Q2 2020 Ribbon Communications Inc Earnings Call

August 5, 2020

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Ladies and gentlemen, thank you for standing by our conference I'll begin on entirely once again, ladies and gentlemen, thank you for standing by our conference will begin momentarily.

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Greetings and welcome to the Robyn Communications second quarter 2020 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 there.

Mitre. This conference is being recorded and is now my pleasure to introduce your host Monica Gould Investor Relations. Thank you you may begin.

Good afternoon, and welcome to written second quarter 2020 financial results Conference call.

Monica Gould Investor Relations ever been communications also on the call today will be Bruce Mcclelland ribbons, Chief Executive Officer, and Mick Lopez ribbons Chief Financial Officer.

Today's call is being webcast live and will be archived on the Investor Relations section of our website and women communications Dotcom, where both her press release in our supplemental supplemental data are currently available.

Certain matters, we will be discussing today, including the business outlook financial projections for the third quarter 2020 in the proposed sale of the Candy Communications business 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 or documents filed with the FCC, including our most recent form 10-K and form 10-Q.

I refer you to our Safe Harbor statement included on slides two and three 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 measure are included in the earnings press release, we issued this afternoon.

As well as the supplemental slides for this conference call, which again are both available on the Investor Relations section of our web site.

Finally, as you'll recall, we completed our acquisition VCA Telecom on March three 2020, which impacts comparisons to prior periods statements about ribbons organic business within Standalone cloud and edge inorganic revenue growth refer to the business and financial results of Redmond Communications.

Excluding the CIA business.

References to packet optical network relates to the CIA business.

Overall ribbon ribbon or total company results are consolidated results and include the results for Sci from acquisition date.

Women operates as a single segment however for the sake of clarity, we are including additional detail on the former you see I telecom business performance as they continue to integrate we will transition to providing business unit performance rather than legal entity financials.

And now I would like to turn the call over to Bruce.

Thank you Monica and thank you everyone for joining us today.

We're very pleased with our performance in the second quarter as we navigate this challenging time.

Before we go through the details of our second quarter performance and talk about our outlook for the second half the year.

I'd like to make a few comments on the announcement, we made today relative to our candy your stance communications business.

As part of the portfolio assessment that I've been doing since joining earlier this year. It became clear that a different path would be beneficial to realize the full potential for candy.

As announced we have signed an agreement to sell the business to American virtual cloud technologies.

Abbvie technologies.

Maybe see technologies as a publicly traded IP services company.

The strong management team focused on assembling a world class portfolio of unified Cloud Communications managed services and cyber security technologies and services.

We believe the all stock transaction will unlock the value of our Candy communications business.

And allow ruben shareholders to benefit from the potential upside.

While reducing the ongoing investment that is needed to ensure the full potential is achieved.

In the first half of 2020, we estimate there would have been a 9 million dollar improvement to within EBITDA had we excluded the can be operation.

Maybe see technologies will be an important customer for rhythm.

As a minority investor we will be completely aligned on prioritizing success of our mutual customers and our most important now set employees.

The deal is structured as an asset purchase with NBC technologies, acquiring the ongoing candy business, including certain intellectual property customer contracts and ongoing operations.

Key customers include ATM tea.

Eddie slot.

The city of Los Angeles, and many others.

Robin will receive 13 million shares of ABCD, an approximate value of $50 million based on the current PVC technologies share price.

We expect the transaction, which is contingent on financing PVC technology shareholder approval consent from our lenders under our credit facility and other customary closing conditions to close before the end to 2020.

I'm very excited about this new direction for candy and the potential for this business.

As well as the increased focus this will give the within team on our core service provider and enterprise strategy.

Now on to other highlights in the second quarter.

We reported total sales of $210 million, a 45% increase from the same period last year, reflecting the inclusion of a full quarter packet optical sales from that you see I acquisition.

Excluding Sci sales the traditional within business on a standalone basis remained very solid with sales increasing to $147 million from $145 million in the same quarter a year ago.

Sales from organic within software based products increased 39% in the second quarter compared to the same period last year, which had a very positive effect on our profitability.

We continue to make good progress on our strategic objective to diversify and grow our enterprise business.

Overall sales to enterprise customers accounted for 30% of our product revenue up from 21% in the year again quarter.

The standalone within cloud and cloud an edge enterprise sales increased 42% year over year, and 38% quarter over quarter. Despite lower sales of our on premise SPC solutions arising from the shift to working from home.

And we're starting to see the benefits from restructuring activities and other cost containment actions. We took in the first half with non-GAAP operating expenses declining approximately 11% quarter over quarter on a comparable basis.

Combined with the higher sales and stronger gross margins overall profitability grew by 31% year over year with adjusted EBITDA of $30 million in the second quarter.

For the first half we've delivered $39 million of adjusted EBITDA almost double the 20 million achieved in the first half 2019.

Like many companies the majority of our employees continue to work very effectively from home and we have started slowly phase in stock to office with a small percentage of employees in certain locations.

We have maintained extensive employee engagement and have great examples of initiatives by Ruben employees to support the local community.

Our customers continue to see elevated traffic levels related to work from home driving network capacity augmentation and continued focus on transitioning legacy networks to IP.

Customers are prioritizing solution certainty and speed of deployment over evaluating new technologies.

In some regions, such as India, and Japan, there remain logistical challenges that have slowed down certain types of projects and delayed new product testing and certification.

Overall, our engagement level with customers has increased and is very similar to pre co bid levels and visibility in that business has improved and we currently have no significant supply chain restrictions.

Lower travel and marketing activities contributed to our lower operating expenses in 2020.

We have quite a few notable customer accomplishments in the second quarter.

On the Fiveg front, we were very excited to announce the Bharti Airtel went live with a new IP Mpls network utilizing our Neptune platform with a specific focus on readying their network for Fiveg services.

We have a great partnership with Airtel and this deployment of thousands of network elements is a great affirmation of the differentiation designed into our packet optical portfolio.

Air tell is also leveraging our mobile analytics platform to further manage the performance of their network.

A little closer to home, but still on the Fiveg theme, we had an important win with a major U.S. mobile carrier with a new Volpi voice transcoding platform to support both Fourg am our wideband voice codecs and next Gen Fiveg enhanced voice services or EPS codecs.

This was a 10 million dollar initial deal with deployment in the third quarter potential for future growth.

While these two wins are obviously very different they emphasize the importance that fiveg will have in network modernization and investment going forward.

Our core SBC business had a very good quarter with both enterprise and service provider customers.

We were very proud of the work, we did with bandwidth to rapidly increase system capacity leveraging a cloud based deployment on the Cws plus public cloud platform.

As the stay at home order created significant traffic growth.

And we went live with a new customer in Japan to support their Fourg mobile launch as they pioneer commercialization of the open ran standard.

Despite the work from home operating model, we had a very busy quarter as we partnered with Microsoft to train hundreds of their global one commercial partners on the use and deployment of direct routing to support augment calling within the teams environment.

We continue to see momentum building with our Microsoft engagement and believe this will be a growth driver in the second half the year and into 2021.

Our candy business had several notable accomplishments in the second quarter, we launched a new IP toll free click to connect capability with a TNT in their apiay marketplace that provides customers with the ability to simply add inbound voiceover IP toll free calling.

This is particularly powerful for call center environments operating in multiple locations are migrating from legacy Tdm systems.

And together with one of our tier one carrier partners. We were awarded the Ucas opportunity with a nationwide healthcare services company covering over 80000 end user and users in over 100 locations.

And during the quarter, we surpassed 200000 seats on the Candy business services platform a big milestone.

I'll now ask mic to comment in more detail on our Q2 performance and then I'll come back on and talk about the outlook for the business.

I want to welcome you to the team and your first written earnings call. We're delighted to have you with us Mick.

Thank you Bruce I am honored to join the ribbon leadership team and especially grateful for the warm welcome as Bruce mentioned, our second quarter showed good performance considering our challenging economic environment. We have provided supplemental slides on our website with graphs and tables to assist our investors.

Total revenue of $210 million in the second quarter was comprised of $147 million for cloud, an edge and 64 million for packet optical to repeat again for the sake of clarity.

We've been acquired Sci remarks third so the first quarter of 2020 had one month of packet optical revenue of $30 million, while the second quarter has a full quarter included for 64 million.

As previously mentioned as we continue to integrate we will transition to providing business unit performance rather than legal entity financials, given the recent Sci acquisition all year on year comparisons are again.

Ribbon standalone unless otherwise noted.

The second quarter 2020, GAAP financial results were as follows total company revenue was $210 million gross margin was 53% operating expenses were $111 million loss per share was six cents. Please note that last year, we had $63 million gain from me.

Litigation settlement, including the company's GAAP financial results, which added 57 cents to earnings per share.

For ribbon as a total company our non-GAAP second quarter performance was total revenue of $210 million non-GAAP gross margin was 59% non-GAAP operating expenses were $99 million non-GAAP adjusted EBITDA was $30 million compared to 22 million last year the him.

Proven and adjusted EBITDA was driven by higher software mix in cloud and niche and continued cost containment efforts across the company.

Non-GAAP diluted earnings per share was six cents compared to 14 cents last year, which reflects the higher share count from.

Acquisition.

Our diluted share count for the second quarter was 151 million shares compared to 111 million shares in prior year, primarily driven by the easy I acquisition.

Packet optical network business reported Q2 revenue of $64 million, which was down 26% versus prior year due to challenging operating environments in regions such as India.

From a profitability perspective are easy I entity achieved gross margins of 39% and by controlling expenses, we were able to minimize the EBITDA loss to $7 million into cloud an edge business Q2 revenue was $147 million, reflecting growth of 1% from the previous year driven by demand from our.

Enterprise customers strong growth in software revenue resulted in better gross margins for cloud an edge of 67% versus 63% in the previous year. Our non-GAAP operating expenses of 64 million decreased 10% from the prior year driven by restructuring savings temporary employee salary.

Productions, and minimal travel and other discretionary expenses cloud an edge non-GAAP operating margin was 23%, which is 10 percentage points higher than last year non-GAAP adjusted EBITDA for cloud an edge was $37 million, which is $15 million higher than last year and reflects an adjusted EBITDA Mark.

One of 26%.

Now some additional perspective on cloud and niche there was $72 million of product revenue and 75 million of services revenue in the second quarter of 2020 cloud and software product revenue increased by $12 million compared to the same period last year.

Software with 60% of total product revenue in the second quarter of 2020 compared to 43% and the second quarter of 2019.

We would like to provide some of our key metrics for the second quarter.

Book to Bill ratio, excluding maintenance was 1.12 times are solid pipeline is providing us with much better visibility into sales in the second half of the year.

Software revenue was 39% of total product revenue across the total company.

Maintenance was 33% of total revenues, which is fairly consistent with the prior year.

Top 10 customers accounted for 47% of total revenue, which compares to 52% last year service providers accounted for about 70% of our revenue in the quarter and enterprise customers represented 30%. This compares favorably to the second quarter 2019, which had seven.

The 9% that revenue from service providers and 21% from enterprise customers.

While in last year's second quarter International customers accounted for 42% the revenues as a result of the easy I acquisition International customers represented 52% the revenue and the second quarter of 2012.

Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $94 million, including restricted cash of $13 million, we anticipate using approximately $8 million of restricted cash over the next year to pay certain real estate taxes associated with the easy merger.

The principal balance of our term loan was 397.5 million as of June Thirtyth, 2020, which is down $2.5 million, reflecting a quarterly principal payment our revolver of $100 million remained undrawn.

The effective interest rate on our term loan was 3.9% for the second quarter of 2020, and Deleveraged and fixed charge coverage ratio covenants for comfortably met.

From a cash perspective, the company use 30 million of cash in operations for the second quarter.

If we were to adjust for unusual items, including payments of 25 million for acquisition related costs from the first quarter and positive 9 million in receipt from the Mehta switch settlement, our cash from operations would have been a positive $13 million.

We anticipate spending approximately 7 million in the second half of 2024 restructuring and acquisition related expenses.

We received an accelerated payment of $16.7 million from Medis, which in July that completed their payments to written.

Capital expenditures were $9 million for the quarter, which was $5 million higher than normal due to real estate leasehold improvements in our north Dallas and Japan facilities. In summary, we had good quarter with strong performance by cloud, an edge and recovery and the packet optical network business now I'd.

The turn the call back to your neighbors.

Great. Thanks, Mick let me add a few more thoughts on each of our businesses and our outlook for the third quarter.

Our cloud and edge portfolio is a broad set of voiceover IP related products and services deployed with many of the major carriers and enterprises around the world.

Continued investment in these products is driven by the adoption of IP technologies to reduce cost and enable advance collaboration services.

The recent work from home transition continues to be a tailwind for the business given the increase in network utilization.

A significant portion of the addressable market growth for cloud an edge is within the enterprise vertical, particularly as unified communication solutions, such as Microsoft teams zoom and Amazon chime become commonplace.

As use of these you see platforms expands beyond collaboration use cases and begins to replace replace traditional network or PBX voice systems.

Secure scalable Sip trunking becomes a critical ingredient.

This is an area, where we are laser focused.

And we're expanding our solutions to support the growing you see market.

This week, we launched within connect a portfolio of subscription based as a service offerings.

This ribbon connect offering supports Microsoft teams direct routing and enables carrier grade voice, calling capabilities in minutes.

Microsoft teams is one of the fastest growing unified communication platforms in the world with more than 100 million daily active users.

Robin connect provides a seamless way for service providers value added resellers and system integrators to quickly tap into this rapidly expanding market by easily adding voice, calling capabilities to Microsoft teams.

We are taking a partner first wrote to market with this offering supporting a best of breed approach to the solution.

Robin connect for Microsoft teams direct routing is the first of several subscription based offerings designed to rapidly accelerate time to market for real time communications.

We also continue to have good traction in the financials vertical with nine global financial institutions, increasing capacity on our session management solution in the last quarter.

Illustrating the significant role we play in these global enterprise networks as they continue to modernize and optimize their IP based communications network with our software on premise based solutions.

With a broad array of public or private cloud and on premise SBC solutions, we really have the market covered.

With security top of mind for many consumers our leadership in defining and deploying call Trust and identity management solutions continues to gain momentum with service providers.

Our new call Trust offering utilizes machine learning models to determine the colors intend and reputation in real time for every call and enables the service provider to determine how each call should be handled.

Greatly reducing the number of unwanted ruble calls and fraud calls.

In the second quarter, we secured two tier one north American customer wins for this offering.

And of course, our cloud and hedge businesses underpinned by a strong recurring maintenance revenue stream supporting many of the largest telephony networks around the world.

In the second quarter, we had two satisfying win backs with customers that a discontinued support from us in favor of another third party only to return and renew coverage.

Overall, we continue to expect year over year sales growth of 2% to 3% for the cotton edge business with improving earnings from a stronger software mix and lower operating expenses.

Growth related to enterprise communications will outpace other areas and pace the overall growth of the business.

Turning to our packet optical networks business, we saw some recovery in sales as customers renewed projects paused during the early stages of cobot 19.

In particular, we had a solid quarter in European and former Soviet Union countries.

The businesses in India is still impacted by both cobot delays as well as the ongoing adjusted gross revenue feed dispute between several wireless carriers and the department of telecommunications.

However, there is a significant Supreme court hearing on the case plan for next week and we're optimistic that clarity will be reached and service providers can move forward with certainty in their business.

From a general activity perspective, we have seen deployments recover in July to approximately 50% of the pre cobot levels and expect this trend to continue to improve.

Engagements related to Fiveg network planning are very robust and we expect this to be a significant driver for our business in 2021.

In addition to our Bharti Airtel announcement, our portfolio was ranked very strongly by a recent global data report that focus specifically on Fiveg transport solutions.

Particular, we had market leadership ratings in areas, such as timing and synchronization.

At work slicing and program ability and power efficiency.

This affirmation underlines the technology differentiation and competitiveness of the portfolio.

Our timings perfect given the increased global pressure on Chinese competitors in certain markets, creating opportunity for new wins in market share gains.

Of course, one of our highest priorities is to penetrate the north American market, leveraging the strong ribbon presence and relationships.

During the quarter, we added additional sales executives with deep experience in the North American optical market to address the opportunities that we are seeing with current within customers.

While it will take time for the strategy to play out we have a broad set of opportunities in the pipeline.

Overall, we expect our packet optical business to continue to improve in the second half of the year and to be poised very well for growth in 2021.

We expect to further benefit from the integration efficiencies and increased scale of the combined company.

As a result of the improving visibility and solid backlog, we are providing financial guidance for the third quarter.

We anticipate sales in the range of $210 million to $220 million with a slightly higher mix of hardware sales.

Our outlook for adjusted EBITDA is in a range of $25 million to $29 million and non-GAAP earnings per share of five to seven cents.

This outlook excludes any potential effects of the sale candy.

While we still continue to face near term challenges, we have a lot of opportunity and I'm confident in our ability to adapt and position the company for profitable growth.

That concludes our formal remarks I do want to personally thank the entire ribbon team around the globe for their hard work this past quarter and the excellent progress we've made on integration as well as cost containment.

To give a special thanks to our sales team that a very solid results during the challenging pandemic.

This time I'd like to ask the operator come back on the line and open up for questions.

Thank you will now be conducting a question and answer session.

I'd like to ask a question. Please press star one on your telephone keypad confirmation indicate your line is in the question Q.

Prestart too if you'd like to have your question from the Q for participants using speaker equipment, maybe necessary to pick up your handset before passing the Sarkies one moment. Please pull for your question.

Our first question comes from the line of Paul Silverstein with Cowen. Please proceed with your question.

Okay. All of your line is on mute.

I should learn how to use a cell phone I apologize.

For the.

For so you will taking the questions two big picture question. So I admit first with respect to these two effective optical.

I want to make sure understood your comment Bruce the 50% recovery you cited was that specific to India or do that.

And I know it was a big.

The biggest piece from a geographic perspective.

Was that common specific to in the or was that relative to the overall packet optical revenue.

Yes, sorry, I wasn't clear Paul that was specifically around the deployments were doing in India with the large carriers there and.

Yeah, we're deeply involved with them doing the service element of deploying the product and so we get pretty good visibility into what's going on and we're kind of more than halfway back to to where we were earlier this year in deployment velocity.

Bruce and trying to discern the opportunity or the risk for that matter. How big is India is a portion of your I assume you'd be totally packet optical today are virtually packet optical as opposed to the.

The traditional business, how big is India is a portion of the optical revenue present.

Yes, we do a little bit of cloud meds, there, but the larger portions packet optical and it's about about a third of the business something like that for the overall tacked on packet optical sales.

In the bulk of the balance to be Russia, Eastern Europe is real Middle East Africa.

Got it yes.

All right in as a general proposition, if we think beyond India. What are you seeing in terms of recovery on the packet optical twos before asking about club.

Yes, the European region, and the countries, we sell into and former Soviet Union you saw more significant recovery in the second quarter particular, as we got to the end of the quarter. So we had pretty pretty solid results there and.

Again as the deployment velocity continues to increase in India and of course, we get through solving the adjusted gross revenue fee dispute hopefully next week, we're optimistic that India really starts to Reaccelerate Tim.

And and gosh. The the announcement, we did with Bharti here. This week is a good indicator of how significant a presence we have over there.

All right one more question, we may impact jobs come before I get the cloud pauses by students 90 days ago, but.

But.

Obviously, you can take advantage from an acquisition perspective, whether acacia yell insight on that coherent DSP, but as it to proposition.

A level competitive intensity an obstacle.

Given the nature of the competitors, where you have some very fine much much larger entities was significantly greater assets.

Sure somewhat resource constrained I'm, just curious Bruce I know it wasn't on your watch I know you're coming in you just made a strategic decisions, particularly but.

From a long term perspective.

Yeah.

Challenged opportunity of having sufficient resources, especially given the cost of technology.

And the technical complexity, the technology unity and go up dramatically with each line rate. It is fine as you sized business.

Stream we good.

Super RV Galliprant perspective, how do you from launch with respect to be on managing quarter to quarter.

What's the likelihood from your perspective, the puts and takes being able to seed that.

And be successful and I don't need to be cynical, but.

But again looking longer term you get near the new serves in town what are your thoughts on how you navigate that very challenging.

These factors long.

Well I think Paul it's a lot of around focus we're trying to do everything for everyone.

Thats when you have a challenge and in fact.

The decision we made around Kenny is a perfect example of a really focusing in on where we're going to invest and we're going to be successful.

This global data report, we just saw just highlights the technology strength in the portfolio and the thought leadership, we're gaining around particular around fiveg networking and the evolution towards private networking, so I understand the skepticism but.

Yes, exactly our advantage I mean were coming in is a bit of a disruptor with.

I hope I think a differentiated technology approach.

And we we've proven we can be successful selling directly head to head against the major industry names.

The strategy.

Fairly simple here right as we've talked about is to take that technology advantage and then leverage.

The the footprint in the in the relationships and and go head to head and when the business.

And we're not afraid to go do that.

We need to prove it we're going to show you. Obviously the strategy is going to make sense, but no I'm very confident in in our ability to go do that in.

Look I go back to my visitors were less little company competing against the big names that can it can happen, but you've got to have a good strategy and really focus on and pick your spots somewhere you're going to succeed.

Fair enough, let me ask you both cloud business.

In the gate.

So youre there about wins, but the the trends that you identified in terms of enterprise Sip trunking.

These are not new things bid in the market for quite some time readily identifiable.

By way of example, Audiocodes does that mean Thirtys belongs to split between enterprise and service letters through focused on enterprise for awhile for that matter document days figure was back on its maybe was already Rubin.

When youre, creating arrival bought.

The private company.

No it doesn't matter, but focus small focused on the Microsoft enterprise opportunity. So there's still lots welker videos, a lumpy focused on Friday, what's good for you know, what's what are the key things that need to change for you all to too I, just better job executing against that prominent.

On the enterprise opportunity.

There is that it by teams and by the general and gone.

Yes, Paul I think when you bifurcate or you kind of breakdown the enterprise market, you'll find there's a variety of different addressable markets.

Where we've done pretty well if you look at the kind of a major enterprises I think I talked about.

Nine of the major financial institutions investing in our SBC product just in the last quarter.

And thats not necessarily for unified communications is for their own Sip trunking needs.

Between their offices interconnect to the network et cetera.

These then look at the other part of the enterprise market Theres, obviously kind of small medium sized business market and the unified communications market and there's a variety of different technical solutions you need to address the fall the full addressable market.

So we've got.

You know best in class kind of appliance based products, we've got cloud native products, we now launched as a service product and we have on premise.

Scalable solutions from small to medium to large.

We've been building up some of those additional capabilities and and playing catch up in a portion of the market, but the other portion as I mentioned the larger enterprises I think we're leading the market in those areas.

What's obviously gotten more attention recently is the.

Significant growth around unified communications, and just to kind of pause on that for a minute you think about Microsoft teams in the 100 million plus daily users. They now have on that platform only a fraction of those daily users are using it for telephony needs for PBX replacement for.

Net calling.

So thats when you start to need secure Sip trunking SPC platforms. So what we think happens the adoption rate now has gone from.

Just collaboration towards using that as a platform for all your communication needs and so we think it is different is not the kind of just the while it's been around for a while I think there's a sea change and how these products are going to get leverage by enterprises and as Weve expanded the portfolio, we that isn't as a service capability.

I feel like we're pretty well positioned to take share or is that business grows.

Where's the is it seems the sure opportunities you're most excited about reserve and other parts of Europe showed that there are more so.

Yes, we mentioned teams alive, but theres several additional outstanding Ucas collaboration platforms out there.

At all do similar things and all need this.

Secure off net.

Connection so.

It's Microsoft it's it's zoom.

A handful that are really leading the industry and so we're really are focused on all of them not just on Microsoft teams.

But as we've seen the momentum build there we've put more more effort around that and partner pretty closely now with their sales team to position ourselves better. So there's been a lot of work Paul go in the last.

Six to nine months to improve our position there. It's it's not just doing the same thing hoping for a different outcome.

I appreciate the responses resource.

Thanks, Paul appreciate call.

Our next question comes from the line of Mike Latimore with Northland Capital markets. Please proceed with your question.

Yeah, great. Thanks, and thanks for the detailed presentation. They are very helpful.

In terms of the candies sale I just wanted to make sure I got the number I did you say that EBITDA would have been 9 million higher in the first half of the year.

Absent Kandi is always that.

That's right that's right Mike exactly.

Any revenue color on that as well.

Yes, it can kind of goes up down a little bit every quarter, but you could model it as between three and $4 million a quarter in revenue.

Okay in the first half of the year.

Great and then.

Obviously, the kind of work from home trend came on strongly and rapidly.

It did your your customers clearly needed you more to handle the traffic, but I'm wondering did any of that lead to maybe pull forward of any capacity purchases you might not see later in the air or is this just kind of.

Situation, where you know traffic elevated and they're going to need to invest kind of throughout the year.

Yes, a little hard to put a finger on exactly but it feels more incremental then pull forward.

And then there's kind of an ongoing nurturing of the business to keep up with capacity as well as best as I mentioned kind of this transition to support more unified communication collaboration, which we don't think is a short term phenomenon, we think thats a longer term growth engine or tailwind for the business.

Got it and then.

In this maybe in a detailed somewhere but in terms of SBC versus a gateway sales has there been a notable shifts.

And have recently because of these these studies that were from on trends or is it a pretty consistent.

Pattern there.

When you say gateway I think you're talking about the on premise.

Universal CPG type platforms right for enterprise and yes, we have seen a bit of a decline in deployment rental is not a massive one but it hasn't been hasn't been growing.

Which we account to obviously that the work from home and if you're not forming new businesses and adding new locations, you're not adding a lot of on premise equipment. What we have seen is obviously the traffic shift to the cloud and the additional capacity around networking for those for that use case.

Mm.

Yes.

And with regard to that.

Former Soviet Union it sounds like that's kind of coming back to normal level is that the freight interpretation there.

Yes, particularly towards the end of the quarter uneven into third quarter the business has been.

Pretty solid I don't know, if it's quite back to where it was but it.

It was it was pretty solid Mike. So we were pretty pleased to see that come back probably a little stronger than I thought it would.

Great and then just last one.

Maybe just an update on how you're thinking about debt repayment and the plans are on them.

Yes, So I think obviously, we're really focused on integration of cash generation Im not sure. We're at a point, where we're thinking about accelerated debt repayment and things like that but.

We're we're certainly thinking in the mid term there is going to be focused around use of cash to pay down debt. So.

Okay.

Great. Thanks, a lot.

I appreciate it thank you.

Thank you once again as a reminder, if he would like to ask a question. Please press star one on your telephone keypad for participants you think speaker equipment, maybe necessary to pick up your hands that before passing the Starkey. Our next question comes from the line of five Nachum with Cowen and company. Please proceed with your question.

Thank you for taking my question.

I have a couple.

Well first.

On that can be 50.

Can you elaborate a little bit more.

Would've assumed that can plug in one of the more promising.

Portfolios.

In your product portfolio that had been look promising growth prospects can you walk us through your rationale for they'll look at the.

No.

Yes, Thanks to 100 appreciate the question.

I think we're still pretty excited about the potential for the business, but a couple of factors I think come into play a I believe that continued significant investment around that business is needed to really realize the potential obviously, we're competing against a variety of larger players investing a lot around sales and marketing and I felt like.

If we were really going to see the potential we were going to have to double down more around that and really focus on investing there.

Obviously, we have three or four other product lines in the company the need focus as well and so I think.

Some of the earlier discussion folk deciding where strategically we're going to invest.

How we're going to be a significant player in these markets is all critical to the strategy and I feel like we can really unlock the value of of that asset and still benefit in the potential upside longer term with an equity investment in somebody that is focused on that market 100%.

So it feels like we get the benefit of both in some ways, we get the potential upside of a business that we believe in they become an important customer for us we continue to sell them products that enable the candy service and we lower the short term investment and we increased focus so.

It seems to check off a lot of important things for the company.

Okay.

Got it now.

The big the broader question on on technology and demand trend.

I should get indeed.

Extraordinary times coordinating team.

Don't you agreed that but.

Zoom, becoming so prevalent the need or conditioned on ucas maybe.

Limited ill give you. An example, I mean in App communication is becoming a far more prominent mail communicating use teladoc.

Communication not to communicate directly so are you.

How do you think about long term implications for the UK.

Opportunity, especially when you see over the top news other than you guys split is becoming more prevalent in this and Muslim world our work from home looking touched on items.

I can get that market is permanently impacted maybe.

Somewhat curtailed.

For traditional mucus list.

Certainly a big picture question.

I do think there's room for multiple winners in this space I'm not sure Theres, a one size fits all.

Everything moves to a best effort over the top service. If you will I think there's plenty of room for premium solutions in the markets still today I think there's room for on premise solutions I think there's room for terminal devices on People's desks.

No I, just think it's a big market and I'm not sure picking one winner or two winters makes sense.

Yes, obviously, we're trying to continue to expand the portfolio to meet the customer where they are in the market.

I want high performance carrier grade robust highly fault tolerant platforms, we've got the best in the world.

If they want to spin up an instance in native you asked for or is your we've got that so.

Yeah, I guess, that's the way I think of it.

I guess, what I was trying to as well.

In a different way list.

That prior to October 19th, Let's say you guys market was.

A billion dollar Tim but post goal would 19 with zone when other in NAV based applications kind of eating away. Some of the opportunity would you be that you can chime in as kind of somewhat decrease or maybe shrunk.

The other modes of communication to become more prevalent.

Yes, So I guess, maybe my definition of Ucas is a little broader perhaps I think I see what you're saying that the traditional.

Enterprise kind of in building, primarily in the office Ucas platforms.

Shifted permanently towards a work from home over the top type solution.

It probably has been a shift.

From our perspective, we're trying to serve both those markets. If you will so to me its expanded our addressable markets, but it's probably created some competitive shift for others.

So can you elaborate more on how you will pivot into this new.

Over the top cloud delivered applications, how do you see this market will you and how are you or can you provide any anecdotal data points that support how youre solutions are being levered or utilized.

Well with a zoom collaboration platform or Microsoft teams or.

Some similar other products.

The moment that a connection moves off of the collaboration platform to a traditional PST in connection you need to interface and Thats, where we come in we providing that Sip trunking interface. The security the robustness around that and if the world went to 100% everybody stays within proprietary.

And collaboration environment, you would need done.

But I'm not sure that's a world anytime soon so.

Got it appreciate your answer as well.

Step back into line.

Okay. Thanks, Don.

Thank you. Our next question a follow up from Paul Silverstein with Cowen. Please proceed with your question.

I appreciate you go through with the follow up.

<unk>.

The first one EBITDA comment on Candy, the 9 million for so do you mind, a ballpark that from an Opex perspective can you was costs you.

Something on the order of 8 million to quarter.

I will open up can you just give me the number.

Yes, that's that's a little higher it's probably more closer to 5 million a quarter Paul.

But no the close so you'll do lot spagnoli lease funding per quarter since just from Kenya lets them up as from from an Opex perspective, that's about right Yep.

No that's rolling it KUSA, Okay, Paul Thank you.

Thank you we have reached the end of our question and answer session I'd now like turn the call back over to Mr. Mcclelland for any closing remarks.

Yes, Thank you Michelle.

Concludes our call I look forward to updating everyone on our progress next quarter I hope to see many of you virtually in our upcoming Investor Conference over the next 30 days, thanks, very much and have a good evening.

Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation have a wonderful day.

[music].

Greetings and welcome to the Ribbon Communications second quarter 2020 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 Monica Gould Investor Relations. Thank you you may begin.

Good afternoon, and welcome to ribbons second quarter 2020 financial results Conference call on Monica Gould Investor Relations Ribbon Communications also on the call today will be Bruce Mcclelland ribbons, Chief Executive Officer, and Mick Lopez ribbons Chief Financial Officer.

Today's call is being webcast slides and will be archived on the Investor Relations section of our website and within communications Dotcom, where both her press release in or supplement totally supplements old data are currently available.

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 or documents filed with the FCC, including our most recent form 10-K and form 10-Q <unk>.

I refer you to our Safe Harbor statement included on slides two and three 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 measure are included in the earnings press release, we issued this afternoon.

As well as the supplemental slides for this conference call, which again are both available on the Investor Relations section of our web site.

Finally, as you'll recall, we completed or acquisition VCA Telecom on March 3rd 2020, which impacts comparisons to prior periods statements about ribbons organic business within Standalone cloud in edge inorganic revenue growth referred to the business and financial results of Ribbon Communications.

Excluding the CIA business.

References to packet optical network relates to the CIA business.

Overall ribbon ribbon or total company results are consolidated results and include the results for Sci from acquisition date.

Rittman operates as a single segment, however for the sake of clarity, we're including additional detail on the former you see I telecom business performance as they continue to integrate we will transition to providing business unit performance rather than legal entity financials.

And now I would like to turn the call over to Bruce.

Thank you Monica and thank you everyone for joining us today.

We're very pleased with our performance in the second quarter as we navigate this challenging time.

Before we go through the details of our second quarter performance and talk about our outlook for the second half the year.

I'd like to make a few comments on the announcement, we made today relative to our candy advanced communications business.

As part of the portfolio assessment that I've been doing since joining earlier this year. It became clear that a different path would be beneficial to realize the full potential for candy.

So now we have signed an agreement to sell the business to American virtual cloud technologies.

EBC technologies.

Maybe see technologies as a publicly traded IP services company.

The strong management team focused on assembling a world class portfolio of unified Cloud Communications managed services and cyber security technologies and services.

We believe the all stock transaction will unlock the value of our Candy communications business.

And allow women shareholders to benefit from a potential upside.

While reducing the ongoing investment that is needed to ensure the full potential was achieved.

In the first half of 2020, we estimate there would have been a 9 million dollar improvement to within EBITDA had we excluded the can be operation.

Maybe see technologies will be an important customer for rhythm and as a minority investor we will be completely aligned on prioritizing success of our mutual customers and our most important now set employees.

The deal is structured as an asset purchase with a b C technologies acquiring the ongoing candy business, including certain intellectual property customer contracts and ongoing operations.

Key customers include ATM tea.

Eddie slot.

City of Los Angeles, and many others.

Within will receive 13 million shares of VCT, an approximate value of $50 million based on the current HBC technologies share price.

I'm very excited about this new direction for candy and the potential for this business.

As well as the increase focus this will give the within team on our core service provider and enterprise strategy.

Now on to other highlights in the second quarter.

We reported total sales of $210 million, a 45% increase from the same period last year, reflecting the inclusion of a full quarter packet optical sales from that you see I acquisition.

Excluding Sci sales the traditional within business on a standalone basis remained very solid with sales increasing to $147 million from $145 million in the same quarter a year ago.

Sales from organic within software based products increased 39% in the second quarter compared to the same period last year.

Each had a very positive effect on our profitability.

We continue to make good progress on our strategic objective to diversify and grow our enterprise business.

Overall sales to enterprise customers accounted for 30% of our product revenue up from 21% in the year again quarter.

The standalone within cloud and managed cloud an edge enterprise sales increased 42% year over year, and 38% quarter over quarter. Despite lower sales of our on premise SBC solutions arising from the shift to working from home.

And we're starting to see the benefits from restructuring activities and other cost containment actions, we took in the first half.

Non-GAAP operating expenses declining approximately 11% quarter over quarter on a comparable basis.

Combined with the higher sales and stronger gross margins overall profitability grew by 31% year over year with adjusted EBITDA of $30 million in the second quarter.

For the first half we've delivered $39 million of adjusted EBITDA almost double the 20 million achieved in the first half of 2019.

We have maintained extensive employee engagement and have great examples of initiatives by Ruben employees to support the local community.

Our customers continue to see elevated traffic levels related to work from home driving network capacity augmentation and continued focus on transitioning legacy networks to IP.

Customers are prioritizing solution certainty and speed of deployment over evaluating new technologies.

In some regions, such as India, and Japan, there remain logistical challenges that have slowed down certain types of projects and delayed new product testing and certification.

Overall, our engagement level with customers has increased its very similar to pre kobin levels and visibility in the business has improved and we currently have no significant supply chain restrictions.

Lower travel and marketing activities contributed to our lower operating expenses in 2020.

We had quite a few notable customer accomplishments in the second quarter.

We have a great partnership with Airtel and this deployment of thousands of network elements is a great affirmation of the differentiation designed into our packet optical portfolio.

Air Til is also leveraging our mobile analytics platform to further manage the performance of their network.

A little closer to home, but still on the Fiveg theme, we had an important win with a major U.S. mobile carrier with a new Volte voice transcoding platform to support both Fourg am our wideband boys codecs, and Nexgen Fiveg enhanced voice services or EPS codecs.

This was a 10 million dollar initial deal with deployment in the third quarter potential for future growth.

While these two wins are obviously very different they emphasize the importance that fiveg will have in network modernization and investment going forward.

Our core SBC business had a very good quarter with both enterprise and service provider customers.

We were very proud of the work, we did with bandwidth to rapidly increase system capacity leveraging a cloud based deployment on the Cws plot public cloud platform.

As the stay at home order created significant traffic growth.

And we went live with a new customer in Japan to support their Fourg mobile launch as they pioneer commercialization of the open ran standard.

We continue to see momentum building with our Microsoft engagement and believe this will be a growth driver in the second half the year and into 2021.

This is particularly powerful for call center environments operating in multiple locations are migrating from legacy Tdm systems.

And together with one of our tier one carrier partners, we were awarded a ucas opportunity with a nationwide healthcare services company covering over 80000 end user end users in over 100 locations.

And during the quarter, we surpassed 200000 seats on the can be business services platform a big milestone.

Ill now ask mic to comment in more detail on our Q2 performance and then I'll come back on and talk about the outlook for the business.

I want to welcome you to the team and your first written earnings call. We're delighted to have you with us Mick.

Total revenue of $210 million in the second quarter was comprised of $147 million for cloud, an edge and 64 million for packet optical to repeat again for the sake of clarity.

Driven acquired Sci remarks third so the first quarter of 2021 month of packet optical revenue of $30 million, while the second quarter has a full quarter included for 64 million.

Ribbon standalone unless otherwise noted.

The second quarter 2020, GAAP financial results were as follows total company revenue was $210 million gross margin was 53% operating expenses were $111 million loss per share was six cents.

Please note that last year, we had $63 million gain from a litigation settlement, including the company's GAAP financial results, which added 57 cents to earnings per share.

Proven and adjusted EBITDA was driven by higher software mix in cloud and edge and continued cost containment efforts across the company.

Non-GAAP diluted earnings per share was six cents compared to 14 cents last year, which reflects the higher share count from the acquisition.

Our diluted share count for the second quarter was 151 million shares compared to 111 million shares in prior year, primarily driven by the easy I acquisition.

Packet optical network business reported Q2 revenue of $64 million, which was down 26% versus prior year due to challenging operating environments in regions such as India.

From a profitability perspective are easy I entity achieved gross margins of 39% and by controlling expenses, we were able to minimize the EBITDA loss to $7 million.

In the cloud an edge business Q2 revenue was $147 million, reflecting growth of 1% from the previous year driven by demand from our enterprise customers strong growth in software revenue resulted in better gross margins for cloud an edge of 67% versus 63% in the previous year, our non-GAAP operating.

Expenses up 64 million decreased 10% from the prior year, driven by restructuring savings temporary employee salary reductions and minimal travel and other discretionary expenses cloud on edge non-GAAP operating margin was 23%, which is 10 percentage points higher than last year non-GAAP.

Adjusted EBITDA for cloud and edge was $37 million, which is $15 million higher than last year and reflects an adjusted EBITDA margin of 26%.

Now some additional perspective on cloud an edge there was $72 million of product revenue and 75 million of services revenue in the second quarter of 2020 cloud and software product revenue increased by $12 million compared to the same period last year.

Software was 60% of total product revenue in the second quarter of 2020 compared to 43% in the second quarter of 2019.

We would like to provide some of our key metrics for the second quarter.

Book to Bill ratio, excluding maintenance was 1.12 times are solid pipeline is providing us with much better visibility into sales in the second half of the year.

Software revenue was 39% of total product revenue across the total company.

Maintenance was 33% of total revenues, which is fairly consistent with the prior year.

Our top 10 customers accounted for 47% of total revenue, which compares to 52% last year service providers accounted for about 70% of our revenue in the quarter and enterprise customers represented 30%. This compares favorably to the second quarter 2019, which had seven.

Any 9% of revenue from service providers and 21% from enterprise customers.

The principal balance of our term loan was 397.5 million as of June Thirtyth, 2020, which is down $2.5 million, reflecting a quarterly principal payment our revolver of $100 million remained undrawn.

The effective interest rate on our term loan was 3.9% for the second quarter of 2020 and de leveraged and fixed charge coverage ratio covenants for comfortably met.

From a cash perspective, the company use $3 million of cash and operations for the second quarter.

If we were to adjust for unusual items, including payments of 25 million for acquisition related costs from the first quarter and positive 9 million in receipt from the met a switch settlement our cash from operations would have been a positive $13 million.

We anticipate spending approximately 7 million in the second half of 2024 restructuring and acquisition related expenses.

We received an accelerated payment of $16.7 million for Mehta switch in July that completed their payments to revenue.

The turn the call back to users.

Great. Thanks, Mick let me add a few more thoughts on each of our businesses and our outlook for the third quarter.

Our cloud an edge portfolio is a broad set of voiceover IP related products and services deployed with many of the major carriers and enterprises around the world.

Continued investment in these products is driven by the adoption of IP technologies to reduce cost and enable advanced collaboration services.

The recent work from home transition continues to be a tailwind for the business given the increase in network utilization.

A significant portion of the addressable market growth for cloud an edge is within the enterprise vertical, particularly as unified communications solutions, such as Microsoft teams zoom and Amazon chime become commonplace.

As use of these you see platforms expands beyond collaboration use cases and begins to replace replace traditional network or PBX voice systems.

Secure scalable Sip trunking becomes a critical ingredient.

This is an area, where we are laser focused.

And we are expanding our solutions to support the growing you see market.

This week, we launched within connect a portfolio of subscription based as a service offerings.

This within connect offering supports Microsoft teams direct routing and enables carrier grade voice, calling capabilities in minutes.

Microsoft teams is one of the fastest growing unified communication platforms in the world with more than 100 million daily active users.

I've been connect provides a seamless way for service providers value added resellers and system integrators to quickly tap into this rapidly expanding market by easily adding voice, calling capabilities to Microsoft teams.

We're taking a partner first road to market with this offering supporting a best of breed approach to the solution.

Robin connect for Microsoft teams direct routing is the first of several subscription based offerings designed to rapidly accelerate time to market for real time communications.

We also continue to have good traction in the financials vertical with nine global financial institutions, increasing capacity on our session management solution in the last quarter.

With a broad array of public or private cloud and on premise SBC solutions, we really have the market covered.

With security top of mind for many consumers our leadership in defining and deploying call Trust and identity management solutions continues to gain momentum with service providers.

Greatly reducing the number of unwanted ruble calls and fraud calls.

In the second quarter, we secured two tier one north American customer wins for this offering.

And of course, our cloud and hedge business is underpinned by a strong recurring maintenance revenue stream supporting many of the largest telephony networks around the world.

In the second quarter, we had two satisfying win backs with customers that as discontinued support from us in favor of another third party only to return and renew coverage.

Overall, we continue to expect year over year sales growth of 2% to 3% for the cotton edge business with improving earnings from a stronger software mix and lower operating expenses.

Growth related to enterprise communications will outpace other areas and pace the overall growth of the business.

Turning to our packet optical networks business, we saw some recovery in sales as customers renewed projects pause during the early stages of coded 19.

In particular, we had a solid quarter in European and former Soviet Union countries.

The businesses in India is still impacted by both cobot delays as well as the ongoing adjusted gross revenue feed dispute between several wireless carriers and the department of telecommunications.

From a general activity perspective, we have seen deployments recover in July to approximately 50% of the pre koby levels and expect this trend to continue to improve.

Engagements related to Fiveg network planning are very robust and we expect this to be a significant driver for our business in 2021.

In addition to our Bharti Airtel announcement, our portfolio was running very strongly by a recent global data report that focus specifically on Fiveg transport solutions.

In particular, we had market leadership ratings in areas, such as timing and synchronization.

At work slicing and program ability and power efficiency.

This affirmation underlines the technology differentiation and competitiveness of the portfolio.

Our timings perfect given the increase global pressure on Chinese competitors in certain markets, creating opportunity for new wins and market share gains.

Of course, one of our highest priorities is to penetrate the north American market, leveraging the strong ribbon presence and relationships.

During the quarter, we added additional sales executives with deep experience in the North American optical market to address the opportunities that we're seeing current within customers.

While it will take time for the strategy to play out we have a broad set of opportunities in the pipeline.

Overall, we expect our packet optical business to continue to improve in the second half of the year and to be poised very well for growth in 2021.

We expect to further benefit from the integration efficiencies and increased scale of the combined company.

As a result of the improving visibility and solid backlog, we are providing financial guidance for the third quarter.

We anticipate sales in the range of $210 million to $220 million with a slightly higher mix of hardware sales.

Our outlook for adjusted EBITDA is in a range of $25 million to $29 million and non-GAAP earnings per share of five to seven cents.

This outlook excludes any potential effects of the sale of candy.

While we still continue to face near term challenges, we have a lot of opportunity and I'm confident in our ability to adapt and position the company for profitable growth.

To give a special thanks to our sales team that is very solid results during the challenging pandemic.

This time I'd like to ask the operator come back on the line and open up for questions.

Thank you will now be conducting a question and answer session.

I'd like to ask a question. Please press star one on your telephone keypad a confirmation indicate your line is in the question in queue.

Prestart too if you'd like to one of your question from the Q for participants using speaker equipment, maybe necessary to pick up your hands that before passing the sarkies one moment. Please pull for your questions.

Our first question comes from the line of Paul Silverstein with Cowen. Please proceed with your question.

Okay. All your line is on mute.

I should learn how to use the cellphone I apologize.

True.

For seasonal taking the questions two big picture question. So in that first with respect to these two effective optical.

I want to make sure understood your comment Bruce the 50% recovery you cited was that specific to India or do that.

And I know it was the.

The biggest piece from a geographic perspective.

Was that common specific to India or would that relative to the overall packet optical revenue.

Yes, sorry, I wasn't clear Paul that was specifically around the deployments were doing in India with the large carriers there and.

Yeah, we're deeply involved with them doing the service element of deploying the product and so we get pretty good visibility into what's going on and we're kind of more than halfway back to where we were earlier this year in deployment velocity.

Bruce and trying to discern the opportunity or the risk for that matter. How big is India is a portion of your I assume you totally back at all people today are virtually packet optical as opposed to the.

Traditional business, how big is indeed as a portion of the optical revenue present.

Yes, so we do a little bit of cloud meds, there, but the large portions packet optical and it's about about a third of the business something like that for the overall packed on packet optical loan sales.

In the bulk of the balance to be Russia, Eastern Europe is real Middle East Africa.

You got it yes.

All right. It is a journal proposition if we think beyond India. What are you seeing in terms of recovery.

On the packet optical fuse before asking about club.

Yes, the European region, and the countries, we sell into and former Soviet Union is.

Again recovery in the second quarter particular, as we got to the ended the quarter. So we had pretty pretty solid results there and.

And and gosh. The the announcement, we did with Bharti here. This week is a good indicator of how significant a presence we have over there.

All right one more question, we may impact jobs come before I get the cloud in a positive last students 90 days ago, but.

But.

Obviously, you can take advantage from an acquisition perspective, whether acacia yell insight on that coherent DSP, but as the two proposition.

Given the level competitive intensity an obstacle.

Given the nature of the competitors, where you have some very fine much much larger entities was significantly greater assets Youre somewhat resource constrained Im just curious Bruce I know it wasn't on your watch I know you're coming in you just made a strategic decisions, particularly but.

From a long term perspective.

Yeah.

Challenged opportunity of having sufficient resources, especially given the cost to technology.

And the technical complexity the technology hand in hand go up dramatically with each line rate. It is fine as you sized business.

Stream we good.

Supplier from signally productive specie, but how do you from launch with respect to be on managing quarter to quarter.

What's the likelihood from your perspective, the puts and takes dilutive seed that.

And be successful and I don't need to be cynical, but.

But again looking longer term you give you the new sheriff in town what are your thoughts on how you navigate it very challenging on.

You do factors long.

Well I think Paul it's a lot of around focus for trying to do everything for everyone.

Thats when you you have a challenge and in fact.

The decision we made around Kenny is a perfect example of really focusing in on where we're going to invest and we're going to be successful.

This global data report, we just saw you'll just highlights the technology strength in the portfolio and the thought leadership for gaining around particular around fiveg networking and the evolution towards private networking, so I understand the skepticism but.

Thats exactly our advantage I mean were coming in is a bit of a disruptor with.

I think a differentiated technology approach and we we've proven we can be successful selling directly head to head against the major industry names.

This strategy is fairly simple here right as we've talked about is to take that technology advantage and then leverage.

The the footprint in the in the relationships and and go head to head and when the business.

And we're not afraid to go do that we need to prove it we've got to show you. Obviously the strategy is going to make sense, but no I'm very confident in in our ability to go do that Tim.

Look I go back to my visitors wireless little company competing against the Big names that can it can happen, but you've got to have a good strategy and really focus on and pick your spots on where you're going to succeed.

Fair enough, let me ask you both cloud business.

In the gate I appreciate your they're back when the.

Turning to you identified in terms of enterprise Sip trunking seamless user not new things due to the market for quite some time readily identifiable if I look by way of example, Audiocodes does that mean 30 from August split between enterprise and service letter. So those folks don't enterprise for why.

For that matter Bagger Daves figure was back on its maybe it was already Rubin when youre, creating arrival bought.

Private company on the shoot.

Doesn't matter, but focus small focused on Microsoft enterprise opportunity.

Welcome to years, a less focused on the strides what's good for you know what's what are the key things that each changed for you all to too I just better job executing.

Since that prominent.

On the enterprise opportunity through all presented by teams and by the general and gone.

Yes, Paul I think when you bifurcate or you kind of breakdown the enterprise market you will find there's a variety of different addressable markets.

Where we've done pretty well if you look at the kind of the major enterprises I think you know I talked about.

Nine of the major financial institutions investing in our SBC product just in the last quarter.

And that's not necessarily for unified communications is for their own Sip trunking needs.

Between their offices interconnect to the network et cetera.

These then look at the other part of the enterprise market Theres, obviously kind of small medium sized business market and the unified communications market and there is a variety of different technical solutions you need to address the fall the full addressable market.

So we've got.

You know best in class kind of appliance based products, we've got cloud native products, we know launched as a service product and we have on premise.

Scalable solutions from small to medium to large.

What's obviously gotten more attention recently is the.

Net calling.

So thats when you start to need secure Sip trunking SPC platforms. So what we think happens the adoption rate now has gone from.

Just collaboration towards using that as a platform for all your communication needs and so we think it is different is not kind of just the while it's been around for a while I think there's a sea change and how these products are going to get leverage by enterprises.

And as Weve expanded the portfolio, we that isn't as a service capability.

Like we're pretty well positioned to take share or is that business grows.

Gross.

Is this your opportunity.

It is about reserve another particular officer that Theyre more so.

Yes, we mentioned teams allied but there is several additional outstanding ucas collaboration platforms out there.

At all do similar things and all need this.

Secure off net.

Connection so.

It's Microsoft it's it's zoom.

A handful that are really leading the industry and so we're really are focused on all of them not just on Microsoft teams.

Six to nine months to improve our position there. It's it's not just doing the same thing hoping for a different outcome.

I appreciate the response resource.

Thanks, Paul appreciate call.

Our next question comes from the line of Mike Latimore with Northland Capital markets. Please proceed with your question.

Yeah, great. Thanks, and thanks for the detailed presentation and very helpful.

In terms of the candies sale I just wanted to make sure I got the number I did you say that EBITDA would have been 9 million higher in the first half of the year.

Absent candies, though is that.

That's right that's right Mike exactly.

Any revenue color on that as well.

Yes, it can kind of goes up down a little bit every quarter, but you could model it as between three and $4 million a quarter in revenue.

Okay in the first half of the year.

Great and then.

Obviously, the kind of work from home trend came on strongly and rapidly.

You know did your your customers clearly needed you more to handle the traffic, but I'm wondering did any of that lead to maybe pull forward of any capacity purchases that you might not see later in the air or is this just common situation, where you know traffic elevated and they're going to need to invest kind of throughout the year.

Yes, a little hard to put a finger on exactly but it feels more incremental then pull forward.

And then there's kind of an ongoing nurturing of the business to keep up with capacity as well as best as I mentioned kind of this transition to support more unified communication collaboration, which we don't think is a short term phenomenon, we think thats no longer term growth engine or tailwind for the business.

Got it and then.

This maybe in a detailed somewhere but in terms of SBC versus a gateway sales has there been a notable shifts.

And have recently because of these these studies that were from trends or is it a pretty consistent.

Pattern there.

Yes, when you say gateway I think you're talking about the on premise.

Universal CBD type platforms right for enterprise and yes, we have seen a bit of a decline in deployment rather it was not a massive one but it hasn't been hasn't been growing.

We account to obviously that the work from home and if you're not forming new businesses and adding new locations, you're not adding a lot of on premise equipment. What we have seen is obviously the traffic shift to the cloud and the additional capacity around networking for those for that use case.

Yes.

With regard to that.

Former Soviet Union it sounds like that's kind of coming back to normal level is that the great interpretation there.

Yes, particularly towards the end of the quarter uneven into third quarter business had been.

Pretty solid I don't know, if it's quite back to where it was but.

It was it was pretty solid Mike. So we were pretty pleased to see that come back probably a little stronger than I thought it would.

Great and then just last one.

Maybe just an update on how you're thinking about debt repayment and the plans are on that.

Yes, So I think obviously, we're really focused on integration of cash generation Im not sure. We're at a point, where we're thinking about accelerated debt repayment and things like that but we're we're certainly thinking in the mid term there is going to be a focus around use of cash to pay down debt. So.

Okay.

Great. Thanks, a lot.

I appreciate it thank you.

Thank you for taking my question.

I have a couple.

Well first.

On that can be strategic though.

Elaborate a little bit more.

Would've assumed that can plug in one of the more promising.

Portfolios.

In your product portfolio that had been look promising growth prospects.

Can you walk us through your rationale for they'll look at the right now.

Yes, thanks to HUD. Appreciate the question I think we're still pretty excited about the potential for the business, but a couple of factors I think come into play a I believe that continued significant investment around that business is needed to really realize the potential.

Finally, we're competing against a variety of larger players investing a lot around sales and marketing and I felt like if we were really going to see the potential we were gonna have to double down more around that and really focus on investing there.

Obviously, we have three or four other product lines in the company the need focus as well and so I think some of the earlier discussion folk deciding where strategically we're going to invest.

As an equity investment in somebody that is focused on that market 100%.

So it feels like we get the benefit of both in some ways, we get the potential upside to have a business that we believe in they become an important customer for us we continue to sell them products that enable the can be service and we lower the short term investment and we increased focus so.

It seems to check awful lot of important things for the company.

Okay.

Got it now.

The bigger broader question on on technology and demand trend.

I should get indeed.

Extraordinary time to go with maintaining.

Don't you agreed that.

The zoom, becoming so prevalent the need or conditioned on ucas, those maybe somewhat limited ill give you. An example, I mean in App communication is becoming a far more prominent mail communicating use tableau dogs.

Communication not to communicate directly so are you.

You know how do you think about long term implications will the UK.

Opportunity, especially when you see over the top news other than UK split is becoming more prevalent in this and multiple award.

Work from home remote working touched the volumes.

Does that market is permanently impacted or maybe.

Somewhat curtailed.

For traditional you cosmos.

But certainly a big picture question.

I do think there's room for multiple winners in this space I'm not sure Theres, a one size fits all everything moves to a best effort over the top service. If you will I think there's plenty of room for premium solutions in the market still today I think there's room for on premise solutions I think there's room for.

Terminal devices on People's desks.

I, just think it's a big market and I'm not sure picking one winner or two winters makes sense.

Yes, obviously, we're trying to continue to expand the portfolio to meet the customer where they are in the market. If they want high performance carrier grade robust highly fault tolerant platforms. We've got the best in the world.

If they want to spin up an instance in native you asked for or is your we've got that so.

Yeah, I guess, that's the way I think of it fun.

I guess, what I was trying to add more.

In a different rate was.

But prior to covert 19, let's say you guys market was.

A billion dollar Tim but post gold would 19 will resume and other in NAV based applications kind of eating away. Some on the opportunity would you agree that you can chime in as kind of.

Somewhat decrease or maybe shrunk.

The other modes of communication that become more prevalent.

Yes, So I guess, maybe my definition of Ucas is a little broader perhaps I think I see what you're saying that the traditional.

Enterprise kind of in building, primarily in the office Ucas platforms.

Yes.

Shifted permanently towards a work from home over the top type solution.

They are probably has been a shift.

From our perspective, we're trying to serve both those markets. If you will so to me its expanded our addressable market, but it's probably created some competitive ships for others.

So can you elaborate more on how your pivoting to this new.

Over the top cloud delivered applications, how do you see this market for you and how are you can you provide any anecdotal data points that support how youre solutions on being lowered or utilized.

Well with a zoom collaboration platform or Microsoft teams or.

Some similar other products.

And collaboration environment, you would need that [laughter], but I'm not sure that's a world anytime soon so.

Got it appreciate your answers though.

Step back into the line.

Okay. Thanks, Don.

Thank you. Our next question a follow up from Paul Silverstein with Cowen. Please proceed with your question.

I appreciate you go through with the follow up.

<unk>.

The business EBITDA comment on Cambia, the 9 million for so do you mind, a ballpark that from an Opex perspective can you was costing you.

Something on the order equaling the quarter Omo Wilson that he can you just into the number.

Yes, that's that's a little higher it's probably more closer to 5 million a quarter Paul.

But no the close so you'll do was 5 million lease funding per quarter since just from county alone.

That does from from an Opex perspective, that's about right yep.

No that's going to Crusa.

Okay, Paul Thank you.

Thank you we have reached the end of our question and answer session.

Turn the call back over to Mr. Mcclelland for any closing remarks.

Yes, Thank you Michelle.

That concludes our call I look forward to updating everyone on our progress next quarter I hope to see many of you virtually in our upcoming Investor Conference over the next 30 days. Thanks very much in have a good evening.

Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation have a wonderful day.

Q2 2020 Ribbon Communications Inc Earnings Call

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