Q4 2020 Ribbon Communications Inc Earnings Call
Greetings and welcome to the ribbon communications fourth quarter and full year 2020 financial results. At this time all participants are in listen only mode. A 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 I would now like to turn the conference over to your host Tom Berry Investor Relations for Ribbon Communications. Please go ahead Sir.
Yeah.
Good afternoon, and welcome to ribbons and fourth quarter and full year, 'twenty and 'twenty financial results Conference call I'm, Tom Berry Investor Relations of Ribbon Communications.
Also on the call today will be of Bruce Mcclelland ribbon as Chief Executive Officer, and Mick Lopez Ramos Chief Financial Officer.
Today's call is being webcast live and will be archived on the Investor Relations section of our website at ribbon communications dotcom or both of our press release and our supplemental slides are currently available.
Certain matters, we will be discussing today, including the business outlook and financial projections for the first quarter of 'twenty 'twenty, one and the full year 'twenty 'twenty, one and beyond are forward looking statements such statements are subject to the risks and uncertainties that could cause actual results to differ materially from those contained in 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.
And refer you to our Safe Harbor statement included on slide two of the supplemental slides for this conference call.
In addition, we will present non-GAAP financial information on this call.
Reconciliations of the applicable GAAP measure are included in the earnings press release, we issued this afternoon as well as and the supplemental slides for this conference call, which again are both available on the Investor Relations section of our website.
As we've previously noted we completed the acquisition of E. C. I Telecom on March 3rd 'twenty, and 'twenty and completed the sale of Candy Communications on December one 2020.
Further in the fourth quarter of 'twenty and 'twenty, We began segment reporting for our cloud and edge and IP optical networks businesses. These items impact comparisons to prior periods and now I would like to turn the call over to Bruce Bruce.
Okay.
Great. Thank you Tom Good afternoon, everyone and thank you for joining us today to discuss our 2020 results and outlook for 2021, we announced.
The preliminary results on January 20.
And we felt it was important to communicate the stronger performance relative to our guidance and also due to the typically elongated fourth quarter reporting schedule.
Before reviewing the details of our fourth quarter results I wanted to take a minute to discuss our 2020 full year of accomplishment.
And I'm very proud of the company's achievements during such a challenging and extraordinary year.
And when the COVID-19 pandemic began early last year.
Our sales organization quickly transitioned to remote selling and virtual product proof of concepts.
This rapid response enabled us to grow revenue on an organic basis for the year.
Even with the challenges presented by the pandemic.
And we have significantly increased our global presence with sales outside the U S now well over 50% of total sales.
From a product and technology perspective, we will continue to work through our transition to a more software centric portfolio with.
And with new products, such as our Virtualized see 'twenty call session controller.
And our cold trusts robocall mitigation platform and.
And ribbon connect supporting SBC as a service for Microsoft teams deployments.
And despite the challenges of dealing with Covid, we were very successful and the integration of the Ci repositioning ribbon to participate and the very large IP optical systems market.
And that's part of the integration, we streamline the organization and realigned our portfolio to improve profitability and shift investment into higher growth areas.
We successfully completed the sale of our candy Ucas business and improving our.
Short term financial profile and preserving the ability to share and the upside value creation from of business.
The combination of these structural changes along with good execution on our strategy means ribbon and ended 2020, much stronger than where we started and.
And we're well positioned for growth in 'twenty and 'twenty, one and beyond.
Shifting to the details of our fourth quarter and we're very pleased to report strong results that exceeded our expectations and further demonstrates that we're progressing and our strategy.
We're seeing the benefits of combining a strong software business with the higher growth IP optical business moving.
The strong profitability and increased diversification of selling our expanded portfolio to a broader range of customers.
The quarter, we again achieved the new record level of adjusted EBITDA.
And I realize the benefits of the combined cloud and edge and IP optical businesses.
Total sales increased 6% quarter over quarter, and very encouraged by the improvement and our IP optical business with revenue, increasing 15% versus the third quarter.
And the positive adjusted earnings contribution for the second consecutive quarter.
With the growth and IP optical sales, we further diversified our geographical presence of generating 60 per cent of our total revenue from customers located outside of the U S.
I'd like to highlight some notable customer activity and the quarter beginning of North America.
And our IP optical business at the reported and our last earnings call. We secured our first win with the top four cable and the so L T and.
Extended that momentum with new business from five regional telco carriers.
The leverage our existing ribbon relationships per customer wins, and all but one of these cases.
Our IP optical revenue in North America was up 105% from third quarter of 'twenty.
Fourth quarter 'twenty revenue from the region nearly matching ECS sales for all of 2019.
Still early but we're seeing clear signs of our strategy working.
And the cloud and edge business, we continue to benefit from the migration to cloud communications with our session software solutions.
The recent report that we commissioned shows the greater than 100% increase and interest among small and medium sized businesses and deploying Microsoft teams and 70% of the surveyed indicated that they will implement direct routing for teams requiring certified sbcs to enable this connectivity.
Continued with a variety of network transformation projects and SPC capacity expansion activities and the fourth quarter with over $35 million and new orders from North American tier one service providers across our call processing media gateways, Sbcs and service and solutions.
And Latin America, we embarked upon and network transformation project with the tier one carrier using our new Virtualized see 'twenty call control platform.
Starting in the four countries with further expansion into three more countries planned this year.
The snow with the word it's noteworthy that projects and two of the countries are rip and replace of Huawei systems.
We're also pleased to announce wins with our software based sbcs and Brazil, Claro part of American Mobile group and vivo telephonic because of the Brazilian operation.
In Europe, we worked with the systems integration partner and the region and secure the first large scale deployment of our new optical 90, 901 Metro edge platform for <unk>.
Large defense customer.
This was a multimillion dollar project and we shipped over 400 units and the fourth quarter.
Well, Alex and this new product and Q4 and as efficiently extends O T and switching from the network core to the high demand Metro access network.
Additionally, we continue to sell to and sell through division of the Telecom Italia.
We're working with them to implement metro optical networks, replacing legacy SDH networks with our multi service platform and more than 20 cities worldwide.
We're collaborating with them to win new regional enterprise optical opportunities in Europe.
And India overall sales and the fourth quarter were very consistent with the previous quarter to.
The improvements and several accounts.
Still too early to predict the timing of substantial spending recovery, but the new fiscal year starts April one. So we're hopeful that momentum will pick up for the second half of 'twenty and 'twenty one.
We are benefiting from our Bharti Airtel contract signed last summer.
The multiple purchase orders and the quarter and more expected as they prepare their networks for <unk>.
These are multi year contracts and will help propel our growth in 'twenty and 'twenty, one and beyond.
Initially, but its own ideas.
Utilizing our Neptune platform for their four G rollouts, because the shift away from Huawei products, and we expect more business as part of this transition.
Also in India, We continued our normal business with data generating significant enterprise connectivity bookings.
And Japan, we saw the culmination of a long sales cycle with several significant cloud and edge win with tier one service providers valued at over $10 million.
The projects are now underway and will conclude throughout 2021.
Yeah.
While the transition from a regional commentary to some additional detail on our product portfolio.
The full year revenue and our core SBC portfolio grew 18% versus 2019.
Overall, SBC revenue grew 6% and 2020 and grew.
And the core products more than offset the decline and our on premise enterprise edge CPE products, where demand was negatively impacted by the COVID-19 pandemic.
Additionally, we launched our ribbon connect direct routing for Microsoft teams service and currently has seven distributors signed up and going through Onboarding and another nine and the pipeline.
Our product sales to enterprise customers grew 3% quarter over quarter and represented 27 per cent of total product revenue and the fourth quarter and <unk>.
30 per cent for the full year 'twenty.
Sales were particularly strong and the defense segment and the quarter.
In addition at the end of the year, we have booked nearly 60% of our maintenance renewals for 'twenty and 'twenty one across approximately 900 customers.
By the end of January and we'd completed almost 70 per cent of renewals for the year and many of these contracts are multiyear in duration you.
Risking our plans for 'twenty and 'twenty, one and beyond.
Our renewal rate for the business remains and the high ninety's per cent for direct customers.
And the IP optical business, we had a surge and proof of concepts and demos of evaluating our unique <unk> capabilities late in the year.
We are laser focused on converting these opportunities and the sales in 'twenty and 'twenty one.
We've also progressed to the final stages on several important metro optical tier one service provider opportunities outside the U S, giving us a clear path to share games and 'twenty 'twenty, one leveraging the strong historical ribbon presence.
Okay.
Now a few updates on our continued transformation efforts.
We are making great progress on the integration of ribbon and the UCI and we're implementing organizational efficiencies across the company.
During the fourth quarter, we enabled automated cross selling processes and consolidated our sales CRM platforms.
Where does the streamlined many of our other internal processes and tools and putting security platforms and information systems.
Last month, I announced that Steve Mccaffrey had joined the ribbon to lead sales and our EMEA and Asia Pac Asia Pac regions.
He brings over 30 years of experience, helping carriers and enterprises of all of their business Communications and previously managed the 2.4 billion dollar international business addressing both carrier and enterprise customers at Arris.
And then December Sean Matthews was appointed our EVP of corporate development and strategy. John has extensive experience and successfully leading corporate strategy and business development for global companies and <unk>.
Prior to joining red and home and you can make the most of the Tivo and era.
I'm very excited to have Sean and Steve joined the team and look forward of partnering with them as we drive new growth initiatives to expand the presence of our cloud merge and IP optical businesses.
And in December we announced that we completed our sale of the Kandy Cloud communications business to American virtual cloud technologies and.
And just this week, we announced the deal to sell a small product compliance and reliability testing business called quality check.
Part of our Israeli operation.
We're happy with the progress, we've been making and shaping the ribbon portfolio and sharpening the focus on our core strategy.
Additionally, we are designating Plano, Texas with our global headquarters.
Given our global operations and the changes and the business. Following the <unk> acquisition last year. We believe the time is right to make this change the.
The recently opened the new facility and Plano that will serve as headquarters and where and the process of consolidating our research labs from several of and locations.
This move reflects.
And how we have effectively been operating for the last six months.
Moving the consolidation of offices to help reduce costs.
Although the headquarters of relocating we expect the continue to have the strong presence in westford mouse.
Lastly, I'd like to note that we published our first global sustainability report earlier this month.
Committed to providing our stakeholders with increased visibility and responsiveness and I reported as a key milestone and that effort and re.
And the report on our website and see how we account for our ESG performance through 2019, and 2020 as well as our support of the United Nations Sustainable development goals.
I'll now ask make the comment in more detail on our Q4 and full year of 2020 performance and will then come back on to talk about our outlook for the business.
Thank you as Bruce stated, we had a strong second half of the year and an outstanding fourth quarter financial performance that exceeded our expectations. We recorded a second consecutive quarterly adjusted EBITDA record generating $49 million and in the quarter and $131 million for the full year of 2020.
And a 53% increase from full year 2019, we.
We also generated $36 million and cash flow from operations and the fourth quarter, two and the year with the $136 million and cash please.
Please refer to our Investor relations website for the supplemental slides with graphs and tables summarizing our fourth quarter performance.
And our ongoing efforts to improve our investor disclosures and to assist the analyst community and evaluating our business. We have made three significant enhancements and our financial statements. First we are formally establish two business segments within the company and we'll be reporting additional disclosures on these business sector.
And it's going forward.
Art cloud and edge business includes the legacy ribbon products and our IP optical networks business includes ACI products.
The segment results are broken out and both our 10-K and in our earnings presentation.
And for greater clarity, we will be showing the amortization of intangible assets and a separate line within operating expenses, rather than within cost of product and sales and marketing expenses.
We incorporated this change into the fourth quarter results and have recast prior periods for historical reference last we will report our non-GAAP quarterly taxes by computing and annual global right for the company.
We will apply that single rate for each quarter, rather than multiple rates by jurisdiction for the overall quarterly results. We expect this to provide a more consistent rate throughout the year and to enable investors to better understand the impact of taxes on the company's results. We are also of recasting the 2019 and 2020 non-GAAP.
Results using this methodology.
Now back to our performance during the quarter.
We had a record GAAP earnings quarter, reflecting the sale of our Candy Unified Communications business on December one.
And our other income line, we recorded a $115 $5 million of income associated with the fair value of the convertible debt and warrants received from the sale of <unk>.
Fluctuations and a B C T stock price will also affect other income and expense line in future periods. As we will use the equity method to provide quarterly mark to market estimates and note that we will evaluate a b C D over much longer periods, and the quarterly fluctuations and the stock price and.
And due to this volatility we excluded the results of the candy asset sale and end of period valuation and our non-GAAP results.
Our non-GAAP fourth quarter, and full year, 'twenty and 'twenty performance was free.
For the fourth quarter total revenue of $244 million up from $231 million last quarter and at the high end of our guidance range of $235 million to $245 million for the full year total revenue of $844 million increased 50% from 563.
And we recorded last year.
Organic growth for cloud and edge business was 4% for the year.
Non-GAAP gross margin was 59% for both the full year and fourth quarter 2020, similar to our non-GAAP gross margin and third quarter of 2020.
Non-GAAP operating expenses of $100 million and the fourth quarter and $382 million for the full year fourth quarter Opex came in below our guidance of $105 million due in part to savings from the candy divestiture and lower discretionary costs.
Non-GAAP adjusted EBITDA was $49 million and the fourth quarter compared to 43 million and the third quarter and was above our guidance range of $36 million to $40 million the.
Sequential improvement and adjusted EBITDA was due to higher sales and gross profit and both cloud and edge and IP optical networks as well as savings from the candy divestiture.
For the full year non-GAAP adjusted EBITDA was the $131 million up from $86 million and 2019.
Non-GAAP diluted earnings per share was <unk> 18 cents above our guided range of 12 to 14 and was 43 cents for the full year.
Our diluted share count was the 153 million shares and the fourth quarter and $145 million for the full year net.
Now looking at the results of our two business segments.
And our cloud and edge business fourth quarter revenue was $155 million, while full year 2020 revenue was $583 million, reflecting a growth of 4% from the prior year driven by strong demand from our service provider customers.
Non-GAAP adjusted EBITDA for cloud and edge was $47 million, which is 3 million higher than last year and reflect an adjusted EBITDA margin of 30%.
Three percentage points above our third quarter adjusted EBITDA margin of 27% driven by the Kandi sale restructuring savings and minimal travel and other discretionary expense savings.
Here are a few additional points on our cloud and edge performance in the fourth quarter.
We recorded $74 million of product revenue and $81 million of services revenue.
Software accounted for 64% of total product revenue and the fourth quarter of 2020 compared to 51% and the fourth quarter of 2019.
For the full year software it was 62% of cloud and edge product revenue up from 47% and 2019.
Turning to our IP optical business, we recorded fourth quarter revenue of $89 million and increase of $12 million or 15% from the third quarter non.
Non-GAAP gross margins were 44 per cent for the quarter and IP optical again generated positive adjusted EBITDA for the quarter.
Yeah.
Here are some consolidated key metrics for the company.
Maintenance represented 29% of total revenue and the fourth quarter.
Our top 10 customers accounted for 45% of total revenue and the fourth quarter down from 49% and the third quarter of 2020.
Service providers accounted for 73% of revenue and the quarter and enterprise customers represented 27%.
As previously mentioned international customers represented a greater percentage of revenue generating 60% of our total revenue and the fourth quarter of 2020 as compared to 55% and the third quarter.
Our book to revenue ratio, excluding maintenance was 102 times for the full year of 2020.
Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $136 million, including restricted cash of $7 million.
This isn't it and increase of $25 million from the previous quarter.
Our 100 million dollar revolver still remained undrawn.
The principal balance of our term loans was $393 million as of December 31.
Which is down $2 million, reflecting a quarterly scheduled principal payment the.
The effective interest rate on our term loan was four 4% in the fourth quarter of 2020, similar to the rate and the third quarter.
We are now and the process of refinancing a portion of our credit facility to further lower our effective interest rate going forward.
We again comfortably and that our quarterly financial covenants as per our credit facility calculations in the fourth quarter of the leverage ratio was 245 times versus the maximum of four times and our fixed charge coverage ratio of 397 times versus a minimum of 1.25 times.
Our net debt of cash was 258 million as of December 31, 2020, which divided by the last 12 months of adjusted EBITDA provides a leverage ratio of less than two times.
From a cash perspective, the company generated and exceptional $36 million of cash from operations and the fourth quarter for the full year ribbon generated $102 million of cash from operations, which included $26 million and receipts from the meta switch legal settlement.
We anticipate approximately $7 million for restructuring and acquisition related expenses and the first quarter of 2021.
Capital expenditures were $8 million for the quarter, which included $2 million of real estate lease hold improvements.
For the full year capital expenditures were $27 million, including lease hold improvements of $13 million for our new Plano headquarters and Tokyo offices.
With $10 million of that reimbursed by the landlord.
Now I'd like to turn the call back to Bruce to discuss our outlook for the first quarter and full year of 2021 Bruce.
Thanks, Nick.
Before reviewing our guidance I would like to provide some broader commentary on the marketplace and how we're thinking about 2021.
Our club Maj, and IP optical businesses are well positioned to benefit from the multiple market trends.
Including the distributed network applications five G transport edge computing, and increasing enterprise workloads that are presenting of large shift and the performance requirements of communications networks.
Despite the ongoing travel restrictions our engagement level with customers remains strong.
We continue to see significant our RFP activity and remote proof of concept product demonstrations and place of onsite lab of evaluations.
<unk> ability and the business remains solid and we have not experienced significant supply chain constraints.
Lower travel and marketing activity also contributed to our lower operating expenses and 2020, and we projected to continue and the first half of 2021.
We expect the shift towards working from home to continue for years to come.
<unk> emphasized the importance of great broadband networks.
Broadly and will be a key part of the government infrastructure priorities and.
And funding opportunities such as art off and the U S will be of catalyst for more investment and the types of solutions provided by ribbon.
Perhaps for the first time and the last 20 years, the competitive playing field has shifted and its becoming more balanced.
The sentiment towards Chinese equipment providers has turned very negative ensuring significant market share shifts and Europe and multiple Asia Pacific regions.
And we believe the ability of focused and specialized providers such as ribbon is the competitive advantage against larger competitors attempting to compete across a broader range of technologies.
With that as the backdrop and consistent with our fourth quarter results press release, the press release, a few weeks ago.
And providing additional visibility on our expectations for full year 2021, and the first quarter.
As noted in our press release, we expect growth of roughly 10% and 2021 relative to our performance in 2020.
And both the top and bottom line.
We also expect typical seasonality and our results with momentum growing throughout the year and the.
The first quarter, representing roughly <unk> 21 per cent of annual sales.
For the full year, we anticipate sales to be and the range of $925 million to $945 million.
Adjusted gross margin of 55% to 56% and.
And adjusted EBITDA of $145 million to $155 million.
For the first quarter of 2021 projecting sales to be and the range of $190 million to $200 million adjusted gross margin of 55% to 56%.
Adjusted EBITDA of $14 million to $18 million.
We're also providing additional visibility on our expected interest and income tax expenses for the year. Please.
Please refer to the presentation on our website for additional details.
With the many strong industry dynamics working in our favor.
Focused strategy and strengthened the leadership team, we're very excited about the year ahead.
Operator that concludes our prepared remarks, and we can now take a few questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad. The confirmation tone will indicate that your line is and the question queue.
You May press star two if you'd like to remove your question from the Q4 of participants using speaker equipment and may be necessary to pick up the handset before pressing the star keys.
One moment, please while we poll for questions.
The first question is from Paul Silverstein Cowen. Please go ahead Sir.
And I appreciate the detailed disclosure of Bruce I've got a handful of questions, but they're all very discreet of book and Bill can you answer.
First off in terms of quarterly Opex and margin the balance of 'twenty 'twenty, one taking into account the disposition of candy and insight you can offer about what would your plan for expenditure levels.
Yeah, Hey, Paul.
I think for first quarter in the <unk>.
And 95 to 98 range of some sort of ballpark like that with a little bit of variability and the.
Then as the year progresses, we think will be under $100 million of quarter were right in that range give or take a few million dollars.
Alright, I appreciate the suck.
And on your IP optical business I think I heard you referenced 20 wins, how many total customers and business habit frozen.
And what are the nature of the wounds. The use cases do they run the gamut are they focused on putting the the old transport and <unk>.
And what's the mix among tier one service providers other service providers and enterprises and the other customers or however, you want to however, you think about the mix in that particular business.
Yeah. So a bunch of questions. There I don't have the exact number of active customers you know its in the hundreds maybe Nick and do some research and to get back to you or look it up on the call here, but.
It's a long list of customers.
Fairly evenly balanced between what we think of as enterprise critical infrastructure type customers and service providers and.
And obviously there is a number of of what we think of as a tier one service providers and certain geographies like India and Russia.
Obviously, a little less slow obviously in North America today, but.
And there was a reasonable mix of of both.
Okay.
And how.
I think I heard you say, the India was solid and it was flattish.
And your mouth, but as we look forward for that business. It sounds like your confidence less optimistic how much of your growth expectations is tied to rebound and India and Russia and other such the lack of a better way to put and emerging markets that were a big piece of the story.
For the global downturn.
And those regions.
Yeah, well, so you've got and can you heard it right India was a very consistent and Q4 to Q3 we.
We did see purchasing from a different mix of customers, which I think was really good.
And we're not projecting of snap back certainly and this quarter.
As I mentioned at the start of the fiscal year starts April 1st there. So as they kind of finalize their budget planning and we get into the summer months, we hope we start to see spending.
And to the level it was in 2019.
The overall.
At the end of the year of kind of year to date at the end of 2020, I think the our business and India was down something like 44% versus 2019. So there's there's plenty of room for recovery.
<unk> been getting partially back to where we were in 2019 and.
And that is certainly part of the expectation as we grow this year, that's certainly part of the story.
You know other regions Europe was very strong and the fourth quarter just across the board across the entire business and.
And the former Soviet Union was it was pretty solid I think overall for the entire year was essentially consistent with the with 2019.
Yeah.
Bruce I know you're on the roads will be most of those better and optical what are you thinking about into me and putting and so I can sort of dynamics would you characterize the demand environment writ large again, putting aside of individual reason regions would you characterize it as healthy and meaningfully improving status quo.
Let me just ask you. The open question, how would you characterize demand relative to the 90 days ago relative to 180 days ago.
Yeah. Good question as we as we got into the last month or two of of 2020. We were we were really almost maxed out in the number of trials and activities and proof of concept work that was going on.
Ultimately, that's going to translate into the business for us or for someone else, but the demand environment looked looked really healthy as we ended the year.
Alright, one last question I apologize to you and others on the call, but real quick.
Respect of Huawei, I think I heard you referenced that you had two wins that were directly related to why we cut backs.
How many active opportunities are out there and ore.
These boats and the optical and in the cloud and edge SBC or other platforms was the mostly optical or the other.
Yes, so the two of that I mentioned, and Latin America were and our cloud and edge business. These were replacements of existing coal voice.
Voice over IP call control systems basically.
But so we're seeing obviously, we're seeing opportunity and cloud and edge and certain market more broadly.
Certainly there is going to be opportunity for for some share shift happening this year and in Europe and in several countries in Asia Pacific for sure.
And that's where we're focused right if we can.
We get a piece of that much larger spend that will be very meaningful force.
I appreciate the responses. Thank you.
Thanks, Paul appreciate it.
Yeah.
We have a question from Dave King B Riley. Please go ahead Sir.
Thank you and good afternoon.
The first question is on the.
You provided and North America optical sales increased 105% sequentially can you provide similar numbers for Europe and in Asia.
Hey, Dave.
Yeah. So in Europe make you probably have the numbers handy.
Okay from Q3 into Q4.
And again Europe was up pretty strongly overall force and Q4 do you have that handy Mick.
Yes.
So we have.
Yes.
For the three months and then in September of Europe.
And Russia was up by about a $1 million most of Europe was up by almost $9 million from $46 million to $57 million.
46%.
And what was the final number of 46 to what.
50, 757 got it okay, and and you have of.
The numbers for Asia too.
And let me add them up here real quick so we basically went from $38 million to $46 million.
Got it.
Very helpful. And then just regarding the full boat.
March quarter as well as for the whole of 2021 can you.
Sure and what your assumptions are regarding see any versus optical and im just curious because.
Youre guiding gross margin to be down about three percentage points. This share what's driving that is it are you expecting optical to be stronger than see any and that's why your gross margin will be about three points lower.
Yes, Thanks, Dave.
For the first quarter again, we kind of always kind of almost always see the first quarter being the weakest quarter of the year. So we expect both segments to be down versus the fourth quarter and the first quarter.
And.
Given the particularly the margin richness around cloud and edge that definitely has an effect on the overall margin and then for the for the entire year, you've got it right I mean, we expect to see.
Disproportionately higher revenue growth from the IP optical piece and with that being a little growth in a lower gross margin and then cloud and edge.
And that affects the overall blended for the company. So it's really of mix mix shift as opposed to.
A shift and gross margin for either of the portfolios.
Yes got it.
Okay got it and pleased to also take into consideration there is some seasonality to our revenues and necessarily and impact our gross margin.
Sure.
Okay.
And.
Yes.
Sorry, Dave sounds like we're getting a lot of noise there.
Mr Kang and you're still on the line.
And I'm here.
Yeah.
And I hear you well Dave.
Okay.
And my actually out of my last question is on quality of Tech.
Has that been factored out in the first quarter as well as dishes revenue outlook or should we.
Take it out after the.
The transaction is closed.
Yes, so we wouldn't take it out until we're closed.
Relatively small business its.
Sub $5 million and revenue and.
And $1 million or less and in earnings so not a not a big needle mover on on and.
On the numbers, but it is it's a good signs of the good indication of of how we're we're really making sure we focus on the core strategy for the company and this is a nice little business and we'll continue to work pretty closely with that group actually on product certification and testing and whatnot and.
And we will.
And we'll be able to benefit from just a little more focus.
Got it thank you.
Thanks, Dave.
And of a question from Mike Latimore of Northland Capital markets. Please go ahead Sir.
Thanks, Scott and congratulations on the great execution of this year.
Thanks, Mike.
In terms of the cloud and edge business I guess.
Yeah.
Generally speaking do you view that business as being stable and growing little bit declining a little bit this year and then what about the dynamic of software do you think software growth faster than the overall cloud and edge businesses here.
Yes. So obviously, we grew year over year at 4% and 2020, and if you account for taking kind of candy out of the mix, we're still targeting of bit of growth. This year.
And in particular, we think.
Price should grow and as we kind of get back into a more back and the office mode. The enterprise edge portion of our business should come back as those deployments start to pick back up so we definitely we want it and we want to grow that business. This year.
Got it and then.
On the enterprise side of I guess cloud and edge.
How how and influential is Microsoft teams, so that business is it.
Over 50% of the demand or under I'm, just trying to get a sense because it tends to be a pretty hydra.
Yeah, I think it's still less than 50% of our our SBC business again as I've kind of described a few times and the past sometimes it's hard to tell when our species of being used for enterprise or for four of carrier applications and so sometimes it's hard to put a complete.
A fine point on it.
But I think the Microsoft piece is pretty significant but I don't think it's at 50% again, it's hard to put an exact number on it.
Got it Okay and then.
Maybe any just general guidance on Capex or really kind of what free cash flow is implied in the guidance for there.
Yeah, Mike why don't you take that one please.
Yes, Mcmahon of having trouble with the disconnection that might've been more of the noise was coming from.
I think I got it.
Got it.
This year, we had capex of standard of $27 million of which 13 was real estate and we got reimbursed for about 10 of that so our number if you normalize and it's about $16 million as we stated before it's four to five a quarter.
So we would expect that going forward into next year that $16 million to $20 million range would be acceptable to us as we invest in our labs and product development in particular.
And so far as cash flow for next year.
The only thing you should take into consideration for modeling is that we expect a growth in the IP optical and particularly those customers as they have a longer type of payment cycle and emerging markets. So theres going to be some use of cash for working capital.
<unk>.
Got it got it that makes sense.
And then just last on product development.
What would what should we think about in terms of.
The key a key product enhancements on cloud and edge and IP out to all of this year.
Yes, so and cloud and edge, there's a there are several important programs.
Kind of the final virtualization of some of the call processing platforms. I mentioned this virtual see 'twenty. So there's still some work going on on that and then there's investment around as a service models for SBC as a service we call ribbon connect.
And as well as our analytics platform.
And I mentioned on I think on Mike maybe on the.
On your <unk>.
Callback of few months ago, we're doing some exploratory work around Mac, where we can really leverage the kind of.
The real time critical software development skills from cloud and edge with some of the networking products and technologies from our from the ICI business. So that's an interesting area.
And.
At the optical we have a pretty robust roadmap this year.
There's quite a bit of investment around.
The additional routing protocols.
Enhancements for Tdm to IP migration and then Ah.
Variety of optical related investments, including.
ZR plus introduction this year and kind of standardized four gig and a 400 gig interfaces.
And a few new platforms coming out and so you know pretty pretty active program. This year.
Alright, great. Thanks, Good luck Yep, Hey, Thanks, Mike.
Gentlemen, we have reached the end of the question and answer session and now I'd like to turn the call back over to Bruce Mcclelland core of for closing remarks. Please go ahead Sir.
Yes, great well, thanks, very much and appreciate everybody's interest again, just to reiterate we're really proud of the accomplishments here in 2020, and even more excited about the.
And the outlook here for 'twenty, one and.
Really focused on the core strategy. So look forward to updating you and the progress throughout the year and some of the conferences and we have coming up shortly thanks very much of a good evening.
This concludes today's conference you may disconnect your lines at this time and thank you for your participation.
Please wait for the tone and a recording will begin.
Yes.