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spk05: Greetings and welcome to the Ribbon Communications First Quarter 2021 Financial Results Conference Call. At this time, all participants are in the listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Tom Berry. Tom Berry. Investor Relations for Ribbon Communications. Thank you. You may begin.
spk13: Good afternoon and welcome to Ribbon's first quarter 2021 financial results conference call. I'm 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 second quarter and full year 2021, 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 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 we prepared for this conference call, which again, are both available on the investor relations section of our website. As previously noted, we completed our acquisition of ECI Telecom on March 3rd, 2020, and completed the sale of Candy Communications on December 1st, 2020. These transactions affect comparisons to prior periods. Further, in the fourth quarter of 2020, we began segment reporting for our Cloud and Edge and IP Optical Networks businesses. And now, I'd like to turn the call over to Bruce. Bruce?
spk04: Great. Thanks, Tom. Good afternoon, everyone, and thank you for joining us today to discuss our first quarter 2021 results and our outlook for the remainder of the year. We had a strong start to 2021 from a profitability perspective with both adjusted EBITDA and non-GAAP earnings per share at or above the high end of our guidance ranges. We also had very good bookings in the quarter with the book to revenue ratio excluding maintenance of 1.14 times and the maintenance bookings for the year now at nearly 80%. This gives us very good momentum towards our financial targets for the year. In our cloud and edge business, we posted strong gross margins along with an 18% reduction in our non-GAAP operating expenses year over year, resulting in EBITDA nearly tripling compared to first quarter 2020. Sales were essentially flat after adjusting for the sale of the candy business. Demand for our core SBC portfolio remained strong, growing 12% year over year, offset by continued weaker demand for the on-premise enterprise edge platforms during this prolonged work-from-home environment. Last month, Microsoft announced a new Operator Connect service, which we already support with our session border controller products. We believe this new service offering will reduce the friction for enterprises to easily deploy high-quality voice capability via the Teams platform and plays to our strength given our broad deployment base with mobile and fixed service providers. This new service will complement the current direct routing alternatives already available, including our new ribbon connect as a service offering that includes support for legacy PBX interoperability in partnership with our channel partners. We have a growing pipeline of partners embracing this new platform and are currently onboarding more than 60 resellers to the program. This is an important initiative as we build our base of recurring revenue. Last week, we announced that our partner program received a five-star rating in the 2021 CRN channel reseller network partner program guide. When dealing with ribbon, our customers expect innovative products and strong collaboration. And this announcement offers further proof that we're meeting those standards. We had strong bookings in our network transformation business in the first quarter with multiple intelligent network modernization projects in North America and Asia Pacific. including expansion orders with three of the largest North American Tier 1 carriers, totaling over $40 million during the quarter. We were also awarded a three-country multi-year deal in Europe to replace a legacy Huawei system, building on our momentum from last quarter. And we signed over $3 million in stir-shaken robocalling deals in the quarter. In our IP optical segment, sales grew 22% year-over-year on a pro forma basis, adding 13 new customers in the quarter. Bookings were strong in Europe with both service providers and critical infrastructure organizations. Sales in India were very consistent with the last several quarters, although unfortunately India is suffering through another significant wave of COVID infections and continues to experience a very slow recovery. Deployment levels are roughly 60% of where they were prior to COVID, and we look forward to a strong second half recovery. We had new wins in other regions, including in the Middle East, where we signed an incumbent carrier to completely replace products from their current supplier, and with Sinia, a network operator based in Finland that operates a fiber optic network in Northern Europe, providing secure connections for international businesses and government organizations. In the United States, we continued to leverage our existing ribbon relationships to earn four new IP optical wins in the U.S. rural infrastructure market. Globally, we have a very active pipeline of opportunities and are currently finalizing contract negotiations on a meaningful Huawei WDM replacement deal. We are also in the final stages of several significant mobile and fixed operator cross-sell opportunities in North America, Russia, and Asia Pacific. We completed 19 large-scale proofs of concept in the first quarter, a mix of both WDM transport and IP networking opportunities. We continue to introduce new innovative products with the successful deployment of the Apollo 9901 access OTN switch in the first quarter and a new high density dual 400 gig MUX ponder that received high scores in the 2021 LightWave innovation reviews. In our IP transport Neptune portfolio, we introduced two new access products that are directly focused on the 5G cell site router and critical infrastructure markets. Available in both fully redundant and non-redundant versions, these products address the operator's needs to rebuild backhaul networks to handle 5G traffic, leveraging pluggable coherent optics. The platforms also support the precision timing requirements of 5G networks, as well as Flexi hard slicing to reliably segment different types of traffic. And I'll turn it over to Mick to provide additional detail on our results for the quarter. And I'll come back on to review our guidance and provide additional details on our plans for the remainder of the year.
spk06: Mick? Thank you very much. As Bruce stated, we had a strong start to the year with continued revenue growth and first quarter profitability that exceeded our expectations. We generated revenue of $193 million, which was in line with our guidance, and adjusted EBITDA of $20 million, which was above our guidance of $14 to $18 million. This led to an adjusted earnings per share of 3 cents, which was at the high end of our one to three cent guided range. As always, please refer to our investor relations website for supplemental slides with graphs and tables summarizing our first quarter 2021 and historical financial performance. Let's start with some commentary about our GAAP results for the quarter. Our GAAP earnings included a $24 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 last year. This was partially offset by $1.5 million in paid in-kind interest income earned on the convertible debt from the same transaction for a net negative impact to GAAP income of $22 million, or 15 cents per share. This was in sharp contrast to the large positive impact of $114 million to income and 74 cents to earnings per share in the fourth quarter of 2020. As we mentioned on last quarter's earnings call, fluctuations in ABCT stock price affect our other income and expense line as we mark to market our investment. Due to this volatility, we have excluded these items related to the candy asset sale from our non-GAAP results. In addition to the usual other factors contributing to the difference between our GAAP and non-GAAP results for the quarter, such as the amortization of intangible assets and non-cash compensation, We incurred $6 million in restructuring expenses related mostly to continued downsizing of our real estate footprint and $1 million in integration expenses. On an adjusted non-GAAP basis, first quarter 2021 results were as follows. Total revenue was $193 million, up 22% from the first quarter of 2020. Non-GAAP gross margin was 57% in the quarter, similar to our gross margin in the first quarter of 2020, due to favorable product mix. Non-GAAP operating expenses were $95 million in the quarter as we continued to drive efficiency. We had favorability in our facility expenses, travel, and other discretionary expenditures. Non-GAAP adjusted EBITDA was $20 million in the quarter, up from $10 million in the first quarter of 2020, due to product mix and favorability in our operating expenses. Non-GAAP diluted earnings per share was $0.03 above our first quarter 2020 non-GAAP diluted earnings per share of $0.01. Our diluted share count was 155 million shares for non-GAAP earnings in the quarter. Now, looking at the results of our two business segments. In our Cloud and Edge business, first quarter revenue was $125 million, down slightly year over year, but flat when adjusting for the sale of our candy business. Non-GAAP adjusted EBITDA for Cloud and Edge was $28 million, nearly three times the $10 million the business generated in the first quarter of 2020, with an EBITDA margin of 23%. The year over year change was driven by the candy sale, restructuring savings, minimal travel, and other discretionary expense savings. Here are a few additional points on the Cloud on Edge performance in the quarter. Product revenue was $50 million, while service revenue contributed $75 million. Software accounted for 52% of total product revenue, roughly flat in the first quarter of 2020. Turning to our IP optical business, we recorded first quarter revenue of $67 million, an increase of $37 million from the prior period on and ask reported basis. On a pro forma basis, the increase was $12 million or 22% year over year. We had good margins at this revenue level with non-GAAP gross margin of 39%. Our IP optical business generated an adjusted EBITDA loss of $9 million for the quarter. Now, here are some consolidated key metrics for the company. Maintenance revenue represented 36% of total revenue in the first quarter, increasing by approximately $8 million from the first quarter of 2020. Top 10 customers were 46% of total revenue in the first quarter, up from 45% in the fourth quarter of 2020, and slightly above the 43% from the first quarter of 2020. Service providers accounted for 77% of our revenue in the quarter, and enterprise customers represented 23%. International customers provided 59% of our total revenue in first quarter, in line with a company record of 60% in the fourth quarter of 2020. As Bruce mentioned, we are encouraged with the book to revenue, which excludes maintenance of 1.14 times for the first quarter. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $109 million, including $3 million in restricted cash. This is a decrease of $27 million from the previous quarter, as expected due to annual variable compensation payouts and seasonal factors. Our $100 million revolver still remained undrawn. As previously announced, we amended our credit facility in early March, increasing our term loan A balance by approximately $75 million, using the proceeds to pay off the term loan B balance. Term loan B carried an interest rate margin that was 500 basis points higher than the term loan A. Now, our effective interest rate has gone from 4.4% to 3.4%. The principal balance of the term loan A was $391 million as of March 31st. Once again, we comfortably met our quarterly financial covenants. As per our credit facility calculations in the first quarter, our leverage ratio was 2.35 times versus a maximum of four times, and our fixed charge coverage ratio of 3.94 times versus a minimum of 1.25 times. Our debt net of cash was $275 million as of March 31st, which divided by the last 12 months adjusted EBITDA provides an accounting leverage ratio of less than two times. From a cash perspective, the company used $6 million in cash from operations in the quarter. Capital expenditures were $5 million for the quarter, which had $3 million of real estate leasehold improvements. Now, I'd like to turn the call back to Bruce to discuss our outlook for the second quarter and full year 2021. Bruce? Thanks, Mick.
spk04: While we continue to execute well in the near term, our focus is also on the longer term transformation of the company. This is a unique time in our industry with significant competitive shifts creating opportunity for Ribbon to gain share while benefiting from the strong secular demand for bandwidth and the increased adoption of cloud communication services. Over the next several years, we also expect significant federal funding initiatives to further improve the broadband infrastructure along with network upgrade investment to support 5G deployment and the modernized legacy TDM networks. We are winning new business that is directly related to the combined strength and portfolio of Ribbon and ECI, validating the merger strategy and growing both top and bottom line. I'm very excited about the strong pipeline of IP optical opportunities, and in particular, several late stage tier one service provider evaluations. leveraging existing strong ribbon relationships. Our portfolio differentiation is becoming more clear in the market and with our customers. Our highly optimized metro WDM platforms are perfectly complemented by a strong portfolio of IP MPLS switching and routing products. One of the key elements being evaluated in these opportunities is our new dual 400 gig ZR plus WDM solution. We expect to be one of the first to market with this new capability, with general availability planned for early in the third quarter. In addition to ultimately supporting vendor interoperability, this new technology represents significant bill of material cost savings. A second key factor in these opportunities where we're seeing significant interest is our MUSE multilayer domain orchestration platform. This suite of tools enables orchestration and optimization across both the optical and and IP layers in the network, supporting a multi-vendor SDN operating environment. This is proving to be an important differentiator for the ribbon solution and is in large-scale deployment with Bharti in India today. With that as the backdrop, here are our expectations for the second quarter. We anticipate revenue to be in the range of $215 to $225 million, with gross margins of 56 to 57%. We expect adjusted EBITDA of 30 to $34 million and non-GAAP earnings per share of nine to 11 cents per share. Our guidance for the full year remains unchanged. Once again, thanks to our employees for continuing to deliver during these challenging times. Operator, that concludes our prepared remarks and we can take a few questions now.
spk05: Thank you. Ladies and gentlemen, at this time we will conduct our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star followed by the number 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, to ask a question, press star 1 on your telephone keypad. One moment while we pull for questions. Our first question comes from Dave Lattimore with Northland Capital Markets. Please state your question.
spk14: Hi. This is his brother, Mike Lattimore, calling in. Hey, Mike. Hi. So interesting on these late-stage Tier 1 opportunities, did you say that they were with cloud and edge customers, one, and also maybe what regions are they in?
spk04: Yeah, so I was referring to the IP optical, Mike, not Cloud and Edge in that commentary. And it's in multiple regions. I think I mentioned Russia specifically, North America specifically, and Asia Pacific as well. So, you know, a number of different opportunities, you know, well down the pipeline basically, you know, to comment on them now.
spk14: Yeah. And are they with current – cloud and edge customers that are also looking at this, or is it independent of that?
spk04: Yes, so several of them are, not all of them, but more than half of them, yeah.
spk14: Okay, right. And then it sounds like in India, you know, obviously a lot more restrictions. I guess you sort of factor that into your guidance here, right, that you're assuming India's a little tighter for a while? Yeah.
spk04: Yes, exactly. Uh, you know, I know, um, well, I commented on, you know, the first quarter was pretty consistent with what we saw in the second half of last year. So it, you know, it is, it's more robust than what it was in the first half last year. Uh, but certainly, you know, not anywhere back to, you know, full deployment velocity. Um, you know, if you look at the deployment that we're seeing right now, it's about 60% of what we saw pre COVID. So there's plenty of room to run still. And, uh, You know, we've tried to take that into account certainly with our second quarter guidance here.
spk14: And just last one. At one point you commented on voice traffic volumes relative to pre-COVID levels. I think you said they were like 30% above pre-COVID at one point last year. Like I said, any update on kind of what you're seeing in terms of traffic volumes?
spk04: I don't have an updated quote on that, but I will follow up on it, Mike, and see if I can get some more detail on kind of latest traffic levels. I just don't have anything in front of me here right now.
spk14: Thanks a lot.
spk04: Great. Thanks, Mike.
spk05: Our next question comes from Dave Kang with B Reilly. Please, to your question.
spk15: Thank you. Good afternoon. My first question is regarding the chip situation. to your first quarter results or second quarter outlook?
spk04: You know, there was nothing substantive, Dave, that impacted Q1. It was obviously tight. You know, we've definitely seen lengthening lead times and, you know, challenges on a variety of different types of components. But, you know, like many, I guess we saw this coming. We're trying to get out in front of it as much as we could and had, you know, sufficient for Q1 and You know, right now we're not anticipating big issues in the second quarter. Again, you know, trying to plan ahead here. You know, we'll see how the second half goes. You know, the real issue comes down to any decommits kind of within promised lead times that you end up with issues on deliveries. But, you know, so far so good. But it's pretty tight. It's got to be worked every day.
spk15: Also, somebody, another equivalent vendor reported earlier this morning talked about margins getting hit because the prices are going up. What about you guys? Any margin impact because of increasing prices?
spk04: You know, there is a little pressure on prices, you know, certainly on logistics as an example. You know, we've seen some elevated costs around that, you know, which impacts a portion of our business. Of course, a lot of what we sell is software as well. So the direct effect on the overall profitability for the company might be a little less than somebody that's more concentrating on hardware.
spk15: Got it. And then I did have a question on India. So it's running about 60% pre-pandemic. When do you expect India to fully recover back to the pre-pandemic level? Are you assuming second half or is that something beyond second half this year?
spk04: Well, so what we believe happens is the second half of the year begins to strengthen from where we're sitting today. Obviously, it's a little hard to tell exactly, you know, when we're back to pre-COVID levels. And, you know, it's a combination of factors around funding for new projects and budgets, et cetera, but then just the logistics in the country and deployment velocity. And we're able to get pretty good visibility on the deployment of our products were directly involved from a service and logistics perspective in the country. And so, you know, the 60% number is pretty accurate based on what we're seeing right now.
spk15: And can you remind us what India was pre-pandemic? Was it about 10% or?
spk04: Yeah, so for ECI, it was about a third of the business prior to merging with Ribbon. So, you know, call it in the 125 million range, annual run rate range, something like that, pre-COVID. Got it. Thank you. Thanks. Thanks, Dave.
spk05: Our next question comes from Paul Silverstein with Cowan. Please state your question.
spk12: I've got a couple of questions. Why don't I start with India just to try to tie up any loose ends. When you, Bruce, when you talk about, if I saw in the prepared remarks, you're talking about meaningful improvement in the second half, and I guess what I just heard you say sounds a little bit different than that, but if I could press you in terms of how much visibility do you have into the second half underlying your view, and what exactly is that view in terms of the degree of strength you're expecting in the second half of the year?
spk04: Well, with the larger service providers we're working with in India, We have a pretty tight planning relationship, you know, given where lead times have gone on products and whatnot. You know, we have to have good visibility. And, you know, we sell a portfolio of products. There's a whole variety of different, you know, configurations that we sell. And, you know, you've got to have that right in the planning phase. So, you know, we go through a bit of a budgeting process and then an engineering process with many of our customers to get to the bill of material to be able to be driving things correctly. So we get good visibility on, say, the next three months, and the next six to nine months beyond that, we have more planning directional information. So it's not 100% scientific, but it's pretty decent. And, of course, where you'll see variabilities is when we're bidding on new regions of the network or replacement of product and things like that. You know, you don't know for sure how much you're going to win or if you're going to win, so there's some variability around those things.
spk12: Bruce, given that the spike in the pandemic appears to be of relatively recent vintage, I recognize it didn't just start yesterday, but it's also not three or six months old. Have you had real-time communications in the last week or two that would inform you as to whether there's been a change in their deployment plans? And I recognize we're not talking about a demand issue, but literally the physical ability of your customers or you on behalf of your customers to deploy product. But have you had communications since it's been apparent that the pandemic spiked up and whether that's changed their planning with respect to those deployments in the second half of the year?
spk04: Well, you know, given the timing of earnings and providing guidance, you know, we do a pretty thorough job in the couple of weeks leading up here to make sure we've got a reasonably accurate view of and we're not projecting significant growth in the second quarter here in India. If things tightened up dramatically, it would have an effect, I suppose, right, obviously. But on the other hand, the country's been living in some pretty tight restrictions for quite a while as well. So I think the answer to your question is yes. We've had discussions and discussions you know, believe we've got an accurate view on what happens here in the second quarter.
spk12: Bruce, again, my apologies. One last question on India. Looking beyond the second quarter into the second half of this calendar year, has there been any change in the deployment plans the past couple weeks because of the spike up in COVID?
spk04: Not that I can put my finger on right now, Paul, but... Yeah, that's the best I can answer the question, I think.
spk12: No, I appreciate that. And, Bruce, to be clear, you're expecting a healthy, a strong increase in the second half of the year relative to that 60% number?
spk04: We are. We are. You know, we're projecting the second half stronger than the first half. Part of it is, you know, projects are parts of the network that we're already being deployed in, and part of it is, you know, new wins that we're anticipating, you know, given opportunities for market share gains in the market.
spk12: And these are primarily or exclusively optical deployments?
spk04: No, it's a combination of the IP MPLS portfolio and the optical portfolio.
spk12: Okay. I appreciate that insight. Let me move on. In terms of opportunities, you referenced Huawei a couple times during the call, and I want to make sure I fully understand. It sounds like you've already secured at least one particular deal. I think you characterized it as $3 million, and I think it was on the voice side of the house. And I think I heard you say that you also are close to finalizing a deal to displace them in optics, although perhaps I misunderstood. But is there any insight you could give us in terms of how many opportunities there are in total that you're in various stages of trying to win that are directly linked to Huawei displacement of new awards? How many of those are in optics? How many are those? or in voice or unified communications, et cetera, and whether it's accelerating, whether it's not steady state, any insight on the opportunity?
spk04: Yeah. So first answer, the first part, you characterized it correctly. You know, I referred to a voice replacement opportunity in Cloud and Edge. and also referred to, you know, kind of close to the finish line on a replacement opportunity in IP optical. You know, the opportunities we're seeing are both in the optical portion of the network as well as in the IP portion of the network. And, you know, certainly the India market is one of the key focus areas as well as, you know, several countries in Europe today. And in general, I think these are fairly meaningful opportunities for us that will move the needle, or I wouldn't mention or wouldn't refer to them sort of thing. So these are not dozens and dozens necessarily. We're focused on a specific list of opportunities where we're either already currently deployed today and we can gain more share or new insertion opportunities with new customers.
spk12: First of all, I appreciate it's not dozens and dozens. Is it over a dozen or would it be more like six to 12 or even lower than six in terms of total potential opportunities that you're looking at?
spk04: You know, the meaningful ones in the short term are, you know, under a dozen. You know, there's real focus around these things. It's not kind of a shotgun in a broad array.
spk12: Would it be in that six to 12 range? Yeah. I appreciate that. Beyond Huawei, if you had to tier what you're most excited about in terms of driving revenue growth specifically, what would be number one and two and three?
spk04: Well, the top two are Huawei opportunities. Well, top three, Huawei opportunities. The second is recovery in the India market. And then the third is, you know, success in North America that we've talked about and the growth that we're targeting here in the North American market. You know, those three things all focused on the IP optical portfolio, you know, are the areas that we believe will drive growth as the year progresses here this year.
spk12: All right. I've already asked about two of the three of those. I just have one question on this. Actually, a broader question, just North America. I think I heard you say you've got a number of opportunity service providers around the world, Russia, U.S., et cetera. Again, trying to get some granular insight, can you characterize, is that also in the range of 6 to 12? Is that more than a dozen? Is it less than half a dozen? Any rough quantification you can give us?
spk04: Well, let me come at it a different way. You know, I think the second quarter is going to be, you know, fairly significantly stronger in North America for us on IP optical. So, we have, you know, a number of projects that are in flight already today that we'll recognize revenue on in the second quarter. So, I think we'll see some, you know, some meaningful improvement there. And, you know, as I referred to these Tier 1 opportunities, You know, these are, again, these are a very focused set of, call them, you know, a half a dozen opportunities that are meaningful to the company that we're focused on and believe we have, you know, a very good shot at winning some share in them. And hopefully we'll have, you know, more specific detail to share on the next call. I greatly appreciate the insight. Thank you.
spk02: Yeah, thank you, Paul.
spk05: Ladies and gentlemen, there are no further questions at this time. I'll turn it back to management for closing remarks. Thank you.
spk04: Great. Well, thanks again for everyone being on the call and your interest in ribbon communications. We really look forward to speaking with many of you at our upcoming virtual investor conferences and updating you on the progress on our next earnings call. With that, operator, that concludes our call.
spk05: Thank you. All parties may disconnect. Have a good evening. you you Thank you. Bye. you Greetings and welcome to the Ribbon Communications First Quarter 2021 Financial Results Conference Call. At this time, all participants are in the listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Tom Berry. Investor Relations for Ribbon Communications. Thank you. You may begin.
spk13: Good afternoon and welcome to Ribbon's first quarter 2021 financial results conference call. I'm 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 second quarter and full year 2021, are forward-looking statements. Such statements are subject to 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 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 we prepared for this conference call, which again, are both available on the investor relations section of our website. As previously noted, we completed our acquisition of ECI Telecom on March 3rd, 2020, and completed the sale of Candy Communications on December 1st, 2020. These transactions affect comparisons to prior periods. Further, in the fourth quarter of 2020, we began segment reporting for our Cloud and Edge and IP Optical Networks businesses. And now, I'd like to turn the call over to Bruce.
spk04: Bruce? Great. Thanks, Tom. Good afternoon, everyone, and thank you for joining us today to discuss our first quarter 2021 results and our outlook for the remainder of the year. We had a strong start to 2021 from a profitability perspective with both adjusted EBITDA and non-GAAP earnings per share at or above the high end of our guidance ranges. We also had very good bookings in the quarter with the book to revenue ratio excluding maintenance of 1.14 times and the maintenance bookings for the year now at nearly 80%. This gives us very good momentum towards our financial targets for the year. In our cloud and edge business, we posted strong gross margins along with an 18% reduction in our non-GAAP operating expenses year over year, resulting in EBITDA nearly tripling compared to first quarter 2020. Sales were essentially flat after adjusting for the sale of the candy business. Demand for our core SBC portfolio remained strong, growing 12% year over year. offset by continued weaker demand for the on-premise enterprise edge platforms during this prolonged work from home environment. Last month, Microsoft announced a new operator connect service, which we already support with our session border controller products. We believe this new service offering will reduce the friction for enterprises to easily deploy high quality voice capability via the Teams platform and plays to our strength given our broad deployment base with mobile and fixed service providers. This new service will complement the current direct routing alternatives already available, including our new ribbon connect as a service offering that includes support for legacy PBX interoperability in partnership with our channel partners. We have a growing pipeline of partners embracing this new platform and are currently onboarding more than 60 resellers to the program. This is an important initiative as we build our base of recurring revenue. Last week, we announced that our partner program received a five-star rating in the 2021 CRN channel reseller network partner program guide. When dealing with ribbon, our customers expect innovative products and strong collaboration. And this announcement offers further proof that we're meeting those standards. We had strong bookings in our network transformation business in the first quarter with multiple intelligent network modernization projects in North America and Asia Pacific. including expansion orders with three of the largest North American Tier 1 carriers, totaling over $40 million during the quarter. We were also awarded a three-country multi-year deal in Europe to replace a legacy Huawei system, building on our momentum from last quarter. And we signed over $3 million in stir-shaken robocalling deals in the quarter. In our IP optical segment, sales grew 22% year-over-year on a pro forma basis, adding 13 new customers in the quarter. Bookings were strong in Europe with both service providers and critical infrastructure organizations. Sales in India were very consistent with the last several quarters, although unfortunately India is suffering through another significant wave of COVID infections and continues to experience a very slow recovery. Deployment levels are roughly 60% of where they were prior to COVID, and we look forward to a strong second half recovery. We had new wins in other regions, including in the Middle East, where we signed an incumbent carrier to completely replace products from their current supplier, and with Sinia, a network operator based in Finland that operates a fiber optic network in Northern Europe, providing secure connections for international businesses and government organizations. In the United States, we continued to leverage our existing ribbon relationships to earn four new IP optical wins in the U.S. rural infrastructure market. Globally, we have a very active pipeline of opportunities and are currently finalizing contract negotiations on a meaningful Huawei WDM replacement deal. We are also in the final stages of several significant mobile and fixed operator cross-sell opportunities in North America, Russia, and Asia Pacific. We completed 19 large-scale proofs of concept in the first quarter, a mix of both WDM transport and IP networking opportunities. We continue to introduce new innovative products with the successful deployment of the Apollo 9901 access OTN switch in the first quarter and a new high density dual 400 gig MUX ponder that received high scores in the 2021 LightWave innovation reviews. In our IP transport Neptune portfolio, we introduced two new access products that are directly focused on the 5G cell site router and critical infrastructure markets. Available in both fully redundant and non-redundant versions, these products address the operator's needs to rebuild backhaul networks to handle 5G traffic, leveraging pluggable coherent optics. The platforms also support the precision timing requirements of 5G networks, as well as Flexi hard slicing to reliably segment different types of traffic. And I'll turn it over to Mick to provide additional detail on our results for the quarter. And I'll come back on to review our guidance and provide additional details on our plans for the remainder of the year.
spk06: Mick? Thank you very much. As Bruce stated, we had a strong start to the year with continued revenue growth and first quarter profitability that exceeded our expectations. We generated revenue of $193 million, which was in line with our guidance, and adjusted EBITDA of $20 million, which was above our guidance of $14 to $18 million. This led to an adjusted earnings per share of 3 cents, which was at the high end of our one to three cent guided range. As always, please refer to our investor relations website for supplemental slides with graphs and tables summarizing our first quarter 2021 and historical financial performance. Let's start with some commentary about our GAAP results for the quarter. Our GAAP earnings included a $24 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 last year. This was partially offset by $1.5 million in paid in-kind interest income earned on the convertible debt from the same transaction for a net negative impact to GAAP income of $22 million, or $0.15 per share. This was, in sharp contrast, a large positive impact of $114 million to income and $0.74 to earnings per share in the fourth quarter of 2020. As we mentioned on last quarter's earnings call, fluctuations in ABCT stock price affect our other income and expense line as we mark to market our investment. Due to this volatility, we have excluded these items related to the candy asset sale from our non-GAAP results. In addition to the usual other factors contributing to the difference between our GAAP and non-GAAP results for the quarter, such as the amortization of intangible assets and non-cash compensation, We incurred $6 million in restructuring expenses related mostly to continued downsizing of our real estate footprint and $1 million in integration expenses. On an adjusted non-GAAP basis, first quarter 2021 results were as follows. Total revenue was $193 million, up 22% from the first quarter of 2020. Non-GAAP gross margin was 57% in the quarter, similar to our gross margin in the first quarter of 2020, due to favorable product mix. Non-GAAP operating expenses were $95 million in the quarter as we continued to drive efficiency. We had favorability in our facility expenses, travel, and other discretionary expenditures. Non-GAAP adjusted EBITDA was $20 million in the quarter, up from $10 million in the first quarter of 2020, due to product mix and favorability in our operating expenses. Non-GAAP diluted earnings per share was $0.03 above our first quarter 2020 non-GAAP diluted earnings per share of $0.01. Our diluted share count was 155 million shares for non-GAAP earnings in the quarter. Now, looking at the results of our two business segments. In our cloud and edge business, first quarter revenue was $125 million down slightly year over year, but flat when adjusting for the sale of our candy business. Non-GAAP adjusted EBITDA for Cloud and Edge was $28 million, nearly three times the $10 million the business generated in the first quarter of 2020, with an EBITDA margin of 23%. The year-over-year change was driven by the candy sale, restructuring savings, minimal travel, and other discretionary expense savings. Here are a few additional points on the Cloud on Edge performance in the quarter. Product revenue was $50 million, while service revenue contributed $75 million. Software accounted for 52% of total product revenue, roughly flat in the first quarter of 2020. Turning to our IP optical business, we recorded first quarter revenue of $67 million, an increase of $37 million from the prior period on 2020. and ASK reported basis. On a pro forma basis, the increase was $12 million or 22% year over year. We had good margins at this revenue level with non-GAAP gross margin of 39%. Our IB optical business generated an adjusted EBITDA loss of $9 million for the quarter. Now, here are some consolidated key metrics for the company. Maintenance revenue represented 36% of total revenue in the first quarter, increasing by approximately $8 million from the first quarter of 2020. Top 10 customers were 46% of total revenue in the first quarter, up from 45% in the fourth quarter of 2020, and slightly above the 43% from the first quarter of 2020. Service providers accounted for 77% of our revenue in the quarter, and enterprise customers represented 23%. International customers provided 59% of our total revenue in first quarter, in line with a company record of 60% in the fourth quarter of 2020. As Bruce mentioned, we are encouraged with the book to revenue, which excludes maintenance of 1.14 times for the first quarter. Turning to the balance sheet we ended the quarter with cash and cash equivalents of $109 million, including $3 million in restricted cash. This is a decrease of $27 million from the previous quarter, as expected due to annual variable compensation payouts and seasonal factors. Our $100 million revolver still remained undrawn. As previously announced, we amended our credit facility in early March, increasing our Term Loan A balance by approximately $75 million, using the proceeds to pay off the Term Loan B balance. Term Loan B carried an interest rate margin that was 500 basis points higher than the Term Loan A. Now, our effective interest rate has gone from 4.4% to 3.4%. The principal balance of the Term Loan A was $391 million as of March 31st. Once again, we comfortably met our quarterly financial covenants. As per our credit facility calculations in the first quarter, our leverage ratio was 2.35 times versus a maximum of four times, and our fixed charge coverage ratio of 3.94 times versus a minimum of 1.25 times. Our debt net of cash was $275 million as of March 31st, which divided by the last 12 months adjusted EBITDA provides an accounting leverage ratio of less than two times. From a cash perspective, the company used $6 million in cash from operations in the quarter. Capital expenditures were $5 million for the quarter, which had $3 million of real estate leasehold improvements. Now, I'd like to turn the call back to Bruce to discuss our outlook for the second quarter and full year 2021. Bruce? Thanks, Mick.
spk04: While we continue to execute well in the near term, our focus is also on the longer term transformation of the company. This is a unique time in our industry with significant competitive shifts creating opportunity for Ribbon to gain share while benefiting from the strong secular demand for bandwidth and the increased adoption of cloud communication services. Over the next several years, we also expect significant federal funding initiatives to further improve the broadband infrastructure. along with network upgrade investment to support 5G deployment and the modernized legacy TDM networks. We are winning new business that is directly related to the combined strength and portfolio of Riven and ECI, validating the merger strategy and growing both top and bottom line. I'm very excited about the strong pipeline of IP optical opportunities, and in particular, several late stage tier one service provider evaluations. leveraging existing strong ribbon relationships. Our portfolio differentiation is becoming more clear in the market and with our customers. Our highly optimized metro WDM platforms are perfectly complemented by a strong portfolio of IP MPLS switching and routing products. One of the key elements being evaluated in these opportunities is our new dual 400 gig ZR plus WDM solution. We expect to be one of the first to market with this new capability, with general availability planned for early in the third quarter. In addition to ultimately supporting vendor interoperability, this new technology represents significant bill of material cost savings. A second key factor in these opportunities where we're seeing significant interest is our MUSE multilayer domain orchestration platform. This suite of tools enables orchestration and optimization across both the optical and IP layers in the network, supporting a multi-vendor SDN operating environment. This is proving to be an important differentiator for the ribbon solution and is in large-scale deployment with Bharti in India today. With that as the backdrop, here are our expectations for the second quarter. We anticipate revenue to be in the range of $215 to $225 million, with gross margins of 56 to 57%. We expect adjusted EBITDA of 30 to $34 million and non-GAAP earnings per share of nine to 11 cents per share. Our guidance for the full year remains unchanged. Once again, thanks to our employees for continuing to deliver during these challenging times. Operator, that concludes our prepared remarks and we can take a few questions now.
spk05: Thank you. Ladies and gentlemen, at this time we will conduct our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star followed by the number 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, to ask a question, press star 1 on your telephone keypad. One moment while we pull for questions. Our first question comes from Dave Lattimore with Northland Capital Markets. Please state your question.
spk14: Hi. This is his brother, Mike Lattimore, calling in. Hey, Mike. Hi. So interesting on these late-stage Tier 1 opportunities, did you say that they were with Cloud and Edge customers, one, and also maybe what regions are they in?
spk04: Yeah, so I was referring to the IP optical, Mike, not Cloud and Edge in that commentary. And it's in multiple regions. I think I mentioned Russia specifically, North America specifically, and Asia Pacific as well. So, you know, a number of different opportunities, you know, well down the pipeline basically, you know, to comment on them now.
spk14: Yeah. And are they with current – cloud and edge customers that are also looking at this, or is it independent of that?
spk04: Yeah, so several of them are, not all of them, but more than half of them, yeah.
spk14: Okay, all right. And then it sounds like in India, you know, obviously a lot more restrictions. I guess you sort of factor that into your guidance here, right, that you're assuming India's a little tighter for a while?
spk04: Yes, exactly. Uh, you know, I know, um, well, I commented on, you know, the first quarter was pretty consistent with what we saw in the second half of last year. So it, you know, it is, it's more robust than what it was in the first half last year. Uh, but certainly, you know, not anywhere back to, you know, full deployment velocity. Um, you know, if you look at the deployment that we're seeing right now, it's about 60% of what we saw pre COVID. So there's plenty of room to run still. And, uh, You know, we've tried to take that into account, certainly with our second quarter guidance here.
spk14: And just last one. At one point you commented on voice traffic volumes relative to pre-COVID levels. I think you said they were like 30% above pre-COVID at one point last year. Like I said, any update on kind of what you're seeing in terms of traffic volumes?
spk04: I don't have an updated quote on that, but I will follow up on it, Mike, and see if I can get some more detail on kind of latest traffic levels. I just don't have anything in front of me here right now.
spk14: Thanks a lot.
spk04: Great. Thanks, Mike.
spk05: Our next question comes from Dave Kang with B Reilly. Please, to your question.
spk15: Thank you. Good afternoon. My first question is regarding the chip situation. to your first quarter results or second quarter outlook?
spk04: You know, there was nothing substantive, Dave, that impacted Q1. It was obviously tight. You know, we've definitely seen lengthening lead times and, you know, challenges on a variety of different types of components. But, you know, like many, I guess we saw this coming. We're trying to get out in front of it as much as we could and had, you know, sufficient for Q1 and You know, right now, we're not anticipating big issues in the second quarter. Again, you know, trying to plan ahead here. You know, we'll see how the second half goes. You know, the real issue comes down to any decommits kind of within promised lead times that you end up with issues on deliveries. But, you know, so far, so good. But it's pretty tight. It's got to be worked every day.
spk15: Also, somebody, another equivalent vendor reported earlier this morning talked about margins getting hit because the prices are going up. What about you guys? Any margin impact because of increasing prices?
spk04: You know, there is a little pressure on prices, you know, certainly on logistics as an example. You know, we've seen some elevated costs around that, you know, which impacts a portion of our business. Of course, a lot of what we sell is software as well. So the direct effect on the overall profitability for the company might be a little less than somebody that's more concentrated on hardware.
spk15: Got it. And then I did have a question on India. So it's running about 60% pre-pandemic. When do you expect India to fully recover back to the pre-pandemic level? Are you assuming second half or is that something – beyond second half this year?
spk04: Well, so what we believe happens is the second half of the year begins to strengthen from where we're sitting today. Obviously, it's a little hard to tell exactly, you know, when we're back to pre-COVID levels. And, you know, it's a combination of factors around funding for new projects and budgets, et cetera, but then just the logistics in the country and deployment velocity. And we're able to get pretty good visibility on the deployment of our products were directly involved from a service and logistics perspective in the country. And so, you know, the 60% number is pretty accurate based on what we're seeing right now.
spk15: And can you remind us what India was pre-pandemic? Was it about 10% or?
spk04: Yeah, so for ECI, it was about a third of the business prior to merging with Ribbon. So, you know, call it in the 125 million range, annual run rate range, something like that, pre-COVID.
spk15: Got it. Thank you. Thanks. Thanks, Dave.
spk05: Our next question comes from Paul Silverstein with Cowan. Please state your question.
spk12: I've got a couple of questions. Why don't I start with India just to try to tie up any loose ends. When you, Bruce, when you talk about, if I saw in the prepared remarks, You're talking about meaningful improvement in the second half, and I guess what I just heard you say sounds a little bit different than that, but if I could press you in terms of how much visibility do you have into the second half underlying your view, and what exactly is that view in terms of the degree of strength you're expecting in the second half of the year?
spk04: Well, with the larger service providers we're working with in India, We have a pretty tight planning relationship, you know, given where lead times have gone on products and whatnot. You know, we have to have good visibility. And, you know, we sell a portfolio of products. There's a whole variety of different, you know, configurations that we sell. And, you know, you've got to have that right in the planning phase. So, you know, we go through a bit of a budgeting process and then an engineering process with many of our customers to get to the bill of material to be able to be driving things correctly. So we get good visibility on, say, the next three months, and the next six to nine months beyond that, we have more planning directional information. So it's not 100% scientific, but it's pretty decent. And, of course, where you'll see variabilities is when we're bidding on new regions of the network or replacement of product and things like that. You don't know for sure how much you're going to win or if you're going to win, so there's some variability around those things.
spk12: Bruce, given that the spike in the pandemic appears to be a relatively recent event, which I recognize it didn't just start yesterday, but it's also not three or six months old, have you had real-time communications in the last week or two that would inform you as to whether there's been a change in their deployment plans? I recognize we're not talking about a demand issue. but literally the physical ability of your customers or you on behalf of your customers to deploy product. But have you had communications since it's been apparent that the pandemic spiked up and whether that's changed their planning with respect to those deployments in the second half of the year?
spk04: Well, you know, given the timing of earnings and providing guidance, uh, you know, we do a pretty thorough job in the, in the couple of weeks leading up here to make sure we've got a reasonably accurate view. Um, And we're not projecting significant growth in the second quarter here in India. If things tightened up dramatically, it would have an effect, I suppose, right? Obviously. But on the other hand, the country's been living in some pretty tight restrictions for quite a while as well. So I think the answer to your question is yes. We've had discussions and you know, believe we've got an accurate view on what happens here in the second quarter.
spk12: Bruce, again, my apologies. One last question on India. Looking beyond the second quarter into the second half of this calendar year, has there been any change in the deployment plans the past couple weeks because of the spike up in code?
spk04: Not that I can put my finger on right now, Paul, but... Yeah, that's the best I can answer the question, I think.
spk12: No, I appreciate that. And, Bruce, to be clear, you're expecting a healthy, a strong increase in the second half of the year relative to that 60% number?
spk04: We are. We are. You know, we're projecting the second half stronger than the first half. Part of it is, you know, projects are parts of the network that we're already being deployed in, and part of it is, you know, new wins that we're anticipating, you know, given opportunities for market share gains in the market.
spk12: And these are primarily or exclusively optical deployments?
spk04: No, it's a combination of the IP MPLS portfolio and the optical portfolio.
spk12: Okay. I appreciate that insight. Let me move on. In terms of opportunities, you referenced Huawei a couple times during the call, and I want to make sure I fully understand. It sounds like you've already secured at least one particular deal. I think you characterized it as $3 million, and I think it was on the voice side of the house. And I think I heard you say that you also are close to finalizing a deal to displace them in optics, although perhaps I misunderstood. But is there any incremental insight you could give us in terms of how many opportunities there are in total that you're in various stages of trying to win that are directly linked to Huawei displacement of new awards? How many of those are in optics? How many are those? or in voice or voice unified communications, et cetera. And whether it's accelerating, whether it's not steady state, any insight on the opportunity?
spk04: Yeah. So first answer, the first part, you characterized it correctly. You know, I referred to a voice replacement opportunity in Cloud and Edge. and also referred to, you know, kind of close to the finish line on a replacement opportunity in IP optical. You know, the opportunities we're seeing are both in the optical portion of the network as well as in the IP portion of the network. And, you know, certainly the India market is one of the key focus areas as well as, you know, several countries in Europe today. And in general, I think these are fairly meaningful opportunities for us that will move the needle, or I wouldn't mention or wouldn't refer to them sort of thing. So these are not dozens and dozens necessarily. We're focused on a specific list of opportunities where we're either already currently deployed today and we can gain more share or new insertion opportunities with new customers.
spk12: Bruce, while I appreciate it's not dozens and dozens, is it over a dozen or would it be more like six to 12 or even lower than six in terms of total potential opportunities that you're looking at?
spk04: You know, the meaningful ones in the short term are, you know, under a dozen. You know, there's real focus around these things. It's not kind of a shotgun in a broad array, so.
spk12: Would it be in that six to 12 range? Yeah. I appreciate that. Beyond Huawei, if you had to tier what you're most excited about in terms of driving revenue growth specifically, what would be number one and two and three?
spk04: Well, the top two are Huawei opportunities. Well, top three, Huawei opportunities. The second is recovery in the India market. And then the third is, you know, success in North America that we've talked about and the growth that we're targeting here in the North American market. You know, those three things all focused on the IP optical portfolio, you know, are the areas that we believe will drive growth as the year progresses here this year.
spk12: All right. I've already asked about two of the three of those. I just have one question on this. Well, Actually, a broader question, just North America. I think I heard you say you've got a number of opportunity service providers around the world, Russia, U.S., et cetera. Again, trying to get some granular insight, can you characterize, is that also in the range of 6 to 12? Is that more than a dozen? Is it less than half a dozen? Any rough quantification you can give us?
spk04: Well, let me come at it a different way. You know, I think the second quarter is going to be, you know, fairly significantly stronger in North America for us on IP optical. So we have, you know, a number of projects that are in flight already today that we'll recognize revenue on in the second quarter. So I think we'll see some, you know, some meaningful improvement there. And, you know, as I referred to these tier one opportunities, You know, these are, again, these are a very focused set of, call them, you know, a half a dozen opportunities that are meaningful to the company that we're focused on and believe we have, you know, a very good shot at winning some share in them. And hopefully we'll have, you know, more specific detail to share on the next call.
spk12: I greatly appreciate the insight.
spk04: Thank you.
spk02: Yeah, thank you, Paul.
spk05: Ladies and gentlemen, there are no further questions at this time. I'll turn it back to management for closing remarks. Thank you.
spk04: Great. Well, thanks again for everyone being on the call and your interest in ribbon communications. We really look forward to speaking with many of you at our upcoming virtual investor conferences and updating you on the progress on our next earnings call. With that, operator, that concludes our call.
spk05: Thank you. I'll pause and disconnect.
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