Q3 2020 Ribbon Communications Inc Earnings Call
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Dead dead dead dead. Good afternoon, everyone and
Welcome to the ribbon Communications third quarter 2020 earnings conference call all participants are currently in a listen-only mode. So you need assistance. Please send all conference specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. You may press star and then one to withdraw your questions, you may press star into age, please also note today's event is being recorded at this time. I'd like to turn the conference call over to Monica gold investor relations for ribbon Communications ma'am. Go ahead.
Good afternoon, and welcome to Ribbons third quarter 2020 Financial results conference call. I'm Monica gold investor relations for ribbon Communications. Also on the call today will be Bruce McClelland, rib, chief executive officer and make Lopez ribbons. Chief Financial Officer. Today's call is being webcast and will be archived on the investor relations section of our website at ribbon Communications. We're both our press release and our supplements of slides are currently available certain matters. We will be discussing today include the business Outlook and financial projections for the fourth quarter to 6:20 and Beyond and our 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 our documents filed with the SEC including our most recent form 10-K and form 10-q. I refer you to our Safe Harbor State wage.
Included on slide two of the supplemental slides for this conference call in addition. We'll we'll present non-gaap financial information on this call reconciliations to the applicable gaap measures 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 website as we previously noted. We completed our acquisition of ECI Telecom on March 3rd, 2020, which impacts comparisons to Prior periods ribbon operates on a single segment. However, for the sake of clarity We are continuing to include additional detail on the former Telecom business performance as we continue to integrate we expect a transitional providing business unit performance in Q4 2020 rather than legal entity financials, and now I would like to turn the call over to Bruce.
Thanks, Monica. Good afternoon everyone and thank you for joining us during this busy earnings week. I hope that you were all healthy and safe. We're very pleased to report strong third-quarter results that exceeded our expectations were clearly beginning to see the benefits of our strategy to diversify and broaden our portfolio combining a strong software business with a higher growth packet Optical business result of both strong profitability and revenue growth.
We achieved a new record level of adjusted ebitda during the quarter on the strength of increasing software sales in are cloud-managed business and we're very encouraged by the improvement in our packet Optical business with sales increasing 22% sequentially and a positive adjusted earnings contribution for the quarter our strategy to sell the expanded portfolio to our combined customer footprint is beginning to bear fruit juice has noted last quarter. Our customers continue to see elevated voice and data traffic levels related to The increased usage of digital and social platforms as well as broad-based adoption of online collaboration platforms such as Microsoft teams and zoom
those service providers
And Enterprises have responded to this network strain by increasing or accelerating their investment in capacity and capabilities directly aligning with our portfolio offerings and strategy off. Our engagement level with customers remain strong activity is increased significantly and we've been able to leverage remote proof-of-concept product demonstrations in place of on-site lab evaluations.
Disability in the business remains solid and we have no significant supply chain restrictions lower travel and marketing activity have also contributed to the lower operating expenses in 2028. I'd like to start by highlighting a number of recent notable customer accomplishments in activity in the quarter a key part of our strategy is to strengthen our packet Optical business and presence in North America leveraging the position we have with the cloud-managed portfolio in particular. We have a strong focus on cable operators as well as the regional Telco providers. We're making good progress on a strategy and expect to report meaningful sales in the fourth quarter more broadly. We continued our packet Optical networks momentum securing business with eight new critical infrastructure in a prize customers in the quarter including a smart city project in Asia a large European Railway deployment.
European car manufacturer and expansion of a national research in education Network in Europe
In India, the long-standing dispute between the Telecom service providers and the department of telecommunications has been resolved by their Supreme Court closure on this issue provides certainty over the operating environment and a path to renewed investment in the country's Communications infrastructure what we expect it will take several quarters for spending to fully rebound were optimistic above the opportunity for God within 20 21.
We're very strong sales of our session management portfolio in the third quarter across a variety of applications and regions contributing to the earnings beat this quarter as an example. We continued the strong momentum we have in the financials vertical with a large software order from a major us-based multinational Bank to support their migration to Microsoft teams, and to increase call Center capacity are high-performance Enterprise and service provider SPC platform sales are up more than 25% year-to-date.
As adoption and usage of cloud-based Communications and collaboration platforms accelerate. We have expanded our offerings to include multiple cloud-native deployment and usage models. We offer additional Zoom phone certifications this quarter.
Finally, we secured several new contracts for our call Trust platform that addresses the growing security challenges related to fraud and robocalling bookings for this solution in the quarter where three times wage level of the previous quarter.
Despite operating in the midst of the COVID-19 demek. We've made great progress on the integration of ribbon and ECI of this massive multi-billion-dollar packet and Optical Market.
Also last quarter we announced that we signed an agreement to sell.
Candy Cloud Communications business to American virtual Cloud Technologies. We continue to make progress on the deal which remains contingent on successful completion of their Capital raised up to date candy is contributed ten million dollars in sales with a twelve million dollar ibadah laws.
Oh no es make the comment in more detail on our Q3 performance and will then come back on to talk about our outlook for the business Nick. Hey, thanks Bruce. We had exceptional third quarter financial performance that exceeded our expectations. Please refer to our investor relations website for supplemental slides with graphs and tables summarizing our third-quarter performance total revenue of $231,000. And the third quarter was comprised of $154 million dollars for cloud and Edge and seventy eight million dollars for packet and Optical as Bruce mentioned we continue to make great Traction in our integration efforts. We plan to transition to providing business unit performance rather than legal entity financials commencing in our fourth quarter of 2020 given the acquisition took a year-on-year comparisons are against ribbon stand alone unless otherwise noted the third quarter 2020 gaap Financial results were as follows total company. Revenue was 231 Million Dead.
Income for Sheriff was $0.04 which included a benefit of $0.03 from the release of a tax valuation allowance from Ireland legal entity for ribbon as a total company wage. Gap third-quarter performance was total revenue of $231 million versus $210 last quarter and guidance range of 210 220 million dollars on a non-gaap gross margin was 59% Non-gaap operating expenses were ninety eight million dollars non-gaap adjusted evidence was forty-three million dollars compared to twenty-three Million last year and was above the guidance range of 25 million to twenty nine million dollars the Improvement and adjusted evidence was due to both tire sales and better gross margins in both cloud and Edge and packet Optical Networks.
Non-gaap diluted earnings per share was $0.16 are diluted Share account for the third quarter was $152 million shares compared to a 111 million shares in the prior-year with the increase primarily driven by the ECI acquisition in the cloud and Edge business third-quarter. Revenue was $154 million dollars reflects growth of 12% from the previous year driven by strong demand from our service providers our largest customer Verizon at some major projects this past quarter and accounted for 16% of our total revenue software Revenue grew significantly and was 69% of overall product sales in the quarter resulting in better non-gaap gross margin for cloud and Edge of 66% versus 64% in the third quarter of the previous year our non-gaap operating expenses of sixty-three million dollars decrease dead.
eight percent from the
Prior year. Driven by restructuring savings temporary employee salary reductions and minimum travel and other discretionary expenses.
Cloud and Edge non-gaap operating margin was 25% which is 11 percentage points higher than last year non-gaap adjusted for cloud. Niche was $42,000, which is $19 higher than last year and reflect an exceptional adjusted ebitda. Margin of 27% Now some additional perspective on cloud and Thursday. We recorded seventy-five million dollars of product Revenue in 72 go to network business recorded third-quarter revenue of 78 million dollars an increase of $14 or 22% from the previous quarter.
From a profitability perspective. We are pleased to report a positive adjusted of 1 million dollars for our ECI entity driven by exceptionally strong gross margin wage 46% and increase of 700 basis points sequentially and continued expense controls.
We would like to provide some Consolidated metrics for the third quarter are booked to revenue ratio, excluding maintenance was 0.9 three times as compared to one point one to six times in the second quarter of 2020. We continue to have a solid pipeline providing us with good visibility into sales and the upcoming quarter software Revenue accounted for 43% of total product Revenue across the company maintenance represented 32% of total revenue our top 10 customers accounted for 49% of total revenues, which compared with 47% in the second quarter of 2020.
Service providers accounted for 71% of Revenue in the quarter and Enterprise customers represented 29% International customers represented a greater percentage of Revenue with 55% of Revenue in the third quarter of 2020 as compared to 52% in the second quarter of 2020.
Turning to the balance sheet. We ended the quarter with cash and cash equivalents of 111 million dollars including restricted cash of $7. This is an increase of $17 from the previous Court. The principal balance of our Term Loan was $395 million dollars as of September 30th, which is down 2.2 million dollars thousand acting a quarterly scheduled principal payment. Our revolver of a hundred million dollars remained on drawing the effect of interest rate on our Term Loan was 4.4% in the third quarter of 2026 compared to 3.9% for the second quarter of 2020. The rate increase was driven by the higher interest rate percentage for the $75 million-dollar tranche of a Term Loan that was assigned on August 18th for details. Please refer to our 8-k filed in August or a no ten Q to be filed in business days.
Once again, we comfortably met our quarterly Financial covenants a spare. Our credit facility calculations in Q3 20. Our leverage ratio was 2.6 time versus maximum of four times and are fixed charge coverage ratio of 3.9 times versus a minimum of 1.25 times from a cash perspective or The company generated 29 million of cash from operations, which included an accelerated final payment receipt of Sixteen point seven five million dollars from the metal switch legal settlement.
We anticipate approximately four million dollars for restructuring and acquisition-related expenses into fourth quarter of 2020 Capital expenditures were four million dollars for the month, which included two million dollars of real estate leasehold improvements for our North Dallas offices facility. Now, let's turn the call back to Bruce.
Great. Thanks, Mick.
As we look to the fourth quarter and into twenty Twenty-One, we expect many of the key trends supporting our business to continue in are cloud-managed portfolio adoption of cloud collaboration platforms such as Microsoft teams and zoom foam will continue to create demand for our growing portfolio of SPC products from both service providers and Enterprise customers a significant portion of this business is now trying to Enterprise software Solutions as well as capacity growth via license activation on existing infrastructure in 2021. We expect the consumption model to begin to shift to recurring Revenue off leveraging our new cloud-native service offerings overall. We expect continued profitable growth in the product category. Our Network transformation business has seen a burst of activity than a year to adjust to traffic growth related to the work from home transition. We expect the investment in digital transformation to continue but a slower Pace than 20 21, we're dead.
Adjacent opportunities in areas such as service Insurance machine learning and analytics and fraud and Robo called mitigation that leverage our install base with high-margin software applications. And we expect the associated technical support Revenue stream to continue given the lifeline critical nature of the service deployed on these platforms will further benefit from the portfolio wage adjustments and operational efficiencies. We've made in 2020 that lower our overall operating costs and improve their earnings power of the company in our packet Optical business were very pleased to see the recovery takes shape after a slow start to the year while the operating environment remains challenging. We're clearly making progress on our strategy and are well-positioned to gain share is the spending environment impact several factors contribute to our optimism including resolution of the India AGR dispute Paving the way to clear a capital allocation plans and investment in this large important Market dead.
Growing negative sentiment towards Chinese manufacturers unlocking significant market share growth opportunity the investment shift towards 5G capable transport platform and recognition of ribbons technology leadership and the potential for cross-selling the entire ribbon portfolio and a particular gaining momentum and the critical of North American Market with our packet Optical portfolio wage. We believe the combination of these factors will result in a major transformation for ribbon, which is taxes already. Well underway strengthening our balance sheet and creating a significant shareholder value age.
In the near term for the fourth quarter, we anticipate further Revenue growth with sales in the range of $235 billion to $245 billion dollars primarily related to the continued Improvement in the package business.
We expect profitability to be in the range of 36 million to 40 million dollars of adjusted ebitda reflecting the higher mix of packet optical sales as well as slightly higher off X home a hundred and five million dollars as we eliminate temporary salary reductions.
No.
App earnings are projected to be in the range of $0.12 to $0.14 per diluted share. This guidance excludes any potential effects of the proposed sale of candy and assumes existing COVID-19 conditions.
In summary, we just had a great third quarter with exceptional performance by cloud and Edge and improved results in our packet Optical Network business. We expect this trend to continue in the fourth quarter of operator that concludes our prepared remarks and we can now take a few questions.
Ladies and gentlemen at this time will be getting the question and answer session to ask a question. You may press star and then one using a touch-tone telephone if you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys to ensure the best sound quality to withdraw your questions. You may press star and to once again that it's star and then one to ask a question will pause momentarily to assemble the roster.
No, first question today comes from Paul Silverstein from Calvin and Company, please go ahead with your question.
It's good evening Bruce. Thanks for taking the question first off that particular banking daily reference to large-scale. Can you give us any sense for how large that is?
Multi-million Paul, you know not not eight digits, but well in the seventh, so that's just the one quarter of that extends over time. No, just just in the in the 1/4 and you know, this is expansion of both call Center capacity as well as helping with the migration to broader deployment of Microsoft team. So, you know as you recall, there's a variety of deployment models for that. But in their case, they, you know, deploying the capacity, you know within their infrastructure.
Understood in the Bruce on the packet Optical business. I think you cited a new customers. Can you give us any sense? That's relative to what how large is that customer base today in the nature of customers that you weren't any signs of progress in North America with the service writers are targeting.
Yeah, that's a good question. I don't have the exact number in the back of my head Paul trying to look that up for you off line. But you know, obviously we have a you know, a variety of customers that we contribute to get time that you know, seventy eight million or so in sales and some are you know sub million dollar transactions and some multi-million. So, you know, it's a pretty broad Diversified customer base, but I'll try and get the number for you offline, you know, as I mentioned the remarks we are definitely making progress here in North America and and hope to have you know, a couple of notable things to to announce here in the South Quarter even so making making some pretty good progress.
Will last if I may I recognize we're all in an uncertain times ability is challenging about sometimes even worse. And now that said any visibility into next month. Well clearly we expect the packet Optical momentum to continue and grow, you know, if you look at as an example, you know, one of our larger markets in India, you know, your two days were down about fifty percent from last year, you know primarily due to the the dispute we talked about but every quarter is getting a little better clearly and you know as the the spending of money and improves their, you know, we we definitely expect considerable growth in 21 for that portion of the business and you know, I think there's room for us to still grow around the cloud and Edge business in particularly just transition to software just continues
Could be you know a real strong platform base for the company. So, you know, we're pretty pretty excited as we kind of get through COVID-19 and and you know get into a more normalized. But even with the world we're living in now clearly, you know, the business has continued to improve this year for us.
I appreciate the response. I'll pass it on. Thank you.
Our next question comes from Michael Adam or from Northland Capital, please go ahead with your question.
Hi, this is Aditi is on behalf of Michael Lattimore. Can you give an idea about how important the 5G back call is when it comes to the ECI growth. Well, you know for the most part the networks that are migrating to 5G are being used for augmenting capacity for the current Network some of the advanced capabilities both the radio side and on the network side.