Ribbon Communications Inc.

Greetings and welcome to Rebund Communications Third 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. 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, Bruce McLennan, CEO. Sir, you may begin.

Good afternoon and welcome to Ribbon's third quarter 2022 financial results conference call. I'm Bita Melanian, SVP of Marketing at Ribbon Communications. Also on the call today are Bruce McLennan, 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 fourth quarter of 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, including 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 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?

Great. Thanks, Bita. And thanks to everyone for joining us today to discuss our third quarter results and our outlook for the remainder of the year. I'm very excited to report significant improvements in our IP optical networks business this quarter. Revenues increased significantly to $82 million up 20% sequentially and year over year. Perhaps more importantly, our product and service bookings increased over 90% versus the previous quarter, with a book to bill of 1.4 times for this segment. Obviously, overall demand was not an issue, and we could have easily shipped more product in the quarter. However, availability of a small number of key components and general logistics challenges continued to limit overall output. The increased IP optical revenue in the quarter resulted in a dramatic improvement in non-GAAP gross margin, returning to more historical levels at 38%. The 900 basis point improvement is equally partitioned between three factors, higher volume, lower supply chain cost, and overall customer and product mix. From a regional mix perspective, sales in Europe increased by more than 40% versus the second quarter, and North America increased by over 15%. Our IP optical sales in India were down about 6%, which were limited by the supply of key components. We expect India to be stronger again in the fourth quarter. An extremely important element of our strategy is the focus on the large service provider IP routing market and the investment in an expanded portfolio of IP routing solutions. We've made great progress on this strategy in the third quarter. with bookings of our Neptune IP routing products more than doubling compared to the second quarter, and making up more than half of the IP optical segment product bookings in the quarter. We received a huge validation of the strategy with a major new 5G mobile cell site router win and large booking with Bharti Airtel in India, one of the largest mobile carriers in the world. This new win builds on the IP MPLS deployments we're already doing with Airtel in the access and aggregation layers of their network and extends our footprint to include cell site routing. Part of our recently announced XDR family of routing solutions, this flexible 64 gigabit IPMPLS cell site router includes advanced routing capabilities and is perfectly suited for aggregation of ever-increasing 4G and 5G mobile traffic. More broadly, we continue to make good progress on our pipeline of major tier one mobile and telecom carrier opportunities. Of the 18 RFPs I mentioned last call, we have wins and initial POs from four of them, and decisions are pending on three others and look very positive. And we've been excluded from three of them. Ramping to significant revenue will obviously take time, but I'm pleased with the initial success. The incremental R&D investment we've been making in this segment, and particularly in advanced IP routing software and hardware platforms, is directly linked to the momentum building with these new major customer opportunities. But ultimately, what really matters is how this translates into a sustainable, profitable business. We have a clear path to profitability with the stronger sales and improved margins and expect to close in on this goal in Q4. We're also planning additional cost improvement actions across the company to accelerate overall profitability in 2023 and increase cash flow. In our cloud and edge segment, AT&T was a real bright spot this quarter, and I'm very encouraged by the growing opportunity funnel resulting from their increased focus on network infrastructure and reducing operational costs. The combination of network transformation projects to significantly reduce operational costs, along with great sell-through enterprise channel partnership resulted in AT&T once again becoming a 10% plus customer in the quarter. In several of the projects, we're now leveraging technology from our IP routing portfolio to enable the migration of TDM voice networks to IP and other multi-service access integrations. This type of solution synergy is a real bonus on top of the original ECI acquisition strategy, and one of the many ways we're finding opportunities to sell the IP optical portfolio to existing ribbon voice over IP customers. We were honored to have Scott Mayer, former AT&T Networks Engineering and Operations President, join our Board of Directors last quarter. He's providing great input on strategic direction, both from a technology and a business perspective. Activity with our largest customer, Verizon, was very strong this last quarter, but many of the projects involved deploying products shipped last quarter, resulting in lower product sales this quarter. Overall engagement with service providers related to network modernization and introduction of new cloud-based technologies remains very high across all regions. Sales of our cloud and edge solutions to enterprise customers continue to build this quarter, increasing 17% quarter over quarter and 26% year over year. Once again, we have a very nice distribution of new wins and growth across multiple enterprise market verticals, including Johnson & Johnson in healthcare, Giant Eagle in retail, Marathon Petroleum and Energy, the University of Calgary in higher education, and Accenture in consulting. The one thing that these companies and institutions all have in common is large, complex communication needs, and they all selected Ribbon to help solve these challenges. One of the key productivity improvement enablers for enterprises of all sizes continues to be the adoption of unified communication platforms. We're partnering with Microsoft and Poly on a very successful roadshow across North America, Europe, and Asia, promoting our solutions and educating hundreds of enterprises on the merits of investing in hybrid work technologies. Service providers continue to be a very large and important channel to market for UCaaS services, such as Microsoft Teams and Zoom. And increasingly, they're augmenting their on-premise solutions with public cloud managed service platforms. for the session border controller and policy management functionality. Our Ribbon Connect service is a perfect fit, and we were recently selected by Cincinnati Bell to support their Microsoft Operator Connect deployment. This complements the highly successful sell-through business we've developed partnering with many of the U.S. service providers using our broad enterprise edge on-premise SBC portfolio. As I highlighted last quarter, Modernization of the communications infrastructure across U.S. federal government agencies is a very large opportunity for us over the next several years. We were awarded an initial defense agency order in Q3, but anticipated several larger deals also closing in the quarter and beginning to shift for revenue. But timing on these projects has proven very difficult to predict. While we fully anticipate they'll be awarded in Q4, we have de-risked our guidance by planning them for revenue in 2023. And finally, our focus on added value applications such as network monitoring, service assurance, mobile radio network congestion, and fraud and robocalling mitigation received a boost this quarter with a significant deal with the U.S. Tier 1 operator, and additional wins in France for the shaken application, where we established a very strong market leadership position with three of the largest carriers. Overall application revenue more than doubled this quarter. As we discussed last quarter, we have a great pipeline of new products beginning to come to market. Our new XDR IP routers address a wide variety of applications, from multi-service edge aggregation through to high-performance metro routing for mobile and broadband networks. Based on the latest generation of merchant routing silicon, these built-for-purpose platforms compare favorably on a cost, density, and power perspective. and with a routing feature set to address the large telecom IP routing market. Following the introduction of the XDR 2100 800 gigabit router last quarter, we expect to begin initial shipments by the end of the year of the XDR 2300, a three terabit modular redundant platform that significantly expands our addressable market. We already have initial customer orders and expect this to be a strong new market entrant as service providers transform their IP transport networks to leverage hyperscale data center architectures and technologies. The platform also supports a full set of optical interfaces, including 400 gig ZR and ZR+, coherent optical pluggables, enabling further convergence of the IP and optical layers of the network. In the first half of 2023, the XDR portfolio will expand further with several new variants, including the 2700, an 8 terabit per second high capacity modular platform for metro aggregation and IP transport. The 2700 has a unique pay-as-you-grow architecture that allows switching capacity to be added as needed, providing a very compelling total cost of ownership, and completes a comprehensive portfolio of 5G optimized IP routing solutions from the very edge of the network through to the metro core. With that, I'll turn it over to Mick to provide additional detail on our third quarter results. and then come back on to discuss guidance for the fourth quarter.