Greetings, and welcome to the Ribbon Communications Fourth Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bita Milanian, Senior Vice President, Global Marketing. Thank you, Bita. You may begin.

Good afternoon, and welcome to Ribbon's Fourth Quarter 2022 Financial Results Conference Call. I am 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 first quarter of 2023 and beyond 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 measure are included in the earnings press release we issued earlier today, as well as 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?

Thanks, Bita, and thanks to everyone for joining us today to discuss our fourth quarter results and our outlook for 2023. I'm very pleased to report solid financial results for the fourth quarter, the strongest quarter of the year, with year-over-year growth in revenue and earnings. Overall, sales were above the midpoint of guidance, growing 13% sequentially and 1% year-over-year. Adjusted EBITDA increased 25% versus the third quarter and 11% versus the fourth quarter of 2021. And bookings momentum continued with book-to-revenue of 1.1 times, even with higher sales levels in the quarter. Operating expenses were slightly higher than we projected, primarily related to higher customer-related travel expenses and variable sales compensation. Continued elevated supply chain costs and component expedite fees, along with customer and product mix resulted in gross margins a little below our initial projections. The highlight of the quarter was the continued improvement in our IP Optical business, with sales improving across all regions and multiple new customer wins. In particular, momentum continued to grow in our IP Routing portfolio, which we believe will only get stronger as additional new products enter the market this year. But we also posted good results in our Cloud and Edge segment, with one of the strongest quarters ever for sales to enterprise customers and a strong quarter for session border controller sales. All of this resulted in $16 million of free cash flow in the quarter and $67 million of cash at year-end. Overall, it was a very good quarter and sets a great foundation for 2023. Now, a little more detail on each of our operating segments. This was by far the strongest quarter for our IP Optical Networks business since the ECI acquisition in early 2020. Revenue was $97 million, growing 18% quarter-over-quarter following growth of 20% in…

Thank you, Bruce. In the fourth quarter of 2022, our financial results showed good improvement over the previous quarter and prior year, with revenue growth momentum for our IP Optical Networks business and continued profitability contributions from our Cloud and Edge business. Please refer to our Investor Relations website for supplemental slides, summarizing our fourth quarter 2022 and historical performance. Let's start with consolidated corporate financial performance. In the fourth quarter of 2022, Ribbon generated revenues of $234 million which is an increase of $3 million or 1.3% from the prior year, driven by a 17% increase in IP Optical Networks that compensated for a 7% decrease in Cloud and Edge. Non-GAAP gross margin was 52.4% which is a 150 basis point decrease from prior year, entirely driven by the increased percentage mix of IP Optical Networks from 36% of total Ribbon revenues in fourth quarter of 2021 to over 41% in fourth quarter of 2022. Gross margins were unchanged year-over-year for Cloud and Edge at 64% and for IP Optical at 36%. Non-GAAP operating expenses were $97 million, a decrease of $5 million or 5% year-over-year, as we continue to reduce labor costs even in an inflationary environment and look forward to additional efficiencies in 2023. Non-GAAP adjusted EBITDA was $29 million for the quarter which is an increase of $3 million or 11% increase from prior year. Non-GAAP diluted earnings per share, was $0.09 higher than our guidance as a result of improvements in our global tax provision estimates. Our non-GAAP tax rate for the quarter was 3.2%, to reflect the modification of our quarterly tax provision. Our non-GAAP tax rate for the full year, 2022 was approximately 31% which is an 800 basis point reduction from 39% in the prior year in 2021. Our cash taxes for…

Great. Thanks, Mick. As we enter 2023, the operating environment for the telecom industry remains healthy despite a variety of macro pressures including higher inflation and operating costs. Consumers continue to rely heavily on the services provided by our customers in order to enable a digital mobile lifestyle and competition for consumer dollars remains fierce. It's imperative for our customers both service provider and enterprise to invest in their communication infrastructure in order to stay competitive. There are a number of common themes that we hear from our customers on how they are prioritizing their investment in 2023. First and foremost, mobile remains the top priority for the majority of operators. The adoption of 5G has hit a tipping point with mass market adoption exceeding 50% in many countries. The higher speeds and improved coverage enabled by 5G technology greatly increases the data traffic on the network. This in turn is a major catalyst for the deployment of increased fiber capacity from the radio head to the core network and broader deployment of IP/MPLS to the edge of the network. The next major priority is to increase the capacity and reach of the fixed broadband network. Availability of fiber-to-the-home Internet access for the majority of consumers is an imperative for practically all countries reflecting the adoption of hybrid work and education practices. Significant federal funding is supporting more aggressive business plans and a supercharged investment cycle. These first two priorities adds an even higher level of attention on total cost of ownership, the third key focus area. Increased competition and impacts from inflation puts a premium on every dollar spent and a spotlight on the cost of maintaining both new platforms and legacy infrastructure. Solutions that lower support costs, reduce power consumption and decreased real estate needs have grown in…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Tim Savageaux with Northland Capital Markets. Please proceed with your question.

Hi. Good afternoon. I have a question on, when you announced with Bharti and also a follow-up on the pipeline. And you made some comments in the prepared remarks, which were along the lines of what I was thinking, which is, this is a new area for Ribbon in terms of the long haul. I wonder if you can give us a sense of how significant -- well, I think it's significant from a competitive standpoint, if you can talk about that competitive environment and how you were able to translate from backhaul to long haul? And then, in terms of the business, how incremental do you think that is to what you're doing with Airtel right now? I think, there was -- I think, the word massive appeared somewhere in this press release. So maybe expand on that as well?

Yes. Hey, Tim. Well, thanks for joining us for sure. Yes, so we're obviously pretty excited about the opportunity to expand the business with Bharti Airtel. As you highlighted, our business traditionally has been more around the access aggregation layer of the network. And a lot of what we've been doing has been IP/MPLS at the Layer 2, Layer 3 layer of the network. In order to move into the long haul portion of their network, there was additional product development work required -- to meet some of their requirements. And so that's been a work in progress for the last year or so going through POCs and field trials, et cetera and culminating finally with the award and the initial deployment starting here this year. So, it was quite a process to become one of those selected vendors. It's a portion of their network we've never been in before. And as I mentioned, I think it really does kind of reinforce the competitiveness of the portfolio. So, from a, kind of, a incremental or scale perspective, it's certainly meaningful for us the initial purchase kind of double-digit million level as we scale here this year. So, we'll see how that grows over time, but it's one of those kind of major Tier 1 things that were very strategic for us and where our focus has been. And I think from a competitiveness perspective as operators in that part of the region of the world and others look at different alternatives from a supply perspective, it's given us the opportunity to gain some market share and expand what we're doing.

Great. And congrats on that. And your kind of last comments there lead me into my next question which is you're looking for Tier 1s. And I guess specifically, I don't know if it was six or eight, but you put a number on the number of opportunities that you're pursuing in North America also made reference to multiple and I think the comment was about Tier 1s in terms of opportunities in Europe. I wonder if you might just give us an update on the state of the pipeline in terms of maybe extend that to Asia and make the comment global with regard to opportunities pursued and how you've seen that develop over the last little while?

Yes. So, obviously, I'm trying to provide some level of forward indicators of future success here and the engagements with what I call Tier 1s. These are major operators in different regions of the world. And so obviously Bharti we're able to announce here in India. I mentioned a few others like Eastern Telephone and InfiniVAN who are major, major operators in their part of the region of the world or MTN GlobalConnect operating out of Africa. So, those are all the types of examples that maybe aren't top of top names known in North America but they're clearly major, major operators internationally. So that pipeline is still very active of additional opportunities that we're working on either from an RFP or a proof-of-concept perspective several in North America several in Europe and several in Asia-Pacific. So, it's pretty well-balanced. And a real key part of our strategy obviously to grow that business provide a more stable source of revenue more predictable allows us to be more predictable from a supply chain perspective improve cost all those things that I think are really required to have enough scale to be a really strong competitor in the space. And they span both Optical and IP both our key focus areas for us to find those entry points and kind of land-and-expand once we're inside these major accounts.

Great. Thanks very much.

Yes, thanks Tim.

Thank you. Our next question is from Greg Mesniaeff with WestPark Capital. Please proceed with your question.

Yes, thank you. and congrats on the results.

Thanks Greg.

First question I wanted to ask you was the business -- the IP Optical business in Europe, particularly the UK, can you give us some indication as to what percentage of that business is Huawei replacement?

It's a little hard to put our finger on it and I can't comment specifically on the UK. I would say just to give you a sense though Greg the -- I think the majority of our business is more in Continental Europe than it is in the UK today from an IP Optical perspective. We mentioned before BT is one of our customers more on the access side of more traditional portion of the network for ECI that we continue. But a lot of our business in Europe is either with the regional telecom providers and/or a lot with the critical infrastructure. And I mentioned a few names where we're very active there today. So I would say that's the stronger part. Just to comment on your Huawei replacement question. Certainly there are countries like the UK, which have been pretty aggressive in their position around Huawei as part of their infrastructure. As you get into other countries in Europe it's less a stringent requirement at this point whether it's in Italy or Spain or Germany there isn't quite as strong a mandate. And so we do face Huawei in many of the countries that we compete in today. And we don't win them all, but we definitely have to compete against them and many of the cases we're winning in an environment where we're competing directly with them.

Got you. And turning to the Cloud and Edge business. It seems to me the session border controller market when you subdivided by carrier and enterprise has kind of gone through some shifts in the last couple of quarters in terms of both market share and relevant -- relative importance. What are you seeing from kind of a macro view of that market in terms of carrier versus enterprise? Are you gaining an enterprise? Are you holding steady in carrier? I mean what are the competitive dynamics you're seeing there? Thanks.

Yes. Good question, Greg. In the carrier space it can be a lumpy business. Many times we're selling it's a capital -- a CapEx purchase either hardware and software together or a software license purchase and a perpetual license. And so we'll sell capacity to one of our carrier customers in a quarter and maybe it will be two quarters or three quarters before they need more capacity again. And so we do see that, kind of, move around in one quarter it could be up another quarter it could be down. In some cases we're selling SBCs alongside our voice infrastructure our NTR business. And in other cases we're selling SBCs and not voice. So it can vary customer to customer. I think we're holding our own very well from a market share perspective. I feel like our portfolio is really well-positioned with the carriers and when we get an opportunity we do pretty well. As you know enterprise has been a strategic area for us to focus on and grow and gain share. It's a part of the market where we have not had as much market share traditionally and it's been a real focus for the last 18 months to evolve the portfolio as well as the go-to-market and the sales motion to gain more share. In some cases now we're providing annual enterprise-wide licenses that basically authenticate the amount of software and capacity that our customers can use. In some cases we're still selling appliances and in fact our enterprise edge portfolio of session border controllers that really addresses small medium-sized business has been very robust selling through our carrier partners. But long answer to your question the enterprise piece has got a real focus. So I'm really pleased to see the growth happen in the fourth quarter here.

Thanks, Bruce. I will pass it on.

Thank you very much, Greg.

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

Thank you. Nice quarter. Perhaps you talked about bookings and book-to-bill. Just wondering if you can provide some color on backlog? I don't think you really talked about backlog. Any color on backlog whether it was up down? And how should we think about -- what should our expectation be going forward?

Yes. Thanks, Dave. So from a -- as you said we don't disclose absolute numbers around backlog. But with the book-to-bill or the book to revenue above one in the quarter it directly implies that we were building some additional backlog. I did comment that we would have shipped more in the quarter if we could. We were supply limited particularly around our access routers and upwards of $10 million or so would have shipped in addition in the quarter if we could have built it. And that's really carried forward into the first quarter. And in fact a lot of that backlog has really moved out into the second quarter as we continue to be short on a specific component around that part of the portfolio. So as I mentioned in the comments we -- because of all that I think we feel like we have better visibility and kind of better line of sight around the momentum in the business given the booking momentum in really both Cloud and Edge and in the IP Optical business.

And so you gave the annual outlook of $840 million to $870 million. Just wondering if you can go over your assumptions, as far as bookings you expected and where the backlog will be any kind of comments?

Yes. So the $840 million to $870 million at the midpoint is I think a little over 4% growth over what we reported in 2022. The assumptions around that are that the Cloud and Edge business is fairly consistent to what we did in 2022. And there's obviously a lot of things going on there with enterprise growing the federal portion of the business, that we're really focused on gaining share, growing and maybe other parts growing less. But overall, we feel like we have visibility to maintaining the level of business that we just did in 2022 and with some of the operational savings, improving the earnings from that part of the business. The top line growth clearly, we expect to come from the IP Optical Networks portion of the business. Again, we just -- we've now had two quarters of pretty solid growth, Q3 and Q4. Obviously, we've got some seasonality. So, naturally Q1 is not at the same level as Q3 and Q4, but up -- but we think up from the previous year. And that will be the large part of the top line revenue growth to drive overall for the company of 4% plus growth, but that part of the business growing at a much faster rate.

Got it. And my last question is on your gross margin outlook. So you're starting at 46% to 48%. First of all, so it's going to be down what six points, seven points sequentially from fourth quarter to first quarter. Just wondering, if you can explain what's driving that decline? And then for you to hit 53% to 54% for the year, I'm assuming you have to exit the year like, I don't know 56% to maybe 58%. So, can you -- what's going to drive that margin expansion from 47% to 50% something from first to fourth quarter this year?

Yes. No, it's a good question, Dave. The first quarter gross margin is not indicative of what we think the year looks like in addition to just a lower revenue level kind of dragging down the gross margin fixed cost absorption. The IP Optical portion of the business we think is down a little bit on margin in the quarter. Some of these new wins, I mentioned typically would have a lower margin at the early stages of the project as we deploy some of the infrastructure. And it's kind of the gift that keeps on giving then as you add capacity and transponders into the network, the margins are better. So, that's kind of the phenomenon going on in the first quarter with IP Optical. And kind of similarly with Cloud and Edge, we think the margins are a little lower than they were a year ago. We do expect to ship more of the enterprise edge equipment, I mentioned in the first quarter, which has more hardware content. So that combination drives a lower expectation on margin in the first quarter. Again, we don't think obviously with the full year guidance, but that's an indication of what the full year looks like at all. But we just had fairly good margin results in Q3 and Q4 '22 and that's more indicative of what we think the rest of the year here looks like.

Got it. Thank you.

Thank you, Dave.

Thank you. Our next question is from Erik Suppiger with JMP Securities. Please proceed with your question.

Yes. Thanks for taking the questions and good quarter. First off, India has come up a couple of times as an active area on 5G. Curious what does the opportunity there outside of Bharti look like? And then secondly, could you -- I'm not sure if you commented, but can you comment a little bit in terms of the timing on the new contract win that you had with Bharti what -- how that will ramp up over the course of 2023?

Yeah. Hey, Erik, yeah thanks for joining. Good question. It's hard not to get excited about where India is headed at this point. Of course, it's been a tougher area for us the last couple of years. But obviously, we're seeing incremental investment going on. And it's not just in telecom, but you probably saw this morning the big purchase around airlines, airplanes going into India and I think that tells you something about the economy. It's pretty hot at this point. And the investment we've made over the last few years establishing the infrastructure that we have in India to support our customers hugely strategic for us. And part of the win part of the differentiation I think we bring is that local presence. As I've mentioned to you a few times, we've got resources across all the major metro areas throughout India supporting our customers with the deployment of the products and that's just a fundamental asset for us as a company. Bharti obviously is our lead strategic customer in the region, but the other operators such as Vodafone and even Tata are really important customers. I think it's an interesting dynamic obviously with Reliance Jio being such a dominant force and creating a super competitive environment. And so how each of the operators reacts, I think will be a little bit different. Clearly, Bharti is kind of doubling down on the investment. And we'll see what the other operators do and how we can expand our business in that region given the investment we've made there. But it's a really exciting market right now.

And in terms of the new contract with Bharti, did you -- what comments did you make earlier about that? How can we think of that in terms of 2023 contribution?

Yeah. So in the last two months or so we've announced two new wins there, one around the Cell Site Router portfolio or product where we're -- which is a brand-new area for us, where we're providing that edge router kind of an access level router right at the edge of the 5G mobile network. And then the new one we just announced yesterday is really on the optical transport layer in the long haul, the infrastructure investment they're making around fiber. Both of these are significant wins for us multi-million dollars that we're now shipping against in the first half of the year. Of course, if we execute well, we hope to compete and continue that and grow that business going forward. So we're kind of in the early stages of deployment and off to a good start.

Very good. Thank you.

Thank you.

Thank you. There are no further questions at this time. I'd like to hand the call back over to Bruce McClelland for any closing comments.

Yeah. Great. Thanks again for everyone being on the call and your interest in Ribbon Communications. We look forward to speaking with many of you at upcoming investor conferences. And we've got a big presence at major events such as Mobile World Congress in Barcelona, the Optical Fiber Communication Conference in San Diego and Enterprise Connect coming up in Orlando. So I look forward to meeting many of you and continuing the discussion. And operator, thank you as well. This concludes our call.

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