Ribbon Communications Inc.

Greetings, and welcome to Ribbon Communications' fourth quarter 2021 financial results conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tom Berry, Investor Relations. Thank you. You may begin.

Good afternoon, and welcome to Ribbon's fourth quarter and full year 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, and Sam Bucci, general manager of Ribbon's IP Optical Networks business. 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 first quarter of 2022 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 the forward-looking statements. These risks and uncertainties are discussed in our documents filed with the SEC, including our most recent Form 10-K and Form 10-Q. I refer you to our safe harbor statement included on slide two of the supplemental slides for this conference call. In addition, we will present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measures are included in the earnings press release we issued this afternoon, as well as in the supplemental slides for this conference call, which, again, are both available on the investor relations section of our website. And now, I would like to turn the call over to Bruce. Bruce?

Thanks, Tom, and thanks to everyone for joining us. I'd like to start the call this evening with a short assessment of our performance in 2021 and the actions we're taking to improve our results going forward. Despite incredible efforts by the employees at Ribbon during a challenging year, we were disappointed with our financial results for 2021. When we started the year, we'd expected to achieve growth in both revenue and earnings. We had just completed a difficult 2020 with the onset of COVID, but performed exceptionally well despite this. and posted improvements every quarter throughout the year. Of course, there's several reasons we missed our growth goals in 2021. We had extended COVID challenges, supply chain issues, heightened employee attrition, and regional headwinds in areas like India, to name a few. But ultimately, our primary challenge has been the length of time it takes to convert our new IP optical customer winds into sustainable revenue, while the investment that's needed to obtain and execute on the winds and develop our roadmap for immediate investments. Similar to others in the industry, we've also been impacted by more than we expected by escalating macro supply chain issues from both the cost and predictability perspective. And we were particularly surprised by the increased intensity of issues in the last several weeks of 2021 and the impact it had on shipments and product costs. Costs across many of our products have increased, and as a result, we've adjusted our forward margin projections for fiscal 22. We've taken a variety of actions to mitigate these issues, and in recent weeks have begun to see stabilization. But we remain cautious and are not assuming any significant improvement in component lead times throughout the remainder of the year, and have adjusted our forecasting process to more accurately account for these issues. We have a strong funnel of IP optical opportunities and a growing list of new strategic wins that have significant long-term growth potential. While conversion of these opportunities into revenue is taking longer than we expected and has been adversely impacted by supply chain issues, we are projecting year-over-year revenue growth of at least 10% for the IP optical segment in 2022. In the critical North American region, we grew by 164% last year, and we're targeting greater than 50% growth again in 2022. Other regions such as Japan, India, and Australia are also expected to contribute to our projected 2022 growth outlook. As we've discussed previously, our investment in IP optical networks spans three product categories, optical transport, IP networking, and domain orchestration and element management. We believe there are strong linkages between each of these technologies, and the combination is a powerful differentiator. As a result, we've been increasing our R&D intensity in the IP optical portfolio, increasing 15% in 2021 and I expect the investment in 2022 to be 25% higher than our 2021 investment rate. I've asked Sam Bucci, the GM of our IP Optical Business Unit, to join us this afternoon to provide a little more detail on the key investments we're making and where he is seeing best growth opportunities based on his 20-plus year career at Nokia and Alcatel-Lucent, leading their optical business.