Greetings. Welcome to the Ribbon Communications First Quarter 2022 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 is being recorded. I'll now turn the conference over to your host Bita Milanian, Senior Vice President of Marketing for Ribbon. You may begin.

Good afternoon, and welcome to Ribbon's first quarter 2022 financial results conference call. I'm Bita Milanian, SVP of Marketing at Ribbon Communications. Also on the call today are 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 rbbn.com, where both our press release and supplemental slides are currently available. Certain matters we will be discussing today, including the business outlook and financial projections for the second quarter and full year 2022 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 these forward-looking statements. These risks and uncertainties are discussed in our documents filed with the SEC, including our most recent Form 10-K. 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 earlier today as well as in the supplemental slides we prepared for this conference call, which again, are both available on the Investor Relations section of our website. And now I would like to turn the call over to Bruce. Bruce?

Great. Thanks, Bita and thanks to everyone for joining us today to discuss our first quarter results and our outlook for the remainder of the year. Financial results for the first quarter were in line with our expectations and at the midpoint of our guidance. Revenue was $173 million and adjusted EBITDA was a loss of $8.7 million. We successfully navigated the continued supply chain related challenges, including new issues like the increased delays being incurred for material transiting through the shipping ports in Shanghai. We expect margins to continue to be affected by higher material and logistics costs again in the second quarter, but fees associated with expediting components are beginning to lessen and as a result, combined with higher revenues, we expect margins to improve this quarter and as the year progresses. Product and service bookings in the quarter were good with an overall book to revenue ratio of 1.2 times. Our IP optical business was 1.27 times for the quarter. Our maintenance and support backlog grew nicely with nearly 80% of the year's maintenance revenue now booked. Our Cloud & Edge business had several notable customer accomplishments so far the year. Last week, we jointly announced with Microsoft the availability of support from Microsoft's Operator Connect using our Ribbon Connect platform. Operator Connect is Microsoft's operator managed service for interconnection between teams and telecom services. We've extended our multi-tenant cloud-native software as a service driven connect solution to support service provider deployments of Operator Connect and announced our first customer Switch Connect in Australia, now offering this turnkey Microsoft team service. Our solution leverages the same proven carrier grade security products and services that are already trusted and deployed in the world's largest telecom networks. Google also announced support for SIP trunking for their Google voice offering…

Thank you very much, Bruce. In the first quarter of 2022, our financial results were in line with our guidance. Ribbon generated revenues of $173.2 million, which was just above the midpoint of our guidance of $165 million to $180 million. We had an adjusted EBITDA loss of $8.7 million, which was so near the midpoint of our guidance of $5 million to $11 million. This led to an adjusted loss per share of $0.08 also within our guided range of $0.10 to $0.07 loss. As always, please refer to our Investor Relations website or supplemental slides summarizing our first quarter 2022 and historical financial performance. Let's start with commentary of our GAAP results for the quarter. Our GAAP loss includes a $27 million non-cash loss associated with the quarterly mark-to-market of the company's investment in American Virtual Cloud Technologies known as AVCT from the sale of our Candy Communications business in 2020. In addition to the usual other fact contributing to the difference between our GAAP and non-GAAP results, such as the amortization of intangible assets and non-cash compensation, we incurred $5 million in restructuring expenses and $2 million in integration expenses. On an adjusted non-GAAP basis, first quarter 2022 results were as follows; total revenue was $173 million down 10% from last year. Non-GAAP gross margin was 50.2% that's expected within our guidance range of 50% to 51%. Gross margin was 700 basis points lower versus our prior year due to lower revenue to absorb fixed costs, higher costs in our supply chain and service delivery organizations and less favorable mix. Non-GAAP operating expenses were $99 million down sequentially from the fourth quarter by $3 million. Year-on-year expenses increased 4% as we continued to invest in our research and development for IP optical networks. Non-GAAP adjusted EBITDA was…

Thanks Mick. To reiterate some mixed comments, we're projecting a sequentially stronger second quarter. We expect double digit growth in both our product segments based on solid backlog and identified projects this quarter. IP optical sales are expected to increase primarily related to projects in the European region and Cloud and Edge growth is related to network transformation projects in North America, as well as increasing sales in our enterprise business. We also expect to see the benefit of improvements we've made throughout our supply chain, including investment in strategic inventory and agreements with key suppliers to reduce expedite fees and component costs. We expect the combination of higher sales and improved product costs will significantly improve profitability compared to the first quarter. As a result, our expectations for this second quarter is as follows. For revenue in a range of $200 million to $215 million; non-GAAP gross margins of 53.5% to 54.5%; non-GAAP adjusted EBITDA between $17 million and $23 million, and non-GAAP diluted earnings per share of $0.03 to $0.06. For the full year, we believe the targets we established on our last call are still achievable based on the growing opportunity funnel and new product introductions. We look forward to solid performance in the second quarter and further improvements in both sales and profitability in the second half of the year. We have an incredible opportunity in front of us as the global investment in communications technology surges over the next several years. Operator, that concludes our prepared remarks and we can now take a few questions.

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

Thanks, Bruce and Mick, I appreciate you taking the questions. It seems pretty clear that your visibility is improved. My direct question to you is beyond Q2, how would you characterize the degree of visibility into the back half of the year?

I think, hey Paul, good to talk to you. I think all the way, through Q3 into Q4, we've got good visibility on the -- if I take it by segment on the Cloud and Edge side, I mentioned the network transformation programs and activity there, we get as you know, pretty good visibility on those activities. In our IP optical business, I mentioned strength in a couple of different regions looking into the second half of the year. We see good opportunities in Europe with our critical infrastructure customers. I talked about a couple of different wins in regions like Africa where we're growing our business and share, and we see opportunities for further growth in India. So I think, we've got a pretty good pipeline of activity and as we look at individual opportunities, this is not kind of just regional and this is down to the specific project specific opportunities to specific customer. So, I think you've characterized it right. I think our visibility is definitely in a good spot here,

Bruce, I don't want to put words in your mouth, but what I think I just heard you say is your visibility is not, well, I want to make sure I understand it correctly. Your visibility's not dependent. It sounds pretty broad based. It's not dependent upon any one particular region, any one particular customer or again, it's fairly broad base. Is that an accurate rendition?

It is. It's not one or two opportunities of extensive size that we're hinging on. It's a whole broad base of accounts across a variety of different regions and some of them we've announced and their projects that are just getting started. I mentioned one of the new voice modernization projects we have with a major operator here in the US that uses products from both portfolios. That project is just going through validations. So we expect revenue in the second half. Yeah, so there's a whole variety of different things in the funnel here that they are looking very positive.

All right. And guys, I recognize this is not unique to you, but impacts all companies. Have you factored in, are you factoring in these lockdowns in China? It doesn't sound like they've had a meaningful impact on you as of yet, but can you give us any color as to whether they have had an impact what the risk is, if they continue for another two weeks, another four weeks, do you then feel a meaningful impact? I assume everyone's got exposure, even if you don't have direct exposure.

Yeah. The primary impact is the logistics coming out of that region. From a production perspective, we haven't been impacted, but just the amount of times it takes to get either finished goods or material through the ports there has extended two to three weeks, and that did have an impact on us in the first quarter. What we are expecting is that it improves in the second half of the second quarter. They're talking about some further openings, May 15 and we've tried to take all of that into account, obviously, as we set the outlook for the second quarter. So we did have some impact in the first quarter that reduced some sales in the first quarter. But, we obviously were trying to be able to estimate those things as we put guidance together and we're able to come in right in the middle of the guidance. So…

One last question for me before I hop back into the queue. Bruce, I pause, you said this, but the view for the two different businesses cloud and manage and IP Optical for the year beyond the quarter, are you expecting growth from both businesses for the year?

I think our view is very similar to where we were 75 days ago. We did the last earning call. We still expect the IP optical business to have double-digit growth going into the full year and the Cloud and Edge business flat to maybe down a little bit for the full year, Paul. So very similar to what we guided to at the last earnings call.

And so if, how do I put this? If one assumed and normalize a stable supply chain environment, it doesn't sound like it is all that stable from other companies that report, but if one assumes no degradation supply chain, where's the greatest opportunity from a demand perspective for upside?

Yeah, I think from a top line revenue perspective, it's definitely in the IP optical, both the IP networking portion of the business and optical. Both of those segments are growing for us. There's definitely room for upside opportunity on the cloud and edge business. It's less dependent on supply chain. More dependent on some of the projects I mentioned. As an example, one I mentioned was around the federal government modernizing their voice infrastructure. We think that's a big opportunity. It does take a while for those programs to get funded and get into deployment and whatnot, but there's definitely an opportunity for upside on the cloud and edge business, around those types of activities.

All right. And Bruce, again, I'll apologize. One more question. It's probably too really to say, but what can I be obstacle get back to within the next two to three years from a revenue standpoint? If India comes back, why that would seem to be good for you, sounds a good opportunities, results where how big can that business be in the next two, three years?

Yeah. We get into the midterm planning, Paul. I get really excited. I talked a little bit about the product pipeline that's coming out and it really creates a much stronger competitive position force. And in particular around IP routing, I just think there's an untapped opportunity. So in that timeframe, in the $0.5 billion plus range, those are the areas that we're clearly targeting to grow the business. A lot of good things have to happen. We have to execute well to do that, but it's easy to see how that business can grow to that level of over the next few years.

I appreciate the responses. Thank you.

Thanks, Paul.

Our next question is from Tim Savageaux with Northland Capital Markets. Please proceed with your question.

Sorry. Hi, good afternoon. And congrats on the outlook in particular. The question to start with about the RFP pipeline and IP optical that you mentioned, I think you talked about a dozen opportunities there and I want to ask a couple of questions about, I guess, can you give us, you mentioned most are having to do with maybe replacing Huawei. So I assume that most of these are carrier type deals. I wonder if there's any, well, if you can give us kind of the size of this pipeline in the aggregate, kind of what you think you might be able to take out of it in terms of a competitive situation, and whether you expect these decisions to be made this year or impact. Is any of this contemplated in your guidance, I guess, or would converting these represent an upside?

Yeah, yeah. Yeah. Great questions and Tim, good to chat with you. So these are all carrier deals. I think all of the ones the 12 that I mentioned are all active service provider telecom and mobile carrier RFPs. Not all of them are Huawei replacement, but there is definitely a trend internationally in Europe, in certain countries in Asia Pacific, where they are squarely positioned on additional suppliers, replacing Huawei in the infrastructure. And when I say replace, that doesn't mean necessarily rip out and replace, but certainly replace them as a supplier. These are all kind of major providers. There's a whole longer list of smaller opportunities obviously, but we kind of honed in on what we think of as tier one carriers. Now, tier one's, it's a overused term. So I tend not to use it very much, but these are major telecom providers, infrastructure providers, typically both mobile and fixed carriers that are looking at either capacity additions into the network from an optical perspective, as I mentioned, potentially replacement of existing suppliers, or in quite a few of the cases as well, looking at IP networking and really pushing IP networking further and further out to the edge, particularly around 5G networks and the front hall portion of the network from a size perspective, the spend on every one of these is multi tens of millions a year. We don't obviously expect that we end up single store or anything like that on these opportunities. We're typically coming into to be a new supplier in the network and I don't expect we win business on every one of them, but I think it just gives you an indication of the potential opportunity here and that the company is positioned differently than where ECI had been previously. We're now getting opportunities in at these major carriers that are really, I think transformative for the company. So I think your last question was on impact this year. In our outlook for this year, we really have very little of this planned in. I've learned the hard way, I think that it takes quite a bit of time to go from this stage of engagement to really significant levels of deployment. So I think these are all really pipeline things for 2022 or 2023 sorry.

Got it. And thanks for that. Just to finish up on that topic, within that group of 12 tier ones, any overlap with your cloud and edge business, or are these all kind of net new customers

Yeah, I'm not sure what the exact percentage is. Maybe it's 50% or something like that or maybe a little more where we have overlap just given, most of the carriers around the world. We have some sort of business with our cloud and edge side. So…

Wow, great. Okay. And then the last question for me was going to be in the same business, IP optical on the gross margin side. They obviously dip down here in Q1 and I know you talked about double-digit growth in both businesses in Q2, but any commentary on where you expect that gross margin to go in Q2 and maybe through the end of the year as you continue to see growth.

Yeah. So Q1 was an abnormal level for sure. The short answer on Q2, we're expecting to be in the mid-thirties overall for the IP optical portion of the business. There's clearly improvement simply from the higher revenue that we're projecting for the quarter and the fixed cost absorption, takes us almost halfway there. The mix that we're seeing in the second are kind of a richer mix of shipments into Europe, into critical infrastructure. So I think that helps our mix a little bit from a margin perspective. And then, finally from a component or product cost perspective, we're seeing a reduction in expedite fees as we've been engaging with our suppliers and trying to control that. You may have seen our inventory level went up a little bit in the first quarter, as well as we're trying to get ahead of making sure we're not scrambling for components at the last minute as much as possible. So yeah, that's kind of the bridge and how we get into the mid-thirties in the second quarter. And then we expect to continue to grind away at this and improve it as the year progresses from there.

Great. Thanks very much.

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

Thank you. Good afternoon. I guess my first question is I joined a call a little bit late, but did you talk about -- I see that you talked about book to bill, what was backlog?

Yes. We don't report the backlog. It is up from previous quarters, Dave coming into the second quarter, but we don't break it out in detail.

Is it roughly like maybe at least, maybe couple of quarters or any granularity?

Can you ask that again, Dave? I'm sorry,

Your backlog. Does it cover maybe a couple of quarters at least, or any comment on that?

No, so we -- we're typically not at that level of backlog, Dave. We'll cover 50% cent plus of the quarter we're in and a lot of it's just the nature of the customers we're working with as we get into the critical infrastructure segments and whatnot. A lot of what we're shipping in a quarter or the next quarter will kind of within the 90 days prior to shipping. So Mick got to add additional thoughts on that.

Yeah, I'd just like to point out that our server services backlog is very robust. So we have multiple quarters, almost 80% of the year kind of in the backlog. It's our product backlog that given the nature of the business and our customers is not as forward looking.

Yeah, that's a great point. So that, a lot of the given the significant portion of maintenance that we have, the big chunk of that's already in backlog. So we're really normally when we're referring to backlog, we're talking about the product portion, so, yeah.

Got it. Regarding your outlook, it looks like what, $30 million to $40 million sequential growth from first to second quarter. Should we expect sort of a similar contributions from both optical and C&E, meaning like if it's $30 million then $15 million and $15 million each, or is one going to contribute more than the others?

Yeah, so we expect both businesses to be up double digit percentage from the first quarter in the second quarter. So we definitely are projecting growth in both of those segments in a similar sort of percentage, cloud and edge may be up a little bit more.

Got it. And then regarding optical gross margin starting at 29%, I think you said mid-thirties this current quarter. You're guiding total gross margin to be blended gross margin to be 55%, 56%. So should we expect gross margin for optical to be maybe, I don't know, high 30s, to hit your 55%, 56% target for the year?

That's directionally correct. We do expect in the second half, again, partly because of volume and partly because of mix and control of product cost that the margins on IP optical continue need to grow back towards where we had been traditionally. We don't think we get back to the 40% range this year. But we're directionally getting close there in the second half.

Got it. And my last question is once again, I missed some of your earlier comments, but sounded like you're implying the supply situation is starting to improve because some of the other companies that reported before you are saying things could be getting actually worse and certainly won't improve until next year. What's your view on that?

Well, perhaps it's all relative. When we started the year, we obviously see -- we saw the pressure on supply chain and adjusted our guidance, adjusted expectations on surprises at the end of quarter, those sorts of things, and took our estimates down. And I'm glad to see we delivered on the results for Q1 as we expected. So perhaps it's a bit of a timing thing. We saw this coming and have taken actions as well as communicated that early. I wouldn't describe the situations that it's dramatically improved and what I mean by that is, the elevated component costs that we're seeing, they're here to stay for most of the year. What we've tried to do is get in front of some of the other related costs, whether it's expedite fees, increase costs around shipping and logistics, those sorts of things to try and get it at everything we can control. So I wouldn't describe it as it's gotten better, but I think one, we saw it coming and two we're addressing the things that are in our control.

Got it. Thank you.

We have reached the end of the question-and-answer session and I'll now turn the call over to Bruce for closing remarks.

Well, great, thanks again for everyone being on the call and the interest in Ribbon Communications. As a reminder, we're holding our Annual Shareholder Meeting on Wednesday, May 25, and we're once again using a virtual format for easy of attendance. So we ask everyone to join us on that. We also have a series of upcoming investor conferences over the next month or two and invite you to to chat with us and we'll keep you posted on progress. So with that operator, thanks very much and that concludes our call.

This concludes today's conference, and you made us connect your lines at this time. Thank you for your participation.