Good afternoon, everyone, and welcome to the Ribbon Communications Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please also note, today's event is being recorded. At this time, I'd like to turn the conference call over to Monica Gould, Investor Relations for Ribbon Communications. Ma'am, please go ahead.

Good afternoon, and welcome to Ribbon's Third Quarter 2020 Financial Results Conference Call. I'm Monica Gould, Investor Relations for 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. Certain matters we will be discussing today include the business outlook and financial projections for the fourth quarter 2020 and beyond and 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 Slide 2 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 measures 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. As we previously noted, we completed our acquisition of ECI Telecom on March 3, 2020, which impacts comparisons to prior periods. Ribbon operates as a single segment. However, for the sake of clarity, we are continuing to include additional detail on the former ECI Telecom business performance. As we continue to integrate, we expect to transition to providing business unit performance in Q4 2020 rather than legal entity financials. And now I would like to turn the call over to Bruce.

Thanks, Monica. Good afternoon, everyone, and thank you for joining us during this busy earnings week. I hope that you're all healthy and safe. We're very pleased to report strong third quarter results that exceeded our expectations. We're clearly beginning to see the benefits of our strategy to diversify and broaden our portfolio, combining a strong software business with a higher growth Packet Optical business, resulting in both strong profitability and revenue growth. We achieved a new record level of adjusted EBITDA during the quarter on the strength of increasing software sales in our Cloud & Edge business, and we're very encouraged by the improvement in our Packet Optical business, with sales increasing 22% sequentially and a positive adjusted earnings contribution for the quarter. Our strategy to sell the expanded portfolio to our combined customer footprint is beginning to bear fruit. As noted last quarter, our customers continue to see elevated voice and data traffic levels related to the increased usage of digital and social platforms as well as broad-based adoption of online collaboration platforms, such as Microsoft Teams and Zoom. Both service providers and enterprises have responded to this network strain by increasing or accelerating their investment in capacity and capabilities, directly aligning with our portfolio offerings and strategy. Our engagement level with customers remain strong. RFP activity has increased significantly, and we've been able to leverage remote proof-of-concept product demonstrations in place of on-site lab evaluations. Visibility in the business remains solid and we have no significant supply chain restrictions. Lower travel and marketing activity have also contributed to the lower operating expenses in 2020. I'd like to start by highlighting a number of recent notable customer accomplishments and activity in the quarter. A key part of our strategy is to strengthen our Packet Optical business and presence…

Thanks, Bruce. We had exceptional third quarter financial performance that exceeded our expectations. Please refer to our Investor Relations website for supplemental slides with graphs and tables summarizing our third quarter performance. Total revenue of $231 million in the third quarter was comprised of $154 million for Cloud & Edge and $78 million for Packet and Optical. As Bruce mentioned, we continue to make great traction in our integration efforts. We plan to transition to providing business unit performance rather than legal entity financials, commencing in our fourth quarter of 2020. Given the ECI acquisition, all year-on-year comparisons are against Ribbon's standalone unless otherwise noted. The third quarter 2020 GAAP financial results were as follows: total company revenue was $231 million; income per share was $0.04, which included a benefit of $0.03 from the release of a tax valuation allowance from our Ireland legal entity. For Ribbon, as a total company, our non-GAAP third quarter performance was total revenue of $231 million versus $210 million last quarter and guidance range of $210 million to $220 million. Non-GAAP gross margin was 59%. Non-GAAP operating expenses were $98 million. Non-GAAP adjusted EBITDA was $43 million compared to $23 million last year and was above the guidance range of $25 million to $29 million. The improvement in adjusted EBITDA was due to both higher sales and better gross margins in both Cloud & Edge and Packet Optical Networks. Non-GAAP diluted earnings per share was $0.16. Our diluted share count for the third quarter was 152 million shares compared to 111 million shares in the prior year, with the increase primarily driven by the ECI acquisition. In the Cloud & Edge business, third quarter revenue was $154 million, reflecting growth of 12% from the previous year, driven by strong demand from our service providers.…

Great. Thanks, Mick. As we look to the fourth quarter and into 2021, we expect many of the key trends supporting our business to continue. In our Cloud & Edge portfolio, adoption of cloud collaboration platforms, such as Microsoft Teams and Zoom Phone will continue to create demand for our growing portfolio of SBC products from both service providers and enterprise customers. A significant portion of this business is now transitioned to enterprise software solutions, as well as capacity growth via license activation on existing infrastructure. In 2021, we expect the consumption model to begin to shift to recurring revenue, leveraging our new cloud-native service offerings. Overall, we expect continued profitable growth in the SBC product category. Our network transformation business has seen a burst of activity this year to adjust to traffic growth related to the work from home transition. We expect the investment in digital transformation to continue, but a slower pace in 2021. However, we're seeing adjacent alternatives in areas such as service assurance, machine learning and analytics and fraud and robocall mitigation that leverage our installed base with high-margin software applications. And we expect the associated technical support revenue stream to continue given the lifeline critical nature of the service deployed on these platforms. We'll further benefit from the portfolio adjustments and operational efficiencies we've made in 2020 that will lower our overall operating costs and improve the earnings power of the company. In our Packet Optical business, we're very pleased to see the recovery take shape after a slow start to the year. While the operating environment remains challenging, we're clearly making progress on our strategy and are well positioned to gain share as the spending environment improves. Several factors contribute to our optimism, including resolution of the India AGR dispute, paving the way to…

[Operator Instructions] And our first question today comes from Paul Silverstein from Cowen and Company.

First off, that particular banking deal you referenced, the large deal, can you give us any sense for how large that is?

Multimillion, Paul. Not 8 digits, but well in the 7s. So...

And that's just the 1 quarter or that extends over time?

No, just in the 1 quarter. And this is expansion of both call center capacity as well as helping with the migration to broader deployment of Microsoft Teams. So as you recall, there's a variety of deployment models for that. But in their case, they're deploying the SBC capacity within their infrastructure.

Understood. And then, Bruce, on the Packet Optical business, I think you cited 8 new customers. Can you give us any sense for -- that's relative to what? How large is that customer base today and the nature of those customers that you're winning? Any signs of progress in North America with the service providers you're targeting?

Yes, that's a good question. I don't have the exact number in the back of my head, Paul, trying to look that up for you offline. But obviously, we have a variety of customers that would contribute to get to the $78 million or so in sales and some are sub-million dollar transactions and some multimillion. So it's a pretty broad, diversified customer base. But I'll try and get the number for you off-line. As I mentioned in the remarks, we are definitely making progress here in North America and hope to have a couple of notable things to announce here in the fourth quarter even. So making some pretty good progress.

One last, if I may. I recognize we're all in uncertain times, visibility is challenging but sometimes, even more so now. That said, any visibility into next year?

Well, clearly, we expect the Packet Optical momentum to continue and grow. If you look at as an example, one of our larger markets in India, year-to-date, we're down about 50% from last year, primarily due to the dispute we talked about. But every quarter is getting a little better, clearly. And as the spending environment improves there, we definitely expect considerable growth in '21 for that portion of the business. And I think there's room for us to still grow around the Cloud & Edge business. And particularly, this transition to software just continues to be a real strong platform base for the company. So we're pretty excited as we kind of get through COVID here and get into a more normalized environment. But even with the world we're living in now, clearly, the business has continued to improve this year for us.

Our next question comes from Mike Latimore from Northland Capital.

This is [indiscernible] on behalf of Mike Latimore. Can you give an idea about how important the 5G backhaul is when it comes to the ECI growth?

Well, for the most part, the networks that are migrating to 5G are being used for augmenting capacity for the current network. Some of the advanced capabilities, both on the radio side and on the network side, are still kind of nascent business models. But what we are finding is, as an operator, is looking at upgrading either the capacity or kind of building a broader network and extending fiber. They're clearly looking towards the future. And why would you spend dollars on infrastructure that's not capable of some of the advanced slicing and timing requirements. So I do think it's pretty important from a future proofness and kind of evolution of the network perspective. But it's not necessarily getting activated and turned on with some of the advanced features yet in the network, if that makes sense.

All right. All right. Fine. And perhaps some comment on the pipeline, like where do you see a big chunk of business coming from? Is it from Verizon or AT&T?

Well, so a lot of our business in Packet Optical is international. And in fact, our business in Europe and Asia Pacific are actually both up year-to-date. So those remain to be really important markets for us. I've mentioned India already. And the kind of former Soviet Union countries are obviously highly important as well. In the North American market, where the kind of base of business is around Cloud & Edge, clearly, Verizon, our largest customer, remains highly important to us. But most of the larger carriers are using our technology, either for traditional landline voice networks or for supporting unified communications collaboration platforms.

[Operator Instructions] And our next question comes from Liz Pate from Cowen and Company.

I just had a quick follow-up. I missed it, Bruce, what you said in terms of the guidance on the OpEx for the fourth quarter.

Yes. So we think it will be up somewhat a little bit from the second and third quarter run rates. Our current estimate is in the $105 million range. We'll see where we finally land. But there's some incremental spend around just base salaries and then probably some success-based spending based on how we finished the year.

Okay. And then looking out to next year. Obviously, this year has been a different story. But would it be safe to assume that OpEx will tick up a bit looking out into next year?

Yes. I guess there's a couple of factors that played there. There's probably some incremental investment around R&D for a number of programs, offset by lower spending as Kandy -- we successfully complete the Kandy transaction. So if you kind of factor those 2 things in, probably not a big change in OpEx overall.

Okay. Great.

And in our restructuring effort, which will assist us in whatever incremental expenses we will have, we'll try to mitigate with continuous restructuring on our part.

Yes. Good point, Mick.

And ladies and gentlemen, I'm showing no additional questions. I'd like to turn the conference call back over to Bruce McClelland for any closing remarks.

Thanks, Jamie. Well, thanks again for everyone joining the call and the interest in Ribbon Communications. We're really, again, pleased with the execution and improved results here in the third quarter, excited about our path ahead. So look forward to seeing many of you in the upcoming investor conferences, you'll find the list in our press release. So with that, thank you, operator. This concludes our call.

Ladies and gentlemen, with that, we will conclude today's presentation. We do thank you for joining. You may now disconnect your lines.