Ribbon Communications Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Mick Lopez announced retirement, and John Townsend joined as Chief Financial Officer effective November 1.
• Q3 results: Overall sales $210 million, up 3.5% year-over-year and 9% quarter-over-quarter. Adjusted non-GAAP EBITDA was $30 million, non-GAAP gross margin 55% (high end of guidance). Non-GAAP operating expenses $90 million, up slightly year-over-year.
• Cloud & Edge: Strong growth with Verizon voice network modernization project, U.S. federal wins (e.g., modernizing U.S. federal softswitch backbone), SBC sales up over 60%, and opportunities with Microsoft Metaswitch replacement.
• IP Optical: U.S. rural broadband success, India and Europe sales trends, and innovation with 400-gig ZR+ module and Apollo 9408 compact modular platform.

Segment Performance

• Cloud & Edge: In Q3, sales were $128 million, up 11% year-over-year and 16% quarter-over-quarter. Revenue run rate exceeds $100 million per year with Verizon, and has deployments in 4 branches of the U.S. military. Non-GAAP gross margin neared an all-time high at 68%, and non-GAAP adjusted EBITDA contribution grew 20% year-over-year to $38 million, accounting for 30% of revenue. Sales to Verizon in the quarter reached 15% of overall company sales.
• IP Optical: Revenue in Q3 was $82 million, down 6% year-over-year but up 4% year-over-year excluding sales to Eastern Europe. Gross margin was 36% due to mix change. Non-GAAP adjusted EBITDA was negative $8 million. However, the U.S. market had strong growth, with revenue increasing more than 100% quarter-over-quarter and year-over-year, accounting for over 20% of IP Optical sales. India sales increased 16% quarter-over-quarter, and Europe sales were up 15% year-over-year and 17% year-to-date.

Guidance

• Fourth quarter: Projected revenue $235 million to $255 million, non-GAAP gross margin 55.5% to 56%, non-GAAP adjusted EBITDA $46 million to $52 million. 2025: Expect mid-single-digit revenue growth and double-digit EBITDA growth, with momentum from Cloud & Edge opportunities and U.S. federal wins offsetting IP Optical declines from Eastern Europe sales.

Risks

• Uncertainty around Microsoft Metaswitch installed base replacement, creating substantial opportunity but also uncertainty.
• Supply chain concerns from Nokia-Infinera merger, which Ribbon aims to capitalize on.
• Accounts receivable collection delays in Q3, affecting cash from operations.

Question and Answer

• Q: About the Metaswitch opportunity, what is the potential size?

A: Deals range from a few hundred thousand dollars to several million dollars. Ongoing maintenance revenue from Metaswitch installed base is in the $75 million range.

• Q: Outlook for Europe in the fourth quarter?

A: Seasonal improvement expected, with the U.S. being the strongest region.

• Q: How does the mid-single-digit growth guidance for 2025 break down by segments?

A: IP Optical adjusting for Eastern Europe decline, while Cloud & Edge growth from voice modernization projects and federal wins drives overall growth.

• Q: What's driving cross-sell success in IP Optical?

A: Cross-selling to existing voice infrastructure customers and using IP routing technology for TDM replacement in service provider networks.