Greeting, and welcome to the Ribbon Communications Fourth Quarter and Full Year 2020 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tom Berry, Investor Relations for Ribbon Communications. Please go ahead, sir.

Good afternoon and welcome to Ribbon's fourth quarter and full year 2020 financial results conference call. I'm Tom Berry, Investor Relations of Ribbon Communications. Also on the call today will be Bruce McClelland, Ribbon's Chief Executive Officer; and Mick Lopez, Ribbon's Chief Financial Officer.

Great. Thank you, Tom. Good afternoon, everyone, and thank you for joining us today to discuss our 2020 results and outlook for 2021. We announced preliminary results on January 25, as we felt it was important to communicate the stronger performance relative to our guidance, and also due to the typically elongated fourth quarter reporting schedule. Before reviewing the details of our fourth quarter results, I wanted to take a minute to discuss our 2020 full year accomplishments. I'm very proud of the company's achievements during such a challenging and extraordinary year. When the COVID-19 pandemic began early last year, our sales organization quickly transitioned to remote selling and virtual product proof of concept. This rapid response enabled us to grow revenue on an organic basis for the year, even with the challenges presented by the pandemic. And we have significantly increased our global presence with sales outside the U.S. now well over 50% of total sales.

Thank you. As Bruce stated, we had a strong second half of the year and an outstanding fourth quarter financial performance that exceeded our expectations. We recorded a second consecutive quarterly adjusted EBITDA record, generating $49 million in the quarter, and $131 million for the full year of 2020, a 53% increase from full-year 2019. We also generated $36 million in cash flow from operations in the fourth quarter to end the year with $136 million in cash.

Thanks, Mick. Before reviewing our guidance, I would like to provide some broader commentary on the marketplace, and how we're thinking about 2021.Our Cloud and Edge and IP Optical businesses are well-positioned to benefit from the multiple market trends, including distributed network applications, 5G transport, edge computing, and increasing enterprise workloads that are presenting a large shift in the performance requirements of communications networks. Despite the ongoing travel restrictions, our engagement level with customers remains strong. We continue to see significant RFP activity and remote proof of concept product demonstrations in place of on-site lab evaluations. Visibility in the business remains solid, and we have not experienced significant supply chain constraints. Lower travel and marketing activity also contributed to our lower operating expenses in 2020, and we project this to continue in the first half of 2021. We expect the shift towards working from home to continue for years to come and this will emphasize the importance of great broadband networks. Broadband will be a key part of government infrastructure priorities, and funding opportunities such as RDOF in the U.S. will be a catalyst for more investment in the types of solutions provided by Ribbon. Perhaps for the first time in the last 20 years, the competitive playing field has shifted and is becoming more balanced. The sentiment towards Chinese equipment providers has turned very negative, ensuring significant market share shifts in Europe and multiple Asia-Pacific regions. And we believe the ability of focused, specialized providers such as Ribbon is a competitive advantage against larger competitors attempting to compete across a broader range of technologies. With that as the backdrop and consistent with our fourth quarter results press release a few weeks ago, we are providing additional visibility on our expectations for full year 2021 and the first quarter. As noted in our press release, we expect growth of roughly 10% in 2021, relative to our performance in 2020, on both the top and bottom lines. We also expect typical seasonality in our results, with momentum growing throughout the year, and the first quarter representing roughly 21% of annual sales. For the full year, we anticipate sales to be in the range of $925 million to $945 million. Adjusted gross margin of 55% to 56%, and adjusted EBITDA of $145 million to $155 million. For the first quarter of 2021, we are projecting sales to be in the range of $190 million to $200 million, adjusted gross margin of 55% to 56%, and adjusted EBITDA of $14 million to $18 million. We're also providing additional visibility on our expected interest and income tax expenses for the year. Please refer to the presentation on our website for additional details. With the many strong industry dynamics working in our favor, a focus strategy and strengthen the leadership team, we're very excited about the year ahead. Operator, that concludes our prepared remarks and we can now take a few questions.

Thank you. At this time, we'll be conducting a question-and-answer session. The first question is from Paul Silverstein of Cowen. Please go ahead, sir.

Thanks, and appreciate the detailed disclosure. Bruce, I've got a handful of questions, but they're all very discreet. I'm hoping you all can answer. First off, in terms of quarterly OpEx in March and the balance of 2021 taking into account the disposition of Kandy, any insight you can offer about what you're planning for expenditure levels?

Yes. Hey, Paul. I think for first quarter, we're in the, 95 to 98 range, some sort of ballpark like that with a little bit of variability. And then as the year progresses, we think we will be under $100 million a quarter or right in that range, give or take a few million dollars.

All right. Appreciate that. Secondly, on your IP Optical business, I think I heard you referenced 20 wins. How many total customers does that business have at present? What are the nature of the wins, the use cases? Do they run the gamut or are they focused on play middle transport? And what's the mix among Tier 1 service providers, other service providers in enterprise and other customers? Or however you think about the mix in that particular business?

Yes, so a bunch of questions there. I don't have the exact number of active customers, it's in the hundreds, maybe Mick do some research and he would get back to you or look it up on the call here. But it's a long list of customers. It is fairly evenly balanced between what we think of as enterprise critical infrastructure type customers, and service providers. And, obviously, there is a number of what we think of as Tier 1 service providers in certain geographies, like India and Russia, obviously a little less slow, obviously, in North America today, but there was a reasonable mix of both.

Okay. I think I heard you say that India was solid was flattish, I don't want to put words in your mouth. But as we look forward for that business, it sounds like your confidence is less optimistic. How much of your growth expectations is tied to rebound in Indian and Russia and other such for lack of a better way to put an emerging markets that were a big piece of the story before the global downturn and to go all on those regions?

Yes. Well, so I think you heard it right. India was very consistent in Q4 to Q3. We did see purchasing from a different mix of customers, which I think was really good. And we're not projecting a snapback, certainly, in this quarter. As I mentioned, the start of the fiscal year starts April 1 there. So, as they kind of finalize their budget planning, and we get into the summer months, we hope we start to see spending similar to the level that was in 2019. Overall, at the end of the year, kind of year to date, at the end of 2020, I think our business in India was down something like 44% versus 2019. So, there's plenty of room for recovery, even getting partially back to where we were in 2019. And that is certainly part of the expectation as we grow this year. That's certainly part of the story. Other regions, Europe was very strong in the fourth quarter, just across the board across the entire business. And former Soviet Union was pretty solid, I think overall for the entire year was essentially consistent with 2019.

Bruce, I know you're on a relatively small size but thinking about in demand putting aside bit of dynamics, would you characterize the demand environment writ large, again, putting aside individual regions, would you characterize it is healthy, meaningfully improving, status quo? Let me just ask you the open question, how would you characterize demand relative to 90-days ago relative to 180-days ago?

Yes, good question. As we got into the last month or two of 2020, we were really almost maxed out in the number of trials and activities and proof-of-concept work that was going on. Ultimately that's going to translate into business for us or for someone else, but the demand environment looked really healthy as we ended the year.

All right. One last question, I apologize to you and others on the call, but real quick. With respect to Huawei, I think I heard you referenced that you had two wins that were directly related to Huawei cut backs. How many active opportunities are out there? And are these both in optical and in your Cloud and Edge, SBC or other platforms? Those are some mostly optical or the other.

Yes. So the two that I mentioned in Latin America, were in our Cloud and Edge business, these were replacements of existing calls, voice over IP call control systems, basically. So, obviously we're seeing opportunity in Cloud and Edge in certain markets. More broadly, certainly, there is going to be opportunity for some share shift happening this year in Europe and in several countries in Asia-Pacific for sure. And that's where we're focused. If we get a piece of that much larger spend, that will be very meaningful for us.

I appreciate the responses. Thank you.

Thanks, Paul. I appreciate it.

We have a question from Dave King, B. Riley. Please go ahead, sir.

Thank you. Good afternoon. First question is on the - you've provided North America optical sales increased to 105% sequentially. Can you provide similar numbers for Europe and then Asia?

Hey, Dave. Yes. So in Europe, Mick, you probably have the numbers handy from Q3 into Q4, again, Europe was up pretty strongly overall for us in Q4. Do you have that handy, Mick?

Yes. So we have for the three months ending at September, Europe - Russia was up by about $1 million, most of Europe was up by almost $9 million from $46 million to $57 million.

46 to? What was the final number? 46 to what?

57, got it, okay. And do you have numbers for Asia too?

Let me add a here real quick, so we basically went from like $38 million to $46 million on optical.

Got it. Very helpful. And then just regarding for both March quarter as well as for the whole 2021, can you share what your assumptions are regarding C&E versus optical? I'm just curious because you're guiding gross margin to be down about 3 percentage points this year. What's driving that? Are you expecting optical to be stronger than C&E and that's why your gross margin will be about 3 points lower?

Yes, thanks, Dave. For the first quarter, again, we've kind of almost always see the first quarter being the weakest quarter of the year. So we expect both segments to be down versus the fourth quarter in the first quarter. And, given the particularly the margin richness around Cloud and Edge, that definitely has an effect on the overall margin. And then for the entire year, you've got it right. I mean, we expect to see disproportionately higher revenue growth from the IP Optical piece. And with that being a little lower gross margin than Cloud and Edge, that affects the overall blend for the company. So it's really a mix shift as opposed to a shift in gross margin for either of the portfolios.

Yes, I would like to add. Please, also take into consideration, there is some seasonality to our revenues and that certainly impact our gross margins. .

Sorry, Dave. It sounds like we're getting a lot of noise there.

Mr. King, are you still on the line?

Yes, I'm here.

We hear you well, Dave.

Okay. Actually, my last question is on QualiTech. Has that been factored out in the first quarter as well as this year's revenue outlook? Or should we take it out after the transaction is closed?

Yes. So we wouldn't take it out until we're closed. It's a relatively small business, it's sub $5 million in revenue and $1 million or less in earnings. So, not a big needle mover on the numbers. But it's a good size, a good indication of how we're really making sure we focus on the core strategy for the company, and this is a nice little business and we'll continue to work pretty closely with that group, actually on product certification and testing and whatnot. And we'll be able to benefit from just a little more focus.

Got it. Thank you.

Thanks, Dave.

We have a question from Mike Latimore, Northland Capital Markets. Please go ahead, sir.

Thanks and congratulations on the great execution this year.

Thanks, Mike.

In terms of the Cloud and Edge business, I guess, generally speaking, do you view that business as being stable, growing little bit, declining a little bit this year? And then, what about the dynamic of software? Do you think software grows faster than the overall Cloud and Edge business this year?

Yes. So, obviously, we grew year-over-year at 4% in 2020, and if account for taking kind of Kandy out of the mix. We're still targeting a bit of growth this year, in particular, we think, enterprise should grow and as we kind of get back into a more, back in the office mode, the enterprise edge portion of our business should come back as those deployments start to pick back up. So definitely, we want to grow that business this year.

And then on the enterprise side of, I guess, Cloud and Edge. How influential is Microsoft Teams to that business? Is it over 50% of demand or under? I'm just trying to get the sense, because it seems to be a pretty high growth?

Yes, I think it's still less than 50% of our SBC business. Again, as I've kind of described a few times in the past, sometimes it's hard to tell when our SBCs are being used for enterprise or for carrier applications. And so sometimes it's hard to put a complete, a fine point on it. But I think the Microsoft piece is pretty significant. But I don't think it's a 50%. Again, it's hard to put an exact number on it.

Okay. And then maybe any just general guidance on CapEx or really kind of what free cash flows implied in the guidance for the year?

Yes. Mick, why don't you take that one, please? Mick may have had trouble with his connection, that might have been where the noise was coming from. We think…

I got it.

There we go.

I got it. This year we had CapEx we stated of $27 million, of which $13 million was real estate, then we got reimbursed for about $10 million of that. So our number, if you normalize it, it's about $16 million. As we stated before, it's $4 million to $5 million a quarter. So we would expect that going forward into next year, that $16 million to $20 million range would be acceptable to us as we invest in our labs and product development in particular. And so far as cash flow for next year, the only thing you should take into consideration for modeling is that we expect a growth in the IP Optical, and particularly those customers, as they have a longer type of payment cycle in emerging markets, so there's going to be some use of cash as for working capital.

Got it. That makes sense. And then just last on product development, what should we think about in terms of key product enhancements on Cloud and Edge and IP Optical this year?

Yes. So, in Cloud and Edge, there's several important programs, kind of the final virtualization of some of the call processing platforms. I mentioned this virtual C20. So there's still some work going on that. And then there's investment around as a service models for SBC as a service we call Ribbon Connect, as well as our analytics platform. And I mentioned on I think, on Mike maybe on your call back a few months ago, we're doing some exploratory work around MEK , where we can really leverage the - cut off really time critical software development skills from Cloud and Edge with some of the networking products and technologies from the ECI business. So that's an interesting area. In IP Optical, we have a pretty robust roadmap this year. There's quite a bit of investment around additional routing protocols, enhancements for TDM to IP migration, and then a variety of optical-related investments, including ZR plus introduction this year, kind of standardized 400-Gig interfaces, and a few new platforms coming out. So pretty active program this year.

All right. Great. Thanks. Good luck.

Hey, thanks, Mike.

Gentlemen, we have reached the end of the question-and-answer session. And now I'd like to turn the call back over to Bruce McClelland for closing remarks. Please go ahead, sir.

Yes, great. Well, thanks very much and appreciate everybody's interest. Again, just to reiterate, we're really proud of the accomplishments here in 2020, and even more excited about the outlook here for '21, and really focused on the core strategy. So look forward to updating you in the progress throughout the year in some of the conferences that we have coming up shortly. Thanks very much. Have a good evening.

This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.