Ribbon Communications Inc.

Greetings and welcome to the Ribbon Communications third quarter 2025 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, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. And it is now my pleasure to introduce to you Fahad Najam with Investor Relations. Thank you, sir. You may begin.

Good afternoon and welcome to Ribbon's third quarter 2025 financial results conference call. I am Fahad Najam, SVP Corporate Strategy and Investor Relations at Ribbon Communications. Also on the call today are Bruce McClelland, Ribbon's Chief Executive Officer, and John Townsend, 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 releases 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 2025 and beyond 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 statements included in the supplemental financial information posted on our website. In addition, we will present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measures are included in the earnings press release we issued earlier today, as well as in the supplemental financial information 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, Fahad. Good afternoon, everyone, and thanks for joining us today to discuss our Q3 results and the outlook for the fourth quarter and full year. I'd like to start by highlighting a recent new product announcement that's getting considerable interest from customers. Acumen is our new powerful AIOps automation platform. designed to help service providers and enterprises navigate the complexity of today's challenging operational environment and accelerate their transition to autonomous networks. Our recent announcement included the endorsement from Altice-owned Optimum, who are integrating the platform into their operation to enhance network reliability and performance. The Acumen platform is built to reduce deployment timelines and deliver customizable automation across the entire network lifecycle. It ingests data from all layers of network, providing end-to-end network observability across multi-vendor and multiple networks. Moreover, it combines out-of-the-box applications built on our analytics and use products with a powerful agent builder capability that enables our customers to develop their own AI agents with various LLM integrations. Our deep protocol and networking experience uniquely positions us to help our customers build fully autonomous AI-driven networks. Beyond AIOps, our Cloud and Edge portfolio is becoming increasingly strategic to our customers' agentic AI platforms and roadmap. We had several very important awards in the third quarter where we've been selected by leading technology providers, including one of the largest SaaS companies in the world, which is leveraging our cloud-native SPCs and WebRTC APIs deployed in AWS to enhance their customer service agentic AI operations. Another notable win in the quarter was with IBM, which is embedding our virtual SPC solutions within its Watson AI platform to enable support for multiple different formats, including voice, to interact with users. These are just some of the examples of the new innovations our team is working on with more to come And I'm extremely excited about the convergence of AI and voice technologies and the significant opportunity ahead for Riven. Okay, now onto our quarterly results. I'm pleased to report a solid third quarter with sales increasing 2% year over year, even as we navigate short-term disruption related to the US federal government shutdown. Year to date, revenue has increased 6% this year and EBITDA has increased 5% versus the same period in 2024. Excluding the impact of sales to Eastern Europe, revenue has increased more than 10% so far this year. Sales to service providers in the quarter increased 5% year-over-year, with growth across multiple accounts, including Verizon, Bardi, and several other operators in North America. Sales to enterprise customers in the quarter were down approximately 3% year-over-year and were impacted by lower sales to U.S. government agencies. Excluding this segment, enterprise sales to all other customers were up almost 7% year over year. While the U.S. government shutdown officially started October 1st, it became a growing distraction in the last few weeks of the third quarter and delayed the procurement process on several projects that would have easily put us above the midpoint of our guidance for the quarter. The ongoing shutdown is obviously affecting many government activities with significant non-critical staff furloughed. This has become an important segment for us, contributing mid to high single-digit percentages of our cloud and edge revenue in 2024. In any event, these projects remain a high priority for U.S. federal agencies, and purchases are simply delayed, not lost. But given the uncertainty over when a resolution will be reached, we have removed the majority of U.S. government-related sales from our projection for the fourth quarter, and now assume these purchases will occur in 2026. To be clear, no business has been lost. Deployments and services are continuing, and we're supporting our customers' mission-critical needs. Notwithstanding this near-term impact, the fundamentals across our cloud and edge and IP optical businesses remain strong. Continuing on the momentum built over the last several quarters, we're benefiting from very good demand across both service provider and enterprise customers as they continue to invest in modernizing their voice and data networks, and we're tracking well against our growth objectives. From a regional perspective, sales to Europe, Middle East and Africa were very strong this quarter, growing 26% year over year. Sales to Asia Pacific countries were also strong, growing 13%, with India really leading the way. Sales in North America were impacted by the lower US federal sales and declined approximately 10% year over year in the quarter. From a consolidated bookings perspective, Product and professional services booking in the quarter were below one times for the first time in almost two years. To some extent, this reflects the impact from the U.S. government shutdown. Booking's momentum so far in the fourth quarter has been good, with more than $30 million of new enterprise and service provider orders received over the last few weeks. Now, a little more detail on each of our operating segments. Sales in our IP optical networks business continued to grow, increasing 11% year over year. one of our strongest quarters in the last five years, and compensating for lost sales to Eastern Europe. The higher sales, favorable regional and customer mix, and expense management resulted in a positive earnings contribution on an EBITDA basis, an important milestone for the business. Business in Europe and the Middle East increased almost 50% year over year with a variety of critical infrastructure and defense agency projects. This included several notable new data center interconnect projects in Central Europe. The first was in support of a large regional insurance provider to provide secure high speed connectivity between its data centers with a key focus on low latency and traffic encryption. The second was with a regional telecom operator building a new 400 gig internet peering network connecting over 200 cities. I'm pleased with the growing pipeline of DCI opportunities that have opened up with our expanded portfolio of IP over DWDM solutions. We also had a very nice optical transport award with a new customer in the Ukraine and are seeing several additional opportunities as this region continues to rebuild and modernize their infrastructure. In the Asia Pacific region, we saw IP optical growth across multiple areas, including Japan, India, and Southeast Asia. Sales to India continued to grow, increasing 31% year-over-year this quarter and are up 50% year-to-date. We had several new projects in Japan, including a new 400-gig long-haul transport win with a regional electric power company that provides internet, mobile, and data center services throughout the region. While IP optical sales in North America were lower this quarter, we were pleased to see our first World Broadband Project Award tied to a provisional bead award expected to be ratified shortly. With growing clarity around the new bead rules and process, I expect momentum to quickly increase over the next several months. To further underscore the progress we've made over the last several quarters in diversifying our IP optical revenue, I'm pleased to highlight that revenue from IP routing solutions has grown by more than 20% year-to-date, and represents approximately 50% of new product sales for the segment so far this year. Optical sales are down year-to-date, but entirely due to the suspension of shipments to Russia mid-last year. In our cloud and edge segment, despite the lower sales this quarter due to reduced U.S. federal sales, we've generated solid revenue growth year-to-date with revenue up almost 9% year-over-year, primarily on the strength of voice network modernization projects. Excluding low growth maintenance revenue, Cloud and Edge product and professional service revenue has grown almost 18% so far this year as compared to last year. We had another strong quarter with service provider customers, growing 5% year over year. In addition to another strong quarter with Verizon, where revenue grew approximately 20% year over year, we're seeing an increasing number of service providers beginning to invest in voice network modernization, with eight new projects initiated this last quarter. Cloud and Edge sales to enterprise customers, excluding US government agencies, were up slightly from the second quarter, but down approximately 10% year over year. As we've moved more customers towards annual enterprise software license agreements, we see a larger concentration of revenue in the fourth quarter when we renew these recurring license agreements. As a result, the amount of our cloud and edge revenue, which is reoccurring in nature, including high margin support and maintenance contracts, continues to increase. As mentioned earlier, cloud and edge sales to U.S. federal customers in the quarter were impacted by the impending government shutdown and were down approximately 60% year over year from our first half 25 run rate. However, In the third quarter, we did receive a significant first order from a new US federal DOD agency that had started a major voice modernization project, and we continue to see the scope of opportunity growing within our US federal customer segment. As I highlighted earlier, we're uncovering multiple new opportunities tied to our customers' agentic and generative AI roadmap, which is very exciting. I already mentioned two very notable wins in the quarter, and our pipeline of opportunities related to adgentic and generative AI platforms is growing. With that, I'll turn it over to John to provide additional financial details on our third quarter results, and then come back on to discuss outlook for the fourth quarter. John.

Thanks, Bruce, and good afternoon, everyone. Let's begin with Q3 financial results at the consolidated level. We generated revenues of $215 million in the quarter, an increase of 2% from the prior year, within the guidance range we discussed during our Q2 earnings call. Third quarter non-GAAP gross margin was 52.6%, lower than we guided, due to lower software sales to US government customers, offset by stronger margins in our IP optical segment. Overall gross margin was up sequentially by 50 basis points, driven by higher margins in both segments. Non-GAAP operating expenses were $89 million in the quarter, up $1 million sequentially, principally due to increased employee expenses, but down marginally year over year, reflecting our continued focus on driving efficiencies within the business. This reduction was achieved despite the weaker U.S. dollar and foreign exchange headwinds of approximately $3 million year over year. 4Q expenses are expected to trend upwards marginally based on seasonally higher employee compensation costs. Third quarter adjusted EBITDA was $29 million, again, within our guidance range. A $1 million decrease from the prior year, driven principally by the lower gross margin I just noted. The non-GAAP tax rate for the quarter was 40%, higher than the 35% we had projected because of changes included in the one big beautiful bill. From a cash tax perspective, as expected, indicated during our two Q1 earnings call, we did not pay U.S. federal income tax in Q3 and expect no further payments for the rest of the year due to the ability to accelerate the deduction of R&D expenses. Interest expense in the quarter was $12 million, including amortization of debt issuance costs. Quarterly non-GAAP net income was $7 million compared to $8 million in the prior year. This generated a non-GAAP diluted earnings per share of $0.04 down from $0.01 in the prior year. Our basic share count was 177 million shares, and our fully diluted share count was 181 million shares of the quarter. Now let's look at the results of our two business segments. In our IP Optical Networks results, we recorded third quarter revenue of $91 million, an 11% increase versus the prior year, and up $7 million sequentially. This was driven by strong sales to India and EMEA. Third quarter non-GAAP gross margin for IP optical was 39.4%, up 350 basis points sequentially, and up 330 basis points from the prior year, reflecting better product and geographical mix, as well as fixed cost absorption on higher revenues. The combination of higher sales and margin resulted in a positive EBITDA contribution of $1 million in the quarter, which was particularly pleasing. Year-to-date, IP optical revenues have grown 2%, but excluding Russia, revenues are up 13%. We now move on to our cloud and edge business. We generate third quarter revenue of $124 million, a decrease of 3% year-over-year and down 9% sequentially. Non-GAAP gross profit was $77 million, producing a non-GAAP gross margin of 62.2%, an improvement of 27 basis points from the prior quarter. This improvement was achieved by tight commercial discipline, and despite some higher margin software-based deals, pushing out from the quarter was noted by Bruce. Margins were approximately 500 basis points lower year over year due to the mix of the revenues in the prior year. as the Verizon network transformation commenced with larger product shipments versus higher service revenues in the quarter just closed. Adjusted EBITDA for the segment was $28 million, or 22% of revenue in the quarter, down 10 million year over year, driven by the margin dynamics just discussed. Moving on to cash and capital expenditure. We remained disciplined and focused on managing our operating expenses and working capital. and generated cash from operations $26 million in the quarter, with a closing cash balance of $77 million, up $14 million from the end of the second quarter. We closed the quarter with a net debt leverage ratio of 2.2 times. Total capex spend in the quarter was $5.5 million, including final payments associated with our new facility in Israel. During the third quarter, we repurchased approximately 900,000 shares under our previously announced stock buyback program for a total cost of $3.5 million. In summary, we produced a robust set of results in the quarter and continue to strengthen the company's balance sheet. With that, I'll turn the call back to Bruce.

Great. Thanks, John. Looking at the final quarter of the year, we have solid momentum across the majority of our business. other than the timing uncertainty related to the U.S. government shutdown. Despite this, we continue to expect Q4 to be the strongest quarter of the year with both our enterprise and service provider customers. In our cloud and edge segment, out of an abundance of caution, we're assuming the U.S. government shutdown will impact new purchases associated with our ongoing voice modernization projects this quarter. This may prove to be a conservative approach, but it will take time for the government to fully restart once a new spending bill is passed by Congress. The outlook for the rest of our cloud and edge business remains consistent with our previous guidance. In North America, we expect continued excellent execution with our Verizon projects and similar revenue to the recently completed third quarter. We're still early in the initial phase of this multi-year program with significant opportunity for multiple years beyond this. as well as a large potential opportunity as Verizon completes their acquisition of Frontier. As I mentioned earlier, across the rest of North American service providers, we have an increased number of voice modernization projects that will begin to contribute in the fourth quarter. And we expect a seasonally strong quarter with enterprise customers as we renew several annual enterprise license agreements with multiple additional projects across financial, healthcare, and industrial verticals. We expect the increased mix of software and services to contribute to significantly higher cloud managed gross margins in the high 60s in Q4, similar to the previous year. In the IP optical segment, the solid third quarter results demonstrate that we're on the right path. In the fourth quarter, we're projecting sales to be at similar levels to the third quarter and increasing mid single digit year over year. We expect India to remain one of our strongest markets with sales increasing yet again both quarter-over-quarter and year-over-year. In addition to continued momentum with key customers such as Bardi and Tata Teleservices, we expect first revenue associated with the new rural India broadband project. In North America and Europe, we expect sales to be fairly consistent with last quarter and with fourth quarter 2024. And starting this quarter, we expect our IP optical maintenance revenue to be lower through the completion of a maintenance contract with a European service provider associated with legacy access equipment. As a result of all these mixed changes, we anticipate IP optical margins to be in the mid-30s in the fourth quarter. So based on these expectations for the fourth quarter, we're projecting revenue in a range of $230 to $250 million and non-GAAP adjusted EBITDA in a range of $42 to $48 million. As I mentioned earlier, while the U.S. government shutdown creates near-term timing uncertainty this quarter, the fundamentals have not changed. We are well positioned to benefit from the growing investment in data centers, critical infrastructure, and fiber networks to meet the exponential increase in data consumption. We expect the growth in our voice communications business to continue with investment across a wide range of service providers, enterprise customers, and government agencies. And we've identified several new growth vectors for the company with the real-world adoption and application of AI technology to help our customers achieve autonomous network operation and the convergence of voice and agentic AI within the enterprise. Operator, that concludes our prepared remarks, and we can now take a few questions.

Thank you. We will now be conducting a 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 queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. And the first question comes from the line of Michael Genovese with Rosenblatt Securities. Please proceed with your question.

Thank you. Hey, Bruce, to start the call, you were talking about software and AI. So my question is, you know, is this, do we think about this as a driver of a cloud and edge growth rate in the future? Or do we think, are we going to have automation and AI software as a category we talk about that will become significant? And if so, when?

Yeah, great question, Mike. We're actually thinking of it as a new category in a lot of ways. And there's really two elements, you know, kind of described in the comments. One is around AI ops, basically, you know, an AI engine that allows our customers to build their own smart agents to help them manage and operate the network. It builds on top of some of the other platforms we already have invested in and developed around large analytic engines and management systems, et cetera. So that's part of it, but it really spans both product categories. So you could really think of it as a new category on its own. The other part that we're really seeing some more momentum around, and I've mentioned this a couple of times on earnings calls, is as the convergence between voice and AI starts to increase in the enterprise, our products kind of sit in the middle here and they provide a bridge between the traditional voice network and these new AI environments. And there's a lot of different use cases there. So, you know, for now we're reporting that revenue within the cloud and edge segment, but in some ways I'm thinking of it really as a new category.

Okay, great. And then can you touch upon both for the quarter as well as the guide, you know, just sort of the, you know, characterize the Verizon cloud and edge business and the US IP optical business, like just, just kind of summarize the third and fourth quarters, how, how those were in each of those two areas.

So in the case of Verizon, um, you know, we, they're a 10% plus customer. So we, we break out their information, um, in our queue when you see that come out. Uh, if I recall correctly, you know, Verizon grew about 20% year over year in the third quarter. Um, and was down from the second quarter. As I mentioned, second quarter is the best quarter we ever had with them. So we knew this quarter was going to be more around services than products. So, you know, again, just a really healthy quarter with Verizon and up year over year. If you recall last year in the third quarter, we were just really kind of getting started with our modernization program. And as John had mentioned, we'd shipped quite a bit of the infrastructure, the products, and then started the service deployments. This quarter is a little bit different. It's more around services than products. So hopefully that helps a little bit on Verizon. On the U.S. IP optical business, you know, it does tend to be a little lumpy as we do different types of programs. As you know, a lot of the business there is with Tier 2 or Tier 3 regional operators. or around some critical infrastructure customers. And so we do see the revenue kind of go up and down quarter to quarter. You know, what we're looking at is really the longer term trend and the growth rate there. One of the things I mentioned was, you know, the obviously the bead funding that, you know, you can kind of start to see come into the market. You know, many of the states now have provisional awards and there's a review process to ratify that and it was good to see, you know, the first project we don't clearly identify that's directly attached to the BEAD funding coming in. So that was nice to see.

Great, great. And August, I'll just take one more in. You know, obviously the reported numbers are the reported numbers. We see them and they're affected by the shutdown. So I'll have to take your word on this next question. But, you know, would you describe sort of X shutdown? Do you think that you would have been in line or do you think you would have beat nicely? Like how, how much, what would have happened if there was not a shutdown?

Yeah, no, I, I think, um, in fact, I think I mentioned it in the call that we would have been comfortably, you know, in the midpoint or above the midpoint, uh, with the, the opportunities. And really it was in the last week, you know, and as you know, we, we transact and close a fair amount of business in the last month of each quarter. And, um, you know, it was just clearly a distraction on anything going on. I spent, uh, several days in Washington that last week. And, you know, it was just obvious that things were getting impacted. Prior to that, I think everybody thought it wasn't going to happen. So, you know, it really started to scramble things in the last 10 days or so of the quarter. You know, I think you know, right, the amount of business that we're doing with these federal agencies now is pretty significant for us. In 2024, I think it was high single digits of our cloud and edge business is all voice infrastructure. So, you know, it's a pretty substantial amount of business. And Q4 last year was a, you know, a really good quarter force in that space. And so I just feel like, you know, given the situation with the government still shut down at this point, the prudent thing to do is to, you know, to take that out of our view for the rest of the year. Hopefully that's a conservative view, but, you know, I think that's the right thing to do at this stage. Thanks very much. I'll pass it on.

Thanks, Mike.

Thank you. And the next question comes from the line of Dave Kang with B. Riley. Please proceed with your question.

Thank you. Good afternoon. First of all, just wondering if you can quantify the impact of FX and tariffs. I think I missed that.

Yeah, so in the case of FX, John, I think in the quarter we're about $3 million, I think, on FX. Is that right?

Yeah, it's just under $3 million year-on-year from an FX impact there, Dave. The biggest component to that is the shekel. We'd seen a pretty stable shekel over the last couple of years. And then with what happened in April, we said at the end of Q2 that we'd seen a weakening of the US dollar. And through the quarter, we'd seen some stability on that. And then with the war in Iran, we saw another weakening as well. So the shekel has been the major factor behind our FX issues, headwinds.

And right now, if nothing changes, I think it's kind of similar. And really, we're trying to compare year over year to give you a comparison here on if we'd had stable FX relative to a year ago, what's the impact? That's what we're trying to quantify here. So on the tariff question. Yeah. Yeah. Yeah. So it's still relatively small at this stage. We benefit from the U.S. MCA free trade agreement with anything we're manufacturing in Mexico. And there's some other provisions that we have for products that we're bringing in internationally. There is some additional costs associated more with cables and shelving equipment and things like that, steel, et cetera, that have tariffs attached to them. It's probably a half million dollar, a quarter headwind, something in that ballpark, Dave, at this point.

Okay.

And then just wanted to clarify, I think you said regarding federal mid to high single digits. I thought you said the mid single MSD to high single digits of C&E. Is that correct? Or is it overall revenue?

Yeah. Given what we're selling there today in the U.S., it's all C&E. So I'm just trying to base it off the C&E numbers. So if You know, last year we did $504 million, $505 million of revenue in C&E. High single digits portion of that has now, you know, diversified into U.S. federal. So it's a, you know, it's a very good business, diversifies us from traditional enterprise as well as service provider. So it's an important element to the work we're doing.

Got it. And then lastly on North America, IP Optical, it was down,

just wondering if you can provide more you know color was it ip or was it optical that was down or what were both down yeah so the majority of what we're selling is uh either ip or ip over dw dm we're bundling basically um you know routers with pluggables with line systems etc so um you know most of the projects look like that today um You know, and as I mentioned earlier, it does tend to be a little lumpy. You know, as an example, last quarter, we had a nice big project with a critical infrastructure provider here in the U.S. This quarter was more focused around rural broadband customers. You know, we expect this quarter looks pretty good with, you know, the pipeline and the backlog we already have there. And as I mentioned, the feed program, we think with that customer, we'll start to ship into that deployment. So... just moves around a little bit quarter to quarter. I did highlight, obviously, how strong EMEA was in the third quarter. It was up, I think, 50% year over year. And so, you know, that was really nice to see, and it really helps with the margins, which tend to be better than what we see in the Asia-Pacific region.

And lastly, on India, it was fairly strong. How long, I mean, is that sustainable or since India can get a little lumpy at times?

You know, it's been, I don't know, I think five quarters in a row now where we've seen nice, sustained momentum in India. And we have been diversifying to a little broader set of customers. I always love talking about India. We have such a great partnership with Bardi in the region. The service and deployment team that we have that partners with them closely out in the market, helping deploy the products is so strategic. Unlike what you see with the investment around mobile infrastructure, which tends to be some big ebbs and flows, ups and downs, as they activate new spectrum and then consume capacity, most of what we're deploying there today is access and aggregation IP routing. And if they're continuing to add more capacity to keep up with the growth in data. So it tends to be a more linear deployment. You know, it's a little early to nail down next year yet, but it feels like we've got some good sustainable momentum there.

Got it. Thank you. Thank you.

Thank you. And the next question comes from the line of Tim Savageau with Northland Capital Markets. Please proceed with your question.

Hey, good afternoon. Just a couple questions.

I'll start with a focus on IP optical. I think you had kind of a surprise positive EBITDA result. And given your guidance, it sounds like maybe you don't expect that to necessarily maintain in Q4, maybe a modest negative. But given the double-digit growth rate, which I think is finally apples to apples, And it looks like you're guiding to something mid-singles next quarter. As you look forward for IP Optical, can that business be a positive contributor or break even in 26? And what type of growth rate do you think you can see here in what appears to be a pretty strong end market environment? Thanks.

Yeah, thanks, Tim. Well, so first of all, obviously, it was, as John said, very pleasing to see a positive EBITDA contribution in the third quarter. I think the mix was a large portion of that with the European market being very strong in the quarter. We know we can be positive on EBITDA at the right level of revenue and margin. Obviously, that's a no-brainer, but But we got to get there. So at a $90 million plus with margins in that 40% range, we're there. But as I mentioned, in the mix in the next quarter, we're not seeing quite the same favorable mix. We have more India, less Europe. And so that just drives the equation. Look, our objective is clearly that this business is a positive contributor for the company. Otherwise, we wouldn't be investing in it. So that's absolutely the objective. You know, the growth this year now at the end of the third quarter is higher than the revenue level we had last year, even though we don't have the revenue going into Eastern Europe. So we've kind of replaced that now with new growth. And that's what we needed to do. It's taken us a year or so to get there, but it's great to see getting to that milestone. The next one is sustainable, positive contribution for the business.

Okay, great.

And before we leave that, I'd like to get an update on what you're seeing in terms of impact from, you know, mergers among your competitors or any other trends that are standing out. Sounds like a little more going on in the data center interconnect side in Europe. If you've got anything additional to call out in terms of what's happening fundamentally across that segment.

Yeah, it was a relatively quiet quarter from big shifts because of changes in the competitive environment and things like that. So I didn't have a lot of kind of notable examples to point to this last quarter. As you know, we brought to market a couple of new products focused on the data center market. not focused on selling pluggable optics into hyperscale data centers, not that type of focus, really around systems, selling transport systems and IP aggregation into data center. So I pointed out a couple of good examples in Europe that we had. We had nice 400 gig optical transport win in Japan, which included picking up data center traffic. And so where we're really focused is working often through our telco partners to attack the data center and aggregate traffic out of the growing investment in data center. Clearly, as these data centers get more sophisticated, more diversified, spread into other regions, there's a need for more and more fiber transport going into the data centers. And so I think the timing on some of the new systems products that we brought to market is good, and we're seeing some good wins here and starting to build momentum. In many cases, it looks a lot like our specialty around critical infrastructure, where low latency really matters. The ability to encrypt individual data streams really matters. And, you know, that's where we've really specialized.

Great. Maybe a couple more quick ones. We saw very strong outlook plans for Q4 capital spending from AT&T this morning. And I know they're not reading the 10% list, but maybe not too far away. Whether it's just run rate business or new projects, which you did refer to, starting up in Q4, any comments on expectations there? And could they join Verizon on the 10% list sometime next year?

Yeah, so I know, you know, listening to their call this morning, John was pretty vocal and passionate around their plans to reduce operating costs and really drive efficiency across the network. Talked about their copper network plans multiple times. As you point out, they're a very important customer for us, one of our largest customers. And I think, you know, again, where we're focused is helping reduce operating costs across the network. So... you know, it's good to see, you know, healthy returns for them and how they're operating, and hopefully that translates into more growth for us as well.

Okay, great.

And finally, I'm going to try and, this is pretty complicated, but I want to try and take a quick swing at the shutdown impact, both in Q3 and Q4. From what you said, you know, that looks like kind of a, you know, a mid-teens million type, you know, situation than you would probably would be around your original guidance range. Without that, though, in Q3, I want to understand a little bit more. It looks like U.S. revenues were down something on the order of 20 million sequentially, you know, Verizon a little, but hung in there pretty well. Are we seeing some of the Q3 impact of the shutdown there in that number? Are there other dynamics driving that? And overall, In terms of the effect in Q3 and Q4, am I in the ballpark if you're coming 10 million one quarter, 15 and X, or something like that? Thanks.

Yeah, so you're in the ballpark, and I do want to make sure I'm as clear as I can on it. So there was an impact in the third quarter, again, in essentially the last week or so, If not for that, we would have been comfortably midpoint plus in Q3. So I think you can derive kind of a pretty good estimate from that. We're not projecting that revenue to catch up in Q4. At this point, we've effectively removed essentially the majority of new business, new orders that we might receive in the quarter from any of the U.S. federal agencies. Again, that may prove conservative, but at this stage, you know, really nothing's getting through the process. You know, there's a lot of the civilian employees furloughed and, you know, that just slows everything down or freezes everything. As I mentioned last year, you know, the business USDOD was a significant part of our business. The first half of this year was on a similar run rate. So it definitely has an impact in the fourth quarter and is the majority say the vast majority of why the numbers are lower. But as I mentioned, the rest of our projections are basically in line with what we expected in the last earnings call.

Great. Thanks. Yep. Thanks, Tim.

Thank you. And the next question comes from the line of Christian Schwab with Craig Hallam Capital Group. Please proceed with your question.

Great. Most of my questions have been answered, but just to follow up on the government business, you know, eventually the government will reopen. We'll have that catch up next calendar year. Given excluding that catch up, what do you expect your government program business growth rate to be in calendar 26 versus 25?

Yeah, it's obviously the right question. And it's a little early to be able to clearly answer that, particularly when the government doesn't even have a budget at this point. You know, trying to answer it in a slightly different way. You know, I mentioned that we did have a new win on a brand new project, basically, with another, you know, top three U.S. government agency in the third quarter. is starting their own voice modernization program, you know, that's additive to the business that we've been having so far. So, you know, what we're obviously doing is expanding the deployments with current customers that are modernizing and then hunting for new ones, right, that will do similar programs. And that's what I think drives the growth next year. You know, if we can bring on even one more new major agency, it moves the needle pretty well for us. So, you know, my, obviously my aspiration here for next year is this business grows at a really, you know, a solid rate going into next year as we build on the programs that we already have.

Great. And then just to follow up on that, you know, what is a typical, can you help us with a typical yearly run rate? that a new win for voice modernization, you know, of a government agency means? Yeah, so in a broad range?

Yeah, yeah, sure. So, you know, there tends to be a combination of hardware systems, you know, in a lot of cases, you know, if you're going into an existing base, let's say, you know, they're looking for survivability. So they want capabilities, both on premise, as well as running in their cloud data centers. And so there's elements of hardware we'll deploy. There's clearly a lot of software systems that will run inside their data centers. And then there's quite a bit of service support that goes into standing these up and deploying them. So those three elements, and of course, we'll recognize revenue on hardware shipment. We'll recognize some software, some ratably, some upfront, but some ratably. And then the service is all ratably over the program. So, you know, kind of getting to answer your question, a project will be multiple years in the making. And, you know, on the larger ones, you know, we're talking tens of millions of dollars over that period of time to go and modernize the infrastructure.

Great.

No other questions. Thank you. Thanks, Christian.

Thank you.

And the next question comes from the line of Rustam Kanga with Citizens. Please proceed with your question.

All right. Hey, guys. Thanks for taking my questions here. Great to see the provisional bead awards. And, Bruce, you kind of mentioned expecting to see momentum in the coming months. Just wondering, are you factoring any of that into your outlook, or is that still a little bit too presumptuous and more on a wait-and-see basis?

Yeah, hi, Russ. Yeah, good question. So, you know, I've talked a few times. I've really in some ways discounted bead from a timing perspective, at least anyway for us. You know, a lot of the investment initially goes into construction, into optics, into driving fiber, et cetera. And the portion that we do, kind of the middle mile aggregation and transport tends to be later in the program. So, it was great to see kind of the first win and opportunity kind of come through here, probably a little sooner than I expected. You know, as you review all of the awards to each of the states now, you know, there's a lot of money that's been provisionally granted, and it'll be interesting to see just how this process unfolds over the next few months on approving these and seeing programs go into execution. You know, at this stage, I haven't figured out how to size this for us next year. I probably wouldn't have put much on it initially, but maybe I've been too conservative in my thinking there. So I have to learn a lot more over the next few months. You know, in fact, we have a customer event coming up next month called Insights. And one of the panels we're focused on bringing in some experts that focus all their time around bead and bead funding programs. So it'll be interesting to get their perspective on how they see it rolling out.

Great, appreciate that. Just wanted to also just saw in the supplemental slides that there was a historically large take up in the direct versus indirect mix there. Anything interesting to call out there or is that more just a function of maybe some of the shutdown dynamics? Thanks.

Yeah, I'll have to go look just to double check, but I'm certain it's tied to the federal business all of those sales flow through a fairly complex set of partners to get to the end customer. So they'll be all in our indirect number.

Makes total sense. Last one for me, just talking about the new product with Acumen and the potential emergence of a new category. Understand it's currently falling into C&E, but is that an area that you continue to expect to announce new product innovation and Is it overly presumptuous to think that you might be telegraphing that down the road you would view ribbon as having sort of three segments to the business rather than two?

Yeah, it's probably much too early for me to predict that yet from an actual financial reporting perspective. But it is interesting. This product really spans both business units, if you will. It doesn't necessarily fit neatly into one or the other. And so we'll just have to think about how do we manage that. It's been really interesting since we announced this project, this product, and announced the project with Optima as our first lead customer. We've gotten just a ton of interest, and I've been to a few industry events and actually been able to do live demonstrations of this product that, again, allows our customers to literally build their own agentech agents and take their information that's being collected off the network and feed it into an LLM of their choice. Basically, uh, it's pretty, it's, it's, it's really, um, a pretty phenomenal capability, uh, that's put in the hands of people that can build their own things here. So we'll see just how transformational is, but it's been pretty, uh, you know, a lot of energy around it the first couple of months and, you know, these, uh, from an economics perspective, just to kind of stand up the solution and the network, get it running, you know, we're talking several million dollars. So there's the ability here for this to really scale as we can get it out to more customers.

Thank you.

And the next question comes from the line of Ryan Koontz with Needham & Company. Please proceed with your question.

Great, thanks. Just a couple of clarifications if I could, Bruce. On the bead win, I assume that's for middle mile optical and aggregation. So you're selling into kind of the backhaul from these remote nodes?

Yeah, exactly, Ryan. So I'll call it middle mile, right? IP over DWDM type infrastructure or network design.

Is that typically handled by the local incumbent telco or third party that's maybe a consortium or such?

Yeah, in this case, it's not a consortium, but it is a number of operators kind of working together on the infrastructure. Yeah, makes sense.

Cool. And then on Verizon going forward, how should we think about that kind of mix of product and service going forward? Is it going to always be kind of seasonal, or how should we frame that up over the next 18 months into next year?

Yeah, we'll try and give as good a visibility as we can. In addition to the modernization program with them, we obviously have a number of other pieces of business, and a lot of what we're transacting or selling these days is very software-oriented. So, you know, it will move the needle, you know, an extra 5 million here or there or less makes, you know, does make an impact on the overall numbers. So, you know, I think the way to think of it is we have this background set of activity focused on modernization, and then you'll see a few additional things kind of come in and out a few times a year. And so it'll create a little bit of variability that way.

A little more lumpy. Yeah. All right, great. And then lastly, just kind of big question, you talk about agentic AI and I assume you're selling mostly session border controllers into these agentic AI applications. And how do you think about that, Tam, right now? We're obviously very early in the market development.

Yeah, so it's, you know, certainly I think the core of the solution is going to be a session border controller. What we're seeing the most interested in is the cloud-native versions of the products. So these are, you know, kind of SaaS environments being stood up in the cloud. You know, the first couple that we've done have been AWS based. So we've, I think we're out in front on the cloud native implementation of not just the SPC, but then all the things that go around, it goes around it, the policy routing, the analytics, the management system, and then pair that with a kind of a web RTC set of APIs that allow, you know, basically programmatic access to the network functions, the telecom network functions. So it's a pretty sophisticated set of solutions that then made up into the customer's agentic AI platform that they're developing. And of course, you know, that's all the buzz, right, is how do you leverage agentic AI to really transform all these different types of services, whether it's contact center or SaaS applications, those sorts of things. So I think the interface into those more and more will be voice. So I think that really puts us in a good spot.

And the bulk of that, Bruce, that technology stack was built for enterprise originally, just traditional enterprise-wise?

It's really the great thing about the technology is that we can deploy it inside a telecom network or inside an enterprise. You know, how we position and sell it and package it is different, but the core technology is very similar.

Got it. All right, that's all I've got. Thank you.

Great.

Thanks, Ryan.

And there are no further questions at this time. I would like to turn the floor back over to Bruce McClellan for any closing remarks.

Great. Thank you. Well, thanks again for being on the call and your interest in Ribbon. We look forward to speaking with many of you at upcoming investor conferences and updating you on our progress. Operator, thank you. And that concludes our call.

Thank you, sir. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.