Ladies and gentlemen, thank you for standing by. Our conference will begin momentarily. Once again, ladies and gentlemen, thank you for standing by. Our conference will begin momentarily. Greetings, and welcome to the Ribbon Communications Second Quarter 2020 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Monica Gould, Investor Relations. Thank you. You may begin.

Good afternoon, and welcome to Ribbon's Second Quarter 2020 Financial Results Conference Call. I'm Monica Gould, 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 data are currently available. Certain matters we will be discussing today, including the business outlook, financial projections for the third quarter 2020 and the proposed sale of the Kandy Communications business 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 the forward-looking statements. These risks and uncertainties are discussed in our documents filed with the SEC, including our most recent Form 10-K and Form 10-Q. I refer you to our safe harbor statement included on Slides 2 and 3 of the supplemental slides for this conference call. In addition, we will present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measure are included in the earnings press release we issued this afternoon as well as the supplemental slides for this conference call, which again, are both available on the Investor Relations section of our website. Finally, as you will recall, we completed our acquisition of ECI Telecom on March 3, 2020, which impacts comparisons to prior periods. Statements about Ribbon's organic business, Ribbon stand-alone, cloud and edge and organic revenue growth refer to the business and financial results of Ribbon Communications excluding the ECI business. References to packet-optical network relates to the ECI business. Overall Ribbon, Ribbon or total company results are consolidated results and include the results for ECI from acquisition date. Ribbon operates as a single segment. However, for the sake of clarity, we are including additional detail on the former ECI Telecom business performance. As we continue to integrate, we will transition to providing business unit performance rather than legal entity financials. And now I would like to turn the call over to Bruce.

Thank you, Monica, and thank you, everyone, for joining us today. We're very pleased with our performance in the second quarter as we navigate this challenging time. Before we go through the details of our second quarter performance and talk about our outlook for the second half of the year, I'd like to make a few comments on the announcement we made today relative to our Kandy advanced communications business. As part of the portfolio assessment that I've been doing since joining earlier this year, it became clear that a different path would be beneficial to realize the full potential for Kandy. As announced, we have signed an agreement to sell the business to American Virtual Cloud Technologies, or AVCtechnologies. AVCtechnologies is a publicly traded IT services company with a strong management team focused on assembling a world-class portfolio of unified cloud communications, managed services, and cybersecurity technologies and services. We believe the all-stock transaction will unlock the value of our Kandy Communications business and allow Ribbon shareholders to benefit from the potential upside while reducing the ongoing investment that is needed to ensure the full potential is achieved. In the first half of 2020, we estimate there would would've been a $9 million improvement to Ribbon EBITDA had we excluded the Kandy operation. AVCtechnologies will be an important customer for Ribbon. And as a minority investor, we will be completely aligned on prioritizing the success of our mutual customers and our most important asset, the employees. The deal is structured as an asset purchase with AVCtechnologies acquiring the ongoing Kandy business, including certain intellectual property, customer contracts and ongoing operations. Key customers include AT&T, IBM, Etisalat, the city of Los Angeles and many others. Ribbon will receive 13 million shares of AVCT, an approximate value of $50 million based…

Thank you, Bruce. I am honored to join the Ribbon leadership team and especially grateful for the warm welcome. As Bruce mentioned, our second quarter showed good performance considering our challenging economic environment. We have provided supplemental slides on our website with graphs and tables to assist our investors. Total revenue of $210 million in the second quarter was comprised of $147 million for cloud and edge and $64 million for packet-optical. To repeat again for the sake of clarity. Ribbon acquired ECI on March 3, so the first quarter of 2020 had 1 month of packet-optical revenue of $30 million, while the second quarter has a full quarter included for $64 million. As previously mentioned, as we continue to integrate, we will transition to providing business unit performance rather than legal entity financials. Given the recent ECI acquisition, all year-on-year comparisons are against Ribbon stand-alone unless otherwise noted. The second quarter 2020 GAAP financial results were as follows. Total company revenue was $210 million. Gross margin was 53%. Operating expenses were $111 million. Loss per share was $0.06. Please note that last year, we had a $63 million gain from a litigation settlement included in the company's GAAP financial results, which added $0.57 to earnings per share. For Ribbon as a total company, our non-GAAP second quarter performance was total revenue of $210 million. Non-GAAP gross margin was 59%. Non-GAAP operating expenses were $99 million. Non-GAAP adjusted EBITDA was $30 million compared to $22 million last year. The improvement in adjusted EBITDA was driven by higher software mix in cloud and edge and continued cost containment efforts across the company. Non-GAAP diluted earnings per share was $0.06 compared to $0.14 last year, which reflects the higher share count from the ECI acquisition. Our diluted share count for the second…

Great. Thanks, Mick. Let me add a few more thoughts on each of our businesses and our outlook for the third quarter. Our cloud and edge portfolio is a broad set of voice-over-IP-related products and services deployed with many of the major carriers and enterprises around the world. Continued investment in these products is driven by the adoption of IP technologies, to reduce cost and enable advanced collaboration services. The recent work-from-home transition continues to be a tailwind for the business given the increase in network utilization. A significant portion of the addressable market growth for cloud and edge is within the enterprise vertical, particularly as unified communications solutions, such as Microsoft Teams, Zoom and Amazon Chime become commonplace. As use of these UC platforms expands beyond collaboration use cases and begins to replace traditional network or PBX voice systems, secure scalable SIP trunking becomes a critical ingredient. This is an area where we are laser-focused, and we are expanding our solutions to support the growing UC market. This week, we launched Ribbon Connect, a portfolio of subscription-based as-a-service offerings. This Ribbon Connect offering supports Microsoft Teams Direct Routing and enables carrier-grade voice calling capabilities in minutes. Microsoft Teams is one of the fastest-growing unified communication platforms in the world with more than 100 million daily active users. Ribbon Connect provides a seamless way for service providers, value-added resellers and system integrators to quickly tap into this rapidly expanding market by easily adding voice calling capabilities to Microsoft Teams. We're taking a partner-first route to market with this offering, supporting a best-of-breed approach to the solution. Ribbon Connect for Microsoft Teams Direct Routing is the first of several subscription-based offerings designed to rapidly accelerate time to market for real-time communications. We also continue to have good traction in the financials…

[Operator Instructions] Our first question comes from the line of Paul Silverstein with Cowen. Paul, can you see if your line is on mute?

I should learn how to use this cellphone. I apologize. Two big picture questions, if I may. First, with respect to the ECI packet-optical. I want to make sure I understood your comment, Bruce. The 50% recovery you cited, was that specific to India? Or did that apply to -- and I know India was a big piece the biggest piece from a geographic perspective of ECI, but was that comment specific to India? Or was that relative to the overall packet-optical revenue?

Yes. Sorry, I wasn't clear, Paul. That was specifically around the deployments we're doing in India with the large carriers there. And we're deeply involved with them doing the service element of deploying the product and so we get pretty good visibility into what's going on, and we're kind of more than halfway back to where we were earlier this year in deployment velocity.

Bruce, I am trying to discern the opportunity or the risk for that matter, how big is India as a portion of your -- I assume India is entirely packet-optical today or virtually packet-optical as opposed to the traditional business. How big is India as a portion of the optical revenue at present?

Yes. So we do a little bit of cloud and edge there, but the larger portion is packet-optical, and it's about 1/3 of the business, something like that, for the overall packet-optical sales.

And the bulk of the balance would be Russia, Eastern Europe, Israel, Middle East, Africa?

You got it. Yes.

All right. And as a general proposition, if we think beyond India, what are you seeing in terms of recovery on the packet-optical piece, before I ask about cloud?

Yes. So the European region and the countries we sell into in former Soviet Union, you saw a more significant recovery in the second quarter, particularly as we get to the end of the quarter. So we had pretty solid results there. And again, as the deployment velocity continues to increase in India and of course we get through solving the adjusted gross revenue fee dispute, hopefully, next week, we're optimistic that India really starts to reaccelerate. And gosh, the announcement we did with Bharti here this week is a good indicator of how significant a presence we have over there.

All right. And 1 more question, if I may, on packet-optical before I get to the cloud. And I apologize if I asked you this 90 days ago, but obviously, you could take advantage from an acquisition perspective, whether Acacia, Neo and Inphi on a coherent DSP. But as a general proposition, given the level of competitive intensity in optical and given the nature of the competitors, where you have some very fine and much, much larger entities with significantly greater assets, and you're somewhat resource-constrained. I'm just curious, Bruce. I know it wasn't under your watch. I know you're coming in. You just made a strategic decision with respect to Kandy. But from a long-term perspective, the challenge versus opportunity of having sufficient resources, especially given that the cost of technology and the technical complexity of that technology hand-in-hand go up dramatically with each line rate. And as fine as ECI has been historically, extremely good supplier from a technology product perspective, but how do you, from a long-term perspective, beyond managing quarter-to-quarter, what's the likelihood from your perspective, the puts-and-takes of being able to feed that and be successful? And I don't mean to be cynical, but again, looking longer term, and again, you're the new sheriff in town. What are your thoughts on how you navigate that very challenging, the factors look?

Well, I think, Paul, it's a lot around focus. We're trying to do everything for everyone. That's when you have a challenge. And in fact, the decision we made around Kandy is a perfect example of really focusing in on where we're going to invest and where we're going to be successful. This global data report we just saw just highlights the technology strength in the portfolio and the thought leadership we're gaining around -- particularly around 5G networking and the evolution towards private networking. So I understand the skepticism, but that's exactly our advantage. I mean, we're coming in as a bit of a disruptor with, I hope, I think, a differentiated technology approach. And we've proven we can be successful selling directly head-to-head against the major industry names. The strategy is fairly simple here, right, as we've talked about, is to take that technology advantage and then leverage the footprint and the relationships and go head-to-head and win the business. And we're not afraid to go do that. We need to prove it. We've got to show you, obviously, that the strategy is going to make sense. But no, I'm very confident in our ability to do that. And look, I go back to my days at ARRIS when we were this little company competing against the big names. It can happen, but you've got to have a good strategy and really focus on and pick your spot, somewhere you're going to succeed.

Fair enough. Let me ask you about your cloud business. And again, I appreciate you weren't there back then, but the trends that you identified in terms of enterprise, SIP trunking, Teams, these are not new things. They've been in the market for quite some time, readily identifiable. If I look by way of example, AudioCodes has a 70-30, if I'm not mistaken, split between enterprise and service providers. They've been focused on enterprise for a while. For that matter back in the days, I think it was back in when it was Sonus. Maybe, it was already Ribbon, when you all, predating your arrival, bought a private company, [ assuming now -- ] it doesn't matter. The focus, more focused on the Microsoft enterprise opportunity. So there's been a lot of talk over the years, a lot of focus on the enterprise. What's different now? What are the key things that need to change for you all to do, I guess, a better job executing against that prominent or potentially prominent enterprise opportunity all presented by Teams and by the general environment?

Yes. Paul, I think when you bifurcate or you kind of break down the enterprise market, you'll find there's a variety of different addressable markets. Where we've done pretty well, if you look at kind of the major enterprises, I think I talked about 9 of the major financial institutions investing in our SBC product just in the last quarter. And that's not necessarily for unified communications. It's for their own SIP trunking needs between their offices, interconnect to the network, et cetera. They -- then look at the other part of the enterprise market. There's obviously a kind of small, medium-sized business market and the unified communications market. And there's a variety of different technical solutions you need to address the full addressable market. So we've got best-in-class kind of appliance-based products. We've got cloud-native products. We now launched as-a-service product. And we have on-premise, scalable solutions, from small to medium to large. We've been building up some of those additional capabilities and playing catch-up in a portion of the market. But the other portion, as I mentioned, the larger enterprises, I think we're leading the market in those areas. What's obviously gotten more attention recently is the significant growth around unified communications. And just to kind of pause on that for a minute. You think about Microsoft Teams and the 100 million plus daily users they now have on that platform, only a fraction of those daily users are using it for telephony needs, for PBX replacement, for off-net calling. And so that's when you start to need secure SIP trunking SBC platforms. So what we think happens, the adoption right now has gone from just collaboration towards using that as a platform for all your communication needs. And so we think it is different. It's not the kind of just the -- well, it's been around for a while. I think there's a sea change in how these products are going to get leveraged by enterprises. And as we've expanded the portfolio, we've added an as-a-service capability, I feel like we're pretty well positioned to take share as that business grows.

Bruce, is that -- is the Teams, the share opportunity that you're most excited about? Or is there another particular opportunity that you're even more excited about?

's Yes. So we've mentioned Teams a lot, but there's several additional outstanding UCaaS collaboration platforms out there that all do similar things and all need this secure off-net phone connection. So it's Microsoft. it's Zoom. There's a handful that are really leading the industry. And so we really are focused on all of them, not just on Microsoft Teams. But as we've seen the momentum build there, we'll put more and more effort around that and partner pretty closely now with their sales team to position ourselves better. So there's been a lot of work, Paul, go in, in the last 6 to 9 months to improve our position there. It's not just doing the same thing, hoping for a different outcome.

Our next question comes from the line of Mike Latimore with Northland Capital Markets.

Yes, great. In terms of the Kandy sale, I just wanted to make sure I got the number right. Did you say that EBITDA would have been $9 million higher in the first half of the year absent Kandy. Is that what you said?

That's right. That's right, Mike. Exactly.

Any revenue color on that as well?

Yes. It kind of goes up, down a little bit every quarter, but you could model it as between $3 million and $4 million a quarter in revenue in the first half of the year.

Great. And then obviously, the kind of work-from-home trend came on strongly and rapidly. Did your -- your customers clearly needed you more to handle the traffic. But I'm wondering, did any of that lead to maybe pull-forward of any capacity purchases that you might not see later in the year? Or is this just kind of a situation where traffic is elevated, and they're going to need to invest kind of throughout the year?

Yes, it's a little hard to put a finger on exactly, but it feels more incremental than pull-forward. And then there's kind of an ongoing nurturing of the business to keep up with capacity as well as this -- as I mentioned, kind of this transition to support more unified communication collaboration, which we don't think is a short term phenomenon. We think that's a longer-term growth engine or tailwind for the business.

Got it. And then this may be in the details somewhere. But in terms of SBC versus gateway sales, has there been a notable shift, kind of, recently because of these work-from-home trends? Or is it a pretty consistent pattern there?

Yes. When you say gateway, I think you're talking about the on-premise universal CPE-type platforms, right, for enterprise. And we have seen a bit of a decline in deployment level. It's not a massive one, but it hasn't been growing, which we account to, obviously, the work from home. And if you're not forming new businesses and adding new locations, you're not adding a lot of on-premise equipment. What we have seen is obviously the traffic shift to the cloud and the additional capacity around networking for those -- for that use case.

Okay. And with regard to the former Soviet Union, it sounds like that's kind of coming back to a normal level. Is that the right interpretation there?

Yes, particularly towards the end of the quarter and even in the third quarter, the business has been pretty solid. I don't know if it's quite back to where it was, but it was pretty solid, Mike. So we were pretty pleased to see that come back probably a little stronger than I thought it would.

Great. And then just last one. Maybe just an update on how you're thinking about debt repayment and the plans around that.

Yes. So I think, obviously, we're really focused on integration and cash generation. I'm not sure we're at a point where we're thinking about accelerated debt repayment and things like that. But we're certainly thinking, in the midterm, there's going to be a focus around use of cash to pay down debt.

[Operator Instructions] Our next question comes from the line of Fahad Najam with Cowen and Company.

I have a couple. First, on the Kandy strategic sale, can you elaborate a little bit more? I would have assumed that Kandy was probably one of the more promising portfolios in your product portfolio that had the most promising growth prospects. Can you walk us through your rationale for the sale of Kandy assets now?

Yes. So thanks, Fahad. I appreciate the question. I think we're still pretty excited about the potential for the business. But a couple of factors, I think, come into play. I believe that continued significant investment around that business is needed to really realize the potential. Obviously, we're competing against a variety of larger players, investing a lot around sales and marketing. And I felt like if we were really going to see the potential, we were going to have to double down more around that and really focus on investing there. Obviously, we have 3 or 4 other product lines in the company that need focus as well. And so I think some of the earlier discussion, deciding where strategically, we're going to invest, how we're going to be a significant player in these markets is all critical to the strategy. And I feel like we can really unlock the value of that asset and still benefit in the potential upside longer term with an equity investment in somebody that is focused on that market 100%. So it feels like we get the benefit of both in some ways. We get the potential upside of business that we believe in. They become an important customer for us. We continue to sell them products that enable the Kandy service, and we lower the short-term investment and we increase focus. So it seems to check off a lot of important things for the company.

Got it. Now kind of like a bigger, broader question on technology and demand trend, especially given these extraordinary times of COVID-19, don't you agree that, with Zoom becoming so prevalent, that the need for traditional UCaaS services maybe quite limited? And I'll give you an example. I mean, in-app communication is becoming a far more prominent way of communicating, you use teledoc communication, you have to communicate directly. So are you -- how do you think about long-term implications for the UCaaS opportunity, especially when you see these over-the-top players, other than UCaaS players becoming more prevalent in this -- the more from -- work from home, remote working type of scenario, do you think that, that market is permanently impacted or maybe somewhat curtailed for traditional UCaaS players?

That's certainly a big picture question. I do think there's room for multiple winners in this space. I'm not sure there's a one size fits all. Everything moves to a best effort over-the-top service, if you will. I think there's plenty of room for premium solutions in the market still today. I think there's room for on-premise solutions. I think there's room for terminal devices on people's desks. I just think it's a big market, and I'm not sure picking 1 winner or 2 winners make sense. Obviously, we're trying to continue to expand the portfolio to meet the customer where they are in the market. If they want high performance, carrier-grade, robust, highly fault-tolerant platforms, we've got the best in the world. If they want to spin up an instance in AWS or Azure, we've got that. So yes, I guess that's the way I think of it, Fahad.

I guess what I was trying to ask was, in a different way was that prior to COVID-19, let's say the UCaaS market was $1 billion TAM. But post-COVID-19 with Zoom and other in-app-based applications kind of eating away some of the opportunity. Would you agree that the UCaaS TAM has, kind of, somewhat decreased or maybe shrank as other modes of communication have become more prevalent?

Yes. So I guess maybe my definition of UCaaS is a little broader, perhaps. I think I see what you're saying, the traditional enterprise kind of in-building, primarily in-office UCaaS platforms. Has that shifted permanently towards a work-from-home, over-the-top type solution, there probably has been a shift. From our perspective, we're trying to serve both those markets, if you will. So to me, it's expanded, our addressable market, but it's probably created some competitive shifts for others.

So can you elaborate more on how you're pivoting to this new over-the-top cloud-delivered applications? How do you see this market for you? And how are you -- can you provide any anecdotal data points that support how your solutions are being levered or utilized?

Well, with a Zoom collaboration platform or Microsoft Teams or similar other products, the moment that a connection moves off of the collaboration platform to a traditional PSTN connection, you need an interface, and that's where we come in. We're providing that SIP trunking interface, the security, the robustness around that. And if the world went to 100%, everybody stays within a proprietary collaboration environment, you wouldn't need that. But I'm not sure that's a world any time soon.

Our next question is a follow-up from Paul Silverstein with Cowen.

Based on your EBITDA comment on Kandy, the $9 million first half, am I in the ballpark that, from an OpEx perspective, Kandy was costing you something on the order of $8 million a quarter? Or am I way off on that? Can you just give me the number?

Yes. That's a little higher. It's probably more closer to $5 million a quarter, Paul.

$5 million a quarter. So you'll derive $5 million, at least $5 million per quarter savings just from Kandy alone, just on that business.

From an OpEx perspective, that's about right. Yes.

Thank you. We have reached the end of our question-and-answer session. I'd now like to turn the call back over to Mr. McClelland for any closing remarks.

Yes. Thank you, Michelle. That concludes our call. I look forward to updating everyone on our progress next quarter. Hope to see many of you virtually in our upcoming investor conference over the next 30 days. Thanks very much, and have a good evening.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.