Greetings. And welcome to the Ribbon Communications Third 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tom Berry, Investor Relations.

Good afternoon. And welcome to Ribbon’s third quarter 2021 financial results conference call. I am Tom Berry, 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. Certain matters we will be discussing today, including the business outlook and financial projections for the fourth quarter of 2021and beyond are forward-looking statements. Such statements are subject to 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 two 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 in the supplemental slides for this conference call, which again, are both available on the Investor Relations section of our website. And now, I’d like to turn the call over to Bruce. Bruce?

Great. Thanks, Tom. Good afternoon, everyone. And thank you for joining us today to discuss our third quarter 2021 results and our outlook for the fourth quarter. The third quarter played out almost exactly as we expected, with the exception of increasing supply chain constraints. Revenue in the quarter was $210 million, with approximately $9.5 million moving to the fourth quarter due to supply chain related constraints. Profitability was very solid, with both adjusted EBITDA, our non-GAAP earnings per share within our guided range, despite the lower sales and increased costs related to component pricing, transportation and logistics. Without these issues, we would have been at the midpoint of our guidance on the revenue range and we would have exceeded our guidance for both adjusted EBITDA and non-GAAP earnings per share. In our IP Optical Networks segment, we continue to add new customers with 12 new logos this quarter and to build our presence in the critical North American market, where sales in this region have increased 270% on a year-to-date basis. We have an exciting new win in the quarter with Viaero Wireless and Fiber Networks, a top 10 mobile network operator in the U.S. Viaero was deploying our entire IP Optical solution set, Apollo for DWDM transport, Neptune for IP/MPLS networking and Muse for domain orchestration and network management. The deployment will support 1 gig and 10 gig client side aggregation over a 200 gig optical transport network that easily scales up to 400 gig wavelengths. A converged IP Optical Network supports both broadband backhaul and 5G Xhaul services. We also announced a new win-win to Dakota Central, a long time Ribbon Cloud and Edge customer based in North Dakota. They chose our IP Optical solution to increase broadband speeds and provide the ability to backhaul 5G mobile…

Thanks. As Bruce stated, we were very pleased with our performance this quarter, considering the challenging supply chain environment. Let’s start with commentary about our GAAP results for the quarter. Our GAAP net loss of $59 million includes a net negative impact of $55.6 million or $0.38 per share related to our investments in AVCT. As we have mentioned in the past, fluctuations in AVTC stock price affect our other income and expense line as we mark-to-market our investments every quarter. We have excluded this non-cash item from our non-GAAP results. Other factors contributing to the difference between our GAAP and non-GAAP results for the quarter include $2 million in restructuring expenses related mostly to continue downsizing of our real estate footprint, $2 million in integration expenses and usual adjustments for amortization of intangible assets and non-cash compensation. On an adjusted non-GAAP basis, third quarter 2021 results were as follows. Total revenue was $210 million, down 7% year-over-year when adjusted for the sale of Kandy and negatively impacted by approximately $9.5 million from supply chain constraints during the quarter. Non-GAAP gross margin was 57% in the third quarter within our guidance range and down 2 percentage points from the prior year period. Cloud and Edge maintained strong margins of 67%, IT Optical Networks margin of 37% was affected by component cost and freight increases, as well as other items that we will explain in detail. Non-GAAP operating expenses were $93 million in the quarter, up from $90 million in the second quarter due to one-time benefits we have last quarter, as well as incremental R&D investments in IT Optical Networks segment, along with increased travel and marketing expenses. Non-GAAP adjusted EBITDA was $32 million at the low end of our guidance, with a good result given the supply chain constraints.…

Great. Thanks, Mick. Before discussing our guidance for the fourth quarter, I’d like to provide a few comments about progress we are making on our core strategy across selling our IP Optical portfolio to the broad base of traditional Ribbon customers utilizing our voice over IP solutions. We had very big ambitions for our IPO Optical business and have a deliberate strategy in each region to gain entry into large service providers that control the majority of the capital spend in the industry. In the last 12 months, we have had a series of material wins with significant operators such as Rogers, Optus, SingTel, Altice, Megaphone, Telecom Italia, Taiwan Mobile and Sony. The revenue growth associated with these wins is not yet reflected in our current financial results in a material way, but we are investing in both R&D and go-to-market to support these wins. It will be a strong addition to the base of customers currently supporting our business. Beyond that, we have significantly increased the number of Tier 1 customers we are actively engaged with and who are evaluating one or more elements of our portfolio. As highlighted on slide 12 of our third quarter investor presentation. The sales cycle will take time, but we expect many of these customers will be the next wave of wins, further increasing revenue in the second half of 2022 and full year 2023. And the list of potential additional targets beyond this is even longer and collectively represents an even larger addressable market. All-in, we estimate that we can address a $14 billion global market and are investing to capture a much larger share than we have today. Our disruptive approach to enable a more open ecosystem in network architecture, optimizing across both optical and IP layers of the network and…

Our first question is from Paul Silverstein with Cowen. Please proceed with your question.

Thanks, guys. First off, Bruce, the $9.5 million of delayed shipments, if you had recognized those in Q3, does it follow that the fourth quarter outlook would be $9.5 million less or is there -- is this as one would think a ripple through that there’s another $9 million or $10 million or some number of revenue that’s delayed that will be delayed from Q4 into Q1 for some of the reasons tie to logistics, et cetera?

Yeah. Hey, Paul. That’s a good question. I would say, it’s a zerosome, so if we had shifted in Q3, it would be a deduct from Q4. Having said that, as we look at the Q4 guidance, obviously, we are trying to take into account any restrictions and whatnot that we see and try to take that into account as we sit here today. So, I think, we are going to continue to see a variety of issues and we are doing the best we can to make sure we estimate them as accurate as we can and put…

Okay.

… in a situation.

Okay. I appreciate the challenges with respect to visibility, et cetera, for you and all of your peers, but I want to keep you honest, when you talk about third quarter would have been $9.5 million better, but for, I just want to make sure you are clearly saying that by definition, the fourth quarter outlook would have been $9.5 million worse, but for that…

Okay.

…revenue has been recognized. But let me move on. I don’t mean to give you a hard time. I just want to make sure?

Yeah. No. That’s correct Paul.

Mick, can you repeat the impact from supply chain, I heard the $9.5 million, but how much of a hit some margins for total company, as well as for -- I don’t know if you broke it out, I apologize if I missed it. But for the Optical and for Cloud and Edge, how much was both the revenue and the margin for both those businesses?

Yeah. Paul, so we noted that the impact to revenue was $9.5 million and it’s about half and half related to each of the business segments. In regards to the margin erosion that was a bigger impact on cost increases, logistic and transportation, expedite costs, and that was about 300 basis points on the IP Optical Network side.

Was that the 300 basis points of total impact, so it was all on IP Optical or is there also some on Cloud and Edge?

That was a little on Cloud and Edge, obviously -- it went obviously with the margins where they are, it’s not as significant on the Cloud and Edge side.

Got it. And Mick on the or Bruce, with respect to normalized gross margin IP Optical, I thought you all had been referencing a mid-40s to your credit model previously for that business other than I would have thought you could do. But can you just refresh my memory, what is the outlook for that business on a nor -- if we normalize -- if you normalize for the impact from supply chain as a steady state, what are you expecting that business to run at?

Yeah. So we are estimating low-to-mid 40s. So it could be anywhere from 40% to 45%, depending on mix and volume, et cetera. And as Mick mentioned, the, let’s call it, 300 basis points impact of higher costs right now. We estimate that continuing in the fourth quarter, which is why we are projecting margins in that segment right around 40%.

But long-term, Bruce, do you think it can be a low-to-mid as much as mid-40s business normalized?

I think you will see that happen quarter-over-quarter, Paul. I think if you look over an extended period of time and do an average, it’s probably in the 40% to 43% range. It will just move around a little bit each quarter.

Got it. All right. One more for me before pass it on, which is, Bruce, on this impressive customer wins at least the names of the customers that you are citing, Telecom Italia, et cetera, can you give a sense for the nature -- I assume the projects vary in nature, but there’s, of course, you becoming the key optical supplier for metro or other builds and then it was scaring, it’s a screwed project and no shame if it’s the latter, but can you give us a sense for what are the nature of those projects across those customers in terms of revenue…

Yeah.

…revenue impact and the nature of the projects? Thank you.

Yeah. Yeah. It’s a great question, Paul. So some of them are -- they are project based. They are more let’s say enterprise WDM services, so you will do one project at a time and you may have more in a quarter or less than a quarter, it can vary. I think the real potential here for us though is that we get into the core portion of the transport network like we talked about with the Rogers opportunity. That ends up being a more consistent multiyear business and really starts to build a stronger foundation for us like we have with our other Tier 1 customers in Russia and India and other areas. And these are all for us to be meaningful opportunities, double-digit millions annually and really start to strengthen the business for us.

Each opportunity you would size it at least double digits annually, somewhat...

No. I wouldn’t say -- I would say some are probably less than that, but tend to be more enterprise oriented. But the larger ones are in that magnitude.

Bruce, can you give us -- I don’t know if you want to, but can you give us in the aggregate those larger -- the incremental wins from the past quarter to were those worth on an annual basis or a quarterly basis?

Well, the -- in a general sense, not to avoid the question, but obviously, its sensitive information. They contribute towards our goal of 10% plus growth on an annual basis. So that annual growth 10% on $300 million plus is annually $330 million worth of growth growth. That gives you an idea of what we expect out of kind of the aggregate and hopefully more, right, I mean, we are really obviously putting a lot of effort into this space.

Got it. All right. I will pass it on. I may come back if no one asks questions. Thank you, guys. I appreciate.

Thanks, Paul.

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

Thank you. Good afternoon. I guess, first question is regarding, Mick, tax you said 39% in fourth quarter. Is that just for the fourth quarter or should we use that for next year as well?

Yeah. Certainly, this will be only for the fourth quarter. We have had some changes in our regional jurisdictional tax mix. For the full year it will then average out to be 31%. So effectively quarters one through three at 27% and adjustments in fourth quarter so that the full year is at 31%.

So how should we think about next year’s tax rate back to 31% or?

I would say that, obviously, we would like to reduce it back to the 27%, with some further improvement, but keeping it in that range would be about right.

Okay. And then, I guess, I can’t figure out OpEx for fourth quarter, but how should we think about OpEx fourth quarter and beyond?

Well, you have seen that we have managed OpEx fairly well. We had unusually low OpEx last quarter, about $90 million that did have some one-time beneficial effects. This quarter we were a closer to the mid-90s. We do expect a fourth quarter as usual to have a lot of variable compensation and other seasonal aspects that will put it closer to $100 million. But our goal is to maintain our OpEx in that mid-90 range and certainly continue to drive efficiencies in some aspects in order to continue to drive R&D in our future growth areas.

And Dave, if I might just add a comment on that, so some of the increases is seasonal, if you will, rate variable comp, et cetera. But we are investing more, as I mentioned on the call, around R&D investment and go-to-market investment around IP Optical. As we win more of these customers and they all come with the some roadmap commitments and things like that, I think, we will continue to invest more. We are really looking at that, this as a growth area for us and a great place to invest.

Got it. And just a couple of questions regarding the supply chain situation, so how many chips are fairly tight or giving you problems, is it like 1Zs or 2Zs, which one of your competitors talked about or is it more broad based?

The biggest area, I think, where we see pressure is around routing silicon, IP networking silicon. It’s probably the area that’s most challenging. But we had a variety of smaller things as well, really a handful of things. All it takes is obviously one component to cause an issue, so whether it’s a connector or a fan or PCB. What we are seeing and it really picked up in the third quarter is a tightness in a variety of different areas and so it puts a lot of focus on making sure we are planning appropriately or partnering closely with our manufacturing partners and good visibility from our customers on the demand, and I commented, we see pretty strong demand here in the fourth quarter and part of the challenge is just making sure we can supply as much of it as we can.

Okay. And my last question is on back to chips. My understanding is that some of these chips lead times are like I believe one, one-and-a-half years, one and a half might be a little bit drastic, but maybe one year or so. And if prices are going up, wouldn’t your gross margin be impacted when these higher chips go into production like one year from now. So like fourth quarter of next year, gross margin will be under incremental pressure because of higher chips, higher priced chips?

Yeah. Yeah. I do think we will see cost of goods pressure. We of course are attacking that on a daily basis with different programs across the company to continue to evolve the products and reduce cost and substitute less expensive parts, all those types of things and really be able to try and manage that. You have seen a number of suppliers in the industry look at increasing prices and those sorts of things to also help offset the increased cost and I think you will see more of that as the years progress here. You are correct, if you go out and place an unplanned order today in some components, you will get a one year lead time on them. And so having again good visibility, good forecast and long lead time orders on key components, all those kind of regular things are part of the job these days. And we have seen this cycle before, the last big supply demand balance issue was around memory and other components like that and it does level out, it takes time to happen, but it does come back into balance particularly around core A6 and core silicon of course the fab houses are oversubscribed these days and it really starts with that fundamental level that then drives restrictions and cost increases back into the whole supply chain. And what I do know is it levels out and it will happen and trying to predict exactly when that happens is almost a fool’s errand. You really just need to get on it and kind of manage it.

Got it. Actually let me squeeze in one more, some of the rubber companies have raised prices. Do you have that kind of leverage to raise prices on some of your products?

Yeah. I don’t think of it so much as leverage as it’s really what’s the competitive balance and as we are all trying to win new business and position new products we are looking for ultimately for the best value for our customer, lowest cost for the best value and that’s actually something we are really good at. The advanced tools we have for designing the network really allow us to drive to a really lowest possible bill of material cost. And part of as we are doing that pricing is looking at what are the target margins we are trying to generate. And so I do think there’s some flexibility, there would be more flexibility as more pressure increases around supply, for sure.

Got it. Thank you.

All right. Thanks, Dave.

Our next question is from Mike Latimore with Northland Capital. Please proceed with your question.

Hi. This is Aditya on behalf of Mike Latimore. Could you tell me how much the top 10 customers contribute to your overall revenue?

Yeah. We will look that up here for you, it’s in the low-50 range, but we will look it up here in just a second.

Yeah. It is about that the top 20 is usually around 60%.

But, Tom, will get that for you here in just a minute.

All right.

Yeah. It’s 47%. Bruce is almost exactly right 47%. Yeah.

47%. All right. Thank you. Got it. And could you give me some color on how the situation is in India, like do you guys see a bit of improvement in 3Q compared to the previous quarter or just a little more color on what’s happening in India?

Yeah. Our third quarter was, I think, slightly better than the second quarter, it was very, very similar and we saw our deployment rates kind of recover in the July timeframe from earlier in the second quarter. And we do expect a stronger fourth quarter certainly in India versus the third quarter, just not as strong as I thought maybe 45 days ago. It’s an interesting changes over the last 30 days in India. The Department of Telecom there has provided some relief to the mobile carriers related to the adjusted gross revenue taxes that are owed over the next 10 years and it basically pushed out the timing of some of those payments. I think that’s going to provide some relief to the overall industry, which is great. The other comment I will make is that one of our large customers, Vodafone-idea, it’s pretty public knowledge that they have been working on trying to recapitalize a portion of the balance sheet for the company and there’s been kind of increased level of rumors around getting that done here part of it, I think, because of some of the relief that the government is providing. That’s an important element to our getting back to normal in the Indian environment that’s one of our largest historical customers there and getting them back into investing in the infrastructure is really key for growing our business and accelerating growth the overall company next year.

Noted. All right. Thank you.

All right. Thanks very much.

Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back over to Brian McClelland (sic) for closing remarks.

Yeah. Great. Well, thanks very much for everybody joining us today. We are really looking forward to the Ribbon Spotlight events coming up next month and really highlighting some of the differentiation in the portfolio and how Ribbon wins and so we are really excited about that. And as you have seen in our press release, we have a number of investor conferences over the next 45 days, so look forward to connecting with everyone. Thanks very much.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.