Ribbon Communications Inc. (NASDAQ:RBBN) Q1 2024 Earnings Call Transcript April 24, 2024
Ribbon Communications Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello and welcome to the Ribbon Communications First Quarter 2024 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Joni Roberts, Chief Marketing Officer. Please go ahead, Ms. Roberts.
Joni Roberts: Good afternoon and welcome to Ribbon’s first quarter 2024 financial results conference call. I am Joni Roberts, Chief Marketing Officer at Ribbon Communications. Also on the call today, 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, rbbn.com or both, our press release and supplemental slides are currently available. Certain matters we’ll be discussing today, including the business outlook and financial projections for second quarter of 2024 and beyond are forward-looking statements. Such statements are subject to the risks and uncertainties that could cause actual results to differ materially from those contained in these forward-looking statements.
These risks and uncertainties are discussed in our documents filed with the SEC, including our most recent Form 10-K. I refer you to our Safe Harbor statement included in the supplemental financial information posted on our website. In addition, we’ll present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measure are included in the earnings press release we issued earlier today, as well as the supplemental slides we prepared for this conference call which again are both available on the Investor Relations section of our website. And now, I’d like to turn the call over to Bruce. Bruce?
Bruce McClelland: Great. Thanks, Joni. Good morning, everyone and thanks for joining us at this new time today to discuss our Q1 results and outlook for the year. I’d like to start with a few comments on the major announcement we just released with Verizon this morning. As I’ve mentioned on recent calls, there’s a significant opportunity with telecom service providers in large enterprises, including the US Federal Government to complete the replacement of legacy TDM voice switching platforms with modern cloud-based solutions. There’s a strong ROI for our customers with multiple benefits, including improved overall quality and reliability of the service, significant cost savings from lower power consumption and cooling requirements, a reduction in facilities and floor space that can be repurposed to meet the exponential growth and data consumption from mobile and broadband services and lower engineering and operations effort needed to manage this complex network.
All while significantly reducing the environmental footprint made from providing this critical communication service. We’re very excited about this new multi-year program with Verizon. It’s an extension of the ongoing work we’ve been doing together but on a much larger scale. Ribbon will provide both, product and professional services, to rapidly decommission legacy central office equipment while fully maintaining current services and features. The initial deployment phase of the program will be over the next three years, leveraging our full portfolio of virtual and cloud native call controllers and session border controllers, advanced analytics, line access and universal media gateways. We expect the program to generate over $300 million in revenue for Ribbon over that period with potential for follow-on programs to continue to support Verizon’s [ph] efforts in building the most advanced networks.
We’ve worked closely with the Verizon team to reduce the implementation cost by defining a focused large scale project that has economy of scale benefits. This is a major endorsement for both, Ribbon’s portfolio and expertise in the migration of these complex communication networks. The measured approach Verizon is taking to migrate services and preserve significant revenue streams is applicable to practically all our other service provider customers, where we aim to develop similar programs and generate significant benefits from this cloud migration. Now on to our first quarter 2024 results. We had an excellent first quarter where our strategy to leverage our long-term relationships to diversify and grow our business continues to pay-off.
Profitability improved significantly year-over-year and exceeded the high-end of our guidance range with adjusted EBITDA of $12 million. We benefited from a favorable mix of sales to customers in the quarter, particularly in the EMEA region, where sales increased 24% as compared to the first quarter last year. Higher sales in the EMEA resulted in strong gross margins exceeding 40% in the IP optical segment, as well as the seventh straight quarter of year-over-year sales growth. This includes customers across a number of markets, including service provider, defense and critical infrastructure. Gross margin in the cloud managed business was also strong in the quarter, primarily due to continued growth in the enterprise market, with product sales increasing 15% year-over-year.
This includes a number of voice modernization projects with US government federal agencies. The strong gross margin and reduction in operating expenses of 5% year-over-year contributed to earnings exceeding the top end of our guidance for the quarter. Adjusted EBITA over the trailing 12 months increased to $105 million for the company, a major improvement trend over the last several quarters. While lower spending from us Tier 1 service providers continue to impact our cloud managed results, with sales declining 11% year-over-year this quarter; with our new Verizon program and the potential for similar engagements with other customers, we believe we’ve reached a low point and expect solid recovery in the business. We expect the new Verizon program alone to underpin this business for the next several years.
This quarter, we also continue to increase the software content of our product sales, growing from 25% to 29% year-over-year, increasing margins. The continued growth in enterprise has been a key driver behind the higher software sales, improved margins and solid earnings contribution. Overall, company’s sales in the quarter were at the lower end of our guidance with a few million dollars of equipment in transit at the end of the quarter and site readiness delays with a few smaller deployments for rural customers in the US. Now, a little more detail on each of our operating segments. Building on the momentum from the second half of 2023, IP Optical Network sales increased 9% year-over-year in the first quarter, with the majority of the growth coming from the EMEA region.
This resulted in stronger margins for the segment, consistent with the previous quarter at 41% and a significant improvement of $17 million in adjusted EBITDA versus the first quarter last year. In EMEA, the critical infrastructure private networks market segment continues to be a great fit for our portfolio where high performance and information security are major differentiators. We had a number of expansion projects in the defense sector with customers such as the Israeli Defense Force, the Swiss Army and the Finnish Defence Forces. We also had several new projects with customers in segments such as energy distribution, railways and education. This all complemented ongoing business with a number of service provider customers across the region.
In the Asia-PAC [ph] region, sales to key customers in India, including Bharti Airtel and Tata Teleservices, were down only slightly year-over-year and included the full portfolio of both, Optical Transport and IP routing products. There were also very positive signs that Vodafone Idea will complete their long awaited capital injection, with the company’s public offering successfully completing this week. They plan to invest aggressively in 5G upgrades and we believe we are very well positioned to be a key supplier as they reinvest in their network, driving growth for the India region in the second half of this year. In the Americas region, IP Optical sales increased year-over-year in Canada and Latin America, while shipments into the US were lower in the rural broadband segment this quarter due to customer timing and site readiness [ph] delaying revenue recognition into the second quarter.
From a product line perspective, sales of our Apollo Optical Transport products were once again strong this quarter, increasing 9% year-over-year. This reflects the stronger mix of these products sold into the EMEA region and was a good start to the year. I expect this optical growth trend to continue as our new Apollo 9400 platform shipments continue to grow, supporting the highest 1.2 terabit per second speeds available in the market today. We’re effectively expanding our addressable market with this platform and are able to better address services such as data center interconnect, complementing the current 9600 platform that’s favored by telecom operators. We shipped more than 50 9400 chassis [ph] so far and have a pipeline of more than 20 opportunities in process.
Sales of our Neptune IP routers grew 2% year-over-year in the first quarter, reflecting lower rural sales this quarter. Also the first quarter of 2023 were the first volume shipments to Bharti [ph] for the 5G Cell Site Router [ph] last year, climbing their deployments and building some inventory. We expect this product line to continue to grow with a very good pipeline of new customer opportunities. Overall, IP Optical product and service bookings were 1.07 times revenue in the quarter building backlog for the second quarter. In our cloud managed segment, as expected, the lower spend from US Tier 1 service providers continue to affect our year-over-year comparisons with the reduced spending starting midway through the second quarter last year.
Excluding sales to our large US Tier 1 customers, revenue in the first quarter from all other customers grew 1% year-over-year, despite lower overall industry investment. With the new Verizon program, we expect a significant improvement going forward. Enterprise cloud managed product sales increased 15% year-over-year in the quarter with a continued expansion of a major voice modernization project with the US federal agency. We expect this trajectory to continue in the second quarter. The cloud managed [ph] business continued to drive strong profitability due to higher software mix. And product and service bookings were good in the quarter of 1.06 times revenue. We expect a much stronger second half for the year in our cloud managed business with the continued momentum in enterprise and a significant increase in sales to service providers.
This includes the beginning of the new network modernization program with Verizon. We expect initial product shipments from that project to begin in the third quarter and deployment services to ramp as the program accelerates exiting the year at $100 million per year run rate, once again with this key customer providing a strong foundation for growth in this segment. We continue to maintain a strong re-occurring maintenance business across our customer base and have approximately 80% of this year’s maintenance revenue and backlog are under contract for the cloud managed business, as well as for the IP Optical segment. With that, I’ll turn it over to Mick to provide additional detail on our first quarter results and then come back on to discuss outlook for the second quarter.
Mick?
Miguel Lopez: Thank you, Bruce. Good morning, everyone. We were very pleased with our financial performance in the first quarter as we exceeded the high-end of our guidance for gross margins and adjusted EBITDA on strong performance by IP Optical Networks in particular. On a trailing 12 month basis, our adjusted EBITDA is $105 million, back to levels over $100 million prior to the 2022 supply chain disruption. As always, please refer to our Investor Relations page on the Ribbon website for supplemental financial information. We will also see that we have now included an excel worksheet to facilitate your analysis. Let’s begin with financial results at the consolidated corporate level. In the first quarter of 2024, Ribbon generated revenues of $180 million which is a decrease of 3.5% from the prior year.
Non-GAAP gross margin was 55.1% which is 700 basis points higher than prior year due to a positive product and regional mix. As you will hear, both business segments had significant improvements in gross margin percentages versus prior year. Non-GAAP operating expenses were $91 million, an improvement to $5 million or 5% year-over-year driven by continued reductions in R&D and sales expenses from last year’s restructuring efforts. Non-GAAP net loss was negative $1 million which is a $2 million improvement from the previous year. This generated non-GAAP diluted loss per share of negative $0.01 which is an increase of $0.01 versus prior year. Our non-GAAP tax rate year-to-date was 35%. Our interest expense for the quarter was $6 million consistent with the previous year.
Adjusted EBITDA was $12 million in the quarter which is a great $14 million improvement from last year’s EBITDA loss of negative $2 million; this is the best first quarter profit performance in the last three years. Our basic share count was 172 million shares and our fully diluted share count was 175 million shares for the quarter. Now, let’s look at the results of our two business segments. In our Cloud & Edge business, first quarter revenue was $102 million, a decrease of 11% year-over-year, driven by lower product sales at US Tier 1 service providers. We are increasingly confident that we can grow our revenues for this business segment with the incremental business from Verizon’s Network Modernization Program. The Cloud & Edge business had a strong first quarter non-GAAP gross margin of 66%, up about 500 basis points from the prior year.
This improvement was driven by an increasing mix of software product sales which were 68% of total product revenues. The Cloud & Edge business segment continues its steady cash and profit contribution with an adjusted EBITDA of $17 million, or 17% of revenues. Let’s turn to our IP Optical Networks business results. We recorded first quarter revenue of $78 million which was an improvement of $6 million or 9% increase versus the prior year. Non-GAAP gross margin for IP Optical Networks was 41%, up about 1400 basis points from the prior year from 27% in the first quarter of 2023. This resulted in gross profit of $32 million which is a $12 million or 64% improvement from previous year, mostly driven by lower product costs and better regional mix from EMEA sales.
If you recall, one year ago, we made sales of our initial long haul optical transport infrastructure equipment to India at lower margins. Adjusted EBITDA for the quarter was a loss of $6 million which is an improvement of $17 million year-over-year. This is the seventh straight quarter of year-over-year improvement in IPON [ph] profitability. We continue to strive for positive adjusted EBITDA for this business segment in 2024 as it continues to grow. Let’s now discuss total company cash flows and capital structure. Cash from operations was excellent with a positive $13 million in the quarter; that’s now two positive cash flow quarters. We use cash in the quarter of $3 million for capital expenditures in our quarterly $5 million term loan repayment.
We ended the quarter with $31 million of cash and cash equivalents and increase of $4 million from the end of 2023. Our senior term loan balance was at $230 million and the $75 million revolver loan had zero balance outstanding; part of bank covenant calculations which includes $55 million of our preferred equity and total debt. Among other adjustments, we comfortably met both of the term loan covenant metrics in the first quarter. Our bank leverage ratio was at 2.71 times which is within our target range of 2 times to 3 times. The fixed charge coverage ratio was 1.77 times. Speaking of that [ph], we have started a process of refinancing our capital structure, both the term loan and preferred shares. As part of this process, we have already received a B2 rating from Moody’s and a B minus from Standard & Poor’s, both with a stable outlook.
You may have noticed that we were scheduled this earnings call from the afternoon to the morning to accommodate the lenders kick-off meeting this very afternoon. Assuming stable market conditions, we expect to have our refinancing done in several weeks. We remain confident in the continued support of our financial partners to obtain a flexible and long-term capital structure to sustain our profitable growth. Now, I’ll turn the call back to Bruce to provide more comments on our outlook for the second quarter.
Bruce McClelland: Great. Thanks, Mick. As I said last quarter, I’m very confident in our ability to continue to grow revenue and improved profitability this year. The new Verizon program will provide a strong foundation for the company with opportunity for similar programs with other telecom operators. We expect revenue from the Verizon program to begin in the third quarter with deployment ramping overtime. The improved margin trend over the last few quarters and the strong profitability in Q1 further increase our confidence of achieving our full year guidance. In addition to the recovery in the cloud managed telco business, we continue to add significant new wins with US federal agencies that are initiating their own voice modernization programs.
In fact, we have a very strong and growing global government and defense business that leverages our entire portfolio of voice and data products. And a strong professional services practice tailored for this market vertical; the scalability, reliability and information security aspects of our products are significant differentiators and there’s a larger market that we are not yet fully addressing. We have made this a strategic area of investment given the large opportunity, particularly in North America and Europe. Globally, the government and federal market segment accounted for almost 10% of overall sales for Ribbon in 2023. From a portfolio perspective, I’m excited about our innovation pipeline. As I mentioned earlier, our new Apollo 9400 compact modular optical transport platform is gaining momentum and significantly expands the portion of the market that we can address, including long haul transport, subsea networking and data center interconnect.
While we’ve already been successful penetrating these markets and have multiple deployments with customers such as Bharti, IPS, Ciena and Telehouse [ph]; the 9400 platform has been purposely designed for the unique environmental requirements of these market segments. We conservatively estimate $1 billion increase to our addressable market and are excited about the momentum behind this new product, with industry leading 1.2 terabit per second coherent [ph] optics. At the recent optical fiber communication conference at San Diego, we made a joint announcement with Cisco, highlighting the interoperability between our 9400 platform and the Cisco NCS 1014 platform. Interoperability and optical networking is very rare and has a great endorsement of our open networking strategy.
This will enable our customers to stay on the cutting edge of technology without being locked into proprietary solutions. In our IP routing portfolio, we continue to expand our product line and just completed the introduction of the Neptune 2400 High Performance Aggregation Router. Leveraging a common network operating system, the 2400 is a great fit for middle mile and edge aggregation applications and supports a rich set of IP routing features and capabilities. This allows us to address the growing number of IP services. This 4.8 terabit non-blocking router supports a significant number of 100 gig and 400 gig client side interfaces, making it an ideal platform for a number of high capacity applications with coherent ZR+ optical uplinks [ph].
The lens by which our customers manage our portfolio and data networking products, is our cloud native news platform. With our customers, we’ve identified a number of practical applications that can benefit from the power of generative AI. Complex network planning, rapid [ph] isolation and root cause analysis and intelligent network optimization are great examples of the way we were leveraging generative AI to improve our products and differentiate our solutions. So, we’re off to a solid start in the first quarter and are making very good progress on our key strategic goals, including achieving sustainable profitability in our IP optical business, returning to growth in our telco voice infrastructure business, diversifying and expanding sales in enterprise market verticals including financial, healthcare and government information security and accelerating innovation and capturing cost efficiencies with full integration of our product teams.
For the second quarter, we expect sequential growth in both of our businesses. In IP Optical, we expect continued momentum in the EMEA region, as well as growth in North America and Asia Pacific. We expect gross margins to continue to be in the high 30s or better. In Cloud Managed, we expect improvement in the US Tier 1 environment, coupled with growth in enterprise, as well as the additional US federal projects. Based on this, for the second quarter, we’re projecting revenue in the range of $200 million to $210 million, non-GAAP gross margins of 53.5% to 54.5% and non-GAAP adjusted EBITDA in a range of $20 million to $25 million. Our guidance for the full year remains unchanged, although as I mentioned earlier, we’re definitely off to a good start to meet these financial objectives along with a strong second half.
Operator, that concludes our prepared remarks. And now we can take a few questions.
See also 30 Countries that Receive the Most Aid from UNDP and 20 Affordable, Promising Cities to Buy Real Estate in 2024.
To continue reading the Q&A session, please click here.