Greetings, and welcome to the Ribbon Communications Second Quarter 2021 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. Please note, this conference call is being recorded.

I will now turn the conference over to, Tom Berry, Investor Relations for Ribbon Communications. Thank you. You may begin..

Good afternoon, and welcome to Ribbon's second quarter 2021 financial results conference call. I am Tom Barry, Investor Relations of Ribbon Communications. Also on the call today will be 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 ribboncommunications.com, where both our press release and our supplemental slides are currently available..

Great. Thanks, Tom. Good afternoon, everyone. And thank you for joining us today to discuss our second quarter 2021 results and our outlook for the remainder of the year.

We had a strong second quarter from a profitability perspective, with both adjusted EBITDA and non-GAAP earnings per share well above our guidance ranges, and we had good cash generation. Revenue in the quarter was negatively impacted by the COVID situation in India and to a lesser degree supply chain challenges.

That said for the first six months of the year, we achieved 10% year-over-year revenue growth. Adjusted EBITDA is up 60% and non-GAAP earnings per share is up 133% as we continue to benefit from stronger product margins, and disciplined expense management. In our IP Optical segment, sales in the quarter grew 10% year-over-year.

Our strategy to increase our presence in North America is really starting to take shape, with revenue in the first half exceeding all of 2020 for this important region. We had a very exciting announcement earlier this week with Rogers Communications, a leading diversified communications and media service provider in Canada.

We were selected by Rogers to upgrade their national optical transport network, leveraging our new DWDM 400 gigs, ZR Plus platform for both metro and long haul applications. We were the first to market with this new technology and have initial shipments to a customer in Latin America and the quarter is planned..

Thanks. As Bruce stated, we were pleased with our performance from a profitability perspective in the quarter. We generated $43 million in adjusted EBITDA and $0.17 and non-GAAP diluted earnings per share each well above the guidance range we provided in the first quarter earnings call.

While revenue came in slightly below expectations, we were able to compensate with robust gross margins and continued expense management to substantially improve our profitability and cash generation.

As always, please refer to our Investor Relations website for supplemental slides with graphs and tables summarizing our second quarter 2021 and historical financial performance. Let's start with commentary of our GAAP results for the quarter.

Our GAAP result this quarter included a $2.8 million gain on the sale of our QualiTech business, which closed during the quarter.

As we had mentioned in our earnings call in February QualiTech, is a small product compliance and reliability testing business that was part of ECI when we acquired them, that result also had a $12 million non cash gain associated the quarterly mark to market of the company's AVCT Investment from the sale of our Kandy Communications business last year.

Additionally, we received $1.2 million in paid in kind interest income earned on the convertible debt from the same transaction for a net positive impact to GAAP net income of $13 million or $0.09 per share for AVCT, including the gain from the QualiTech sale, the impact is $16 million to GAAP net income and $0.10 per share.

As we have mentioned in the past, fluctuations in AVCT stock price affect our other income and expense line as we mark the market our investment. Due to this volatility, we have excluded these items from our non-GAAP results.

Other factors contributing to the difference between our gap and non-GAAP results for the quarter include $3 million in restructuring expenses related mostly to continued downsizing of our real estate footprint and $1 million in integration expenses and the usual adjustments for amortization of intangible assets and non-cash compensation..

Great. Thanks, Mick. Before discussing our guidance, I'd like to provide some commentary on current trends in the market and the operating environment. It's very satisfying to see our strategy gain momentum, as we establish Ribbon as a significant contender in the IP Optical Networking space.

Wins like Rogers, Optus and Singtel and others already in the pipeline will create momentum for further share increases and significant revenue growth in 2022 and beyond.

The four pillars of our strategy include, focusing on products and technology that are crucial to meeting the challenge of delivering exponential bandwidth growth in both fixed and mobile networks, enabled by investment 5G edge networking and cloud enabled applications, competing in large addressable markets such as optical and IP networking, where there are opportunities for a significant share growth and a favorable competitive environment, with a global pressure on Huawei and other Chinese suppliers..

Our first question is from Dave Kang with B Riley. Please proceed..

Yes, Thank you. Good afternoon. First question is regarding your concerns about macro issues.

How much revenue was impacted in second quarter and what about third quarter revenue impact of what would have guidance would have been if there were no component shortages, as well as COVID remained mild?.

Yes, hey, Dave. Bruce here. So in the second quarter, just to kind of give you a perspective that we've been running in India, our business in India in $22 million to $24 million a quarter range and we did I think something like $17 million in the second quarter. So, and we've expected a little bit of growth in the second quarter in India.

So that's certainly, kind of, balance the impact in the second quarter. Fortunately, we were able to have a stronger mix in the quarter and resulted in -- being able to achieve the earnings that we did above expectations, and I think that just shows the, again, kind of the power of the business model here and the diversification of the business.

As we look into the second half of the year, as I kind of mentioned in the remarks, I think it's prudent to be pretty cautious about the timing of recovery and deployment, scaling in India at this point.

And so we're not anticipating, a lot of growth off of that base, which really accounts for the lower projection for the third quarter -- for the most part.

From a supply chain perspective, as I mentioned it's not so much that it impacted a lot of revenue in the second quarter, but it did impact how flexible we could move to kind of shift where we ship product and whatnot. We have components for one product line, but not for another, it's a little more difficult just to react quickly.

So that was really, the limit on being able to recover the revenue in the second quarter. And I think, that certainly plays into is I think about guidance for the second half of the year and certainly for the third quarter just being a little more prudent and cautious in the outlook there. Obviously, we're still expecting a pretty strong second half.

Particularly, around the fourth quarter, we've got -- a really strong funnel of opportunities and except to finish pretty strong for the year..

Got it? So just regarding your second half of can you back out the first three quarters, you're implying fourth quarter revenue of about $276 million. So that's about what $55 million, $56 million sequential increase. I mean, that's a pretty big sequential uptake from third to fourth quarter.

Are you expecting that -- most of that growth to come from optical? And if that's the case, then shouldn’t we be more conservative with gross margin assumptions? Or maybe I'm wrong and maybe expecting C&E to drive that most of the growth?.

Yes. So your math is that, is about right. You know, it's about 10% growth or a little more off of the fourth quarter of last year. And it's really a number of things. It's really strength across both businesses. You know, we expect a variety of critical infrastructure projects in Europe to come to fruition in the fourth quarter.

We're expecting more business in our Israel business with the IDF as the new government's been formed, and budgets come to fruition. We expect stronger enterprise spending. You know, I commented on, enterprise being down in the quarter and capacity being utilized by some of our largest -- larger customers and enterprise. So we expect that to increase.

We have a variety of what we call network modernization programs, which are six months to nine months in duration that come to completion, and we can recognize revenue towards the end of the year. And in India, we were expecting a little more business as the year progresses, but not dramatically.

So it's really a variety of different things that, that kind of come to fruition in the second half of the year..

Got it. Thank you..

Thanks, Dave..

Our next question is from Paul Silverstein with Cowen & Co. Please proceed..

Thanks for taking the questions. Bruce, these wins at Rogers, Optus, Singtel in particular.

Can you give us any sense of the revenue opportunity associated with local what period of time?.

Yes. So I'm a little cautious in being able to share a lot more detail than we had in particularly the press release with Rogers. Obviously, it's pretty significant for us. And just a major step forward in our strategy here with these wins. These are big deals for us. I don't expect a significant amount of revenue in 2021.

I think we'll probably see some towards the end of the year, but these are material in size and multi-year in duration. And obviously a pretty competitive process to win these. So really, really proud of the team's work there and excited about partnering with these customers..

And a super common applause each one individually that each one is meaningful..

That's correct..

Are they all in the same vicinity and size or is one without I understand that customer confidence, but it's one particularly larger than the others are they're all about the same size?.

Yes, so I think Rogers footprint is certainly larger and the number of connections both mobile and fixed is pretty significant. And of course, they're going through their own merger with Shaw up in Canada. So that will just don't scale the footprint there. So I think that's probably the largest..

And again without asking you to betray customer confidence is, is there reasonable margins associated with these deals? Or did you have to give meaningful discounts in order to get into?.

Yes, so I think it was a competitive process. And what they're looking at, obviously, beyond the technology and the product and everything is ultimately multi-year total cost of ownership. And in particular, with the both Rogers and in office, these are existing Ribbon customers that we do considerable business with on the rest of the portfolio.

And so I'm looking at this from an account profitability perspective. And I can just tell you that these are all good businesses for us..

And we're looking to as they roll out, we're not going to be hearing you and Mick talking about your margin of safety meaningful, because of the roll out of these big deals..

Well, it's going to be blended in with everything else. And that's about the only color I can provide you with at this point on that, Paul..

Right. Understood. But let me move on. With respect to India, is there one particular project that you're expecting not to happen? Or is it more broad, because I heard you correctly, it's not that you're expecting your revenue go to zero, it's not that they're shutting down project sites not allowing you and other vendors in.

And so there's no revenue to be had? It sounds like you're expecting at least the 17 million users a quarter and a quarterly run rate, if not more, so what informs how broad in terms of COVID impacting the ability for you to get your equipment into the site, which I assume is the issue, unless there's some other issue above and beyond that?.

Yes. That's correct. And I think I described a couple times in the past, we have a pretty extensive professional service team throughout the region and are pretty deeply involved with the actual deployment and management of the products as they go into the network.

And so we do get good visibility on the actual deployment rate on a daily and a weekly basis. And what we saw in the second half of the second quarter, as we got into late May timeframe, the daily deployment volumes went down, I mean, it's just got so difficult to move around the country.

And I know, we had a bit of a discussion on this in the earnings call back in late April, early May, and things changed a lot in four or five weeks. So what we saw was the deployment rate go down considerably, it didn't go to zero, but it was close to zero for several weeks.

What we've seen in July as a recovery, not back to the full level of it was earlier in the year, but certainly better than what it was for a few weeks there. And so we again, we get good consumption visibility. And so we were able to anticipate demand, we've received additional orders in July. So certainly, it's not going to zero.

But, as you know, I anticipated this business, not only being steady but increasing as the year progresses as COVID started to wind down and spending started to increase in the year. And so I'm being a little more cautious at this point, obviously..

Bruce, I'm scratching my head. So they're not shutting down all sites, not all customers are shutting them all sites. But nor are they giving free and open access otherwise, you won't be talking about your revenue at this run rate.

So what exactly are they doing? They're allowing access to some sites, but not others are they're restricting the number of staff that can get access, what is the limiting factor?.

I think the way to think of it as everything just takes longer being able to navigate to get site access, to get approvals, some of these are construction programs. So it's just -- everything just takes longer. And so your velocity is down from where it was.

And again, because we were able to see this in almost on an hour-by-hour basis, we get a good view on what's happening there. And so it's like I just said it's not zero, it's -- but it's not back to even where it was earlier this year yet.

And I don't yet know what the timing is on exactly how fast that recovers and what happens in the country? I mean, you've seen all the news. It's been a difficult environment for the last two or three months there..

Understood one last question by me.

Putting aside demand measured by revenue, looking at forward metrics in particular RFP's, RFI's RFQ's, how would you characterize demand activity opportunities in your optical business?.

Yeah. I would say it's pretty similar to late last year earlier this year, where I commented on it being pretty intensive. I think that continues. Obviously, we're now having some success out of the back end of that pipeline, which is fantastic. And I.

Please proceed..

Yes, sorry about that, Paul..

No worries.

So, I apologize, you were about to say, what the activity was like when you cut out?.

I'm sorry. We've got a couple issues here today. I think the activity say in the last two months has been pretty similar to what we saw earlier this year. When I commented on it being pretty intensive, I think there's just pretty significant engagement in a variety of areas. Obviously, some of these new wins drive even more activity.

We got a lot of work going on to support these new customers and get them into deployment.

And when we go through an intensive RFP process, like some of the ones we've now been successful on, one of the key things at the back end of that process is a pretty extensive channel check, where they're going and talking to all of our -- as many references as we can provide them.

And so these new wins become really, really important references in these regions to leverage going forward..

Got it. I'll pass it on. Appreciate the responses. Thank you..

Thanks so much, Paul..

And our final question is from Mike Latimore with Northland Capital Markets. Please proceed..

Yes, thanks. Great profitability and great win at Rogers there.

In terms of the -- it sounds like, Bruce, there's no real change in your cloud and agile look this year, is that fair -- that's pretty much tracking as expected?.

The one piece that I know we can do better on still, Mike, which I've probably said multiple times, is around the enterprise side of that business. The service provider portion of our business is doing really, really well. And you can see that in some of the numbers when you get a chance to go through it.

What we've seen in enterprise is several of our larger accounts, financial institutions, et cetera that took on a lot of additional capacity last year, it's taking some time for that to be absorbed and for them to need more capacity.

And so that portion of our business in the second quarter and even in our third quarter outlook is down year-over-year. That'll certainly come back as more capacity is needed.

Theory that we continue to need to do better is around the mid-market enterprise and as I mentioned in the remarks, we've done some restructuring our sales to get more focused on channels, channel enablement. We've got a great portfolio. We've launched the new as-a-service package.

And so there's just -- there's a variety of different ways to deploy the product. We've got to get a little better on how we serve that part of the market. And I know we can do better and we're probably not where I want to be at this point..

Okay. And then you talked about in terms of the fourth quarter, there might be some of the network modernization deal getting completed.

What type of revenue do you recognize? Is that more software revenue in those being completed that you'd recognize?.

Well, they end up being a combination of software and hardware. But as you've seen with our margins, even when our hardware mix is higher, we're generating good margins on the way we've now priced platforms.

So, typically these modernization projects, where you're going into a central office and you're upgrading a class four class five switching complex to next generation virtualized platforms, even if we're providing the compute platform that the software is running on, these are these are good margins.

And typically, there's a pretty sizable professional service element that comes with that as well. And some of that is, you're realizing the expense throughout the year and then the revenue gets -- was recognized in some cases. So that can help out on margins as well..

Yeah. And then just last one, you mentioned a – Huawei replacement with a U.S. wireless provider.

Was that a Tier 1 kind of wireless provider or smaller?.

No, it's smaller than that. I probably would have shouted louder if it was a Tier 1. It's a meaningful size wireless operator that obviously had leveraged Huawei infrastructure.

That was a pretty meaningful win for us and it's a great example of the power of the platform, the competitive competitiveness of the solution that we're bringing to market here..

All right. Okay. Thank you..

Great. Thanks, Mike..

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks..

Yeah. Thank you. Well, as I mentioned in the remarks, we get some real tail winds to the business here and these new customer wins are pretty significant for the company. I really feel like we're in a in a great spot and the strategy is really starting to work.

So really excited about the path ahead, look forward to connecting with many of you at our upcoming virtual investor conferences and keeping you apprised of our progress. With that, operator, thank you, that concludes our call..

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