Greetings and welcome to the Ribbon Communications Second Quarter 2024 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. Thank you. You may begin.

Good afternoon and welcome to Ribbon's second quarter 2024 financial results conference call. I'm Joni Roberts, Chief Marketing Officer at Ribbon Communications. Also on the call today is 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 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 third 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. I refer you to our safe harbor statement included in the supplemental financial information posted on our website. 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 the supplemental financial information we prepared for this conference call which again are both available on the Investor Relations section of our website. Now, I'd like to turn the call over to Bruce. Bruce?

Great. Thanks, Joni. Good afternoon, everyone and thanks for joining us today to discuss our Q2 results and outlook for the rest of the year. I'd like to start this afternoon with a short recap on the progress we've made over the last 18 months executing against our strategic goals and improving the foundation of the company. In early 2023, we initiated the final phase of integration of the ECI acquisition by restructuring the organization and integrating common functions such as R&D, operations, customer support and deployment services. This allowed us to capture significant savings and better execute on programs that leverage products and technologies from both our business units, such as the significant investment being made in expanding broadband to more rural regions across the U.S. that will only accelerate with the $42 billion allocated in the Inflation Reduction Act for Rural Broadband. The investment that we've made in new products allowed us to capture additional share in regions such as India with the long haul and Cell Site Router programs with Bharti Airtel, increasing our revenue in India by 30% last year. We expect to continue to see these benefits of the new operating structure for years to come. We've also been very successful in growing our business with enterprise customers as they modernize their communication infrastructure and leverage public cloud platforms. Similarly, we won a series of significant multiyear voice modernization projects with U.S. Federal defense agencies that are now underway and will continue well into the future. Financial results have improved significantly, particularly in the IP Optical business, where we have now had 8 straight quarters of year-over-year higher earnings contribution from the business, resulting in a trailing 12-month adjusted EBITDA for the company once again above $100 million in 2024. This allowed us to go…

Thank you, Bruce. Good afternoon to everyone. We were pleased again with Ribbon's ability to meet adjusted EBITDA earnings guidance driven by strong product gross margins and continued focus on operating expense management. On a trailing 12-month basis, our consolidated adjusted EBITDA remained over $100 million. Most notably, our IP Optical networks is getting closer to sustained breakeven profitability with the last 12 months adjusted EBITDA of negative $5 million or just under 2% of revenue. Meanwhile, we continue to manage the Cloud & Edge business, resulting in strong EBITDA margin performance of 24% for the last 12 months. With our expectations for revenue growth in both segments in the second half of the year, Ribbon's financial performance will only improve. As always, please refer to our Investor Relations page on the Ribbon website for supplemental financial information. Let's begin with financial results at the consolidated corporate level. In the second quarter of 2024, Ribbon generated revenues of $193 million which is a decrease of 8.5% from the prior year and below the low end of our guidance. Non-GAAP gross margin was 54.4% which is at the high end of our guidance. This is a 240 basis point improvement over prior year due to a positive product and regional mix and IP optical networks. Non-GAAP operating expenses were $86 million, an improvement of $4 million year-over-year and quarter-over-quarter, driven by continued reductions in R&D and sales expenses from last year's restructuring efforts. This is the lowest operating expense level since the merger of Ribbon and ECI in 2020. Non-GAAP net income was $9 million which is a $1 million improvement from the previous year. This generated non-GAAP diluted earnings per share of $0.05 which is an increase of $0.01 versus prior year. Our non-GAAP tax rate year-to-date was 35%. Our…

Great. Thanks, Mick. Now, focusing on the second half of the year, we're expecting significant growth with revenue increasing approximately 25% as compared to the first half. We expect margins to remain relatively consistent with the first half. And with continued OpEx control, bottom line earnings are expected to more than double, very similar to the profile of the business in 2023. There are a number of specific tailwinds supporting the business and our outlook for the second half. First, the Verizon program is off to a great start and the combined team is fully activated. The first phase of sites to be upgraded have been identified and detailed designs are underway. We're scaling the deployment teams and ramping production on the necessary hardware components and installation material. Revenue on hardware and software is recognized as we ship and the professional service revenue is recognized as the work is performed on each site. Sales to Verizon in the second quarter once again exceeded 10% of sales, increasing 40% quarter-over-quarter and we project sales in the second half of the year to increase approximately 50% versus the first half. Second, we expect a strong second half with rural and regional service providers in the U.S., building out fiber networks using both our optical transport and IP routing solutions. We have a very strong pipeline and growing backlog that projects significant growth versus the first half and will approximately double year-over-year. We've increased the number of network engineering and consulting firms we're working with and broadened our geographic coverage to more areas which has helped further increase our opportunity funnel. Approximately 50% of the projects are benefiting from some form of incentive funding such as RDOF and ReConnect [ph]. In addition to traditional telecom service providers, we're also seeing a growing number…

[Operator Instructions] The first question is from Michael Genovese of Rosenblatt Securities.

First, congratulations on the strong margins and EBITDA and what sounds like a robust second half revenue outlook across a bunch of end markets. It's good to see all that. But I want to tie a bow on the second quarter and just understand the second quarter a little bit more. We got what you said about enterprise, about Federal and that basically Edge and Cloud would have been in line, Federal deal hasn't slipped. I want to quantify the shortfall in optical in 2Q a little bit more. Like how much was Eastern Europe versus -- it sounds like the U.S. was soft in the second quarter but will be stronger in the second half of the year?

Yes. Thanks for the question, Mike. So like the first part, I think you've got right. The largest shortfall was this Federal deal which was significant in size. I think as I mentioned in the remarks that it would have gotten us to the guidance range. So we were at $193 million total with the bottom of the range of $200 million. So it gives you an idea of the size of that deal. And obviously, the incremental contribution from that, given it's essentially software, would have resulted in the earnings being even much, much stronger above the guidance range just with that deal alone. On the optical side, I think Mick mentioned that the year-over-year change in Eastern Europe was about negative $6 million. So that gives you an idea of the shortfall from Eastern Europe in the quarter, give or take a few million dollars. So, I hope that makes sense.

Yes. And then -- I mean, if we think about the guidance change for the whole year, is the primary moving piece there at Eastern Europe? Is that the way we should think about it?

Yes. From a negative perspective, it's all Eastern Europe. And I frame that in the $20 million to $25 million range, again, offset by the other tailwinds I mentioned across the board, really a whole variety of different things. So we have a pretty strong outlook for the second half despite the fact that we're reducing shipments into Eastern Europe. And I think that's in line with what we've seen from others, the pickup in the second half and then some of the things a little more specific to us around the Verizon project, around U.S. Rural Broadband expansions, all driving the growth in the second half of the year for us.

Okay. And just a couple more for me. So we've got the Verizon, new deal is already kicking in and you guys announced Brightspeed the other day. Those are pretty impressive names. And should we think about there's something going on in the industry where this is a trend and we can expect to see more of the same going forward with other customers?

Yes. This certainly feels like that, Mike. The other one we talked about earlier in the year was with MTN Group in Africa even with a modernization of their voice infrastructure. And so there's been a series of these. I also referenced another U.S. MSO program. And I think as people look at the investment in their network infrastructure and how do they get more efficiency, drive down costs and be able to feed the growth in fiber and in mobile, it's a really great area to look. And we've done some work to drive down costs in the ROI and getting some good momentum. You kind of overlay that with the opportunity around the Metaswitch footprint which is pretty substantial in the market and gives us some really good momentum around the Cloud & Edge business and the return to growth there.

And then finally, the OpEx -- with OpEx coming down so much -- I mean we like to see it but I guess I just want to ask a question about sort of the R&D requirements of the business, what the R&D intensity looks like right now? How do you protect R&D as you're restructuring this aggressively?

Yes. Thanks, Mike. So we're pretty careful about that. I mean R&D is the fuel. It's the engine of the future for sure. We've gotten at it by really coming at it structurally and being able to get the most out of the combined set of resources in the company with the reorganization we started about 18 months ago. And the area we're focused on is really around sustaining engineering, how do we get really, really efficient around the cost structure for supporting the installed base. We've actually implemented some really interesting technology that helps our customers upgrade their networks more efficiently and get them on a common software base and that allows us to obviously get more efficient in how we support them as well. So there's a whole series of things that we've gone after there to keep the engine strong, so. But thanks for all the questions, Mike.

The next question is from Christian Schwab from Craig-Hallum Capital.

So a lot of the questions were kind of answered there. But just on the Rural Broadband, a lot of people are really talking about Rural Broadband or the BEAD [indiscernible]. You kind of mentioned the other programs. Is the strength that you're seeing for Rural Broadband on the OTN and optical side getting ready for those money to be released? Or are there a few states where you guys are really well positioned where money is getting into the market a little bit faster than, say, broadly based?

Yes. So the BEAD program is not contributing anything yet today. So it's not the source behind the programs we have this year at all. As I mentioned, I think about half the programs -- we estimate half the programs have some sort of Federal assistant or stated assistance behind them. But it's not the new BEAD program. It tends to be RDOF or ReConnect [ph] funds or a few other sources of funding. It's interesting that our participation in the middle mile portion of the network is probably a spend that's staged a little later than the initial investment around driving fiber, putting in the fiber access equipment, et cetera. And then as that infrastructure gets put in place and the traffic grows, then they have to upgrade the middle mile portion of the network. And so I think it may be just a reflection of the timing on how that works and where our participation is. And yes, we've just got a great funnel of opportunities in the second half here. Some of them are a little larger that really helped, obviously, drive growth. And then the final thing I'll add is we're participating in the optical transport layer as well as the Metro IP routing layer and so, that gives us access to a good source of the program or size -- part of the program as we have a little broader addressable market.

And then on the disruption due to M&A, I mean, are there more opportunities here in the United States kind of on Infinera? I know Infinera opportunities were more data center centric which -- in more longer haul-ish type of applications. But where -- what products -- in both of those acquisitions, the Hewlett Packard-Juniper, the Nokia-Infinera, what products that you have -- that you think you have the opportunity to be disruptive in the marketplace and maybe take share as road maps are questions and employees are let go [ph]?

Yes. So in the case of the Nokia-Infinera deal, it's squarely in the optical transport arena. And as you rightly pointed out, it's not so much in the North American kind of hyperscale data center portion of the market. It's more in Europe and Asia Pac. And typically, it's in cases where maybe both Nokia and Infinera -- I don't have a share of the deployments at a customer and they want to make sure they have a diversified customer base or supplier base and so it prevents opportunities for others to come in and win some of that share. In the case of the HP and Juniper deal, it's squarely in the IP routing space, really in the metro, middle mile and access aggregation layer where perhaps Juniper had a position with a telecom operator and it's an opportunity for us to go in and provide an additional source. And given the focus that we have on the telecom market in particular and the products that we've designed specifically for that type of network, I think it gives us a good position to take more share there as well.

And then my last question, I'll sneak in here, Bruce. On the Brightspeed that you just announced, you've done a good job of quantifying the Verizon opportunity at $300 million over the next few years, exit at kind of $25 million-ish in Q4 of this year. Can you give us any color at what the multiyear opportunity of Brightspeed could be?

Yes. Just directionally, not to talk too specific about an individual customer but obviously, Brightpeed's footprint is smaller than the larger Tier 1s fixed line providers like AT&T and Verizon. I think the footprint they picked up was about 6 million lines. And obviously, there's a transition to fiber and IP across the network. But there's quite a substantial footprint of legacy TDM lines there and I think we've worked really successfully to justify the ROI and modernizing a portion of that network at least. And these programs do take time to modernize a switch location, doesn't get done overnight. So it kind of stretches over a period of time. And hopefully, we can continue to grow in the footprint that we're already deploying in and then identify some of these new customers as well that we can get on board for the similar program.

The next question is from Tim Savageaux from Northland Capital Markets.

Let's stay on that one for a second because that would be an obvious kind of guidepost to try and at least get a sense of what Brightspeed could mean. And it is a smaller footprint but it's not that much smaller. I think Verizon is what, 17 million, 20 million lines, something like that. Is that a fair way to look at it? In terms of proportional understanding, they've got a big business network over there at Verizon and anything. I guess overall, without pressing you too hard, it seems material or...

Yes, like, it could be.

Fair to say?

Yes, no, I think it's very meaningful and it's very strategic. I mean, Brightspeed is an innovator here in the market and we love to be partnered with them here. I guess what I would say kind of a little more generally about this switch modernization, there are some uniqueness depending on the configuration of the switch, how many legacy lines are left, what the split is between businesses and residential and then what region of the market they're deployed in. The cost of power in California is a lot higher than the cost of power in other regions. So you really got to kind of roll up your sleeves and figure out what portion of the installed base has an ROI that makes sense to make the upfront investment. And so again, I don't want to comment too much more on Brightspeed specifically but I would just say more generally, you've got to really kind of look at the details on each one. And so the comparisons aren't just -- they've got a particular number of lines and so it scales proportionately. And -- I know I'm not helping you a lot but that's kind of the nuances behind the scenes.

That's helpful. Off the top of your head, you think, hey, maybe these rural markets have actually more voice lines or more traditional voice than the bigger ones as well.

Yes.

While we're on the topic, what about -- can you talk to us about where you stand or if you see any opportunity at the kind of sister company where Brightspeed spun out of, the old CenturyLink, the current Lumen? Is -- Would you put that on the -- and maybe you're already there to some degrees, I don't know. Any thoughts there?

Yes. So we -- not surprisingly, we've got a large installed base across many of the operators here in the U.S. and Lumen being one of them. Nothing specific to talk about around their plans, around that portion of the network but we definitely have a large footprint that we're continuing to help support and maintain, that's across the network there.

Okay. I think I'll take a break from uncomfortably mentioning customer names and move on to a [indiscernible] discussion which is, I think, Mick, that you said you expect growth in both segments in the second half on a year-over-year basis. Just want to confirm that? And it seems like that would put you for the year in IP Optical maybe flat to up a touch. Am I kind of looking at that the right way?

Yes. Let me jump in. Mick can comment on this as well. So the -- with, obviously, the change in the business in Eastern Europe, the year-over-year growth on IP Optical is a little less than what we'd started the year projecting. I think if you kind of back into it with our new full year guidance, it's up a bit, a tad year-over-year. And the Cloud & Edge business up 2% to 3%, something like that, maybe a little more. So I think you could back into those numbers directionally.

And any update, given this -- I think it was last quarter, called out a certain amount of enterprise growth either for the quarter, or expectations for the year which sort of implied some continued declines in service provider and this is Cloud Edge now. Given the strength that you're seeing in the second half, or expect to see and I think that was borne out from what we've seen from the carrier reports thus far, is there any update in terms of those dynamics, kind of Tier 1 versus non-Tier 1 and how you're seeing that progress moving forward in Cloud & Edge?

Yes, I think you got the math very accurate there, Tim. So I think in the second quarter, service provider for Cloud & Edge was very consistent with 1 year ago, down a few million dollars and the Tier 1 portion of that very stabilized. So great to see, I'll call it, kind of bottoming out. We said that last quarter, we kind of reached the bottom and expect significant growth in the second half from the service provider piece. So the decline in Cloud & Edge in the second quarter year-over-year was essentially mostly enterprise and within enterprise, it was mostly the one Federal deal that contributed most of it. So it's unfortunate, right, that it just closed inside the quarter like we planned, we would had a really strong number in the second quarter, particularly on the earnings line would have been outstanding.

Okay. And last one for me. I do think this kind of shift in competitive landscape is really intriguing and makes a lot of sense. Anecdotally, can you give us anything in terms of immediate customer reaction in the wake of the recent Infinera deal or with regard to the Microsoft apparent news? Is that something that's happening real time from your perspective? And is there anything you can share with us in terms of reaction you're getting across the customer base?

Yes. So it's definitely happening in real time, kind of not just supposition, I suppose, right? We have a couple of specific examples where -- and again, we're obviously focused on going and trying to capture this. So we're proactive in reaching out and looking for opportunities. But specific cases where we know 2 vendors that are deployed in the network that are becoming one supplier and we want to be the alternative there providing that supplier assurance. So several specific examples like that. They don't translate into revenue overnight. It does take time, obviously but there's several specific examples just like that. On the Metaswitch side, given kind of the abrupt approach taken around the transition there, there's a lot of discussions with customers where maybe they felt comfortable sweating the asset in the network for a continued period of time but now kind of concerned over what the future holds and so discussions around replacing product that's deployed or transitioning from a on-premise solution to more of a cloud-based solution. It just opens up the funnel of opportunity in a pretty broad way. So we don't have any of that in our projections for the year because, again, I think it takes time to translate that into wins and revenue but it's an area we're pretty focused in.

The next question is from Dave Kang from B. Riley Securities.

My first question is, I was wondering if you can talk about the Neptune's ramp at AT&T and other Tier 1s? I think you mentioned MSO, maybe provide more color on that customer?

Yes. So we pointed out even with the Brightspeed migration that we're doing, it leverages our Neptune router as part of that solution and it's involved in a couple of different ways kind of as a standard router as well as being able to support what they call TDM circuit emulation, being able to remove legacy TDM circuits or SONET infrastructure and carry it all over an IP fiber network, really helps reduce the cost of supporting all this legacy in infrastructure. So that that concept, that solution that we're using at a Brightspeed, same sort of approach that we talked about with AT&T last year and it's actually a key enabler in this whole migration. So we wanted to become really a standard element of the voice network modernization and that's the entry point at a number of carriers, large and small. So I don't want to get into specific commenting on a specific customer but it's an integral part of that solution now and really that linkage between the portfolio that we acquired from ECI and have been investing in how that combination makes a lot of sense for us.

And can you just talk about the ramp, the trajectory, like, is it going to peak in maybe fourth quarter or next year? And any color on that?

Well, we definitely have a strong second half. And in fact, I think as you do the analysis on the numbers are very strong on Q4. And again, it's similar to what I've heard from others, I know Nokia said something similar this week that the fourth quarter is expected to be unusually strong, if you will. I don't think of that as a peak. I think it's a peak for this year, obviously but it creates a foundation for us to grow into '25. And clearly, we think that's what we'll be able to do despite the reduced business out of Eastern Europe. We're able to -- as the growth we've been able to experience over the last couple of years, be able to continue that trajectory even with that coming out of the view for next year. So, that's what we're here for. We want next year to be a significant improvement over this year. And I think the foundation we've created, the wins in some of these larger accounts now really provide us the ability to do that.

And then last quarter, you talked about Apollo 9500, sounded like a number of trials. Just if we can get an update, any kind of potential wins in the pipeline?

Yes, exactly. So that new platform, the 9400 uses the 1.2 terabit at the latest generation optical front end. In fact, the announcement we had, I think, on Tuesday this week with Converge over in the Philippines is using that new platform. So we're able to dramatically improve or increase the capacity on the existing fiber network by migrating from a 400-gig infrastructure to 800-gig basically with that new optical platform. And that's a perfect example, Dave, of a new win with a key customer that we're really helping expand. If you go check the press release out, they talk about the growth that they're seeing from the hyper data center build-out and AI applications. So I think that's an indication of the future opportunity here with this new platform which has been adapted to be more data center centric, right, the different form factors and the ability to aggregate 400-gig client-size interfaces on this platform is pretty unique. So we're excited about where that goes. And we had a good second quarter, continue to grow on the deployments kind of at a similar rate as what we saw in the first quarter.

And my last question is regarding Vodafone Idea, it looks like they got capitalized. Can you just remind us what kind of customer, how big they were? What kind of products you are providing? And going forward, what kind of opportunities should we expect from these guys?

Yes. Thanks for that question, Dave. So the India market was in excess of $100 million annually for ECI. Vodafone was probably 30% or so of that. And we're obviously not ramped back to that level. But the second half we see a meaningful improvement in the investment they're making on the optical platforms that we have as well as the IP MPLS platforms that we provide into the market. So it's tens of millions of potential incremental business for us as we go into 2025. And it's just -- it's great to see them kind of back on their feet. And we've done a lot of work to support them over the last couple of years to make sure the network continues to operate successfully. And hopefully, that will translate into new business for us going forward.

Just to be clear, do you still have that relationship or you have to go through a back to square one and get redesigned in and all that, we have to go through that? Or you're just -- you are one of the incumbents and just waiting for purchase POs [ph]?

Yes. We're one of the incumbents and have continued to do a little bit of business with them every quarter to help support keep new adds, new businesses, new revenue streams where they can -- they find the money to kind of continue to make those investments. And we continue to support them on local resources, helping operate the network. So there's no rebuilding required at all. We're on the ground ready to roll.

The next question is from Trevor Walsh from Citizens JMP.

Bruce, maybe a quick one for you around the Eastern Europe business. It seems like that was probably maybe kind of a building type of occurrence kind of happening over time, just seeing challenges and troubles there. So just curious if there was anything in particular that -- something that broke the camel's back or a change that allowed -- that kind of caused you to stop operations there? And then secondarily, what's required for that business to kind of come back to return? Is it essentially like a ending of hostilities or kind of what's the outlook from that perspective?

Yes. Thanks for that question, Trevor. So just to kind of recap our approach there. We have a small number of customers, telecom operators that basically provide Internet access and access to information to the people of the region. And we felt like that was something that was important that we would continue to participate in. There's a whole set of regulations and sanctions you've got to be able to manage through in order to be able to do that. And given the heritage of our products coming out of Israel, we were able to continue to support the business there. Those restrictions have recently increased and focused around telecom equipment and those sorts of areas. And so after we finished analyzing the changes, we came to the conclusion that we would suspend shipping new products into the region. It is subject to change, those rules change periodically. And so we'll just watch that carefully. And -- but at this point, we've basically removed it from our view for the rest of the year, impacting approximately $20 million to $25 million in the second half of the year.

I appreciate the color. Mick, maybe jumping over to you. Good to see the continued improvement on the IP Optical profitability front. Is there anything kind of in any given quarter that might kind of trip you up in terms of just seeing that and continued drive towards profitability that you see? Or is it really just kind of, just continuing to execute and nothing necessarily that can be out of the ordinary and that kind of continued positive progression?

As you well know, we've been working on improving the profitability in IP Optical now and it is last 12 months with a negative EBITDA of just $5 million or about less than 2% of the total revenues. And it's really on the back of customer satisfaction, selling to our customers at higher margins and they value that. There's been a regional mix impact. Of course, that's very positive and we've also been optimizing our R&D. So we continue committed to bringing this business segment to profitability and a lot of it is going to be contingent on its continued growth.

Maybe just one more. With the refinancing of the cap structure, is there anything kind of on the go forward now from an investment perspective or investment kind of priorities that you kind of have now have access to or opened up to that you might not have before? Anything you can kind of give us perspective on in terms of areas that you're looking at that has now changed the game just given that new set of funds liquidity?

We are very fortunate to have these strategic partners. And I think that we now have a very solid capital foundation base. We're focused on executing to our plan. There is nothing really major in the near term that we're focused on. It's really executing the plan that we -- in our strategy we've talked about.

Yes. And Mick, just to jump in for a second here. I think it's fair to say that having 1 or 2 lenders that we can have strategic discussions with, it just enables us to kind of move a little more quickly than managing a larger bank syndicate if we wanted to do something. So it just -- the buzzword we used a lot is flexibility. There's just a lot more flexibility in this cap structure than what we had previously.

There are no further questions at this time. I would like to turn the floor back over to Bruce McClelland for closing comments. Great.

Well, thank you. Thanks for everyone joining our call here today. We have a couple of great investor conferences coming up over the next 6 weeks. So we look forward to talking to many of you individually and keeping you apprised of our progress. Thank you very much, operator. Thank you as well.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.