Welcome to the Ribbon Communications Fourth Quarter 2018 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Wednesday February 20, 2019. I'd now like to turn the call over to Mr. Daryl Raiford, Chief Financial Officer of Ribbon. Please go ahead, sir.

Thank you. Good afternoon, and welcome to Ribbon's fourth quarter and full-year 2018 financial results conference call. On the call with me today is Fritz Hobbs, our President and CEO. Today’s call is being webcast live on our Investor Relations website at ribboncommunications.com. Both our press release and our supplemental data are currently available on our website. Shortly after the call, a recording of this call and the transcript will be available. 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 assumptions regarding Ribbon's business, financial results, growth, anticipated benefits from past and pending acquisitions and other opportunities in the marketplace that include risks and uncertainties that could cause 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 recent quarterly and annual reports on Form 10-Q and 10-K, respectively. While we may elect to update or revise forward-looking statements at some point, we specifically disclaim any obligation to do so. Unless otherwise indicated, all results discussed are on a non-GAAP basis. Statements about profitability refer to adjusted EBITDA, unless otherwise indicated. A reconciliation of GAAP to non-GAAP results may be found in our press release and within the supplemental data on our Investor Relations website. And now, I’d like to turn the call over to Fritz.

Thank you, Daryl, and good afternoon to everyone on the call. This was a pivotal year for Ribbon Communications and I’m extremely pleased with the accomplishments that we’ve made both strategically and financially. During the year, we completed a significant complicated merger integration, while continuing to effectively serve our worldwide customer base. We nearly doubled the combined profitability of our two predecessor companies as compared to 2017. This dramatically improved our financial strength and balance sheet flexibility. We broadened our software offerings and strengthened our enterprise focus with the acquisition of Edgewater Networks. We made progress driving forward our Kandy cloud, CPaaS and UCaaS offerings with several major accounts and numerous enterprises. And with Ribbon Protect, our security and analytics software, we deployed this product at 10 customers, including our large previously announced launch at SoftBank and we are in trials at numerous service providers and enterprises. I'm very pleased with our fourth quarter and full-year 2018 financial performance. We exceeded our expectations for both revenue and adjusted EBITDA. Specifically, in the fourth quarter, non-GAAP revenue was $173 million and adjusted EBITDA was $34 million. For the full-year 2018, non-GAAP revenue was $612 million, an increase from last year of 73%. Adjusted EBITDA grew to $84 million, an increase of 105%. Daryl will take you through our financial performance and 2019 outlook. But first, I would like to highlight a few key achievements. First, we continue driving forward our strategy to invest in our core products where we’re increasingly focused on software solutions. In 2018, nearly our entire research and development effort, over 95% of our R&D investment was directed into software and cloud product development. Overall, we're very pleased with the customer acceptance of our session virtualized software, also known as SWe, where we have over 1,500 customers of…

Thank you, Fritz. I’m going to review our non-GAAP financial results for the fourth quarter and full-year 2018. I will then provide commentary on our outlook for 2019. The slides within our Investor Relations website have supplemental information that details our historical financial performance. Our reporting framework is consistent with what we have presented in prior periods. I would encourage you to access these materials from our website at this time, if you have not already done so. As a reminder, when I refer to non-GAAP in conjunction with the financial metrics, these financial metrics exclude the effect of purchase accounting and other items detailed in our earnings materials. Reconciliations of our non-GAAP financial metrics are provided in our earnings press release and our earnings presentation, both of which are available on our Investor Relations website. Now turning to the financial results. On a non-GAAP basis, our fourth quarter 2018 total revenue was approximately $173 million. Gross margin was 65%. Operating expenses were $81 million, earnings per diluted share was $0.26 and adjusted EBITDA was $34 million. As a percentage of revenue, adjusted EBITDA was 20% during the fourth quarter. For the full-year 2018, on a non-GAAP basis, total revenue was $612 million. Gross margin was 62%, operating expenses were $307 million, diluted EPS was $0.58 and adjusted EBITDA was $84 million. Enterprise sales were 23% of our product revenue this quarter and 21%, for the full-year 2018. The Enterprise is a relatively faster growing market for us and we expect enterprise revenue percentage to continue growing over time as a result of the acquisition of Edgewater coupled with projected growth in sales of application, security and analytics software to the enterprise. As a percentage of total non-GAAP product revenue, sales of software and software subscriptions were greater than 40%…

Thank you. [Operator Instructions] Our first question comes from the line of Mike Latimore from Northland Capital Markets. Your line is open. Please go ahead.

Thanks. Yes, very nice fourth quarter there. Edgewater, does that kind of hit your expectations for the fourth quarter?

Yes, it did. While we said, we don’t expect to really report on Edgewater going forward after the third quarter, the integration is well, well, underway and we are incorporating the functions within the Ribbon functions and the products across our portfolio. Edgewater did exceed our expectations. We’ve guided to $10 million and we reported $12 million of Edgewater sales in the fourth quarter.

Okay, got it. And in terms of the first quarter outlook, is that both product and service affecting the first quarter guidance there or is that more on the product side?

No, I would say, it's products and service. We are -- it would be a combination. Like we said, we are expecting -- we've judged the macro conditions, we are aware of others in other fare companies in the industry and what they said about Q1. We’ve lifted our order pipeline. We think that Q1 will be a little soft compared to normal seasonality with the return to low to single-digit growth for the full-year in 2019 in terms of top line.

Right. And then the SBC, can you -- do you have like sort of like what percent of product revenue was SBC in the quarter?

Yes. Our session solution -- our session software solution sales in the fourth quarter on non-GAAP product revenue was 64% and for the full-year it was 56%.

Got it. Got it. Right. And I guess just last one, any update on the lawsuit with Metaswitch where that stands?

Yes, Ribbon will continue -- in terms of the lawsuit with Metaswitch, we are going to continue to defend our intellectual property rights against Metaswitch. We'll continue pursuing help from the courts to receive compensation from Metaswitch's widespread unauthorized use of Ribbon's trade secrets and patented technology. Our original patent lawsuit against Metaswitch in 2014 resulted in a jury verdict that Metaswitch infringed seven Ribbon patents and owed approximately $9 million in damages to Ribbon. We are looking forward to our upcoming April 22 trial to assert our contention that Metaswitch has been engaged in an orchestrated campaign to steal and use Ribbon's trade secrets.

Got it. Got it. Okay. Very good. Thanks a lot.

Thank you. See you soon.

Our next question comes from the line of Mark Kelleher from D.A. Davidson. Your line is open. Please go ahead.

Great. Thanks for taking the questions. It sounded like you may have anticipated that last question. Just wanted to …

We are asked that question a lot.

I bet you're. The -- just to get this, the Q1 revenue guidance now down more, usually the seasonality there is pretty significant. Last two years it's been down 20% sequentially. You are indicating it could be down more than that, that the 20% is the typical seasonality?

Yes, like we said, we think the first quarter is going to be a difficult comparable to last year, but we do believe, as we said, we think the full-year will be up single-digit revenue growth versus last year.

Okay. And can you talk a little bit about Kandy and the expectations there? Sound like that’s getting some traction.

We do. We’re making progress with Kandy. We continue investing in the product. We see some traction in terms of bookings performance. And while it's not material to our business right now, there is growth of a little base and we expect to be speaking to that coming up here more in the future as traction continues.

Okay. And then maybe just talk about the general competitive position that you are in. Are you taking market share? Does your guidance for the year assumes growing at the market rate or do you -- how strong is the competition, particularly Oracle?

In terms of our core -- so the question I believe is in terms of our core business as opposed to CPaaS or UCaaS. In terms of our core business, we do expect we are number one in terms of the market share in a number of our positions. We do expect in the service provider market that the undercurrents will continue, whereby the growth in the market will be led by NFV and virtualization, offset by decline in traditional equipment sales. We position ourselves very well to be -- as we said in the prepared remarks, our software and subscription sale -- our software stand-alone and subscription sales for the year and the fourth quarter were both well above 40% of our total product sales. We expect that to continue. We positioned ourselves into that virtualized NFV wave, and we believe that we can take share with that.

Okay, great. Thanks.

Thanks, sir.

[Operator Instructions] Our next question comes from the line of Paul Silverstein from Cowen and Company. Your line is open. Please go ahead.

Thanks, guys. Appreciate you taking the questions. I will give it to you one at a time, but I’ve got several. First off, what is the organic growth that you are expecting for 2019?

Hi, Paul. It's nice to speak to you. We expect our core products to be relatively stable in terms of 2019 growth with virtualized software only sales, Enterprise Edge and cloud initiatives to be growing. And we expect this -- that particular growth to be offset -- somewhat offset by lower appliance sales. We do expect declines in our overall maintenance revenue driven by pricing pressure and some decommissioning of legacy equipment.

So if I net all that out, I just think simplistic way and I apologize, but I’m a simple person. If I just -- if netting all that out, if I back out Edgewater and I apologize on getting any other prominent acquisitions, I don’t think they were, but back at Edgewater, what would all in the organic growth look like for '19?

Well, we are not breaking out Edgewater for 2019. We said we would not do that following, after the October 30 call. Taking altogether though, we do expect 2019 to grow in the mid -- in the low to -- low single digits. We expect the service -- the service provider market we do participate in to grow at a very modest CAGR and we expect to grow our relative percentage of enterprise revenue to total revenue, we expect to grow that in an enterprise market which analysts believe will grow in a range of between 6% and 12% CAGR. So we are taking steps to position the core business into the higher kind of subsection -- sub-segment growth of the virtualized NFV market and toward enterprise which has a higher CAGR.

I got it. And I recognize that you did answer in part the following question, but I want to ask it, which is given the expectation for an extraordinarily low seasonality -- in your first quarter typically seasonally low, but it sounds like you expected to be that much lower this year. Going back to your comments about visibility, how much of the outlook for the year is based on a solid pipeline, solid order book beyond Q1 visibility? And how much of it is somewhat looser or based on how -- I’m trying to get a feel for just how much visibility you’ve in for the year?

You know our -- I think we have typical season -- we have typical visibility that we'd have at this time. Our backlog is a percentage of -- our backlog business is relatively the same. Of course, we are growing more of a book ship business when we speak -- when we’ve taken our number one market position in the SME segment of the SBC market. I think that in terms of the seasonality, while we don’t guide Q -- we certainly don't guide within the quarters, we’ve said -- we've seen what our peers have commented upon. And when we do see some soft conditions in Q1, no doubt some of these macros and the disruption on the federal shutdown things like that have played into some of the service providers CapEx and spin thoughts as well. So while we do expect that seasonality, as we said, to be a little exacerbated in Q1, we do expect to still grow at single -- low single digits for the full-year. And I think, Paul, we really -- with the full-year still in front of us -- we still have a full-year in front of us, we think that it is really appropriate right now to just guide to the ranges that we’ve guided too, and then refine that as we get farther into the year.

Understood. If you can bear with me just a couple more, I appreciate it. From a gross margin perspective, any thoughts you can share with us in terms of what you expect or hope to get to as a reasonable best case for '19 or even better exiting '19?

Well, we don’t grow -- we don’t guide gross margins.

I know you don't do formal guidance, but I’m hoping you could give some, but …

We don’t. It's there to believe that the -- and of course, gross margin does vary from quarter-to-quarter depending on our product mix, depending on the amount of software content versus appliance content and things like that. But we do still expect that continuing trend of gross margin over the longer term to be driven by our ship to software and further to be that gentle increase or upslope in margin over the long-term.

Got it. And just one or two more, I appreciate it. With respect -- I heard your response on Kandy. Is it the same response on Ribbon Protect in terms of the trajectory, but currently the revenue base is still very low now we are breaking out or is it more meaningful in the case of Ribbon Protect?

No. You’re correct, you're correct. It would be ..

All right. So you're seeing traction on both. My final question, any visibility as to when those become meaningful 5%, 10% plus of revenue, is it within 12 months, is it further out in that based upon your current order books, your customer acquisition et cetera? Any thoughts you could share?

We are really excited about the potential. I think that it would not be unreasonable for something -- within the timeframe that you’ve mentioned for us to be speaking more to it, but we’ve work to do. We’ve that traction to capture. We’ve those opportunities to bring home, we would be excited to then get it to a point where we will be speaking to it.

Got it. And last question for you and Fritz, if I may, which is, when you all look into the future of the next 12 months, what are you most excited about? And what’s the greatest risk from a high-level perspective? What’s the greatest opportunity? What’s the greatest risk?

Well, I think the -- Paul, I think the greatest opportunity is, I think this restructuring of our teams is actually really interesting opportunity. I mean, I’ve said to you all a bunch of times, I think we’ve a unique asset in our distribution system around the world. And now we’ve a couple more products to push through that, I think this is going to be a really interesting year to prove out that that’s a very important and valuable asset for us. So I look at that as one of the real opportunity. I also think, as Daryl alluded to earlier, I think this is going to be interesting year to see if we can get enough momentum that I really want to talk to you about the green shoots that we’ve talked to in the past, which would be Ribbon Protect, Kandy, Anova, obviously the projected as we move through -- so what the great thing about Edge is, it allows us to provide a broader solution package for some of our clients. So I think that’s going to be all upside. I think the risk is always, you've got a macro risk if the world is really slowing down, but most of this stuff has to happen. So we -- I think that that’s a -- we would look at this as a fall of the log kind of sales year, this going to be tough. But I think that's the kind of risk you can run into because as you well know and one of our problems with giving more guidance than we do to you -- on the quarters et cetera is, there's a lot going on in some of these countries where we really think we’ve interesting opportunity and things can change pretty darn quick on their order book. And that’s why we are a little more conservative and we probably -- a little more conservative, which because we don't know how that's going to play out. But I think that we really are excited about the opportunities, whether it would be in India or in Japan or in our federal space, and I think with this organization we are going to be better able to coordinate our solution set to our clients.

Got it. Daryl, anything you want to add?

No, I would echo all of that. I think the company is positioned itself very, very well to take advantage of some of the trends around the NFV and virtualized network environments. We’ve made steps to expand our enterprise business and take -- and as Fritz said, the opportunity to take that overseas is in front of us and we intend to do that, and we -- these markets around our key financial -- our key verticals and financials, federal -- and particularly in Japan, and really the outside of United States network transformation solutions market in general, is still a good opportunity for us for sure, and I think we are excited about that. Those would be really three fundamental aims that I think, as Fritz said, the new organization.

And I guess, Paul, we've also got ourselves in a position where I don't think we are afraid to be opportunistic if we see something out there that looks really interesting, whether It would be new technology that fits or role-up opportunity. I think we are going to try to be pretty opportunistic and we can find things to do. And so, I think we have a balance sheet and a financial structure today that should give us a fair degree of flexibility in that regard if we can find some opportunities. I wouldn't be surprised if we do, but that will be obviously something we will talk about when we get there.

Got it. Guys a quick housekeeping. Are we going to see in the K, how large Verizon was? I know you called it out as nearly 10% for the quarter and the year, but will you disclose it in terms of total contribution?

Yes. The percentage is disclosed in the K.

Can you share that us with at this time?

I don’t have it in front of me. I'm sorry Paul, I don't have. The K will be on file by the end of next week or right at the first of the week after and I’m just going to yield to that, because I just don’t have it in front of me.

No worries. I appreciate you taking the questions.

I would say -- Paul, I would say -- I would say this. We are excited about our relationship with Verizon. I mean, we feel like we have a really great symbiotic relationship with them. They’ve been incredibly open to having dialogue with us across all kinds of product mix. So we feel like they are a great client, we hope we are a great supplier to them.

All right. Thanks guys.

Thank you, Paul.

At this time I would like to turn the call back over to our presenters for any final remarks.

Well, thank you everyone for joining our fourth quarter and full-year 2018 earnings conference call. As Fritz said, we are very excited about 2019 and the opportunities that we’ve in front of us. We look forward to speaking with you following the Q1 earnings cycle.

Ladies and gentlemen, that does conclude the call for today. We thank you for your participation, and ask that you please disconnect your lines.