either won or are shipping. Let me be, you know, accurate on that. Yes.
The difference being there's some you've won that haven't yet shipped.
That's correct.
All right. Eight that you've won, some of which you've shipped to. Eight that you've won in total. Got it.
Yes.
Are there any such awards in which Huawei was the incumbent and the carrier in question is moving away from Huawei that you're aware of that you haven't won?
If I look at over the last few months, let's say six months or so, there are two that have delayed their decisions right now, so they're continuing on as they kinda go through their process.
There've been no carriers to date, again, of which you're aware, which you bid that have awarded away from you?
That's correct.
All right. One last question on this line. Sorry, I recognize there are wins and there are wins, but to your knowledge, are you getting a material position in these eight wins that you've already secured? Has that been communicated to you, the portion of the opportunity?
Yeah, they typically don't give you percentage awards, of course. Of all, you know, the ones that I've talked about, none of those are we expecting it to be immaterial. All of those we are expecting, you know, materially greater than 20%, let's say. I mean, these aren't immaterial awards.
All right. I recognize there's the timing factor, but if we took the eight wins to date collectively, any expectation you could share with us in terms of the annual revenue impact, range, whatever?
I mean, you know, we've given a range before. You know, we have the largest ones. You know, Mike, what was the range, $80 million-ish?
80 is the largest, yeah.
there aren't many of those, of course. There are, in general, you can think of them as somewhere between $10 million and $20 million a year.
Okay. One final question from me. I recognize it's no longer just about RDOF in terms of various government funding programs, and not just in the U.S. for that matter. Can you give us a sense for what the flow is from RDOF as well as from the other U.S. programs, what type of impact you're seeing now and what you expect for 2022 all in?
Yeah. For us, ARPA, I mean, we've seen some awards directly that we attribute to ARPA and, you know, like some municipals. It's a little. I wouldn't, I don't consider that money really flowing en masse yet. For RDOF, I know that we have orders in-house that are directly related to RDOF and the releasing of funding for RDOF. That has started. We're, you know, that will progress. You know, just from our conversations with customers in the U.S. that are RDOF recipients, you know, there's kind of two different types of RDOF customers. There are customers that are existing carriers that are, you know, growing their footprint in order to meet the RDOF properties. Those ones typically are farther along and expect material contributions this year.
There are new ones that are really kind of standing up their operations for the first time. Needless to say, those aren't as far along and, you know, I could easily see some of those delay into next year.
Got it. I'll pass it on. Appreciate the responses.
All right. Thank you.
Our next question comes from Tim Savageaux from Northland Capital Markets. Tim, please go ahead.
Thanks. Good morning, congrats on the results for Q4. I hopped on a bit late, and I don't know if you commented on this. Since we're at year-end, I don't know if you guys talked explicitly about backlog or whether you could share some color on the extent to which that backlog increased in the quarter or any color on bookings level. You know, I wonder what challenges remained and, you know, with no supply issues, kinda what could you have shipped either for Q4 or for Q1 guide? Thanks.
That last part of that question is an interesting way to look at it. Yeah, so I mentioned in my comments that bookings were another record, and that they were up over 20% quarter-over-quarter, which itself was a record, and over 50% year-over-year. We were materially over those amounts. I mean, it was a really strong quarter for bookings. Yeah, we weren't able to meet the demand that's out there today. Hopefully, we're looking forward to being able to get to that point. In relation to your backlog or if we could have shipped literally $hundreds of millions that we have in backlog that people would take today and would have taken in the fourth quarter.
It's really us getting through that backlog that's important.
Great. Thanks. Just in terms of the customer base, you mentioned very strong demand in the U.S., it looks to be mostly rural driven. I wonder if you could address what you might be seeing out of your traditional tier two customers. Several big fiber ramps there. I think you've also got some competitive activity. It looks like Nokia's made some inroads with Frontier, for example. It seems like there's been a notable uptick there. I wonder what ADTRAN has seen from a U.S., well, traditionally what we call the U.S. tier twos.
Yeah. Yeah. That uptick we have seen, now, you know, tier two people have different definitions of what a tier two, and we probably need to start getting more explicit. Let's say large tier threes or tier twos, however you categorize it, that space is up significantly. The forecast that we have and in some cases, orders that we have placed through this year, you know, we would expect that to grow, continue to grow actually pretty strongly this year. That has gone well. We've also seen movement in, you know, we have one large, let's say, carrier tier one as well as, you know, we also sell to MSOs. You know, that one is actually coming to life as well.
I mentioned that we have gotten some orders in place for shipments through this year from that carrier. If you talk, you know, if you read what they're saying they're going to do, it's, you know, they're getting very serious about fiber as well. I think in general, I don't think there's any space in the U.S. that isn't a really good environment.
Okay. Last one for me here. You know, with the revenue forecast, you know, flat here in Q1, though with, at a much higher level than expected, you're looking for some modest gross margin improvement, similar, you know, kind of to what you saw here in Q4. Mike, I wonder if you can remind us, what the impact, overall supply impact is on those margins. I mean, you know, would you be in the low forties ex those cost issues or maybe an update there in terms of what you're seeing and for the guidance?
Yeah, sure. Looking back at Q4, the impact that we saw was between 7 and 8 percentage points, and it's roughly evenly split between additional component and expedite fees on the components. The other side of the split is freight and logistics costs. Similar to the prior quarter, maybe a little bit worse of an impact during that quarter, but if you take that 7-8 percentage points on what we actually printed on a non-GAAP basis and we're solidly in the 42%-43%, which is generally what our expectation is in the normal business environment.
You expect that to maintain the Q1, that 7-8, or does that get a little bit better? That's it for me.
Well, I think if you look at our guidance, and you take the midpoint of that guidance, we're projecting significant headwinds out there.
As a reminder, to ask any further questions, please press star followed by one on your telephone keypad now. Our next question comes from Bill Dezellem from Tieton Capital Management. Bill, please go ahead.
Thank you. I would like to follow up on the supply chain phenomenon. Clearly in the fourth quarter, something went right late in the quarter, raw materials unfolded throughout the quarter and how that might be relevant for us to view the potential upside to your guidance in the first quarter versus risks.
Yeah. Let me touch that. Mike, if you have anything to add. We enter the quarter right now with a list of, you know, effectively backlog, and then new orders that we think will be coming in that have some priority to getting them shipped. That can be, you know, it can be whether or not it's a new customer that we're trying to make sure they get up and running or some supply constraint or real demand issues with a customer that we need to make sure we prioritize. As you would expect, the number when you enter the quarter is almost in all cases higher than when you exit the quarter, right? It's a fairly large number coming into the quarter.
Then we do a kind of Pareto of highest-risk components, lowest-risk components, and from that kind of come up with, okay, this is where we think we're going to end up. We were, needless to say, a little conservative coming into this last quarter. You basically have fallouts and bring-ins throughout the quarter. The weird thing, the phenomena that you're talking about, which is definitely true, which is, if for whatever reason, the entire supply chain has gotten to this point of everything ships in the last month. So really our availability of components seems to be way more so than ever before, kind of back into the quarter loaded. Oh, I got plenty of backlog that I could ship today, right? If I had the components to ship.
We're kind of hamstrung on where these shipments come, and then you're figuring out what's gonna drop out and what's not. What we've done is been more conservative on the dropouts versus the pull-ins, which has led to the performance that you saw in Q4.
Are you? The fact that we've seen that loosening or availability of components in the third month of the Q4 doesn't, in your mind, necessarily lead to, I guess you already know this for January, but more component availability in January, February and March? It's just the back end.
No. Yeah, because it's been that way pretty much the entire year. I will say that we have a concerted effort, right? To actually bring material in quicker and try to get more of it out of the way in those first two months. We saw some benefit. You didn't see it in the DSOs, but we saw some benefit of that last quarter. We'll see some more benefit this quarter, but it's still a lot of the material shipments will come in that last month.
Okay. One additional question on this front, if I may, and that's relative to the inventory on the balance sheet was up $13 million sequentially in spite of the revenues being up $16 million sequentially. That's a bit counter to what one would normally expect with a nice revenue increase. I'm not trying to be argumentative here, but really trying to understand. Why is it that the increase in inventory that you had in Q4 doesn't roll in to be a benefit in the Q1?
We're buying raw material. Raw material out there and available, we want to nab that raw material. It may not be used, and we may not even have all of the parts necessary for a particular assembly, but if a part becomes available, we wanna get that part. Then you don't have, you know, the assembly labor, and you don't have any costs, right? That $16 million itself may by the time it manifests itself into a finished assembly, could easily be, you know, $20, $30, $40 million worth of material pieces that would go into that assembly. Do you understand what I'm saying?
I think so.
Yeah.
I'm gonna kind of just summarize this in a slightly different way that yes, inventory may be up, but all you need is one component not available for a particular product and you're not able to ship it. It may look externally like you have plenty of inventory, but you need the one part, so that's the problem.
Well, you also have, you haven't converted it to a finished good, which would raise the value of that component. Mike?
It's mostly, Bill, just due to the extreme tightness that's out there. When you see a component, you need to be able to pick it up, even if you're gonna use it in future quarters, because if you don't, it's not gonna be there. The lead times have extended so far. Those are mostly buys from brokers and others where there's an extreme tightness for those components. That increase in inventory is predominantly on the raw material side, where we're trying to build some buffers to avoid missing that one component and not being able to ship.
Right. Thank you both for the time with my questions.
All right. Thanks.
We have a follow-up question from Paul Silverstein. Paul, please go ahead.
Tom and Mike, I hate to ask yet another question about supply chain. I recognize you're talking about something that's not unique to ADTRAN and that hopefully proves to be largely transitory. I just wanna make sure I understand your commentary. I think it's clear, but Mike, remind me. I think you had indicated confidence that you'd be back to the low forties by the first, second quarter timeframe previously. That obviously isn't happening, which in turn clearly indicates, consistent with other companies, that there's been no improvement, let alone meaningful improvement, and that perhaps things have gotten worse in terms of cost impacts as it translates into gross margin. I just wanna make sure that in fact is what's happening, what you're seeing. Is that a function of increased decommits, which many other companies reference? Or is it...
What exactly is going on?
Let me start with, Paul, I don't think we said in Q1 or Q2 this year we would get back to 40%. I think we said late in the year, right? Our previous expectation was we would be extremely challenged through the first half, and then it would start to improve in the back half. I was thinking that we might be able to get back closer to 40% in the latter part of the year, but certainly not in Q1 and Q2. As you know, this thing just continues to play out, and so far, we haven't seen improvement out there in what's going on. I don't think we're ready to say we're gonna get to 40%.
As far as the environment, I mean, to us, the environment feels very similar to what it was in Q3. Feels very similar right now to what it was in Q3 and Q4. Yeah, there's been some decommits, but honestly, we've had decommits throughout that whole period. I don't see an increase in decommits. I just see a continuation.
Well, Tom, I'm gonna play devil's advocate here because I am pretty sure that. I don't mean to be argumentative, but I'm pretty sure that you and Mike previously indicated time. Regardless, again, I'm not trying to give you a hard time, but I just wanna understand if there's been-
That's fine.
deterioration over the last 90 days.
No. Well, I don't know how far back that comment was made, so if it was made at the beginning of the year, okay. We do not see a change until the tail end of the second quarter. That's the environment I did, and then I was hoping that the environment would improve there because we were, you know, some of the large ships versus smaller ships, you know, which is still very fluid. We're definitely not correct. We're expecting a constant environment from where we are today through the first half of this year. Hopefully that'll get better, but right now that's what we're expecting and expecting some improvement in the second half. There's that. Really, I don't think it's any different.
I don't think it's any different than it was in third and fourth. I don't think our feeling about the quarter has really changed, at least since the fourth. You know, I don't know how far back. I haven't looked at the notes there.
Yeah. I think, Paul, if you look at our guidance, we're expecting just minor incremental improvement, right? Similar to what you saw between Q3 and Q4, I think we're expecting to see minor incremental improvement as we go through the next few quarters, but-
And, and-
nothing significant.
Yeah. The bolster on that, you know, the reason that we're saying that is, one, we are farther in the lead times. Two, freight has gotta get better at some point. As Mike said, almost half of our expenses of our overage is because of freight, right? In direct increases in freight costs over what our norm is. You know, the whole thing to that is, you know, when do people start traveling? When does air travel start picking back up again? You know, the congestions at the ports are getting a little better. If there's not another COVID event, you would expect freight to get better. That's a material piece of our overage.
Got it. Last question here. I trust by your commentary that in your case, contrary to most other companies that have reported, you haven't seen a material increase in the number of decommits, or you have?
No. I mean, there is one vendor that has been problematic that continues to be problematic, more so than the rest. No, I mean, we had a couple that hit us early in the quarter. We were able to kind of bounce back from that, and I would say it's very similar to Q3. I haven't seen a change from Q3 to Q4.
I appreciate that. Thank you.
You know, but everybody's got their own, everybody's got their own situation, everybody's got their own stock situation as well. I'm not at all saying that that may not be happening to a group of companies. I can just tell you that ours was very similar.
Got it. Thanks, again, Tom.
I think at this point, I don't see any other questions. I appreciate everybody joining us for our conference call today, and I really look forward to talking to you next quarter. Thanks very much.
This concludes today's call. We thank you for joining. You may now disconnect your lines.