Q1 2022 Ribbon Communications Inc Earnings Call

Greetings and welcome to the Ribbon Communications first quarter 2022 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.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

Please note this conference is being recorded.

Now I'll turn the conference over to your host Peter Melanion Senior Vice President of marketing for Ribbon you may begin.

Good afternoon, and welcome to ribbon first quarter 2022 financial results conference call them become millennium SVP of marketing and communications.

Also on the call today are Bruce Linton ribbons, Chief Executive Officer, and make Lopez ribbons Chief Financial Officer.

Today's call is being webcast live and will be archived on the Investor Relations section of our website at <unk> Dot Com, where both our press release and supplemental slides, which are currently available.

Certain matters, we will be discussing today, including the business outlook and financial projections for the second quarter and full year 2022 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 these forward looking statements.

These risks and uncertainties are discussed in our documents filed with the SEC, including our most recent Form 10-K .

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.

Reconciliations to the applicable GAAP measure are included in the earnings press release, we issued earlier today as well as in the supplemental slides we prepared for this conference call, which again are both available on the Investor Relations section of our website.

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

Great. Thanks, Peter and thanks to everyone for joining us today to discuss our first quarter results and our outlook for the remainder of the year.

Financial results for the first quarter were in line with our expectations and at the midpoint of our guidance.

And you was $173 million and adjusted EBITDA was a loss of $8 7 million we.

We successfully navigated the continued supply chain related challenges, including new issues like the increased delays being incurred for material transiting through the shipping ports in Shanghai.

We expect margins to continue to be affected by higher material and logistics costs again in the second quarter, but fees associated with expediting components are beginning to lessen and as a result, combined with higher revenues, we expect margins to improve this quarter and as the year progresses.

Product and service bookings in the quarter were good with an overall book to revenue ratio of 1.2 times.

Our IP optical business was 1.27 times for the quarter.

Our maintenance and support backlog grew nicely with nearly 80% of the year's maintenance revenue are now booked.

Our cloud and edge business had several notable customer all pushing up so far this year.

Last week, we jointly announced with Microsoft the availability of support for Microsoft Operator connect using our ribbon connect platform.

Operator connect is Microsoft operator managed service for interconnection between teams and Telecom services.

We've extended our multi tenant cloud native software as a service ribbon connect solution to support service provider deployments of operator connect and announced our first customer switch connect in Australia now offering this turnkey Microsoft teams service.

Our solution Leverages, the same proven carrier grade security products and services that are already trusted and deployed in the world's largest telecom networks.

Google also announced support for Sip trunking for their Google voice offering leveraging certified S. P. CS from ribbon.

And Cole just announced selection of ribbons cloud based virtual SBC solution to deliver a complete secure Microsoft teams communication service across Japan.

These recent announcements build on the enterprise momentum, we're seeing with a number of other major businesses.

<unk> Liberty mutual Goldman Sachs Citibank Bank of America.

Cleveland Clinic, John Deere shell and others that have chosen ribbon for their most demanding voice communication requirements.

We also announced a new international win with Turkcell, who selected ribbon to support the digitization of their mobile and fixed voice network interconnect platform using our Virtualized cloud based SBC policy and routing management and element management platforms.

And our IP optical business, we announced a significant win in the first quarter with the second largest European Railway company SNCF based in France.

This is a five year project to replace obsolete sth equipment with our latest O T N W. D M optical platforms.

Followed by the deployment of our Mpls routing solutions.

Reuben continues to build on the great position, we have with many European critical infrastructure operators and we expect additional growth in the second half of the year in this important segment.

We also capitalized on the wind I mentioned last quarter with MTN group with the award of two major projects in the Africa region.

We expect business in this region to accelerate as we build on the success of these initial projects with this top 10 global mobile <unk> com, operator, serving over 270 million subscribers across Africa, and the middle East.

As Sam Buchi, our IP optical networks business leader outlined on our last earnings call.

We have a strong pipeline of new products being introduced over the next several quarters.

There's a growing emphasis on the software aspects of our solutions with major new IP routing features being introduced across our IP portfolio.

These are foundational capabilities that will expand our addressable market.

And they are complemented by the work we've done to product ties our disaggregated ribbon IP network operating system.

Supports the diversity of network requirements using both our custom high performance products and a growing number of third party platforms.

We're introducing a new series of White box products over the next several months called the Neptune 2000 series, which will broaden our portfolio and expand our reach from the edges of the network further into the higher performance Metro layers.

We have a steady stream of enhancements to our Muse multi domain multi vendor management and orchestration cloud based software platform.

With growing engagements with customers.

There continues to be a significant gap in the industry. When it comes to enabling a truly open and interoperable networking environment and a simple customizable way.

And the vision, we have for this platform is really resonating.

From an optical transport perspective, we have a number of important enhancements to our Apollo platform, including support for a new cost reduced and feature enhanced 400 G. ZR plus plug in that includes O T N support and interoperability at the transponder level.

This will be another step towards realizing our strategy to enable open WDM transport networking.

Our cloud and edge team is also in high gear with the introduction of the operator connect integration as well as supporting a growing number of cloud native S. P C opportunities.

We have a major new automation management platform being introduced this quarter that unifies management of all of our cloud and edge software platforms for both enterprise and service provider customers.

This will greatly reduce the friction of introducing new software leveraging a C. I C. D continuous integration continuous development delivery process that will really differentiate us from the competition.

And finally, we're introducing two new enterprise edge SBC products.

The first is a fully containerized cloud native version of our edge SBC software product that's already in use in our ribbon connect solution.

And the second is the next generation enterprise edge hardware platform that provides a significant increase in networking performance at a lower cost point.

This new enterprise edge 8000 is a multipurpose voice and data platform that will expand our market beyond voice services at the enterprise edge.

Which brings me to a few comments on the outlook for the rest of 2022, starting first with our IP optical business.

The level of activity across all regions is certainly increase this year, we had an active rfps with 12 major mobile and telecom carriers around the world.

All of these opportunities are being driven by the need to replace Huawei in the network.

We have a good mix of both IP and optical opportunities, where we're well positioned as a result of the expanded roadmap we're investing in.

For the remainder of 2022, we expect year over year growth in both traditional regions, such as India, and Europe as well as in strategic new growth areas, such as North America, Japan Africa, and the Middle East.

In North America shipments of our IP and optical products increased more than 190% in Q1 versus the first quarter of 2021, and we expect continued momentum with existing customers such as Rogers via wireless did yourself and Cfe the largest electric company in Mexico, as well as with new customers.

On our last call I had mentioned a new major project with a U S tier one service provider to modernize their voice infrastructure over the next several years that will significantly reduce the complexity and operating cost in their network.

This solution combines our telco cloud voice core solution with technology from our IP optical portfolio the.

The project is going well with solution validation, while underway following initial shipments of lab and field validation equipment.

We anticipate commercial deployments to begin in the second half of the year.

I'd also mention a new project in Japan with a major multi service communications provider that uses our Neptune routing platform in a converged edge T application labs.

Lab validation of the solution continues and we anticipate early deployments in the third quarter with this strategic customer.

And our cloud and edge business, we have a strong funnel of network transformation projects with our largest traditional service provider customers over the next several quarters that underpin our view for the year.

Similarly, there is a growing pipeline of large enterprise communication modernization projects as businesses begin the process of returning to the office and updating their voice infrastructure to leverage cloud collaboration platforms that have become commonplace in the work from home era.

This includes very large opportunities with U S. Federal agencies, beginning this year as they replace aging I P. P. B X centrex platforms with modern cloud platforms that are hardened for their unique requirements.

With our existing carrier grade voice application server and policy management deployments at places like the Pentagon ribbon is very well positioned to win a significant share of this large investment over the next several years.

In summary, I'm excited to see the results of the investment, we're making a new products as they begin to reach the market and validation of the strategy as we compete for and win new business as.

As a result, I expect we will continue to improve our financial performance as the year progresses.

With that I'll turn it over to Mick to provide some additional detail on our first quarter results and then come back on to discuss guidance for the second quarter Mick.

Thank you very much for the first quarter of 2020 to our financial results were in line with our guidance.

<unk> generated revenues of $173 $2 million, which was just above the midpoint of our guidance of 165 $280 million.

We had an adjusted EBITDA loss of $8 $7 million, which was also near the midpoint of our guidance of $5 million to $11 million. This led to an adjusted loss per share of a sense also within our guided range of 10 to seven cents loss that's all.

Please refer to our Investor Relations website, a supplemental slide summarizing our first quarter 2022 that historical financial performance.

Let's start with commentary about our GAAP results for the quarter.

Our GAAP loss includes a $27 million noncash loss associated with the quarterly Mark to market of the company's investment in American virtual cloud technology known as a C. T from the sale of our Candy communications business in 2020.

In addition to the usual other factors contributing to the difference between our GAAP and non-GAAP results such as the amortization of intangible assets and noncash compensation, we incurred $5 million in restructuring expenses and $2 million in integration expenses on an adjusted non-GAAP basis first quarter 2022 results, whereas fall.

Total revenue was $173 million down 10% from last year.

non-GAAP gross margin was 52% as expected within our guidance range of 50% to 51% gross margin was 700 basis points lower versus our prior year due to lower revenue to absorb fixed costs higher costs in our supply chain and service delivery organizations and less favorable mix.

non-GAAP operating expenses were $99 million down sequentially from the fourth quarter by $3 million year on year expenses increased 4% as we continue to invest in our research and development for IP optical networks.

non-GAAP adjusted EBITDA was at $8 7 million dollar loss in the quarter due to the lower revenue volumes and their gross margin drivers previously indicated.

non-GAAP diluted earnings per share was a loss of eight cents compared to prior year diluted earnings per share of <unk>.

Our basic share count was 149 million shares and our diluted share count was 154 million shares our non-GAAP tax rate for the quarter was 35%.

Which is 4% higher than our guidance as a consequence of provisions to income from different foreign tax jurisdictions.

Note that our guidance for the full year should now reflect a 35% tax rate.

We're still evaluating the impact on our overall taxes from the requirement to capitalize research and development that became effective in 2022 as part of the tax cuts and jobs Act.

Now looking at the results of our two business segments.

Cloud and edge business first quarter revenue was $110 million down $16 million year over year, mostly driven by declines in product revenues and timing of some service projects non.

non-GAAP adjusted EBITDA for Cod in edge was $16 million down $12 million year over year with an EBITDA margin of 15%. The decline was primarily a result of lower sales and elevated component costs.

This was partially offset by lower operating expense of $4 million as we begin to see the results of the strategic restructuring initiatives.

Here are a few additional points of the cod and hedge performance in the quarter product revenue was $38 million, while service revenue contributed $72 million software accounted for 44% of total product revenue lowered under 52% from prior year's first quarter due to a higher mix of media gateways versus Virgin.

<unk> voice application software and our large network transformation projects.

Let's turn to our IP optical business results. We recorded first quarter revenue was $63 million, which was a $4 million decrease versus the prior year non-GAAP gross margin of 29% was down 700 basis points from the previous quarter.

Decrease was driven by lower revenue absorption of fixed cost of goods sold items higher freight logistics.

And supply chain price expedite fees.

We expect gross margins to improve throughout the year as our revenue increases in component expedite fees are mitigated.

Now here are some consolidated key metrics for the company in the first quarter.

Maintenance revenue represented 40% of total revenue.

And customers were 44% of revenue service providers accounted for 73% of our revenue and enterprise customers represented 27%.

International customers provided 56% of revenue.

We are encouraged with the book to revenue performance, excluding maintenance of one two times, which demonstrates solid momentum with our customers, especially in our IP optical business following a solid bookings quarter.

Now turning to the balance sheet, we ended the quarter with cash and cash equivalents of $95 million, including $3 million in restricted cash. This is a decrease of $11 million from the previous quarter, driven by a term loan payment of $20 million, including a voluntary $15 million prepayment we made.

In the quarter of $100 million revolver still remain undrawn.

As previously announced we amended our credit facility in early March we appreciate the support of our banking syndicate led by citizens Bank.

Standing term loan principal balance is now $355 million after the $20 million payment in the quarter.

We met our financial covenants for the first quarter as per our credit facility calculations, our leverage ratio was 3.54 times versus a maximum of four to five times and our fixed charge coverage ratio was 2.12 times versus a minimum of 1.25 times.

The second quarter leverage ratio maximum is now four five times, which we plan to achieve a combination of enhanced profit and further loan prepayments, we are evaluating enhancements to our capital structure to improve our balance sheet flexibility and credit facility compliance in order to further support.

The continued investment in our growth strategy.

From a cash perspective, the company generated $15 million in cash from operations in the quarter capital expenditures were $3 million for the quarter, primarily driven by our research and development investments.

We met our guidance in the first quarter and expect sequential growth in both revenue and margin in the second quarter and further improvement in the second half.

Our 2022 outlook is bolstered by good book to Bill ratios for both business units.

<unk> services backlog.

And new product introductions in the second half of the year.

We are confident that the steps we have taken to manage the increased input costs, such as raising prices and reducing expedite fees.

As well as reduction in our discretionary expenses will allow us to significantly improve our profitability in the second half.

Now I'd like to turn the call back to Bruce.

Thanks, Matt.

Reiterate somewhat mixed comments, we're projecting a sequentially stronger second quarter.

We expect double digit growth in both our product segments based on solid backlog and identified projects this quarter.

IP optical sales are expected to increase primarily related to projects in the European region, and cloud and edge growth is related to network transformation projects in North America, as well as increasing sales in our enterprise business.

We also expect to see the benefit of improvements we've made throughout our supply chain, including investment in strategic inventory and agreements with key suppliers to reduce expedite fees and component costs.

We expect the combination of higher sales and improved product costs will significantly improve profitability compared to the first quarter.

As a result, our expectations for the second quarter is as follows.

For revenue in a range of $200 million to $215 million.

non-GAAP gross margins of 53.5 to 54, 5%.

non-GAAP adjusted EBITDA of between $17 million and $23 million and non-GAAP diluted earnings per share of three to six cents.

For the full year, we believe the targets we established on our last call are still achievable based on the growing opportunity funnel and new product introductions.

We have an incredible opportunity in front of us as the global investment in communications technology surges over the next several years.

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, a confirmation tone will indicate your line is in the question queue.

You May press star two if you'd like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.

Okay.

Our first question is from Paul Silverstein with Cowen. Please proceed with your question.

Thanks, Bruce and Mike.

Two quick questions.

It seems pretty clear that your visibility has improved mudroom question too is beyond Q2, how would you characterize the degree of visibility into the back half of the year.

I think hey, Paul good to see.

Yeah.

I think all the way through Q3 into Q4, we've got.

Good visibility on the if I take it by segment on the cloud and edge side.

I mentioned the network transformation programs and activity. There you know we get as you know pretty good visibility on those activities.

In our IP optical business.

<unk> strength in a couple of different regions looking into the second half of the year we.

We see good opportunities in Europe , with our critical infrastructure customers I talked about a couple of different wins in regions like Africa, where we're growing our business and share and we see opportunities for further growth in India.

I think we've got a pretty good pipeline of activity and as.

As we look at individual opportunities you know this is not kind of just regional and this is down to the specific project specific opportunities specific specific customer so.

I think you've characterized it right I think our visibility is definitely.

Good spot here.

Bruce I don't want to put words in your mouth, but what are the fingers of searches Suez.

This was not what I want to make sure I understood correctly, you visit always not defending it sounds pretty broad based as positive dependent upon any one particular region you one particular customer.

Fairly broad based or is that an accurate rendition.

It is it's not one or two opportunities of of <unk>.

Extensive size that we're hinging on it's a whole broad base of accounts across a variety of different regions and some of them we've announced in and.

That's there are projects that are just getting started.

I mentioned.

One of the new voice modernization projects, we have with our major opera here.

Here in the U S uses products from both portfolios that project is just going through validation. So we expect revenue in the second half.

Yeah, So there's a whole variety of different things in the funnel here that they are looking very positive.

Alright, guys I recognize this is not unique to you but impact all companies have you factored in or are you factoring in these.

These lockdowns in China. It doesn't sound like we've had a meaningful impact on you as of yet, but can you give us any color as to whether they have had an impact what the risk is if they continue for another two weeks. Another four weeks you didn't feel a meaningful impact I assume everyone's got exposure, even if you don't have direct exposure.

Yes, the primary impact is the logistics coming out of that region.

Production perspective, we haven't been impacted but just the amount of time it takes to get either finished goods or material through the porch. There has extended two to three weeks and that did have an impact on us in the first quarter.

What we are expecting is that it improves in the second half of the second quarter.

They were talking about some.

Further openings may 15th and we've.

We've tried to take all that into account obviously as we set the outlook for the second quarter. So we did have some impact in the first quarter that reduced some sales in the first quarter, but.

We we obviously were trying to be able to estimate those things as we put guidance together and we're able to to come in right in the in the <unk>.

Middle of the guidance so.

One last question for me before I hop back in Q2.

Bruce I apologize Vuzix says as Bud.

The view for the two different businesses Quad and is not the obstacle for the year on the quarter are you expecting growth from both businesses with you.

I think our view is very similar to where we were.

75 days ago, you did the last earnings call, we still expect the IP optical business to have double digit growth going into the full year and the cloud and edge business flat to maybe down a little bit for the full year. Paul So very similar to what we are we guided to at the last earnings call.

And were worse.

So oh.

If one assumes normalized stable.

Supply chain environment and it doesn't sound like it is all that from other companies have reported but if one assumes no degradation in supply chain Where's the greatest opportunity from a demand perspective for upside.

Okay.

Or does this love Yahoo.

Yeah, I think from a top line revenue perspective, its definitely in the in the IP optical both the IP networking portion of the business and optical both of those segments are growing for us.

There's definitely room for upside opportunity on the cloud and edge business, it's less dependent on supply chain you know more dependent on some of the projects I mentioned as an example, when I mentioned was around the federal government are modernizing their voice infrastructure. We think that's a big opportunity. It does take a while for those programs to.

Get funded and get into deployment and whatnot, but there's definitely an opportunity for upside on the cloud and edge business around those types of activities.

All right Bruce.

Apologize one more question.

It's probably too.

What.

What can I have your obstacles give back to within the next two to three years from a revenue standpoint, if a new comes back Wawa's, it's even up and don't seem to be good for you. It sounds like you have office results were helped dig can that business be in the next two three years.

Yes, when we get into the mid term planning Paul I get really excited I mean, I talked a little bit about the product pipeline, that's coming out and it really creates a much stronger competitive position for us and in particular around IP routing I. Just think there is an untapped opportunity so in that in that time frame.

In the half billion dollar plus range I mean, those are the areas that we're clearly targeting to grow the business you know a lot of good things have to happen, we have to execute well to do that but it's it's easy to see how that business can grow to that level over the next few years.

I appreciate the responses. Thank you.

Thanks, Paul.

Our next question is from Tim <unk> with Northland Capital markets. Please proceed with your question.

Sorry, hi, good afternoon.

And congrats on the outlook in particular.

That's a question to start with about the RFP.

Pipeline and IP optical that you mentioned.

I think you've talked about a dozen opportunities there.

And I wanted to ask a couple of questions about that.

You know I guess.

Can you give US you mentioned most of them having to do with maybe replacing Huawei. So I assume that most of these are carrier type deals.

I Wonder if there's any if you can give us kind of the size of this pipeline in the aggregate and what you think you might be able to take out of it in terms of a competitive situation and whether you expect these.

Decisions to be made them this year or impact.

Is any of this contemplated in your guidance I guess her wood.

Converting these represent upside.

Yeah Yeah.

Great great questions.

Tim Good there's good to chat with you.

So.

These are all carrier deals I think all of the ones that the 12 that I mentioned are all active service provider telecom and mobile carrier.

<unk> not all of them are Huawei replacement, but there is definitely a trend internationally in Europe and certain countries in Asia Pacific where they are are squarely positioned on additional suppliers, replacing Huawei and the infrastructure and when I say replace that doesn't mean necessarily rip out and replace but certainly replaced.

As a as a supplier these are all kind of major.

Providers, there theres a whole longer list of smaller opportunities, obviously, but we kind of honed in on what we think of us as tier one carriers now tier ones.

Overused terms, so I tend not to use it very much but these are major telecom providers infrastructure providers typically both mobile and fixed carriers that.

We are looking at either.

Capacity additions into the network from an optical perspective, as I mentioned protection potentially replacement of existing suppliers or in quite a few of the cases as well looking at IP networking and really pushing IP.

IP networking further and further out to the edge, particularly around five <unk> network.

The front haul portion of the network.

From a size perspective the spend.

One of these is multi tens of millions a year.

We don't obviously expect that we ended up singles, where store or anything like that on these opportunities, we're typically coming into to be a new supplier in the in the network.

And I don't expect we win business on every one of them, but I think it just gives you an indication of the potential opportunity here and that the company is positioned differently than where E. C. I had been previously we're now getting opportunities in that these major carriers that are that are really transformative for the company.

So.

I think your last question was on impact this year.

In our outlook for this year, we really have very little of this plan then.

I learned the hardware I think the hard way I think that it takes quite a bit of time to go from this stage of engagement to to really significant levels of deployment. So I think these are all really pipeline things for 2022.

Our 2023 sorry.

Got it and thanks for that and just to finish up on that topic I mean within that group of 12 tier ones any overlap with your cloud and edge business or are these all kind of net new customers.

Yeah, I I'm not sure I'm not sure what the exact percentages, maybe it's 50% or something like that.

Or maybe a little more where we have overlap just given you know most of the carriers around the world. We have some sort of business with our cloud med side. So.

Alright, great.

Okay and then last question for me was going to be in the same business IP optical on the gross margin side.

Yeah, obviously, it dipped down here in Q1, and I know you talked about double digit growth in both businesses in Q2, but any commentary on where you.

Expect that gross margin to go in Q2, and maybe through the end of the year as you continue to see growth.

Yes, So Q1 was an abnormal level for sure.

The short answer on Q2, we're expecting to be in the mid thirties overall for the IP optical portion of the business.

Theres clearly improvements simply from the higher revenue that we're projecting for the quarter and the fixed cost absorption. It takes us almost halfway there.

The mix that we're seeing in the second quarter.

A richer mix of shipments into Europe into critical infrastructure.

So I think that helps our mix a little bit from a margin perspective.

And then finally from a component or a product cost perspective, we're seeing a reduction in expedite fees as we've been engaging with our suppliers and trying to control that you may have seen our inventory level went up a little bit in the first quarter as well as we're trying to get ahead of <unk>.

Making sure where we're not scrambling for components at the last minute as much as possible. So yeah, that's kind of the bridge and how we get into the mid thirties and are in the second quarter and then we expect to continue to grind away at this and improve it as the year progresses from there.

Yeah.

Great. Thanks very much.

Thanks, Tim.

Our next question is from Dave Kang with B Riley. Please proceed with your question.

Hi, Thank you good afternoon I guess my first question. Your question is I joined the call little bit late but did you talk about.

See that you'd talked about book to bill above what was backlog.

Yes, we don't report the backlog.

It is up from.

Previous quarters, they are coming into our into the second quarter, but we don't we don't break it out in detail.

Is it roughly like maybe at least maybe couple of quarters or any any granularity.

Can you ask that again, David I'm sorry.

Your backlog I mean does it cover maybe couple of quarters at least or any comment on that.

Where we're typically not at that level of backlog the Eva will cover.

50% plus of the quarter were in and a lot of it's.

It's just the nature of the customer we're working with as we get into the critical infrastructure segments and whatnot you know a lot of what we're shipping in a quarter or the next quarter will be kind of within the 90 days prior to shipping so.

Additional thoughts on that yeah, I, just like to point out that our services backlog is very robust. So we have multiple quarters almost 80% of the year.

Kind of in the backlog, it's our product backlog that given the nature of the business and our customers is not as forward, but yeah. That's a great point. So that you know a lot of the given the significant portion of maintenance that we have a big chunk of that is already in backlog. So we're really normally when we're referring to backlog we're talking about the product.

So yeah.

Got it.

Regarding your outlook it looks like.

About $30 million to $40 million sequential growth from first to second quarter shall.

Should we expect sort of a.

Another.

Contributions from both optical and see any meaning like if there's 30 million then getting 15, each or is one going to contribute more than the other.

Yes, so we.

We expect both businesses to be up double digit percentage from the first quarter in the second quarter. So we definitely are projecting growth in both of those segments.

In a similar sort of percentage cloud and edge, maybe up a little bit more.

Got it and then regarding optical gross margin starting at 29% I think you said mid thirties.

Current quarter.

<unk> got total gross margin to be plenty of course gross margin could be 50, 556 and so.

Should we expect gross margin for optical to be maybe I don't know high thirties.

To hit your 50, 556% target for the year.

That's directionally correct.

We do expect in the second half again, partly because of volume and partly because of a mix.

Mix and controls.

Product cost that the margins on IP optical continued to grow back towards where we had been traditionally we don't think we get back to the 40% range. This year.

But we're directionally getting close there in the second half.

Got it and my my last question is once again I missed some of your earlier comments, but it sounded like you're implying the supply situation is starting to improve because of some of the other companies that reported before you are saying that things could be getting actually worse.

And certainly won't improve until until next year.

What what's your view on that.

Well, perhaps if it's all relative.

We started the year.

We obviously see we saw the pressure on supply chain and adjusted our guidance adjusted expectations on surprises at the end of quarter those sorts of things and took our estimates down.

And you know I'm glad to see we delivered on the results for Q1 as we expected so perhaps it's a bit of a timing thing we saw this coming and have taken.

Actions as well as communicated that early.

I wouldn't describe the situations at its dramatically improved and what I mean by that is you know the elevated component costs that we're seeing you know where they are here to stay for most of the year. What we've tried to do is get in front of some of the other related costs, whether it's expedite fees increased costs around shipping and logistics those sorts of things.

To try and get at everything we can control so I wouldn't I wouldn't describe it as it's gotten better but I think one we thought coming in to where we are addressing the things that are in our control.

Okay.

Got it thank you.

We have read alright. Thanks for your question and answer session and I'll now turn the call over to Bruce for closing remarks.

Well, great. Thanks, again for everyone being on the call and in the interest in ribbon communications.

As a reminder, we're holding our annual shareholder meeting on Wednesday may 25th and we're once again using a virtual format for easy of attendance. We we ask everyone to join us on that.

We also have a series of upcoming.

Investor conferences over the next month or two so and invite you to to chat with us and we'll keep you posted on progress so with that operator, thanks, very much and that concludes our call.

This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.

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