Greetings. And welcome to the Ribbon Communications Fourth Quarter and Full Year 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

Its now pleasure to introduce your host, Lindsay Savarese. Lindsay, please go ahead..

Good afternoon and welcome to Ribbon's fourth quarter 2019 financial results conference call. I am Lindsay Savarese, Investor Relations for Ribbon. And on the call with me today are Kevin Riley, Ribbon's Interim Co-CEO and CTO,; and Daryl Raiford, CFO.

Today's call is being webcast live and will be archived on the investor relations section of our website at ribboncommunications.com, where both our press release and our supplemental data are currently available, including slides detailing our historical financial performance.

I'd like to remind you that during this call, we may make certain forward-looking statements.

Such statements are based on our current expectations, forecasts and/or assumptions regarding Ribbon's business, financial results, growth, anticipated completion of and benefits from acquisitions, including the pending combination with ECI, The expected closing date of the pending merger, our restructuring and cost containment activities, management and board changes, global economic conditions and other opportunities in the marketplace that include risks and uncertainties that could cause our actual results to differ materially from the statements discussed today.

Any forward-looking statements are qualified in their entirety by cautionary statements contained in Ribbon's most annual report on Form 10-K/A and the company's other SEC filings. While we may elect to update or revise forward-looking statements at some point, we specifically disclaim any obligation to do so, except as may be required by law.

We utilize various metrics to assess the performance of our business. Not all of these metrics are GAAP metrics. And where our metrics are discussed on a non-GAAP basis, we have provided a reconciliation of GAAP to non-GAAP results in our press release and within the supplemental presentation on the Investor Relations section of our website.

Statements about profitability refer to adjusted EBITDA unless otherwise indicated and are on a non-GAAP basis. And now, I would like to turn the call over to Daryl..

Thank you, Lindsay. I'll take you through the fourth quarter and full year 2019 highlights and financial results and then turn the call to Kevin to discuss both Ribbon's ongoing strategy and pending combination with ECI. As a reminder, slides detailing our historical financial performance are available on the Investor Relations section of our website.

Before I start, I'd like to highlight that the Ribbon Board of Directors announced the appointment of Bruce McClelland as our new CEO effective March 1st 2020. Bruce was recently the CEO of ARRIS which was acquired by CommScope in 2019.

The board believes his deep industry knowledge and long track record of growing and diversifying revenue streams, while successfully integrating acquisitions make Bruce the right person to lead the company and drive long term value for our customers and stockholders.

The management team is very excited to have Bruce joint at Ribbon at this important time and we are looking forward to working with him to help lead the company through the next chapter of growth. Additionally, the Board today announced the appointment of two very talented new board members and we'd likewise welcome them to Ribbon.

Now turning to our results and as highlighted on page 9 of our posted earnings deck, our fourth quarter 2019 financial results were as follows, total revenue was $161 million, non-GAAP gross margin was 68%, non-GAAP operating expenses were $69 million, non-GAAP diluted earnings per share was $0.27, and adjusted EBITDA was $43 million.

For the full year total revenue was $563 million, non-GAAP gross margin was 63%, non-GAAP operating expenses were $281 million, non GAAP diluted earnings per share was $0.47 and adjusted EBITDA was $86 million. First let me start by addressing revenue.

For 2019 overall sales were down slightly, but with a positive shift in mix towards a higher concentration of software, in the fourth quarter 2019 software product revenue grew 35% year-over-year to $41 million, achieving 51% of total product revenue.

Similarly for the full year 2019, our software product revenue grew 23% to $122 million for the full year and represented 47% of total product revenue. Most of our software growth came from increasing sales of virtualize software for SBC with contributing growth from our new security, analytics and application software products.

In terms of our service provider enterprise product revenue mix, we continue to see improving trends in our faster growing enterprise market. Enterprise product revenue grew to 29% of total product revenue in the fourth quarter of 2019, as compared to 23% in the last year.

Likewise for the full year enterprise customers accounted for 27% of our product revenue growing from 21% the previous full year. As you know, we sell our products into the service provider and enterprise markets in three solution categories, session control, network transformation and applications and security.

Session control revenue was $45 million in fourth quarter 2019, $12 million lower than fourth quarter 2018, while together network transformation and applications and security revenue was $36 million in fourth quarter 2019, an increase of $6 million from last year.

For full year 2019, session control revenue was $145 million, $18 million less than 2018 and network transformation and applications and security was $117 million approximately flat with 2018. Our fourth quarter and full year gross profit was higher than corresponding periods last year.

Our 35% growth in pure software product revenue drove another record quarterly gross margin for Ribbon with fourth quarter gross margin of 68% and a record full year non-GAAP gross margin for Ribbon of 63%. This is fully on track with the benefits we expected from shifting our product portfolio to sales of pure software and software as a service.

Turning to profitability, adjusted EBITDA in the fourth quarter 2019 was $43 million, representing a record EBITDA margin of 27%, as compared to $29 million or 17% in the fourth quarter of 2018. Full year 2019 adjusted EBITDA was $86 million or 15% margin. This compares to $62 million or an 11% margin for full year 2018.

We're very pleased with our growth in sustainable profit and we continue to target a longer term operating model of 20% adjusted EBITDA margin. Now, turning to the balance sheet. Cash was $45 million at December 31 2019 19, and 11% increase over September 30.

Borrowings under our revolving line of credit were reduced from $55 million at fiscal year end 2018 to $8 million at the end of 2019. In total, we reduced borrowings and retired acquisition deferred consideration by $45 million during 2019.

During the fourth quarter of 2019, we evaluated the carrying value of our goodwill balance, which resulted in a reduction to goodwill of $164 million and is reflected as a non-cash charge. The company generated positive cash flow from operations of $33 million which was more than double what we realized in the fourth quarter of 2018.

For the full year 2019 positive cash flow from operations was $56 million, as compared to $10 million of cash used in operations in 2018. Taking into account capital expenditures, Ribbon generated unlevered free cash flow of $49 million [ph] in 2019, a large improvement from full year 2018.

Turning to 2020, our outlook for full year adjusted EBITDA is between $90 million and $95 million on a standalone basis, excluding the pending ECI transaction. We're forecasting low single digit revenue growth for the full year 2020 and we anticipate that 2020s quarterly revenue seasonality will be comparable to our experience in 2019.

This revenue outlook is based on our expectation for continued market pressure in the service provider space, coupled with growth in our entire enterprise products. To be clear, our outlook for revenue and profitability excludes the pending acquisition of ECI.

Once we complete that transaction, we expect to be in a position to further comment on the combined company. And now, I'd like to turn the call over to Kevin to comment more specifically on accomplishments and strategy for 2020..

Thank you, Daryl. As I reflect on 2019, we realized significant progress on our march towards increased software sales, investing in our intelligent edge [ph] strategy and pivoting our strategic investments and applications towards growth.

I'm very encouraged by the progress we have made on operational cost controls, expanding our business with customers around the world and realizing the next phase of our corporate strategy with the announcement and stockholder approval of the ECI merger.

Team has worked tirelessly to rightsize our spend and pivot Ribbon into new product domains and selling models. Towards this end in 2019 we continue to optimize our operational spend by realizing an 8% year-over-year reduction in non-GAAP operating expenses.

I will now take a few minutes to comment on the 2019 accomplishments that are top of mind, and more importantly serve to underpin what I believe is a strong business foundation for 2020. In 2019, we continue to make solid progress on expanding our software sales and growing our public cloud business.

Our software sales grew from 36% of total product revenue in 2018 to 47% of total product - product revenue in 2019, driving a gross margin improvement of 200 basis points.

In total, we now have over 850 customers who have purchased our software SBC solutions, with 45% of those customers leveraging our technology for Microsoft Skype for Business and Teams, reflecting solid progress on our partnership with Microsoft.

With respect for our public cloud business, we have active production instances in Amazon, Google Cloud and Azure. This gives us great confidence that we are leading our industry on software transformation and cloud migration with products that are highly differentiated.

Our customers trust Ribbon to transform and secure their voice services and software and cloud infrastructure. Our SBC session counts grew 5% year-over-year in 2019 and we have more than doubled our annual SBC session counts since 2016.

This is another proof point that gives us confidence that we are best in class, have the right offers and are valued by the most discriminating customers. In 2019 we made solid strides on revenue diversification to improve stability and linearity of our business.

The split between our service provider and enterprise business improved with enterprise revenue rising from 21% of total product revenue in 2018 to 27% in 2019 We also recognized a modest increase in our services business.

The performance of our services business has been a key corporate initiative and we are very proud of the work our team has done. We have focused on long term support contracts for installed products and have realized updrafts from new products service sales. At the same time, our professional services business has improved year-over-year.

As telecommunication services become increasingly more complex and software oriented, service providers are looking to their vendors to help with the transition to software and cloud infrastructure.

Ribbon has been a leader in this transformation at scale with Tier 1s such as Verizon, which has put us in an excellent position to monetize professional services to facilitate these large digital transformation projects.

Before we pivot to 2020, I'd like to provide some customer proof points that I believe highlight our progress and validate our strategy. We are deeply engaged with two Tier 1 service providers, one in U.S. and one in Japan on operationalizing SIP interconnect based on our software SBC solution.

These projects benefit from the R&D investments we made to implement Verizon's voice over LTE deployment and we are now executing on our strategy of repeating that win with Tier 1s globally.

We announced peerless communications as a new design win for our cloud to edge solution, which represents a significant accomplishment for our edge mark product line and further validates our intelligent edge strategy. Kandy [ph] successfully launched with two Tier 1 service providers in 2019.

AT&T has leveraged Kandy CPaaS to launch its API marketplace with Radio [ph] as an announced customer. Meanwhile, Etisalat has leveraged Candy UCaaS to launch its CloudTalk offering.

We made great strides with our Ribbon analytics platform in 2019, increasing our customer base from 10 to 41 customers, with just under 80% of those customers representing renewable license sales.

While these numbers are encouraging in their own right, I'm especially encouraged by the fact that 18 of 41 analytics customers have purchased our security applications in addition to our network operations applications. This validates our strategy to beachhead the platform and horizontally selling new applications and use cases.

I would like to highlight that Fivenines [ph] a strategic customer for Ribbon is leveraging Ribbon analytics from multiple use cases. Looking to 2020, we are very excited about the opportunities for Ribbon to transform into a more growth oriented business.

We believe our planned integration with ECI will unlock a very sizable and valued growth segment for Ribbon. Pending the completion of this combination, coupled with our solid organic tailwinds for 2019 will lead to a company that is significantly different and focused on growth.

The Ribbon leadership team has spent a significant amount of time preparing for the ECI integration and I can say that the foundation of the dealogic has only grown stronger. We have discussed the combined company's strengths with our customers and received very positive feedback.

The leadership teams of both companies are confident that we're on a path for timely deal closure, followed by focused integration efforts to unlock revenue expansion. ECI represents our next and most authoritative step towards expanding Ribbons strategy and product reach into the data domain.

ECI provide significant TAM expansion with opportunities to compete with 5G business, while at the same time serving the ever increasing data demands on non-5G infrastructure. While we will look to our global salesforce to expand ECI sales reach, this is much more than a cross-selling play.

We believe that there is significant opportunity to bundle Ribbon analytics on top of the ECI packed-optical products to deliver a combined offering that unlocks deep network insights, and raises the bar on network operations, security and data monetization.

We have confirmed the value that our customers are willing to attach to our solutions when we bundle analytics enabled business intelligence to unlock new revenue generating use cases and enable OpEx reductions through network automation and optimization.

We believe that together Ribbon and ECI can apply this strategy to raise the standard [ph] on products that are already highly differentiated and winning in the market.

Focusing on Ribbons standalone business, as we drive into 2020, we will continue our mission to optimize and monetize our customers digital transformation journey by delivering best in class hardware, software and cloud based solutions. Our enterprise edge business is an area where we believe we can build momentum in 2020 and realize growth.

Last month, we launched our Next Generation Intelligent Edge portfolio reflecting the strategic investments we have made into the Edgewater asset since this acquisition. The centrepiece of this launch is our new EdgeMarc 6000 platform.

This platform provides industry leading features and a container based architecture for delivering maximum flexibility and feature enhancement capability. We have the broadest set of Microsoft Certified solutions and are focused on becoming the leading edge infrastructure provider for UCaaS consumption.

We believe our solutions in both hardware and software will enable us to win and grow as UCaaS adoption continues to ramp. We believe this opportunity is very real with only 15% of the global addressable UCaaS market converted.

As the UCaaS market leaders win, our strategy is to win, win them, by delivering SIP Trunking and security solutions in support of their applications. We believe that our service provider core business is stable with modest growth opportunities. As I noted, we are now realizing momentum with increased software sales and repeating wins.

Our strategy is to continue improving our software mix and increase the deployed SBC session counts year-over-year. We believe our investments in and momentum with Ribbon analytics, bundled with our large deployed footprint are a key competitive advantage that have us positioned to extract value from our large service provider install base.

In 2020, you'll hear us message more on security as it relates identity assurance. In particular, North America has taken a strong position against robocalling and we view this as a new application that we are ideally positioned to capitalize on.

We developed and now have the opportunity to overlay robocalling mitigation software on top of our large deployed footprint. The effectiveness of this strategy is underpinned by the successful onboarding of six carriers for robocall mitigation in 2019.

We will look to expand this business in 2020 and use these wins as a springboard to upsell a broader security offering on identity assurance. To summarize, we exited 2019 with very positive momentum in our organic business that has a team excited about the opportunity for growth in 2020.

Namely we recorded year-over-year revenue growth in software, analytics, handy [ph] and professional services, while focusing on the overall performance of our services business.

Our 2019 proof points give us confidence that we have the right offers to take advantage of these digital transformations and we believe that our target markets will accelerate in 2020. We are highly focused and aligned with the ECI team to rapidly integrate post closing and unlock packet optical business growth.

2020 you will see Ribbon continue to optimize R&D investments to fuel our growth initiatives, including packet optical, edge and cloud based offerings. As a result, I expect Ribbon to exit 2020 as a company that is significantly different and much more growth oriented. That concludes our formal remarks.

I want to thank all of you for your continued support of Ribbon. At this time, I would like to turn the call over to the operator for questions. Operator, we are now ready for our first question..

Thank you. [Operator Instructions] Our first question today is coming from Paul Silverstein from Cowen and Company. Your line is now live..

Thanks. I appreciate you all taking the question. Just curious, it's not a huge difference, but if I look at I think your last proxy filing you all were projecting $609 million in revenue and $102 million in EBITDA. If I remember the guidance this evening, you're projecting further an $80 million in revenue and $90 million to $95 million in EBITDA.

What account - what change, what accounts for the difference from when you last commented?.

You're right, Paul. And hello, this is Daryl. It's nice to speak with you.

Our forecast from the proxy in the mid third quarters did anticipate a perhaps modest improvement in the service provider market that we - that we think based on our current outlook will - with some of those - persisting we've moderated that to the current guidance that we've given you..

Daryl, I'm sorry.

That's based on macro environment, that's based on the healthy carrier spend? Or that's something above and beyond?.

Based on the health of carrier spend..

Got it. All right. And I appreciate the color you all offer tonight, greatly appreciate it. On that score, when you look at to next year, I assume you're expecting growth from enterprise and it sounds like you're expecting service provider to be somewhat better than you previously thought. But I trust that's still a challenge.

Why don’t I let you respond..

Yes, we are expecting – yes, we've experienced good growth in our enterprise business and as we said it's approaching 29% to product revenue. We feel good about that. That market is growing faster and we do expect to continue to benefit from that.

We also do expect that the service provider conditions, again, primarily in United States, but elsewhere will persist. We've heard a lot of that from other - from our peers as well. And we're taking that into account in terms of our overall view..

So, okay. If I can push you on this, getting to that low single digit growth rate that you're talking about for Ribbon proper before taking ECI into account.

Can you give any sense for what type of growth you expect in the enterprise business and what type of headwinds you're expecting in carrier and service provider?.

Well, certainly, we haven't disaggregated. We haven't disaggregated it in terms of our outlook and I appreciate that you're always - you're always interested in revenue components. We do think that the enterprise edge business is growing, but it will continue - it has grown and will continue to grow very nicely.

The service provider business has a long - a long sales cycle, very large orders, subject to the network demands and the CapEx, the CapEx forecast of the service providers. And we think that we have good visibility into that.

So based on our order pipeline and just based on what we're seeing when we talk to customers, we feel like we'll take a - we'll take just a really modest growth view in terms of service provider spend and that's up and down within some of our solution categories too.

We do expect some of our solution categories, like session control to improve through 2020, but that's basically what we're seeing..

All right. Let me ask one last question. It's a little bit unfair. I understand Bruce is been with the company for about 10 minutes. But that said, you know, I don't want to rehash ECI acquisition in terms in my view. But given that ECI is pretty far, I think objectively speaking, it's pretty far outside of Ribbons historical core competency of UCC.

Again, putting aside you have a presence with carriers today.

But I guess my question for Bruce and Kevin and you, if you're willing to do ECI and you're talking about Bruce's fine track record in terms of M&A and contemplating future M&A deals, are there any limits to what you would not do?.

That's a great question, Paul. This is Kevin, I'll take that to connect with you again. You know, I think for now, I don't want to speak for Bruce. Basically we're looking forward to him joining the team and I'll let him speak for himself once he's here. But in terms of M&A down the road, I think we have a large integration ahead of us.

We're very focused on getting ECI integrated onboarded and focusing on sales growth with ECI, which is you know one of the fundamental thesis of the deal. And that is what we're entirely focused on.

In terms of what we would consider down the road, I think we have a demonstrated history of evaluating what are the market opportunities and can we go after them organically or do we benefit from M&A to move faster and address an opportunity in a more timely manner.

So I think it would be disingenuous to me to try to predict you know, what's in play and what's out of play in the future. But what I will say is that you know, we now have a pretty broad base to expand off of.

We now have offerings for a service provider voice, now service provided data with ECI and now we also have offerings for enterprise voice and enterprise data with our organic enterprise assets and our Edgewater assets.

So as we look forward in terms of market opportunities down the road, I think we have a broad base to consider where we want to add to and whether we want to do that organically or inorganically..

All right. I'll take the rest of questions offline. I appreciate it. Thank you..

Well, thank you, Paul..

Thank you. [Operator Instructions] We’ve reached end of our question-and-answer session. Let's turn the floor back over to Kevin for any further or closing comments..

Yeah. So on behalf of Daryl, the leadership team and myself, I would just like to thank everybody for joining the call today and look forward to corresponding with you in the future. Thank you..

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time. And have a wonderful day. We thank you for your participation today..