Ladies and gentlemen, greetings, and welcome to the Ribbon Communications Third 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, Chief Marketing Officer. Please go ahead..

Good afternoon, and welcome to Ribbon's Third Quarter 2024 Financial Results Conference Call. I'm Joni Roberts, Chief Marketing Officer at Ribbon Communications. Also, on the call today, Bruce McClelland, Ribbon's Chief Executive Officer; and John Townsend, who will shortly assume the role of 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 fourth 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, including 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. And now I'd like to turn it over to Bruce.

Bruce?.

First, network modernization to drive down cost and retire obsolete infrastructure is a key factor behind the increasing investment from service providers, enterprises and federal agencies to upgrade their voice communication infrastructure.

Legacy TDM and copper networks are increasingly expensive to support and programs such as the Verizon voice core modernization project are clear evidence of the priority now being placed on this part of the network.

We have a growing number of sizable projects with other large service providers that will drive further growth in our cloud & edge secure communications business in 2025 and in years to come. Second, as I mentioned earlier, we're having very good success in federal and defense sectors in the U.S. and Europe.

Mission-critical applications that rely on highly secure networks that are always on and never fail. This is an area where Ribbon really differentiates from the competition. Third, there continues to be substantial investment to improve Internet availability and performance for underserved segments of the broadband market.

This is an area where we're really executing well on our cross-sell strategy and the upcoming U.S. BEAD program will further increase funding across the entire ecosystem. And finally, the shifting competitive environment is creating further opportunity for Ribbon to win new accounts across multiple regions.

In the IP optical space, the merger of Nokia and Infinera introduces supply chain concerns that we expect to capitalize on. And Microsoft has generated significant uncertainty around the Metaswitch installed base that introduces substantial replacement opportunities for us.

The focus we have on cross-selling the entire portfolio to our broad base of customers continues to generate results as highlighted by the success we're having with U.S. rural broadband providers. And the integration of our Neptune IP router with our voice transformation portfolio has opened doors across the entire U.S.

service provider landscape to modernize the aging TDM voice network, leveraging our IP routing technology. While it's still early, we expect the combination of these opportunities to enable us to grow revenue in 2025 in the mid-single-digit range even after accounting for the reduction in sales to Eastern Europe.

We do not anticipate significant changes in operating expenses, enabling the majority of the incremental margin to contribute directly to earnings, where we expect to grow at a double-digit rate. In the fourth quarter, we continue to expect an excellent finish to the year with sequential growth in both businesses.

Voice modernization programs with Verizon and multiple other carriers will continue to ramp, and we anticipate several new awards with U.S. Federal Defense agencies. We expect the momentum in the U.S. rural broadband segment to continue at similar levels to the third quarter.

And we expect a seasonally strong quarter with enterprise customers as we renew annual enterprise license agreements. Our guidance for the fourth quarter projects year-over-year sales growth of approximately 8% at the midpoint, reflecting all of these positive trends.

We anticipate gross margin to be slightly higher than the notable level we posted in the third quarter due to the expected higher mix of Cloud & Edge sales.

Based on this, for the fourth quarter, we're projecting revenue in a range of $235 million to $255 million, non-GAAP gross margins in a range of 55.5% to 56% and non-GAAP adjusted EBITDA in a range of $46 million to $52 million. We certainly recognize that our guidance for the fourth quarter implies significant sequential growth.

But as I've outlined, we have good momentum across multiple areas, along with strong bookings in the third quarter that provide good visibility and confidence for an excellent finish for the year.

Overall, we're making good progress on our key strategic goals, including returning to growth in our telco voice infrastructure business, diversifying and expanding sales in enterprise market verticals, including financial, health care, energy, transportation and government information security, cross-selling the entire portfolio, particularly in the U.S.

and achieving sustainable profitable growth in our IP Optical business and accelerating innovation and capturing cost efficiencies with the full integration of our product teams. Operator, that concludes our prepared remarks, and we can now take a few questions..

[Operator Instructions] The first question is from the line of Christian Schwab with Craig-Hallum Capital Group..

Good quarter. So I'm just curious, can you help us on the Metaswitch opportunity? That seems like that you talked about it being substantial and Microsoft kind of walking away from the platform.

I'm just -- is there a dollar installed base that -- and a percentage of share that you think is reasonable that you could attain on a go-forward basis? Just any more color regarding how substantial that opportunity might be?.

Yes. Christian, so there's a couple of different metrics, I think, to look at. There's quite a range. They're deployed in kind of a broad range of smaller regional rural operators and then quite a few of the Tier 2 operators.

Frankly, places where we're not, they are sort of thing, right? There's a lot of kind of distribution across the footprint between the 2 of us. So these deals can range from a few hundred thousand dollars to several million dollars or larger depending on the scale and the scope.

One of the metrics to look at is the last public filings that Microsoft maintains in the U.K. for that business. And just the ongoing maintenance revenue stream is pretty substantial from that installed base. I forget the exact number, but in the $75 million range or more. So I think it's a fairly substantial footprint.

Of course, some of that will just continue to operate the way it is. Some of it will get upgraded and replaced. And I can tell you, we've got a lot of focus on it. It's an opportunity that doesn't come along very often to go capture some of that real estate, that footprint..

Great. And then my second question has to do with the BEAD program. It sounds like you're seeing some revenue. Nokia on their conference call talked about recognizing their first revenue in the December quarter. That seems a little bit earlier than a lot of people were thinking given the slow start to all the state approvals.

Would you expect that 2025 could be a stronger uptake of movement of spending BEAD dollars? Or do you think it will be kind of gradual in '26 is the big year?.

Yes. I think it's gradual, particularly for us given we're not on the access layer of the network. I am kind of pleased to see the progress, though, over the last few months. I think I was actually doing some reading this morning. I think there are now 9 states that have opened up their grant application windows.

and some are already processing applications. And you could even see perhaps the first awards before the end of the year. So that's good progress compared to where we were, say, 6 months ago.

And again, I think the first half is pretty modest and kind of getting started on the construction portion of some of these programs and then accelerating in the second half. And again, our piece is a little bit later in the process as they start to build out the interconnectivity in the Middle Mile portion.

But it's good to see the progress finally being made here..

The next question is from the line of Michael Genovese from Rosenblatt Securities..

Yes. Bruce, an encouraging quarter, and we go through all of the geographies and the segments, that's really, really promising data points.

But I guess can I just start by asking where, if anywhere in the quarter did not go to your expectations? Was there anywhere where you were sort of slightly disappointed by the demand?.

Well, I'm really pleased with the profitability. Obviously, the mix, the margin, the performance of our services team was really outstanding in the quarter. So it was great to see that come through. Obviously, we were $1.5 million or $2 million below the midpoint of guidance.

So we were a couple of million shy of where I thought we would be and maybe a few deals in Europe, in particular, that could have happened in the quarter. Good pipeline for the fourth quarter here, though, obviously, good momentum and outlook and the margin mix even a little better in the quarter. So really looking forward to a strong finish..

Yes. So following up on that, I mean, for the fourth quarter, it really looks like the U.S. is going to be the star again, but you made positive comments about India as well.

I guess how should we think about Europe in the fourth quarter? Should we think about some positive seasonality? Or is there anything showing fundamental signs of improvement in the fourth quarter in Europe?.

Yes. I think the way I describe that region is really seasonality, the way you just described it. The combination of critical infrastructure and service providers, the service provider piece tending to be a little more seasonal. So I do think we have a stronger fourth quarter, which we typically do in that region.

The U.S., I think, will be the strongest region. I think we shifted back to the U.S. being more than 50% of revenue in the third quarter and probably the same in the fourth quarter. And on India, last year, we grew substantially. We were up 30% last year in India.

This year, as I talked about on the last call, we're down about 20% compared to last year, but the fourth quarter will be the strongest quarter of the year. So we've continued to improve as the year progressed.

And with Vodafone Idea beginning to reinvest in their network and build out both 4G and 5G infrastructure, that's good for the whole vendor community. So looking forward to a stronger year going into next year as well there..

Just one last question for me. I mean this -- looking at it from the outside, I mean, I know it's just started, but it looks like maybe the most promising time ever for sort of softswitch architectures and basically your Cloud & Edge business.

And maybe I'm not remembering well enough sort of something good that happened 10 or 20 years ago in the market. But I mean, something really fundamental seems to be going on there.

Could you -- is this the best time ever for Cloud & Edge? And why, if so?.

Well, in that portion of that business, it's certainly the best that I've been here. I think we've gone through some fairly major upgrade cycles in this space back, say, 7, 8 years ago for kind of the first phase of some of the modern softswitch architectures. There's a lot of focus on pulling cost out of the network operation.

And there's a bit of an issue around aging knowledge-based knowledge workers in this space. And so I think the motivation has really picked up.

Of course, the other part of our business in this space is around unified communications, deploying session border controller and policy management to support Microsoft Teams and Zoom and those sorts of migrations, and we've had a number of really strong years around that part.

But the whole kind of network infrastructure upgrade process that we're seeing service providers and U.S. federal agencies go through, it feels pretty unique for sure..

[Operator Instructions] The next question comes from the line of Tim Savageaux from Northland Capital Markets..

Congrats on the quarter. I wanted to follow up on your mid-single-digit growth guidance, I guess, for calendar '25 and try and get at some of the moving parts there. Obviously, you've seen some declines in IP Optical this year. I think you were expecting that to maybe be flat to up. Now it seems like maybe down single digits. Do you -- given the U.S.

strength, do you expect a strong rebound there? Then again, you've got a lot going on, big orders and big opportunities in Cloud & Edge. So I guess, how would you expect the segments to grow around that kind of mid-single-digit target? And I'll follow up from there..

Yes. Tim, thank you. So there's a number of moving parts here, obviously, to get to an overall corporate average growth for next year.

As you point out, we have been on an approximately 10% per year growth rate on the IP Optical the last few years with the Eastern European business suspension that we implemented last quarter, year-over-year going into 2025, we have to make up, if you will, the shipments that we had in the first part of the year in that region.

And you estimate that in the $25 million range. So to grow next year in that business, we've got to kind of make up that amount and then grow from there. So that gets us to the kind of mid-single-digit range around that business.

In the Cloud & Edge business, voice infrastructure business, a portion of our total revenue there is obviously maintenance revenue, and that tends to be fairly flat year-over-year. So to get to a mid-single-digit growth rate around that, we have to grow at a faster rate on the product and service portion.

And again, so that the implied growth rate around the product side is actually higher than the mid-single-digit range. So between those 2 kind of pieces of the model, that gets you to an overall average in the mid-single-digit range..

Got it. And I think you mentioned in the release and maybe a little bit on the call about pursuing -- obviously, you got the Verizon voice modernization deal and strong growth there, but pursuing opportunities with multiple additional carriers. And I think we can sort of talk about pipelines in several different ways here.

Maybe you could try and quantify those opportunities relative to what you were able to land with Verizon. And I might extend that, you kind of did that with Metaswitch a little bit, at least threw a number out there.

If it's possible to look at the opportunities that are emerging on the IP Optical side with the Nokia-Infinera deal, it'd be interesting to get a sense of that pipeline as well. So address it how you want, but I'm looking for more color on the voice modernization opportunities and then the IP Optical opportunities..

Yes. So on the first one, there's -- it would be hard to find another opportunity of the same scale as the Verizon project. So that's certainly the largest in our funnel.

We've announced a few other ones that we've been able to talk about publicly like Brightspeed, we talked about last quarter as they're modernizing some of their legacy voice infrastructure and migrating off of the Lumen infrastructure as part of that separation.

I've talked about some of the projects we have going in Africa with operators like MTN, putting in a new voice interconnect hub into Africa. There's a number in Europe that we haven't talked about publicly yet that are similar in nature. And then others here in the U.S., obviously, some larger opportunities here to do similar network modernization.

I will say that each network is a little bit different. The regions that are -- that have deployments in much more rural areas with smaller line counts, those sorts of things, maybe the ROI on upgrading those types of switching platforms isn't there. It makes more sense just to operate them as long as you can.

But there's larger ones where it does make sense and there's a good ROI. So there's a good pipeline of those types of additional service provider opportunities in both North America and in Europe that we're pursuing and will be lined up for next year. Of course, you add to that the U.S.

federal that I commented on quite a bit around those types of opportunities, very similar. They're building out their own secure communication infrastructure.

The DISA project that we announced in the third quarter, basically replacing and modernizing that softswitch backbone that operates the DoD, basically interconnect network for voice communications. Yes, just a good pipeline of those types of opportunities that are driving growth for the business.

The other part of your question around the IP Optical pipeline and comment on the competitive environment. So certainly, as we saw in the third quarter here with 20% of our revenue in the U.S. for the first time, we're having good success, particularly in the regional and rural operators, helping build out and add more capacity into the network.

We've got a good pipeline for fourth quarter, and I think those programs continue into next year. And then as the BEAD funding actually starts to move into our portion of the network, I think those are '26, '27 opportunities for us. So good runway going forward there. The other area we haven't talked too much about in the U.S.

is around critical infrastructure. That's a real platform for our business in Europe has not been a big driver so far here in the U.S. We announced American Electric Power earlier this year, sixth largest energy transportation company here in the U.S., that build out their own secure transport and IP routing network.

And we're having a really good program with them this year, helping modernize some of that. So those are some of the other kind of related opportunities. The Nokia-Infinera opportunity specifically, I think, takes a little longer time to develop. It's not so much in North America.

The opportunities we see are more in Asia Pac and in Europe to some extent. And typically, it's an operator that has either both of them deployed in the network today or we're perhaps migrating in a particular direction and for whatever reason, aren't sold on the combined road map or the strategy there.

I think the window of time is between now and when that closes and they bring together a clearer road map. So while that uncertainty is in the market, we're really hustling to go try and find some new wins in that space..

Great. And last one for me real quick.

I mean what could Verizon acquiring Frontier mean for you guys from a voice perspective?.

Yes. I think that's -- it's a real opportunity. I haven't been able to quantify it yet, but we don't do a lot of voice business there today with Frontier other than some maintenance. They haven't invested a lot in modernizing that portion of their network. There's been a lot of focus, obviously, on driving fiber very successfully.

I think there's a good possibility Verizon will look at a similar playbook as they look at the Frontier infrastructure. We won't know that until they're further along in the process, but that's certainly something as we look into, say, the 2026 time frame that could be a further catalyst for us..

The next question is from the line of Trevor Walsh from Citizens JMP..

This is Russ on for Trevor Walsh at Citizens JMP. In regards to the impressive triple-digit growth rate year-over-year in IP Optical, aside from the cited rural broadband fiber initiatives, you guys talked about the success with the cross-sell motion.

Could you just unpack what's kind of driving that success there?.

Yes. So I guess 2 thoughts on that. The rural portion of the business, we think of as cross-sell. Many of these customers, we actually have an installed base of voice infrastructure with them already today. And they're not investing a lot in that, but it's an ongoing support and maintenance and commercial relationship with them.

They rely on us to help operate that network. And so it's given us a bit of an unfair advantage in some ways to be able to go in and compete for this new business as they're investing in these new areas. Many times, the decision-makers are the same people that we work with already on the other part of the business.

And so that part of the cross-sell has really worked well. The other part is really being able to use the IP routing technology, the routing platforms that we have to be able to do replacement of TDM and SONET infrastructure with a broader set of service provider customers.

And so we have a pretty active base now of customers that provide interconnect services in the U.S. between the different operators that help interconnect both data traffic and voice traffic and the cost of these interconnect networks, these traditional TDM networks and SONET networks is going up every year like disproportionately.

And so there's been a lot of interest in using our routers as basically a replacement for doing circuit emulation. And again, that's a great example of cross-sell where we've got a new technology, a new platform that we're going to existing customers and selling into the new space. So several examples like that, Russ, that we're focused on..

There hasn't been a lot of new news, if you will, there. Juniper's position in the customer base that we're in today is relatively modest compared to Cisco, Nokia and Huawei. So there's a few that are in the pipeline there or a couple of smaller wins, Russ, in that space, but not dramatic, so I didn't comment on this go around..

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

Bruce?.

Yes. Thanks very much, Ryan. Thanks again for everybody being on the call and for your interest in Ribbon Communications. We look forward to speaking with many of you at our upcoming investor conferences and keeping you updated on our progress. So operator, thanks very much. This concludes our call..

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