Q1 2021 Ribbon Communications Inc Earnings Call
Yeah.
Greetings and welcome to the Ribbon Communications first quarter 2021 financial results Conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
And one should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
I will now turn the conference over to your host Tom Berry Investor Relations for Ribbon Communications. Thank you you may begin.
Good afternoon, and welcome to <unk> first quarter 2021 financial results Conference call I'm, Tom Berry Investor Relations of Ribbon Communications.
Also on the call today will be Bruce Mcclelland, and <unk>, Chief Executive Officer, and Mick Lopez Evans, 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 Dot Com, where both 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 second quarter and full year 2021 are forward looking statements.
Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained and these forward looking statements. These risks and uncertainties are discussed and our documents filed with the SEC, including our most recent form 10-K.
And I 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.
Conciliation and see applicable GAAP measure are included in the earnings press release, we issued this afternoon as well as and the supplemental slides we prepared for this conference call, which again are both available on the Investor Relations section of our website.
As previously noted we completed our acquisition of UCI Telecom on March 3rd 'twenty, and 'twenty and completed the sale of Candy Communications on December 1st 2020. These transactions affect comparisons to prior periods further and the fourth quarter 2020. He began segment reporting for our cloud and edge and IP optical networks businesses and.
And now I'd like to turn the call over to Bruce Bruce.
Great. Thanks, Tom Good afternoon, everyone and thank you for joining us today to discuss our first quarter 2021 and results and our outlook for the remainder of the year.
We had a strong start to 2021 from a profitability perspective with both adjusted EBITDA and non-GAAP earnings per share at or above the high end of our guidance ranges.
We also had very good bookings and the quarter with a book to revenue ratio, excluding maintenance of 1.14 times and the maintenance bookings for the year now nearly 80%.
This gives us very good momentum towards our financial targets for the year.
And our cloud and edge business, we posted strong gross margins, along with an 18% reduction and our non-GAAP operating expenses year over year.
Resulting in EBITDA, nearly tripling compared to first quarter 2020.
Sales were essentially flat after adjusting for the sale of the candy business.
Demand for our core S. P. C portfolio remained strong growing 12% year over year offset by continued weaker demand for the on premise enterprise edge platforms. During this prolonged work from home environment.
Last month, Microsoft announced a new operator connect service, which we already support with our session border controller products.
We believe this new service offering and will reduce the friction for enterprises to easily deploy high quality voice capability via the teams platform and place to our strength given our broad deployment base with mobile and fixed service providers.
This new service will complement the current direct routing alternatives already available, including our new ribbon connect as a service offering that includes support for legacy PBX interoperability and partnership with our channel partners.
We have a growing pipeline of partners embracing this new platform and are currently on boarding more than 60 resellers to the program.
This is an important initiative as we build our base of recurring revenue.
Last week, we announced that our partner program received a five star rating and the 2021 CRM channel reseller network partner program Guide.
When dealing with ribbon our customers expect innovative products and strong collaboration and this announcement offers further proof that we're meeting those standards.
We had strong bookings and our network transformation business from the first quarter with multiple intelligent network modernization projects in North America and Asia Pacific.
Including expansion orders with three of the largest north American tier one carriers totaling over $40 million during the quarter.
We were also awarded a three country multiyear deal in Europe to replace the legacy Huawei system <unk>.
Building on our momentum from last quarter.
And we signed over $3 million and stir shaken robo, calling deals and the quarter.
And our IP optical segment sales grew 22% year over year on a pro forma basis, adding 13, new customers and the quarter.
Bookings were strong in Europe, with both service providers and critical infrastructure organizations.
Sales in India were very consistent with the last several quarters, although unfortunately, India suffering through another significant wave of COVID-19 infections and continues to experience a very slow recovery.
Deployment levels are roughly 60% of where they were prior to COVID-19 and we look forward to a strong second half recovery.
We had new wins and other regions, including and the Middle East, where we signed an incumbent carrier to completely replace products from their current supplier and.
And with Cynthia on network, operator based in Finland that operates a fiber optic network and northern Europe, providing secure connections for and international businesses and government organizations.
And the United States, we continued to leverage our existing ribbon relationships to earn and for new IP optical wins and the U S Rural infrastructure market.
Globally, we have a very active pipeline of opportunities and are currently finalizing contract negotiations on a meaningful Huawei WDM replacement deal.
We are also and the final stages of several significant mobile and fixed operator cross sell opportunities and North America, Russia, and Asia Pacific We.
We COVID-19 large scale proof of concept and the first quarter a mix of both W. D M transport and IP networking opportunities.
We continue to introduce new innovative products with the successful deployment of the Apollo 99 O. One access O T and switch and the first quarter and our new high density dual 400 gig MX ponder that received high scores and the 2020, one lightwave innovation reviews.
And our IP transport Neptune portfolio, we introduced two new access products that are directly focused on the five <unk> cell site router and critical infrastructure markets.
Available and both fully redundant and non redundant versions. These products address the operators need to rebuild backhaul networks to handle five G traffic leveraging plug a bull coherent optics.
The platforms also support the precision timing requirements of five G networks, as well as flexi heart and slicing to reliably segment different types of traffic.
I'll now turn it over to Mick to provide additional detail on our results for the quarter and I'll come back on to review our guidance and provide additional details on our plans for the remainder of the year.
Thank you very much as Bruce stated, we had a strong start to the year with continued revenue growth and first quarter profitability that exceeded our expectations. We generated revenue of $193 million, which was in line with our guidance and adjusted EBITDA of $20 million, which was above our guidance of 14 to 18 million.
Yeah.
This led to an adjusted earnings per share of <unk>, <unk>, which was at the high end of our one to three cents guided range and as always please refer to our Investor Relations web site for supplemental slides with graphs and table summarizing our first quarter 2021 and historical financial performance.
Let's start with some commentary about our GAAP results per quarter.
Our GAAP earnings included a $24 million noncash loss associated with the quarterly Mark to market of the company's investment in America and virtual cloud technologies no net.
A D C T from the sale of our Candy communications business last year.
This was partially offset by $1.5 million and paid in kind interest income earned on the convertible debt from the same transaction for a net negative impact to GAAP income of $22 million or <unk> 15 per share.
And this was in sharp contrast that a large positive impact of 114 million to income and 74 cents to earnings per share in the fourth quarter of 2020.
As we mentioned on last quarter's earnings call fluctuations and a B C T stock price affect our other income and expense line as we mark to market our investment due to this volatility we have excluded these items related to the candy asset sale from our non-GAAP results.
In addition to the usual other factors contributing to the difference between our GAAP and non-GAAP results for the quarter, such as the amortization of intangible assets and non cash compensation, we incurred $6 million and restructuring expenses related mostly to continued downsizing of our real estate footprint and $1 million and integration expenses.
Okay.
On an adjusted non-GAAP basis first quarter 2021 results were as follows.
Total revenue was $193 million up 22% from the first quarter of 2020.
Non-GAAP gross margin was 57% and the quarter similar to our gross margin and the first quarter of 2020 due to favorable product mix.
Non-GAAP operating expenses were 95 million and the quarter as we continue to drive efficiency, we had favorability in our facility expenses travel and other discretionary expenditures.
Non-GAAP adjusted EBITDA was $20 million per quarter up from $10 million and the first quarter of 2020 due to product mix and favor ability and our operating expenses non.
Non-GAAP diluted earnings per share was <unk> <unk> above our first quarter 2020, non-GAAP diluted earnings per share of one cent.
Our diluted share count was 155 million shares for non-GAAP earnings and the quarter.
Now looking at the results of our two business segments.
And our cloud and edge business first quarter revenue was $125 million down slightly year over year, but flat when adjusting for the sale of our candy business non-GAAP adjusted EBITDA for cloud and edge was $28 million nearly three times, the $10 million of business generated and the first quarter of 2020 with.
And EBITDA margin of 23% debt.
Year over year change was driven by the candy sales and restructuring savings minimal travel and other discretionary expense savings.
Here are a few additional points on the cloud and edge performance and the court.
Product revenue was $50 million, while service revenue contributed $75 million software accounted for 52% of total product revenue roughly flat from the first quarter of 2020.
Turning to our IP optical business, we recorded first quarter revenue of $67 million and increase of $37 million from the prior period on and as reported basis.
On a pro forma basis, the increase was $12 million or 22% year over year. We had good margins at this revenue level with non-GAAP gross margin of 39%, our IP optical business generated and adjusted EBITDA loss of $9 million per quarter.
Now here are some consolidated key metrics for the company.
Net revenue represented 36% of total revenue and the first quarter, increasing by approximately $8 million from the first quarter of 2020.
10 customers were 46% of total revenue and the first quarter up from 45% and the fourth quarter of 2020 and slightly above the 43% from the first quarter of 2020.
Service providers accounted for 77% of our revenue and the quarter and enterprise customers represented 23%.
International customers provided 59% of our total revenue and first quarter in line with a company record of 60% in the fourth quarter of 2020.
As Bruce mentioned, we are encouraged with the book to revenue, which excludes maintenance of 1.14 times for the first quarter.
Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $109 million, including $3 million and restricted cash.
This is a decrease of $27 million from the previous quarter as expected due to annual variable compensation payouts and seasonal factors are $100 million revolver still remained undrawn.
As previously announced we amended our credit facility in early March increasing our term loan a balance by approximately $75 million using the proceeds to pay off the term loan b balance and term loan b carried an interest rate margin debt was 500 basis points higher to the term loans.
Now our effective interest rate has gone from four 4% to three 4%.
The principal balance on the term loan a was $391 million as of March 31.
Once again, we comfortably met our quarterly financial covenants as per our credit facility calculations and the first quarter. Our leverage ratio was 2.35 times versus a maximum of four times.
And our fixed charge coverage ratio of 394 times versus a minimum of 125 times.
Our debt net of cash was $275 million as of March 31, which divided by the last 12 months adjusted EBITDA provides and accounting leverage ratio of less than two times.
From a cash perspective, the company used $6 million and cash from operations and a quarter cap.
Capital expenditures were $5 million for the quarter, which had $3 million of real estate leasehold improvements now I'd like to turn the call back to Bruce to discuss our outlook for the second quarter and full year 2021 Bruce.
Thanks, Mike.
While we continue to execute well on the near term. Our focus is also on the longer term transformation of the company.
This is a unique time and our industry with significant competitive shifts creating opportunity for ribbon to gain share while benefiting from strong secular demand for bandwidth and the increased adoption of cloud communication services.
Over the next several years, we also expect significant federal funding initiatives to further improve the broadband infrastructure along with network upgrade investment to support five G deployment and modernize their legacy Tdm networks.
We are winning new business that is directly related to the combined strength and portfolio of ribbon and and you see I V.
Holiday during the merger strategy and growing both top and bottom line.
And I'm very excited about the strong pipeline of IP optical opportunities and in particular, several late stage tier one service provider evaluations leveraging existing strong ribbon relationships.
Our portfolio of differentiation is becoming more clear and the market and with our customers.
Our highly optimized metro WDM platforms are perfectly complemented by a strong portfolio of IP mpls switching and routing products.
One of the key elements being evaluated and these opportunities is our new dual 400 gig ZR plus WDM solutions.
We expect to be one of the first to market with this new capability with general availability planned for early in the third quarter.
In addition to ultimately supporting vendor interoperability this new technology represents significant bill of material cost savings.
Our second key factor and these opportunities where we're seeing significant interest is our amused multi layer domain orchestration platform.
This suite of tools enables orchestration and optimization across both the optical and IP layers and the network supporting our multi vendor SDN operating environment.
This is proving to be an important differentiator for the ribbon solution and is in large scale deployment with Bharti and India today.
With that as the backdrop here are our expectations for the second quarter, we anticipate revenue to be and the range of $215 million to $225 million with gross margins of 56% to 57%.
We expect adjusted EBITDA of 30% to $34 million and non-GAAP earnings per share of 9% to 11 cents per share.
Our guidance for the full year remains unchanged.
Once again, thanks to our employees for continuing to deliver during these challenging times.
Operator that concludes our prepared remarks, and we can take a few questions now.
Thank you.
Ladies and gentlemen at this time, we will conduct a question and answer session.
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One moment, while we poll for questions.
Our first question comes from Dave Latimore with Northland Capital markets. Please state your question.
Hi, This is his brother, Mike Lattimore, calling and Hey, Bob.
Hi.
So interestingly on these late stage tier one opportunities.
Did you say that they were with cloud and edge customers, one and also maybe what regions are Liam.
Yeah. So I was referring to the IP optical Mike not non cloud and edge and that commentary and it's in multiple regions I think I mentioned, Russia, specifically, North America, specifically and Asia Pacific as well so.
Number of different opportunities.
Well down the pipeline basically two to comment on them now so.
Yeah and.
And are they with.
Current cloud and edge customers that are also looking at this or is it independent of that.
Yeah. So several of them are not all of them but.
More than more than half of them yes.
Okay great.
And then.
It sounds like in India, obviously, a lot more restrictions I guess, you sort of factor that into your guidance here right.
Assuming it needs a little tighter for a while.
Yes exactly.
I know when I comment on your on the first quarter was pretty consistent with what we saw on the second half of last year or so it is it's more robust and what it was in the first half last year.
But certainly not anywhere back to full deployment and velocity.
If you look at the deployment that we're seeing right now it's about 60% of what we saw pre COVID-19.
There's plenty of room to run still and we've tried to take that into account and certainly with our second quarter guidance here.
And then just last one.
At one point, you commented on and voice traffic volumes relative to pre COVID-19 levels and I think you said they were like 30% above pre COVID-19 and one point last year I guess on any.
Any update on kind of what youre seeing in terms of traffic volumes.
I don't have and updated quote on that but I will follow up on it and Mike and see if I can get some more detail on kind of latest traffic levels and I just don't have anything in front of me here right now.
Okay. Thanks, a lot.
Great. Thanks, Mike.
Yeah.
Our next question comes from Dave Kang with B Riley. Please state your question.
Thank you good afternoon.
My first question is regarding the chip situation and any impact.
To your first quarter results, our second quarter outlook.
There was nothing substantive Dave that impacted Q1.
It was obviously tight we've.
We've definitely seen lengthening lead times and and challenges on a variety of different types of components.
And like many I guess, we saw this coming we are trying to get out in front of it as much as we could and and had sufficient for Q1 and right now we're not anticipating big issues and the second quarter.
And again trying to plan ahead here and we'll see how the second half goes.
The real issue comes down to any decommit kind of within a.
Promise lead times that you end up with issues on deliveries, but.
So far so far so good but it is it's pretty tight just gotta be worked every day.
Also somebody.
Another equally and vendor reported earlier this morning talked about.
Margins and getting hit because the prices are going up what about you guys any margin impact because of price.
Increasing prices.
There is a little pressure on on prices certainly on logistics as an example.
We've seen some some elevated costs around that.
Which will which impacts a portion of our business of course, you know a lot of what we sell and software as well so.
The direct effect on the overall.
Profitability for the company and it might be a little less and somebody that's more concentrated on hardware.
Got it and then I did have a question on on India. So it's running about 60%.
And then when do you.
Expense.
India to move fully recovered back to the.
Good day level are you, assuming second half or just something beyond second half this year.
Well, so what we what we believe happens as the second half of the year begins to strengthen from where we're sitting today.
Obviously, it's a little hard to tell exactly when were back to pre COVID-19 levels and.
And it's a combination of factors around.
Funding for new projects and budgets et cetera, but then just the logistics and the country and and deployment velocity and we're able to get pretty good visibility on the deployment of our products were directly involved from a service and logistics perspective, and the country and so the 60% number is pretty pretty accurate based on what we're seeing right now.
And can you remind us what India was pre pandemic was at about 10% or.
Yes, so for <unk>. It was about a third of the business prior to merging with ribbon.
So call it and $125 million of range annual run rate range something like that.
Pre COVID-19.
Got it thank you.
Thanks, and thanks, Dave.
Our next question comes from Paul Silverstein with Cowen. Please state your question.
I've got a couple of questions one on a store with a new just to try to do.
Loosens.
When you Bruce when you talk about first of all on the prepared remarks.
Talking about meaningful improvement in second half and.
I guess, what I, just heard you say sounds a little bit different and that if I could press you on terms of.
How much visibility to have and do the second half underlying your view and what exactly is that view in terms of the degree of strength youre expecting and the second half of the year.
Well with the larger service providers, we're working within India, we have a pretty tight planning relationship.
Given where lead times have gone on products and whatnot, we have to have good visibility.
And we sell up.
Our portfolio of products and there's a whole variety of different configurations that we sell and you've got to have that right and the planning phase. So we go through a bit of a budgeting process and and and engineering process with many of our customers to get to the bill of material to build to be driving things correctly. So.
So we get good visibility on say the next three months and.
The next six to nine months beyond that we have.
More planning directional information.
So it's not 100% scientific but it's pretty it's pretty pretty decent.
And of course, we're where youll see variability is when we're bidding on new regions of the network or replacement of product and things like that.
You don't know for sure how much youre going to win or if youre going to win and so theres some variability around those things.
Bruce given.
The spike and the pandemic appears to be a relatively recent vintage I recognize it didn't just start yesterday, but it's also not three or six months old.
Have you had real tongued communications and the last week or two that would inform you as to whether theres been exchanged and their deployment plans and I recognize from also about a demand issue.
Literally the physical ability of your customers or you won't be after your customers to deploy product would have you had communications since it's been apparent.
And spiked up and.
And whether that's changed their planning with respect to those deployments and the second half view.
Well, given the timing of earnings and providing guidance, we do a pretty thorough job in the and a couple of weeks leading up here to make sure we've got a reasonably accurate view.
And we're not we're not projecting significant growth and the second quarter here in India.
Yeah.
If things tightened up dramatically it would have an effect I suppose range, obviously, but.
On the other hand, the country's been living and some pretty tight restrictions for quite a while as well so.
So I think the answer to your question is yes, we've had discussions and.
I believe we've got and accurate view on what happens here and the second quarter.
And Bruce and Mike.
Just one last question on India looking beyond the second quarter and the second half from this calendar year.
Has there been any change on their deployment plans the past couple of weeks because on this bucket would go.
Not that I can put my finger on right now.
Paul but yes.
Yes, that's the best I can answer the question and I approve.
And Bruce to be clear you are expecting to healthy and strong increase in the second half you are relative to that 60% number.
We are you know we're projecting the second half stronger and the first half part of it is.
And our projects are parts of the network that we're already being deployed in and part of it is new wins that we're anticipating.
Given given the opportunities for further market share gains and the and the market.
And these are primarily or exclusively optical deployments.
No. It's a it's a combination of the IP mpls portfolio and and the optical portfolio.
Okay.
Got it.
On let me move on and.
In terms of opportunities you've referenced while we were a couple of times during the call and I wanted to circle I understand and it sounds like you've already secured at least one particular deal could you characterize is $3 million and it goes on the voice side of the house.
And I think I heard you say that you also are close to finalizing or to displace them and optics.
Although perhaps I misunderstood, but is there any go to promote on it. So you can give us in terms of.
How many opportunities there are in total debt during various stages of trying to win.
That are directly linked and so while we just placement on New awards, how many of those are non flex down their loans.
And voice.
For unified Communications.
Integrations et cetera, and.
And.
Whether it's accelerating and that steady state.
Any insight on the opportunity.
Yeah, So first and so the first part you characterized it correctly.
[noise] referred to a voice replacement opportunity in cloud and edge and also referred to.
Close to the finish line on a.
Replacement opportunity.
And IP optical.
On the opportunities we're seeing are both in the optical portion of the network as well as in the IP portion of the network.
And certainly the India market is one of the key focus areas.
As well as.
Several countries in Europe today.
And in General I think these are fairly meaningful opportunities force that will that will move the needle.
Or I wouldn't mention our wouldn't refer to them sort of thing so.
These are not dozens and dozens necessarily we're focused on a specific list of opportunities were.
We're either already currently deployed today, and we can gain more share where new insertion opportunities with new customers.
Bruce will I appreciate its not dozens and dozens and overdosing or would it be more like six to 12 or even lower than six in terms of total potential opportunities that you're looking at.
The meaningful ones and the short term our are under under a dozen.
There's real focus around these things is not kind of a shotgun and a broad array. So.
And would have been in that six to 12 branch.
Yes.
Yes.
On.
On.
Beyond Huawei what are your.
And what you're most excited about in terms of driving revenue growth specifically.
What would be number one and two and three.
Well the top two.
And our Huawei opportunities.
And while top three Huawei opportunities. The second is recovery and the India market and then the third is success and North America that we've talked about and the and the growth that we that we're targeting here and in the North American market and those three things all focused on the IP optical portfolio are.
Are the areas that we believe will drive growth as the year progresses here this year.
Alright, I've already asked about who through loans and one question on the well actually your broader question just the North America net.
And if you've ever you say, you've got a number of opportunities and service providers.
Around the World, Russia U S et cetera.
And again and trying to get some granular and so I can you characterize is that also and the range of six to 12 zone.
More than a dozens and western half a dozen any rough quantification you can use.
Well, let me let me come at it a different way I think the second quarter is going to be.
Fairly significantly stronger and North America force on on IP optical.
So we have a number of projects that are in flight already today that we will recognize revenue on and the second quarter.
So I think we'll see some some meaningful improvement there and.
As I referred to these tier one and <unk>.
Opportunities.
These are again theres, either a very focused set of call them.
Half a dozen opportunities that are meaningful to the company.
And that we're focused on.
And believe we have a very good shot at winning some share and them and hopefully we'll have more more specific detail to share on the next call.
I greatly appreciate the insight thank you.
Yes, Thank you Paul.
Ladies and gentlemen, there are no further questions at this time I will turn it back to management for closing remarks. Thank you.
Great well, thanks, again for everyone being on the call and your interest and ribbon Communications, we really look forward to speaking with many of you at our upcoming.
Virtual investor conferences, and updating you on the progress on our next earnings call with that operator that concludes our call.
All parties may disconnect have a good evening.