Q3 2022 Ribbon Communications Inc Earnings Call

October 26, 2022

Greetings and welcome to rebound Communications third quarter 2022 financial results Conference call.

This time, all participants are in a listen only mode.

A brief question and answer session will follow the formal presentation.

And no one should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Bill Mcmahon CEO , Sir you may begin.

Good afternoon, and welcome to <unk> third quarter 2022 financial conference.

Conference call.

Our millennium SVP of marketing and communication also on the call today are Bruce Mcclelland ribbons, Chief Executive Officer, and Mick Lopez ribbons Chief Financial Officer.

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

Certain matters, we will be discussing today, including the business outlook and financial projections for the fourth quarter of 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.

Forward looking statements.

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

I refer you to our Safe Harbor statement included on slide 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 issued earlier today as well as a supplemental slide with 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 third quarter results and our outlook for the remainder of the year.

I'm very excited to report significant improvements in our IP optical networks business this quarter.

Revenues increased significantly to $82 million up 20% sequentially and year over year.

Perhaps more importantly, our product and service bookings increased over 90% versus the previous quarter with a book to Bill of one four times for this segment.

Obviously overall demand was not an issue and we could have easily ship more product in the quarter. However, availability of a small number of key components and general logistics challenges continue to limit overall output.

The increased IP optical revenue in the quarter resulted in a dramatic improvement in non-GAAP gross margin returning to more historical levels at 38%.

The 900 basis point improvement is equally partitioned between three factors.

Volume lower supply chain cost and overall customer and product mix.

From a regional mix perspective sales in Europe increased by more than 40% versus the second quarter and North America increased by over 15%.

Our IP optical sales in India were down about 6%, which were limited by the supply of key components.

We expect India to be stronger again in the fourth quarter.

An extremely important element of our strategy is to focus on the large service provider IP routing market and the investment in and an expanded portfolio of IP routing solutions.

We've made great progress on this strategy in the third quarter with bookings of our Neptune IP routing products more than doubling compared to the second quarter, and making up more than half of the IP optical segment product bookings in the quarter.

We received a huge validation of the strategy with a major new five G mobile cell site router win and large booking with Bharti Airtel in India, one of the largest mobile carriers in the world.

This new win builds on the IP Mpls deployments, we're already doing with airtime.

In the access and aggregation layers of their network and extends our footprint to include cell site routing.

Part of our recently announced xdr family of routing solution.

Flexible 64 gigabit IP Mpls cell site router and includes the damped routing capabilities and is perfectly suited for aggregation of ever increasing <unk> and <unk> mobile traffic.

More broadly we continue to make good progress on our pipeline of major tier one mobile and telecom carrier opportunities.

Of the 18, Rfps I mentioned last call, we have wins and initial PFS from four of them and decisions are pending on three others and look very positive and we've been excluded from three of them.

Ramping to significant revenue will obviously take time, but I'm pleased with the initial success.

The incremental R&D investment, we've been making in this segment and particularly in advanced IP routing software and hardware platforms is directly linked to the momentum building with these new major customer opportunities.

But ultimately what really matters is how this translates into a sustainable profitable business.

We have a clear path to profitability with a stronger sales and improved margins and expect to close in on this goal in Q4.

We're also planning additional cost improvement actions across the company to accelerate overall profitability in 2023 and increase cash flow.

And our cloud and edge segment AT&T was a real bright spot this quarter and I'm very encouraged by the growing opportunity funnel, resulting from their increased focus on network infrastructure and reducing operational costs.

The combination of network transformation projects to significantly reduce operational costs.

Along with great sell through enterprise channel partnership resulted in AT&T, once again, becoming a 10% plus customer in the quarter.

And several of the projects, we're now leveraging technology from our IP routing portfolio to enable the migration of Tdm voice networks to IP and other multi service access integrations.

This type of solution synergy is a real bonus on top of the original <unk> acquisition strategy and one of the many ways, we're finding opportunities to sell the IP optical portfolio to existing ribbon voice over IP customers.

We were honored to have Scott Mair, former AT&T networks engineering and operations President join our board of directors last quarter. He has provided.

Adding great input on strategic direction, both from a technology and a business perspective.

Activity with our largest customer Verizon was very strong this last quarter, but many of the projects and bolt deploying products shipped last quarter, resulting in lower product sales this quarter.

Overall engagement with service providers related to the network modernization and introduction of new cloud based technologies remains very high across all regions.

Sales of our cloud and edge solutions to enterprise customers continued to build this quarter, increasing 17% quarter over quarter and 26% year over year.

Once again, we have a very nice distribution of new wins and growth across multiple enterprise market verticals, including Johnson, <unk>, Johnson and healthcare giant Eagle and retail.

With on petroleum and energy.

The University of Calgary in higher education, and Accenture in consulting.

The one thing that these companies and institutions all have in common is large complex communication needs and they all selected ribbon to help solve these challenges.

One of the key productivity improvement enablers for enterprises of all sizes continues to be the adoption of unified communication platforms.

We're partnering with Microsoft in Poly on a very successful roadshow across North America, Europe , and Asia, promoting our solutions and educating hundreds of enterprises on the merits of investing in hybrid work technologies.

Service providers continue to be a very large and important channel to market for <unk> services, such as Microsoft teams and zoom and increasingly they are augmenting their on premise solutions with public cloud managed service platforms for the session border controller and policy management functionality.

Our ribbon connect service is a perfect fit and we were recently selected by Cincinnati Bell to support their Microsoft operator connect deployment.

This complements the highly successful sell through business, we've developed partnering with many of the U S service providers using our broad enterprise edge on premise SBC portfolio.

As I highlighted last quarter.

Organization of the communications infrastructure across U S. Federal government agencies is a very large opportunity for us over the next several years.

We were awarded an initial defense agency order in Q3, but anticipated several larger deals also closing in the quarter and beginning to ship for revenue.

But timing on these projects has proven very difficult to predict while we fully anticipate there'll be awarded in Q4, we have derisked our guidance by planning them for revenue in 2023.

And finally, our focus on added value applications, such as network monitoring service assurance mobile radio network congestion and fraud and Robo, calling mitigation received a boost this quarter with a significant deal with a U S tier one operator and additional wins in France for the shaken application.

Where we have established a very strong market leadership position with three of the largest carriers.

Overall application revenue more than doubled this quarter.

As we discussed last quarter, we have a great pipeline of new products beginning to come to market.

New Xdr IP routers address a wide variety of applications from multi service edge aggregation through two high performance Metro routing for mobile and broadband networks.

Based on the latest generation of merchant routing Silicon. These built for purpose platforms compare favorably on a cost density and power perspective.

And with our routing feature set to address the large telecom IP routing market.

Following the introduction of the Xdr 'twenty 100, 800 gigabit router last quarter, we expect to begin initial shipments by the end of the year of the Xdr 'twenty 303, Terabits modular redone the platform it significantly expands our addressable market.

We already have initial customer orders and expect this to be a strong new market entrants as service providers transform their IP transport networks to leverage Hyperscale data center architectures and technologies.

The platform also supports a full set of optical interfaces, including 400 gig ZR and ZR plus coherent optical plug a bulls, enabling further convergence of the IP and optical layers of the network.

In the first half of 2023, the xdr portfolio will expand further with several new variants, including the 20 708 Terabits per second high capacity modular platform for Metro aggregation and IP transport.

<unk> thousand 700 is a unique pay as you grow architecture that allows switching capacity to be added as needed providing a very compelling total cost of ownership.

And completes a comprehensive portfolio of five G optimized IP routing solutions from the very edge of the network through to the Metro core.

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

Thank you very much Bruce good afternoon to everyone as always please refer to our Investor relations website or supplemental slides summarizing our current quarter and historical financial performance.

Third quarter of 2020 to our financial results showed improvement over the previous quarter and were just slightly below our guidance range.

Let's start with consolidated corporate financial performance ribbon generated revenues of $207 million.

Would have been $2 million higher on a constant currency basis non-GAAP gross margin was 54, 5% also impacted $2 million negatively by currency changes non.

non-GAAP operating expenses were $94 million impacted positively by $2 million from strong U S. Dollar therefore, the foreign exchange impact to ribbon and the third quarter was effectively neutral to profits.

non-GAAP adjusted EBITDA was $23 million in the quarter and non-GAAP diluted earnings per share was <unk> <unk>.

Our basic share count was 159 million shares and our diluted share count was 163 million shares.

Our non-GAAP tax rate for the quarter was 70%, which as we have stated before is derived from jurisdictional income taxation.

In August we entered into a settlement agreement with <unk> that granted ribbon perpetual royalty free rights to web RTC Gateway technology that is integrated into some of our session border controllers and application servers as consideration the company paid cash and surrendered our shares and warrants in ABCD and therefore.

The investment in <unk> has been written down to zero and our balance sheet now, let's look at the results of our two business segments, and our cloud and edge business third quarter revenue was $125 million down 12% year over year, and 9% quarter over quarter product revenue contributed $1 million maintenance.

Revenue was $56 million and professional service revenue was $18 million.

Software as a percentage of total product revenue was 61%.

All of our cloud and edge business experienced declines in revenues. It was able to maintain its high level of profitability with non-GAAP gross margins at 65% and non-GAAP adjusted EBITDA of $33 million or an EBITDA margin of 26%.

Let's turn to our IP optical networks business results, we recorded third quarter revenue of $82 million, which was an increase of $14 million or 21% year over year, and an increase of 20% quarter over quarter product revenue was up 30% compared to the third quarter of 2021.

non-GAAP gross margin for error.

Optical was 38%.

Nine percentage point increase over the previous quarter and a one percentage point higher than the third quarter of 2021 as Bruce mentioned, the significant improvement was driven equally by higher volume lower supply chain costs and overall product mix.

non-GAAP EBITDA loss for the quarter of $10 million was reduced by half from the previous quarter driven by the increased revenues and margins were stable expense controls.

Here are some consolidated key performance indicators for the company in the third quarter maintenance.

Maintenance revenue was $72 million, which represented 35% of total revenue and was constant year on year.

And customers were 46% of revenue and included both Verizon and AT&T as providing over 10% of revenues for the quarter.

Service providers accounted for 70% of our product revenue and enterprise customers represented 30%.

International customers provided 58% of revenue, which is a higher percentage from previous quarter commensurate with the increase in IP optical business as a percentage of total revenues.

We've got healthy booked revenue, excluding maintenance ratios of approximately 128 times for ribbon 145 times for IP optical and 1.13 times for cloud and edge.

Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $56 million.

This is an increase of $18 million from the end of the second quarter demand. In addition to the cash balance is our successful $50 million capital raise led by some of our major investors, including Neuberger Berman J P Morgan and Swatch group.

Our term loan is currently at $335 million outstanding as we have paid off $65 million or 16% of original balance or $100 million revolver remained undrawn at quarter end.

For the third quarter of 2022, we met our term loan covenant metrics as a result of continued profitability constant level of interest rate hedged by our fixed rate swap and application of the equity tier clause in our loan agreement during.

During these times of increasing interest rates ribbon enjoys the benefits of our fixed rate swap that limits, our LIBOR rate to only 90 basis points compared to the current one month spot rate of about 350 basis points.

We had a use of cash from operations of $18 million, driven mostly by the timing of deferred revenues and contract manufacturer payments major.

Major cash outlays included $26 million reduction of accounts payable $7 million increase in inventory for strategic components and to support revenue growth $7 million in capital expenditures, including $3 million for the web RTC perpetual license and $5 million of our debt.

Pay down we're expecting a return to positive cash flows in the next couple of quarters.

In the third quarter revenue continued to show resiliency in our profitability as we navigate it through supply chain disruptions global inflation increases in interest rates in U S dollar appreciation.

With a very positive indicator of revenues and bookings growth in optical we're beginning to see the benefits of our investments in our strategy now to turn the call back to Bruce.

Thanks, Nick.

As we anticipated the third quarter was a market improvement in our IP optical networks business in virtually all key metrics.

The significant investment we're making in developing new products is beginning to show results underlined by the recent <unk> cell site router win with Bharti Airtel and the very strong bookings in the quarter.

Supply chain volatility continues to be a background challenge, but we mitigated much of the impact with some increase in working inventory and expect gross margins in the fourth quarter to be consistent with the previous quarter.

Overall, we expect further revenue growth in our IP routing and optical transport segment in the fourth quarter across the majority of regions supported by significantly higher backlog entering the quarter and approaching profitability on an adjusted non-GAAP basis.

Similarly, we expect the fourth quarter to be sequentially stronger quarter for our cloud and edge business with good backlog and visibility with <unk>.

<unk> traditional service provider and enterprise customer base.

In particular, we anticipate a significant increase in session border controller revenue with.

With increased shipments of high capacity SPC core platforms and capacity licenses to both service providers and enterprise customers.

As well as enterprise Sbcs sold primarily through our service provider customers and increasing usage of our as a service ribbon connect platform.

The U S. Federal network modernization projects remain a large opportunity for us. However, we are taking a more cautious approach assessing the timing of awards and have taken that into account with our revised guidance.

As we look into 2023 I remain very positive on the outlook for our diversified business and the momentum we continue to build with our expanded product portfolio. The.

The recent successful equity investment in the company gives us the resources, we need to realize our vision and we're now starting to see results and this is just the beginning.

Telecommunications industry tends to weather macroeconomic recessionary effects better than almost all other industries.

Imperative that service providers continue to invest in new technologies to keep pace with the exponential growth in traffic.

However, we remain watchful of any signs of reductions in capital investment and need to be flexible to quickly react to the changing environment.

From an operating cost perspective, we are planning.

And implement additional expense reductions going into 2023 to improve profitability and cash generation.

In particular, I see market opportunities that would be more efficiently addressed by further functional integration across the company.

And as we focus on the best opportunities for profitable growth accelerating our path to improve profitability and cash generation.

With that backdrop, our expectations for the fourth quarter are as follows for.

For revenue in a range of $220 million to $240 million.

non-GAAP gross margins of 53, and a half to 54, 5%.

And non-GAAP adjusted EBITDA of $30 million to $36 million.

I'd like to thank the entire ribbon team and our partners for navigating a complex operating environment and look forward to a strong finish to 2022.

Operator that concludes our prepared remarks.

We now open up for a few questions.

Thank you.

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<unk>.

One moment, please while wheel.

Paul.

Our first question comes from Paul Silverstein with Coca.

Colin Please go ahead.

Cole worse.

Bruce in America.

Got several questions Jordan Hi.

High level building Dell apologize those on the call.

First off can you tell us I know you gave the book to revenue optical business.

Could you give us the book to revenue and culinary so you'll see it in the deck, but thoughtfully roadshows.

Yes, I think it is in the well it's somewhere it's 1.13 <unk> in the quarter.

And of course.

For the overall company.

Don.

128.

Sure.

And then in terms of trying to decipher.

Demand secular demand versus macro.

I apologize if you answered this in the prepared remarks, but what are you seeing.

Demand trends in the macro weakness, especially outside of the U S driven.

FX and given europes exposure to energy in particular, it certainly doesn't seem to be worsening the optical business when how much of the cloud nodes weakness or let me what your response.

What youre seeing in both businesses.

Yes, so thanks Paul.

And I guess, if I break it into two pieces certainly the the demand perspective, the demand backdrop around IP optical.

Improved significantly in the third quarter as we as we expected and as we have guided and it's a combination obviously of the momentum around the new products, we're bringing to market.

And in particular as I mentioned the bookings in the third quarter increased surround IP routing in particular.

Now being more than half the bookings in the quarter for that segment was really good to see.

Underpinned our underlying by this new deal with Airtel in India.

I also I think mentioned.

The demand in Europe , and the revenue in Europe , or Europe , Middle East Africa kind of the whole EMEA region was up pretty significantly in the quarter as well.

Obviously, the cloud and edge business was down from previous quarter down from the previous year I'd.

I'd mentioned in particular, we had a great quarter with Verizon in the second quarter and a lot of the activity in the third quarter was deploying some of those products. So so revenue was kind of naturally down there.

Offset by real strength with AT&T and as I mentioned, you know now kind of once again, becoming a 10% plus customer in the quarter.

So those are some of the dynamics I think that affected the third quarter.

As we look into the fourth quarter.

Again, as I think about the two segments.

In the IP optical business now what we're projecting is really some increases in each of the geographies around the world for the most part every one of them. We're expecting some level of increase we don't think Europe is strong from.

An increase perspective as what we saw in the third quarter.

And obviously part of the reduction in <unk>.

In guidance here was around being a little more cautious around what happens in Europe in particular in the fourth quarter.

As I also mentioned, we have some really significant opportunities in the federal space, but just trying to predict the exact timing of when some of the deals go into procurement and when they get closed and as they flow through our partners has just been LNG to nail down exactly so I've tried to be a little more cautious in what we see happen in the fourth quarter.

<unk>.

Bruce I appreciate that you all are not the largest supplier in the world.

It would not be unusual or was a divorce between these larger trends and what you actually see for better or worse relative to your commentary about U S federal about Europe , and even beyond those two.

Are there.

Is the caution or the cautious note about federal in Europe is that because of either your schedule and or European carriers or customers have communicated junior team.

Due to macro concerns or in the case of Europe , perhaps Netflix as well.

They're reevaluating pausing slowly elongated purchasing cycles any of the traditional warning signs that or not just about rhythm, but broader in terms of these broader trends and again. The question is not just a new special Europe , but general Asia Pac any of your service providers to any appreciable extent, causing you concern.

Same thing with U S federal.

Yes, so just to provide a little more color in particular around Europe .

Quite a bit of our business in Europe is with critical infrastructure providers. So it's a range of transportation.

Oil and gas railways.

Those types of customers that are <unk>.

Investing in programs and projects to build out their own infrastructure and I think we've got a great pipeline of opportunities and nothing's happened that's caused anything to really disappear.

I just think.

I expect right that the decision making on some of these takes longer given the macro environment now clearly in Q3, we saw a great increase in business in Europe .

Over the previous quarter, and we expect Q4 to be a strong quarter, but as I look at individual opportunities and trying to predict exactly when they close and when they go to revenue.

Trying to be a little more cautious so it's not so much.

Our macro service provider commentary as it is more specificity around what were selling in Europe .

<unk>.

Federal somewhat similar I mean, theres, a whole lineup of different programs being.

Uncompleted and bid.

And as I mentioned on the last earnings call. There is a really significant legacy infrastructure of Tdm.

Interfaces and products throughout the federal communication infrastructure and.

And all of us need to be replaced and moved over to an IP infrastructure over the next couple of years.

Anybody that's got experience working with the fed knows the timing on when things go through procurement and get awarded it can be a little unpredictable. So again, it's not a real commentary on something that's changed just trying to predict the exact timing is is really the challenge.

Got it what it shows you two questions. If I may only be at school. It sounds like the strength was broader than Airtel. Let me ask you. The question how much of a significant increase in bookings as.

As a function of how much of that goes well beyond words.

Yeah, So airtel has been a significant customer.

For us for a while obviously theyre not at 10% plus customer where they would be they would be listed that way. So there are a portion of obviously the strength in the third quarter, but just just a piece of it so it's not like it was the.

The dominant piece or anything like that I mean, it was it was it was a piece of the growth but.

Just seeing the revenue numbers, obviously out of Europe tells you that there was strength elsewhere as well.

And that's also true of the bookings comment Bruce Europe , with 90% jewelry cumulatively optical on the bookings, yes, exactly exactly same commentary on bookings yes.

Alright.

Again I appreciate your four smaller sized business rolls into a central neurological and so you wouldn't necessarily have experienced the problems recently.

Supply standpoint.

As Bill said Nokia last week said that demand for our assortment is very strong but supply chain remains very challenged she has said that back in early September that doesn't seem to be restricting your growth again I. Appreciate the membership for small units or less any insight you can share, but what youre seeing.

Yes, so if I start with supply.

It is still a battle hand to hand every every day every week on various issues that I mentioned.

I called it a background activity Scott just mentioned I'm, a little tired of talking about supply chain frankly, but.

There are a couple of specific.

Component areas that are still problems force that limit the amount that we can produce and ship in a particular quarter I mentioned in my in my opening that India in particular in the third quarter was down or or.

While lower than I expected it to be primarily because of specific component issues around the products, we ship into that region.

So it's still it's still an issue we could've obviously given the bookings that we had in the third quarter, we could have shipped a lot more in the third quarter, if we'd been able to supply it.

So.

That continues to be an issue just general logistics continues to be an issue.

<unk> products around the world again, where maybe it's a reflection.

On where we're doing business in and scope and size et cetera, but as we completed the quarter. We had a number of shipments that ended up in transit as we were completing an and and should have had a stronger finish to the third quarter. So all those things kind of contribute and I can certainly recognize.

Or relate to the commentary that Nokia had.

More broadly about demand going forward and I mentioned it in my comments you know I am.

Watching really carefully to see signs of reductions in capital spend and budget and I do think.

We will expect to see just more.

Taking more time for decisions to get made on on investments and obviously the macro environments not.

And not a plus from an overall capital allocation and spend perspective, I know as you listen to some of the carriers here in the U S over the last week.

I think both AT&T and Verizon commented on their capital spend plans being.

Unchanged for the rest of this year at least anyway. So we'll see what happens in 'twenty three but.

They have not announced any kind of macro level reductions there that I've seen.

Bruce just to be clear the concern you just expressed that as you'd be appropriately.

Concern just given history, that's not because the carriers of any magnitude.

Number attritional number had communicated to that they are currently planning to cut back.

Is it based on just general appropriate concern or is it actually based on conversations that you've had with you and your team have been scarce.

No I think what we've heard is what they've said publicly and again I haven't seen any.

Public statements around reductions in capital, but I don't think people have put out their plans in detail for 'twenty three yet so.

That's where my my Cautiousness I guess comes in just trying to.

Look a little further into the future as far as this year capital spending that seems to be pretty consistent.

One last question I promise on the India opportunity, you've just had announced the GL.

Four key mantra about political but these are massive budget buildup youre talking about imminently been you've already started over the next 18 months its going to be a ton of spend in the last one which have walgreens due to your out of the picture.

Essentially you would have seen a nokia.

What are you seeing in terms of optical in India has that already started.

<unk> saw a trusted off your router you referenced part of that but.

Where the funds are assurance <unk> build outs whats the outlook for the pipeline there the opportunity over the next 18 months or so.

Yes, this new cell site router opportunity is directly linked to the investment around the <unk> infrastructure build out and I think as you know they are just starting so there's a long runway ahead, there and that that architecture and that <unk>.

Series of products apply not just to our bharti, but too.

Most of the carriers around the world building out <unk> infrastructure.

And.

It's just one product in the portfolio, but the reason we have been making the investment we have we really see a significant opportunity and a spot for us to really grow the company.

In addition to the the optical business that we're doing which also grew clearly in the quarter.

The growth in IP and kind of the increased balance in the portfolio is really exciting to watch here.

Alright, I'll pass along thanks, Bruce appreciate the response, thanks, Paul I appreciate it.

The next question comes from Dave Kang with B Riley. Please go ahead.

Thank you and good afternoon. My first question is.

Just wanted to clarify did I hear you correctly. When you said and then you had talked about margin is that one of the reasons margins increase was because your supply chain costs went down did I hear that correctly.

Yeah, Hey, Dave.

So you did end and there was essentially three reasons why the IP optical margins improved quarter over quarter. One was lower expedite fees that we were paying in the quarter and of course, we just had a good discussion with Paul on supply chain, but no in a variety of areas. We've seen improvements obviously we.

<unk> also invested in incremental inventory and that's allowed us to.

Avoid.

As much as possible any expedite fees and that flowed through and it was about a third of the improvement in the third quarter.

The other two pieces, just overall volume and fixed cost absorption, obviously improve the gross margin percentage in the quarter and then the third was just general mix on what products and what regions, we're shipping into in the quarter.

And regarding the expedite fees, either more room to could decline or like compared to like <unk>.

Pandemic situation, where are we in terms of expedite fees.

Yes, that's a great question. So we are still paying some amount of expedite fees each quarter in both businesses and we make kind of a game time decision on do we do we wait and ship a little bit later or do we pull in or accelerate and pay incremental fees.

And a lot of it depends on obviously the dialogue with the customer and how soon they need the product and those sorts of things. So we are continuing to pay some amount of expedite fees, we anticipate paying some still this quarter around making sure we get products to customers.

And regarding the supply chain situation.

It sounds like.

Last quarter second quarter, I think you quantified that as about $10 million impact looks like since you missed the bike and $11 million this quarter.

It was about $11 million as far as how much you that.

Revenue on the table.

Yes, so I would say half of it was directly related to supply chain and logistics right at the end of the quarter and could have easily gone either way. The other half we had expected some of these federal deals to start to come to revenue in the third quarter and that was the other piece of it Dave.

We'll add.

Of course with the incremental backlog that we've been able to accumulate in the third quarter.

We have kind of a growing impact from supply chain clearly, we could have shipped a lot more in the third quarter given the bookings if we'd been able to build more I had not anticipated that in the guidance. So I don't call that.

Shortage relative to the projection but.

We enter the fourth quarter with stronger backlog than we've had.

Probably ever at this point, so a direct reflection on the bookings momentum in the third quarter.

And so just wanted to be clear.

You can see impacted see anymore than IP optical is that correct.

I think the.

The shortfall relative to our guidance was evenly split between the two businesses most of the impact on cloud and edge was the federal opportunities and most of the impact on IP optical was simply around components and logistics at the end of the quarter.

Okay.

And just wondering whats the rough mix between optical versus IP and what our.

I assume the margins are quite different.

The margin differential between those two.

Yeah. So just to comment Directionally I guess, because we don't we don't break that out specifically, but in.

In the third quarter, obviously, both IP and optical grew from a revenue perspective.

And I have kind of characterized it as 60 40 traditionally and third quarter was similar in nature.

So did comment though that from a bookings perspective IP increased significantly.

<unk> doubled quarter over quarter from a bookings perspective and that they were more than half of the bookings in Q3.

That's what I expect I mean, given the expanding portfolio around IP routing that's definitely.

A stronger growth area going forward.

From a margin perspective.

It'll it'll be different between IP and optical in general.

Specced overtime, the IP margins to be stronger than optical margins I will say it depends on the type of product that we're shipping in what region, we're shipping it into as well. So it can it can vary days, but in general that's a directional comment.

Got it and then obviously with a one five book to Bill.

It sounds like yard.

Building backlog can you just talk about backlog situations I'll be talking you know.

Pretty significant increase in backlog like some other.

<unk> companies.

Any color on backlog situation.

And do you expect that to increase again in fourth quarter and if so when does it peak and when do you start to convert that to revenues.

Yeah. So.

With revenue increasing in IP optical in the third quarter to $82 million and the book to Bill increasing to 1.45 of course, you can easily do the math on that that was a pretty big significant increase overall.

Bookings and in fact, the way I think of it as I think about momentum if I add revenue and bookings together. This was by far the best quarter, we've had for IP optical.

And obviously a lot of that bookings goes into backlog going into Q4, and I think our we don't report our backlog, but our backlog.

10% plus up from where it has been entering quarters in the past so.

That gives us a little better predictability and outlook going into the fourth quarter and clearly the the thinking is in the fourth quarter. We're building backlog for 2023 and expect something similar in the fourth quarter, we'll see how we do but that's that's the outlook we have.

Got it thank you.

Okay. Thanks, very much Dave.

Okay.

The next question comes from Greg <unk> with West Park Capital. Please go ahead.

Thanks could.

Could you hear me.

Greg We got Ya.

Okay. Good.

Bruce towards the end of your prepared remarks, you said that.

We are anticipating additional expense reductions in 2023, and further functional integration if I could pretty much quote you on that can you expand on that a little and tell us what you mean by that give us some color. Thanks.

Yeah, Yeah. So thanks, Greg.

A number of the opportunities that we're seeing now include technologies and products from both portfolios from both the cloud and edge voice core technology as well as in particular IP routing technology and as you see these networks transition from Tdm interfaces to overwrite overnight.

We're able to leverage the technology coming out of the IP optical business and I think.

Today, we are organized around two business units and global sales teams et cetera, we're looking at different ways too.

To take advantage of what we're seeing is the market opportunities and bring these organizations more closely together.

And particularly around how we serve the customer how we do professional services, how we do maintenance and support I think there's opportunities to be more efficient and more effective frankly as we bring the organization more tightly together you could think of it as kind of the next phase of integration. After we brought the two companies together.

And we will have more detail on that obviously as we get into fourth quarter results and outlook for 2023, but that's kind of the color behind the scenes.

Got it got it and just a quick follow up to that same topic as you do that.

Have you explored any possibilities of strategic partnerships with other vendors.

That may have complementary product fit and similar sale.

Sales and marketing organizations.

Yes, that's actually a great question, Greg there's a number of threads around that.

As you think about the broadband access networks and for the most part we're not we're not in the access portion of the network.

There's a number of companies there that I think are good partners for US is we have a complementary set of products.

So that's one area that's fairly active the other is really around the kind of the other end of the network as you think about automation and orchestration.

Clearly, we're focused on the optical and IP domains that we're operating in but that fits into our broader automation and orchestration environment that includes the ran network in the access network and I think theres. Some some really interesting partnership opportunities to accelerate our vision around products like Muse that are.

Kind of the foundation of orchestration for the entire network.

So there's a couple of real good examples that we're exploring there Greg.

Thank you.

Alright, Thanks, Greg.

Next question comes from Tim <unk> with Northland Capital markets. Please go ahead.

Hi, good afternoon.

A couple of questions here, but just wanted to follow up on something you just commented on which is when you.

<unk> talked to expecting something similar in Q4 and IP optical is.

Is that a one 5.5 book to Bill again or at 10% backlog increase or what are you referring to there.

Yes, maybe I should've been more clear Tim So our outlook for Q4 assumes growth in IP optical revenue, obviously and I think if you do the math, that's 10% plus growth in revenue.

And if we think about the bookings target for Q4 from a dollars perspective.

Obviously, something similar to what we've done in Q3 overall for the company not necessarily a one for five.

Bookings.

Our ratio.

Okay.

I'll try to cover that one a little bit later on them.

Fine.

<unk>.

In terms of the and thanks for the update and the detail on the.

RFP pipeline I think if.

I recall properly.

<unk> taken that number to 18th tier ones and I think you said you won four of them are always pieces of four <unk>.

Couple of questions on that which is one can you give us any metrics around the aggregate value of those wins either in total or annually I think.

Characterize this pipeline as you know multi 100 million in annual revenue in the aggregate so relative to that.

On the one hand on the other to what extent were those wins.

Contributors to Q3 revenues or is that more into backlog and into 'twenty three should we think about that.

Yes, so the.

Bharti cell site router or as an example that I can talk about.

So it is an example of one of those opportunities in.

Those are significant deals for us are the initial order they kind of takes us through.

The first part of next year.

Yes.

Want to give specific numbers, but it's double digit millions if you will so.

These are all as you characterize them you know these are tens of millions of dollars each.

And obviously ramp over time, if you think about the Rogers deal that.

We're now in kind of full deployment mode with it took a while to ramp to that level, but we're at that level of spend on an annual basis and then some so.

Each one of these are pretty meaningful for.

Increases for for where we're starting from.

Well right.

And so given that's the case and we expect continued fairly robust bookings in Q4, given the backlog youre going to exit with I mean, you grew with some supply constraints you are able to grow IP optical you know kind of mid single digits. This year.

I would imagine the expectation might be for a pretty significant acceleration in that growth rate in 'twenty three without getting ahead of ourselves sufficiently alright.

Yeah without getting your comments.

Yes, sorry, sorry, Tim, yes, without getting to the point of providing.

Specific guidance for next year, obviously the investment we've made in this product line.

We're expecting significant growth going forward and we've obviously said that for a while we're now seeing some of that start to come into play.

In particular, the the IP routing piece that we're investing in and the momentum there I think is a game changer. So.

We're expecting good growth going into next year and that obviously.

What really matters is how do we get to better profitability in that part of the whole picture here as well as we go into next year and and help ourselves by lowering the operating cost a little bit and and getting the growth and the margin improvement at the same time.

Great and last one for me I think you've talked in the past about approaching.

Approaching 40% gross margins in IP optical through the end of the year, you, obviously got pretty darn close in.

In Q3 as you know.

Given what looks to be a little.

Better than expected performance in Q3, any any update to those targets.

And I guess I'll ask the same non question about next year, I mean, I imagine given the mix improving on the IP side.

Do you feel like 40% plus is a pretty reasonable target.

Yes, so if I think about nearer term.

What we expect looking at the mix in the fourth quarter is gross margins on both businesses similar to what we just did in the third quarter.

So call it 38% on IP optical.

There is room for improvement excuse me on those numbers, particularly around the supply chain costs. So if I look at direct margin and kind of.

Exclude the expedite fees and things like that I like what I've seen.

We still need to see better improvement around what we have today around the <unk>.

Securing components and then I think we close in on that target.

Okay.

Thanks.

Thanks, Tim.

Next question comes from Eric something Gary.

J P. JMP Securities. Please go ahead.

Yes, thanks for taking the question.

First off I'm trying to gauge the incremental change in the supply chain did it change from from Q2 or how would you.

What would you describe the status relative to the last couple of quarters.

Yeah, Hey, Eric Yeah. Good question, So I would say we have had.

Incremental improvements in the Q3.

It's more positive than it was in Q2 that doesn't mean, we don't have issues and shortages and a variety of things but in.

In Q3, we were able to solve many of them. We had a couple of dozen very specific Intel parts as an example.

That meant we couldnt build to the full level, we expected and we ended up having.

Hi.

<unk>.

Material that at 99% of what you needed to build the <unk>.

One key component. So there was some of that in the quarter.

But as I just commented on on expedite fees and whatnot, obviously, they came down in the quarter. So incrementally improve from where we were in the second quarter like what do you what do you think thoughts on that.

I agree I think it has improved we're still not out of what's yet.

Particular.

Logistics and transportation costs are more stable and we're able to move things around much better.

And the basic parts, which were spiking up and down in the beginning of the year. They are more readily available now as those special components that are still very dear and far out.

Mike I'll, just add one more comment to that.

Intimately and I know some of some of our peers have commented the same when we have to look at some design changes in some cases to beyond components that are more readily available and of course, making hardware design changes getting that cut in getting approved by customers takes time.

So we actually see is as we get into kind of the second quarter next year another.

Step up in improvement and stability around supply chain because some of the products that we that we know we're just going to continue to struggle on on some parts will get designed on.

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