Ladies and gentlemen, greetings and welcome to the Ribbon Communications Third Quarter 2023 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joni Roberts, Chief Marketing Officer. Please go ahead.

Good afternoon and welcome to Ribbon’s third quarter 2023 financial results conference call. I am Joni Roberts, Chief Marketing Officer at Ribbon Communications. Also on the call today are Bruce McClelland, Ribbon’s Chief Executive Officer; and Mick Lopez, Ribbon’s Chief Financial Officer. Today’s call is being webcast live and will be archived on the Investor Relations section of our website at rbbn.com where both our press release and supplemental slides are currently available. Certain matters we’ll be discussing today, including the business outlook and financial projections for fourth quarter of 2023 and beyond are forward-looking statements. Such statements are subject to the risks and uncertainties that could cause actual results to differ materially from those contained in these forward-looking statements. These risks and uncertainties are discussed in our documents filed with the SEC, including our most recent Form 10-K and Form 10-Q. I refer you to our Safe Harbor statement included on Slide 2 of the supplemental slides for this conference call. In addition, we’ll present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measure are included in the earnings press release we issued earlier today as well as supplemental slides we prepared for this conference call, which again are both available on our Investor Relations section of our website. And now, I’d like to turn the call over to Bruce. Bruce?

Great. Thanks, Joni and thanks to everyone for joining us today. I am pleased to report solid earnings in the third quarter despite revenue coming in short of expectations. Positive customer and regional mix, lower product cost and strong software sales all contributed to improved gross margins in both of our segments. And as a result of the restructuring plan we implemented earlier this year, our operating expenses continued to improve and were $87 million on an adjusted basis, the lowest point in over 3 years. Combined, this resulted in adjusted EBITDA earnings of $28 million, up 21% year-over-year and near the midpoint of our guidance. This included an EBITDA improvement of $6 million in our IP Optical Networks segment. Sales in our IP Optical business continued to grow year-over-year for the fifth straight quarter, with sales increasing 6% and up 14% year-to-date. Sales in our Cloud and Edge segment were down 4% year-to-date, with reduced spending from U.S. Tier 1 service providers, offset by growth from other customers. The shortfall in revenue this quarter relative to our guidance was largely due to timing of several IP Optical projects in the EMEA region. Several of the projects are now planned for this quarter and the first quarter of 2024. We also had a large Cloud and Edge enterprise RFP that we expected to close in the third quarter that was paused and is now expected in 2024. Despite the lower revenue, lower product costs and strong software mix resulted in very good gross margins for both businesses this quarter. Before I go on to the segment results, I’d like to update you on the status of our operation in Israel. As many of you know, we have a substantial presence in Israel with approximately 20% of our employees located in…

Thank you very much, Bruce. Good afternoon, everyone. In the third quarter of 2023, we were pleased with our financial performance from a profitability perspective. While revenue was below expectations, we were able to compensate with an improved gross margins and continued expense reductions, leading to non-GAAP adjusted EBITDA around the midpoint of our guidance. Please refer to our Investor Relations page on the Ribbon website for supplemental slides summarizing our third quarter 2023 and historical financial performance. Let’s begin with consolidated corporate financial results. In the third quarter of 2023, Ribbon generated revenues of $203 million, which is a decrease of 2% or $4 million from the prior year as our growth in IP Optical almost compensated for the decrease in Cloud and Edge products. Non-GAAP gross margin was 54.8%, which is 30 basis points higher than prior year and a 280 basis point improvement from the previous quarter due to a positive mix and lower product royalties and costs. Non-GAAP operating expenses were $87 million, a decrease of $7 million or 7% year-over-year, driven by reductions in R&D and sales expenses. This marks the third consecutive quarter of sequential expense reductions as a result of our restructuring efforts. Non-GAAP net income was $9 million, which is a $5 million increase from the previous year. This generated non-GAAP diluted earnings per share of $0.05, which is an increase of $0.03 versus prior year. Our non-GAAP tax rate year-to-date is 35%. Our interest expense for the quarter was $7.1 million, which is a $2 million increase from the previous year, driven entirely by the increase in interest rates. Non-GAAP EBITDA was $28 million in the quarter, which is a $5 million or about 20% improvement both year-over-year and quarter-over-quarter. Our basic share count was 171 million shares and our fully…

Great. Thanks, Mick. We expect the fourth quarter to be a very important milestone for us with continued sales growth and improved gross margin in our IP Optical business, resulting in the segment reaching profitability on an adjusted EBITDA basis. We project IP Optical sales in the quarter to exceed $100 million for the first time since 2019 and double-digit growth for the full year. We anticipate IP Optical sales in Europe, the Middle East and Africa to contribute the majority of the sequential growth across multiple market verticals. We also anticipate sequentially higher sales in North America with another strong quarter with rural broadband providers and a small amount of revenue associated with the AT&T project. We expect India to remain one of our strongest markets with consistent IP and Optical shipments to Bharti and Tata Teleservices. We also expect strong IP Optical gross margins in the fourth quarter, benefiting from the higher sales, better regional mix and lower product cost. As we look into 2024, we expect to build on the momentum we have developed and gained share in multiple regions, and we’re very excited about the new AT&T project and several adjacent programs where we will have an opportunity to expand our presence within their network. We’re very focused on building out our portfolio of multi-service edge IP routing solutions, including TDM circuit emulation, 5G cell site routing and IP MPLS aggregation. We have several additional Tier 1 service provider opportunities that we expect will drive additional IP revenue growth in 2024, building on the 30%-plus growth we have accomplished this year. In our Cloud and Edge segment, the work we have done to transition from perpetual licenses to renewable term licensing for enterprise customers will benefit us in the fourth quarter with a number of annual…

Thank you. [Operator Instructions] Our first question comes from the line of Erik Suppiger with JMP Securities. Please go ahead.

Yes. Thanks for taking the question. On the carrier spending in North America, any thoughts in terms of timing, how long this is going to stay kind of in this state? And then also any comments about the contribution level from your new products to the IP optical revenues.

Yes. Hi, Erik. Thanks for the questions. So on the Tier 1 spending environment, I think we’re in a lower environment through the end of the year, obviously. I think budgets are still being set going into next year. So it’s a little early. What is obviously key for us is where do those dollars get spent. And as I mentioned on my remarks, the early planning we had for next year indicates there is opportunities for us to grow from where we’re sitting here today and rebound back to a more normalized level. There are literally thousands of Class 5 wiring centers and switches still that are yet to be modernized. And we’re working on how do we help our customers go faster in enabling that, including the new routing solution I talked about that basically helps eliminate some of the legacy SONET and TDM interfaces. So I think we will have, obviously, a much better view as we get towards the end of the year here. On the contribution of new products, I’d estimate about 20% of our product sales in the third quarter in IP Optical were from new products that we introduced earlier this year. So these are things like the new long-haul, optical long-haul platform, cell site routers, the next-generation Neptune 2000 Series, all of those have combined to 20% or in that order in the third quarter from a revenue perspective. You still with us, Erik?

That’s all my questions. I’m good. Thank you.

Thank you.

Thank you, Erik.

Thank you. Our next question comes from the line of Greg Mesniaeff with WestPark Capital. Please go ahead.

Yes. Thank you for taking my question. Bruce, a two-part question. On the AT&T win that you talked about, is that a multivendor award? Or are you the primary supplier? Are you the sort of the second supplier? How does that shake out? And then I have a follow-on.

Yes. Thanks, Greg. So it’s a fairly unique solution where we combine our routing platform with our voice core, and it basically allows the interconnect for voice traffic as well as functions like circuit emulation allows you to terminate a TDM trunk and run it over top of IP. So the way we’ve architected it and then going through what they call OSMINE certification, which is the back office provision and the management makes it pretty unique. So it’s – I think it’s a unique solution in the market that it’s not just applying to AT&T. It’s really a broad use case for a more rapid replacement of TDM and copper links while still preserving the functionality and the interface into either the consumer or the enterprise. So I think it’s a fairly unique solution that we’ve put together.

And as far as – I know last quarter; you had some Tier 3 smaller carrier wins in the U.S. Can you talk about any progress there? And generally speaking, have your recent wins in IP Optical been market share displacements or additional being added to the existing vendor list. Can you just kind of give us some color on that? Thanks.

Yes. Greg. So the U.S. Rural broadband space continues to be very robust. I think we grew about 50% year-over-year in that segment in the third quarter. So that’s been very consistent growth this year, and we think the fourth quarter is again equally strong or more so in that market. So our U.S. business and our North American business in general has continued to increase and it will be a much more substantial amount of the business. So – and we think that continues going into next year as well.

Thank you. And just to follow-on on my first question, it sounds like from a feature perspective, your IP Optical products strength is their ability to emulate legacy protocols and combine them with new transport capabilities. Is that a fair statement? Is that kind of your secret sauce when you get into competitive bidding situations? Thanks.

Yes. So, that’s a good question. And I think we have identified a spot in the market that is unique, perhaps a little unique to us and may be underserved. And so, it’s a great entry point into the carriers, both large and small, where we can really differentiate. Once a platform or an operating system is an integrated and homologated in the network, it’s a lot easier to expand to a lot of different use cases. And that’s what I was referring to in my remarks, right, that I think once we are in with a use case, it could be a cell site router or could be circuit emulation or it could be IP/MPLS metro aggregation. I mean any of those provide an entry point for us to then grow and find other places to expand the products. And to your other question on gaining share, for the most part, I think these are share gains. In fact I think I saw the second quarter industry report showing us gaining share in the North American carrier service provider aggregation portion of the market. So, some good momentum and some independent statistics that show we are gaining share there.

Okay. Thank you.

Thanks very much Greg.

Thank you. Our next question comes from Dave Kang with B. Riley Securities. Please go ahead.

Thank you. Good afternoon. My first question is regarding AT&T. Just wondering who are the current incumbents and is this a displacement or just addition by AT&T?

Yes. So, I think there is – thanks Dave, a number of suppliers, obviously in the mix in their kind of core routing and metro today. Again, this is kind of the use case that we have identified, focused in on, obviously, where our strength is around the voice infrastructure portion of the network. And there is a lot of opportunity here to replace legacy classified end offices, collapse, tandem switches and then on the enterprise side, migrate customers from legacy TDM interfaces could be solid infrastructure onto a pure IP network. And I think – again, I think we have got a pretty unique solution here. I think some of the larger providers like Cisco is clearly in the deployments there as well.

Got it. And just wondering if you can kind of quantify the opportunity here? And when do you expect to start to ship to AT&T and for how long?

Yes. So, we are obviously early on the planning for next year. We are in, as I mentioned, early deployments now and deploying in a number of additional locations through the end of the year. I think we will have better visibility later in the year on what next year looks like. Ultimately, these are tens of millions of dollars of opportunities for us, obviously, potentially larger as we expand the number of use cases and really prove ourselves in the network.

Got it. And then regarding optical or IP Optical in Europe, it was down 22%. I think you mentioned some of the projects being delayed. Is that related to like macro headwinds? Is that uncertainty causing customers to kind of delay projects or any color on that situation? And what makes you think or have they – are you expecting them to be than this quarter in the fourth quarter?

Yes. So, this is not a, I will call it, a macro headwind in the context of excess inventory and those types of issues. I do think getting to a decision on an opportunity takes longer. Clearly, the interest rate environment creates more challenges. So, people are being more careful in their spending. But from a – it’s not so much really a macro trend issue as far as Q4, our bookings velocity so far in the quarter has been very healthy. So, we have got, I think better visibility, better momentum into the quarter. Some regions like India, we are already kind of fully backlogged for the quarter. So, I think the context here and the visibility we have into the different opportunities is pretty strong at this point, Dave.

Yes. And speaking of India, some of the equipment vendors that sell into India are pointing out that India could be peaking or slowing down already. Just wondering what do you see from your Indian customers?

Yes. So, I think it depends on what part of the network you are in. If it’s in the RAN portion of the network, I think that’s fairly true. The piece of the network we are in, kind of optical transport their IP/MPLS network and their sell-side routers, I think the capacity additions there are happening later in time than the original RAN infrastructure. So again, we have got very good visibility into the fourth quarter. I think next year looks pretty positive as they continue to expand, in particular, things like cell site routers into the locations where they are adding 5G coverage. And obviously, the new share that we have around optical helps us as well, particularly around margins now that we have shifted a lot of the infrastructure elements, we can shift more of the capacity elements going forward.

Thank you.

Thanks Dave.

[Operator Instructions] Our next question comes from the line of Tim Savageaux with Northland Capital Markets. Please go ahead.

Hey. Good afternoon and congratulations on the win with AT&T. It’s been probably been a long time coming and not related, but somewhat so just real quickly, any 10% customers in the quarter? And I will go on from there.

Yes. Hey Tim.. So, Verizon was a 10% plus customer again in the quarter in the third quarter here.

Okay. Just Verizon, and part of the reason I ask that is, and I don’t know what it is about Q3 reports. But last year, on this call, you guys talked about a number of Tier 1 wins, and I think announced the Bharti deal somewhere around that, maybe in advance of that. And of course, you are talking a lot about some incremental Tier 1 opportunities. I guess they didn’t make it to 10% in the quarter, but India is fairly strong. And I think you have already taken a crack at sizing the opportunity with AT&T, at least the short-term opportunity. But I was hoping maybe you could put it into context relative to some of those wins you announced last year and/or what you are seeing in the current Tier 1 pipeline. And maybe an update on that in general, I think last year, you talked about, I don’t know, 18 Tier 1s you were chasing a certain number that you won and etcetera. So, on the anniversary of that, maybe we can get an update there? And then just, I guess an overall question about the size of the Tier 1 pipelines and the AT&T opportunity, in particular relative to some of what you already won.

Yes. So, we have a couple of other customers that are closing in on 10% plus. So and you can imagine who they are based on what we have discussed with the likes of Bharti. One of the other major operators that we announced early this year or late last year was around MTN, very large service provider in the African area, various different countries throughout Africa, and that business is very strong, continues to grow for us as well. Clearly, adding AT&T into the pipeline is a major event for us. And as I mentioned, that solution we are using there really fits well to other carriers, large and small and there is a great way to enter into these accounts. So, I think we will have more to report on that as we get further along in the pipeline with some of those. The other area I mentioned on the call was around the new optical transport platform that we are introducing this year and testing in the Tier 1 carrier in Europe today as well. So, there is more like that, I think as we have invested around the portfolio here and really become a much stronger platform that really fits into the Tier 1 carrier space. So, I guess we will have to kind of continue to keep you updated, obviously, Tim, as we have more to announce here over the next few quarters.

Great. And I think you kind of referenced it a little bit, but – and maybe take it by segments, it sounds like you have got some pretty good orders in the book already on both sides. But from a trajectory standpoint, what do you expect out of orders in the quarter, I guess in terms of what you have already talked about with the increased sequential revenue guide.

Yes. So, obviously we are expecting a pretty strong bookings quarter given a little softer in the third quarter, like I mentioned we expect a really strong IP Optical number this quarter, greater than $100 million in revenues. So, we do a fair amount of book ship in the quarter still. So, a lot of that bookings is happening inside the quarter. In the Cloud & Edge business, while the Tier 1 service provider spending is weaker, we continue to see good momentum in enterprise, and that portion of our business is up substantially. We expect Q4 to be a strong quarter in enterprise for the Cloud & Edge business and a number of additional Federal opportunities, which are sizable as well that will really contribute to a strong fourth quarter here.

Okay. Thanks very much.

Thanks Tim.

[Operator Instructions] As there are no further questions, I now hand the conference over to Mr. Bruce McClelland, for his closing comments.

Yes. Thanks Ryan and thanks again for everybody being on the call today and your interest in Ribbon. We look forward to speaking with many of you several investor conferences coming up over the next month. So, look forward to those discussions. Operator, thank you as well and this concludes our call. Thank you.

Thank you. The conference of Ribbon Communications has now concluded. Thank you for your participation. You may now disconnect your lines.