Greetings and welcome to the Ribbon Communications Fourth Quarter and Full Year 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joni Roberts, Chief Marketing Officer. Thank you. You may begin.

Good afternoon and welcome to Ribbon’s fourth 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 or 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 first quarter of 2024 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 two 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'm very pleased to report solid financial results for the fourth quarter, our strongest quarter of the year and our most profitable quarter in almost three years. Despite a challenging macro environment for telecom suppliers, we're really starting to see the results of our strategy and the investment we have made over the last several years. For the first time, our IP Optical business generated a profit on an adjusted EBITDA basis and was profitable for the entire second half of the year. Our strategy to cross-sell our portfolio to existing customers is working in all regions, U.S. rural, Tier 1 carriers, Japan, India, Europe, and the Middle East. And the focus that we have on the enterprise market vertical continues to offset this period of lower spend by U.S. Tier 1 Service Providers. I think we're really standing out and executing well. Earnings for the quarter were $43 million on an adjusted EBITDA basis, an increase of 48% year-over-year, and $91 million for the full year, or 11% of sales, a 41% increase versus 2022. Cash from operations were $20 million in the quarter. This is just a great accomplishment given the macro environment. Revenue in the quarter was up 11% sequentially with growth from both segments and up 1% for the full year. This was below our original expectations, but a very solid result given the lower spending from U.S. Tier 1 Service Providers across the entire industry. Excluding sales to our large U.S. Tier 1 customers, revenue from all other customers in 2023 grew 8% year-over-year. The shortfall in revenue this quarter relative to our guidance was due to timing of a large US Federal project that has now been awarded, and we expect to recognize…

Thank you, Bruce. Good afternoon, everyone. We were very pleased with our financial performance in the fourth quarter and full year of 2023, as we met the midpoint of our adjusted EBITDA profitability guidance, due to very strong product gross margins and continued expense management. As always, please refer to our Investor Relations page on the Ribbon website for supplemental financial performance slides. Let's begin with financial results at the consolidated corporate level. In the fourth quarter of 2023, Ribbon generated revenues of $226 million, which is a decrease of 3% from the prior year. For the full year of 2023, revenues were $826 million, an increase of 1% versus the prior year. Fourth quarter non-GAAP gross margin was 56.8%, which is 440 basis points higher than prior year, due to very positive product mix, mostly in the IP Optical Networks business unit. For the full year, both business units increased gross margins, but as a result of a higher mix of IP Optical products, the gross margin remained at 53.1%, which is the same as the previous year. For the fourth quarter, non-GAAP operating expenses were $90 million, an improvement of $7 million, or 8% year-over-year, driven by reductions in R&D and sales expenses. For the year, operating expenses were $363 million, a net reduction of $24 million, driven by our restructuring programs. Quarterly, non-GAAP net income was $22 million, which is a $6 million increase from the previous year. This generated non-GAAP diluted earnings per share of $0.12, which is an increase of $0.03, or 39% versus prior year. Full year 2023 net income was $36 million, which was more than double the prior year result. Diluted earnings per share was $0.21, up $0.10, or 93% higher than 2022. Our non-GAAP tax rate year-to-date was 34%. Our interest…

Great. Thanks, Mick. Entering the year, I'm very confident in our ability to continue to grow revenue and improve profitability. The investments that we've made in the IP Optical business have transformed Ribbon into a data networking company, complemented by a unique voice communications practice with significant differentiation and a high barrier to entry. The combination is very powerful with a large addressable market that is constantly undergoing change and disruption, providing an excellent opportunity to expand our share in both the telecom carrier and enterprise markets. We accomplished a number of strategic goals in 2023. First and foremost, we improved the financial performance of the IP Optical Networks business every quarter last year, culminating in a profitable second half of the year. This is a dramatic improvement over the previous three years. We grew sales of both our optical and IP routing product lines and had strategic wins in all regions. There are three key factors behind this success. First, the deep relationships Ribbon has with service providers, particularly in North America and markets like Japan and Australia, that we've leveraged to win and grow our IP Optical business. Second, the significant investment we've made to expand our portfolio with unique competitive advantages that have expanded our addressable market. And third, the focus strategy we have on the middle mile segment of the market, where our combined IP and optical portfolio is a perfect fit as networks blur the lines between optical transport and IP routing. In the Cloud & Edge business, we made good progress on our goal to expand sales in the enterprise market vertical. In particular, we have a strong position with large financial and healthcare providers, and we had a number of very strategic wins with U.S. Federal agents. And while our voice network transformation…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Eric Suppiger with JMP Securities. Please proceed with your question.

Yeah. Thanks for taking the question, and congrats on strong IP Optical. On the -- first off, just did you -- I know your carriers were weak. Did you have any 10% customers in the fourth quarter and for the year?

Yeah. Hi, Eric. So in the fourth quarter, we didn't have a 10% customer. We did for the full year. Verizon was 10% for the full year.

Okay. And then on the carrier front, it sounds like you think it could pick up -- North American carriers could pick up as we get into the second half. What makes you think that that will pick up in the second half, or what context do you have around timing for improvements there?

Yeah. Thanks, Eric. Good question. What we primarily sell into the carriers today is our voice modernization products. And so what we've been working on is trying to lower the payback period, basically, for the deployment or the investment in those products. Today if you're modernizing a Class 4 or Class 5 switch, maybe the payback is seven or eight years. And a lot of it's related to the cost of real estate, power and cooling, and those sorts of factors. Now, if we can get that cost down to three or four or five years, I think it helps really improve the business case. So that's one of the key things that we've been working on.

And will that be available as you get into the second half of the year?

Yes. I think with the right kind of level of volume, we're able to lower those costs and be in that range. And I mentioned the discussions we're having. I think there's definitely a path here where the spending that we're seeing today in the first half of the year, which is consistent with the second half of last year, starts to grow again in the second half of the year and get back to a little more historical levels.

Very good. Thank you.

Thanks, Eric.

Our next question comes from the line of Christian Schwab with Craig-Hallum. Please proceed with your question.

Great. Thanks, guys. I just have -- my first question is a follow-up to the question that was just asked. In the service provider revenue, the second half being better, can you give us an idea of what we should assume is the rough mix between the first half and the second half of the year?

Yeah, Mick, I don't know if you have that off the top of your head. It's probably, what, 40% to 45% in the first half and 50% to 55%.

Yeah. We've been averaging about 45% in the first half and 55% in the second half, and that follows the normal seasonal pattern of most telecom providers where they do their expenditures. They set their budgets in the first quarter and then do most of the expenditures in the third and fourth quarter.

Okay. So even though the first half is starting slow, the mix for the year looks to be relatively the same. Great. So, then we highlighted in the slides, the BEAD program and increased fiber investment could impact, as you talked about middle mile. Do you expect that to have a noticeable impact in the second half of '24, or is that more of a 2025 event?

Right. So about half of the programs we're doing today in that rural broadband space are leveraging some sort of governmental related funding program. So, it's not all of them. It's about half of them approximately. And most of those funding programs -- all of them are not BEAD related. There are previous programs like RDOF and ReConnect America, those types of programs. So, BEAD would be additive to the current operating environment. And I don't see that funding coming in in 2024. And if it does, it's probably not into our market segment. It might be in more of the access layer of the network. So I think it's more of a 2025 phenomenon for us. So the good news is, we've done really well growing that business. I think last year we were up about 88% year-over-year in the rural broadband segment without BEAD funding. So, that could be -- it could be -- we should be pretty additive to that.

Okay. Fantastic. No other questions. Thanks.

Thanks, Christian.

Our next question comes from the line of Dave Kang with B. Riley Securities. Please proceed with your question.

Thank you. Good afternoon. First question is on India and more specifically on Bharti. I believe you have three programs there. Just wondering if you can give us an update which program has started, which one is to follow. Any color on that?

Yeah. Hey, Dave. So the India business was, again, pretty strong in the fourth quarter. Very consistent with the third quarter for the year. I think in India we were up 34% for the full year and we were up 34% in Q4 relative to the prior year. So, a really solid year in India. Bharti being our largest customer there. As you mentioned, there's three kind of three areas of the business. One is around the optical transport, the second around cell site routers, and then the third around their IP networking, the IP/MPLS access layer, aggregation layer of the network. All of those are active today. The cell site router was the one that we were ramping throughout last year. Our production is in good spot now. At this point, it's kind of balanced with the demand picture. And so I think it's kind of leveled out, if you will. Right? It's not I don't expect it to grow at the same rate in 2024 as what we saw in 2023, but should still be a pretty solid business.

So a couple of European vendors, they said that third quarter was actually the peak. And we -- and they saw fairly sharp sequential decline in fourth quarter. You're not seeing that and you still expect some growth, albeit slower pace for '24?

Yeah. So what we saw in the fourth quarter was very consistent level to third quarter. We have seasonality in that region, just like we do in others. So we -- with the first part of the year, we'll be slower. The budget cycle in India -- budgets are finalized at the end of March. So I think we'll have better visibility on the second half of the year once we've gone through that process.

And was India 10% or greater than 10% for the quarter and for the year?

Mick can double check the numbers there. Certainly the growth, 30% plus growth year-over-year puts it right in that ballpark, Dave.

Yeah. Certainly for the company, it is above 10% and twice of that for the IP Optical business.

Got it. And just a quick update on Neptune and AT&T. I think you were pretty bullish about maybe eight figure opportunity. Can you give us an update on that? Maybe not this year, but can you reach that eight figures maybe by next year?

Yeah. So not a lot of new information to share. And I don't want to get ahead of our customer on their plans. Early deployments are continuing. It's not a fast process to do these migrations. So, it does take time to do the implementation. And I think we'll continue to grow the business there as the year progresses. And I still think the market opportunity is exactly as I described it on our last earnings call. And it will take a bit of time to get to those levels for sure, Dave. It's probably not a this year thing. But I think as we get into next year.

And my last question is regarding IP Optical on adjusted EBITDA for first quarter. Is it going to be negative or positive?

Yeah. So we are expecting good margins in the first quarter, but at lower revenue levels than we had just in the fourth quarter, up considerably year-over-year, but not again, given the seasonality, it'll be lower than Q4. So, I think the adjusted EBITDA on the first quarter is likely negative. We'll see what the final mix looks like, but dramatically better than what it was a year ago.

Got it. Thank you.

Thanks, Dave.

Our next question comes from the line of Tim Savageaux with Northland Capital Markets. Please proceed with your question.

Hi, good afternoon. Trying to put a few more numbers together here. There's a lot of them. But in talking about -- I think you talked about Cloud & Edge being up 4% ex-Tier 1s in '23. I mean, the way I'm looking at it, that means your Tier 1s are down 40% or so, something like that. So, A, is that about right? And you laid out a lot of anecdotal kind of growth drivers that we're honestly not really seeing in the guides very much. But it looks like, if you're able to continue to grow Cloud & Edge ex-Tier 1s and from the sounds of the Federal stuff and enterprise, that should be the case. You're expecting another down year in Tier 1s implicit in this flat guide. Am I getting something wrong there? And I'll follow up.

Yes. On the first part of the question, Tim, the Tier 1s were down in the mid-20s. That sort of ballpark. So not at the 40% range, kind of mid-20s. And what was the second part of the question? I'm sorry, Tim.

Yeah. That was U.S. Tier 1s I was talking about, by the way.

Yes.

[Indiscernible]

And that's only for, well, obviously, pertains to Cloud & Edge.

For Cloud & Edge. Right. U.S. Tier is. That's right, Tim.

All right. Well, if you have IP Optical business with U.S. Tier 1s, it'd be a good time to tell us about that right now.

Well, I mentioned one of the programs on the on the last earnings call and don't have a lot of updates this go around.

I mean, for you or 20 -- doing these compares.

Yeah, no. Let me just be clear. The the U.S. Tier 1 decline, we can describe it in two ways relative to the full company revenue or relative to Cloud & Edge. In the Cloud & Edge, all other customers, excluding U.S. Tier 1, were up 4% year-over-year for the full year. At the corporate level, it was 8% given the increase in IP Optical, obviously.

Okay. And then the rest of the question was, if you're guiding flat, it looks -- doesn't look like you're -- it looks like you're factoring in further declines in U.S. Tier 1s. My number is -- that seemed terribly consistent with easy compare on the relatively positive second half commentary.

Yeah. We're being cautious still on what the outlook is and when the incremental spend starts to come back. We are growing clearly in enterprise. We're growing in Federal. We're being cautious about what the service provider market looks like. Obviously, we've seen growth internationally in that segment. So, we'll see what we look like over the next few months here and we get a better visibility into the second half of the year.

Okay. Just to beat this completely to death and I should have started right here. So, you expect you'll be north or south of that 4% growth rate ex-Tier 1s in Cloud & Edge in '24.

It's probably a similar number, I think, Tim. The momentum internationally, the programs. In fact, as we book some of these deals, the revenue gets recognized over a period of time. So, we've got a good start on that. And so I think I think enterprise, international, Federal, they all they all grow this year relative to 2023.

Okay. Great. Just one and a half more here.

Yeah.

You've got IP Optical growth decelerating yet a couple of big wins you just announced. What sort of contribution material? And it doesn't sound like -- sounds like India is a bit of a tough compare, but not horribly. So what sort of a contribution do you have factored in from your big utility and your big telco when you've announced here the last couple of quarters in '24?

They're not dramatic tens and tens of millions of contributions. Each one of these contributes probably single digit millions this year to the to the revenue line, Tim. And so we need to keep adding those types of customers that will help us continue to grow. As I mentioned, we think the product piece of IP Optical grows at 10% or more this year. There'll be a piece of that. Of course, there'll be some regions that don't grow. So you've got to make that up in other areas. So, that's our best view at this point.

Okay. So combined, it looks like there are a significant chunk more than a third of your growth. Plus, you expect India to grow. I'm just trying to get down to what you're telling us about the rest of the world here. Last question for me. If indeed IP Optical can breakeven, looks like you're actually forecasting a pretty significant or at least modest margin decline for Cloud & Edge in next year. It seemed like the anecdotal commentary there was flat. So, I just want to try and reconcile those two.

Yeah. So, I know our best view right now is the margin percent -- gross margin percentage for Cloud & Edge is pretty consistent. It doesn't move around dramatically. It will move 100 basis points here or there, depending on some amount of hardware that we ship. But a lot of it's software, a lot of it's services. So, we don't think there's a dramatic change. If there is, it's in the 100 basis point or so range. I think, Tim, not much more significant than that.

Got it. Thanks.

Thank you, Tim.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Bruce McClelland for closing comments. End of Q&A:

Yeah. Thank you. And thanks for everyone being on the call and your interest in Ribbon Communications. We look forward to speaking with many of you at our upcoming investor conferences. We've got the large Mobile World Congress coming up in Barcelona in a few weeks. And we'll see some of you there and the Optical OFC Conference in San Diego towards the end of March. So with that, thank you, operator. And that concludes our call.

Thank you. You may disconnect your lines at this time. Thank you for your participation.