Q4 2022 Ribbon Communications Inc Earnings Call
Greetings and welcome to the Ribbon Communications fourth quarter 2022 financial results Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being <unk>.
Recorded it is now my pleasure to introduce your host Pizza Milan in senior Vice President Global marketing. Thank you Peter you may begin.
Good afternoon, and welcome to ribbons fourth quarter 2022 financial results conference call.
Become monnion SVP of marketing IDE Ribbon communications also on the call today are boots, Maclennan 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 or may be on dotcom.
Both our press release and supplemental slides are currently available.
The matters, we'll be discussing today, including the business outlook and financial projections for the first quarter of 2023 and beyond are forward looking statements.
Such statements are subject to the risks and uncertainties that could cause actual results to differ materially from those contained in 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.
In addition, we will present non-GAAP financial information on this call.
Cause affiliation to the applicable GAAP measure are included in the earnings press release issued earlier today as well as 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.
Thanks, Pete and thanks to everyone for joining us today to discuss our fourth quarter results and our outlook for 2023.
I'm very pleased to report solid financial results for the fourth quarter, the strongest quarter of the year with year over year growth in revenue and earnings.
Overall sales were above the midpoint of guidance growing 13% sequentially and 1% year over year adjust.
Adjusted EBITDA increased 25% versus the third quarter and 11% versus the fourth quarter of 2021.
Bookings momentum continued with book to revenue of $1, one times, even with higher sales levels in the quarter.
Operating expenses were slightly higher than we projected primarily related to higher customer related travel expenses and variable sales compensation kantar.
Continued elevated supply chain cost and component expedite fees, along with customer and product mix resulted in gross margins a little below our initial projections.
The highlight of the quarter was the continued improvement in our IP optical business with sales improving across all regions and multiple new customer wins in.
<unk> momentum continued to grow in our IP routing portfolio, which we believe will only get stronger as additional new products enter the market this year.
But we also posted good results in our club niche segment with one of our strongest quarters ever for sales to enterprise customers and a strong quarter for session border controller sales.
All of this resulted in $16 million of free cash flow in the quarter and $67 million of cash at year end overall it was a very good quarter and sets a great Foundation for 2023.
Now a little more detail on each of our operating segments.
This was by far the strongest quarter for our IP optical networks business since the <unk> acquisition in early 2020 revenue was $97 million growing 18% quarter over quarter following growth of 20% in the third quarter.
Sales of optical transport equipment grew 16% versus the third quarter and were up 6% year over year.
Sales of our IP routing portfolio grew even faster, increasing 21% quarter over quarter, and 34% versus the FERC fourth quarter or late 'twenty one.
Production of several of our high volume access routers continue to be limited by availability of very specific microcontroller parse, which would have further increased our Q4 revenue by approximately $10 million, but which has now moved into backlog for the first out to May 23.
We expect to have a new design in production by the end of the second quarter as well as additional supply eliminating this bottleneck.
The EMEA region was once again, the strongest region for IP optical sales across a broad range of customers in Continental Europe Africa, the U K and the middle East.
<unk> include growth with the Israeli defense forces.
Your own networks, formerly Corning services.
British Telecom and the finished defense forces.
We also had several new wins in Europe at the end of the quarter, including expansions with the Swiss Army and German railway operator Deutsche Bank.
As well as the Czech Republic Science, and Education network operator.
We believe these new wins will get us off to a good start in the first half of 2023.
The most significant growth this quarter was in the Asia Pac region with multiple key wins, including Eastern Telecom and then city van in the Philippines via tell in Vietnam, Taiwan, mobile and multiple operators in Africa, including MTN global connect and bulk of it.
And we were very excited to be awarded for the first time ever a portion of parties optical transport long haul TWD M network in India is a major.
Your accomplishment the team and highlights the completeness of our portfolio in a highly competitive and fast growing market.
These are the exact type of tier one operators, we're targeting to provide additional scale and predictability for the business.
We also continue to make progress on our strategic goal of gaining scale in the critical North American region with full year sales, increasing more than 30% versus 2021 and exceeding 10% of overall IP optical sales for the year.
Opportunities with additional major tier one mobile and telecom operators also continued to progress.
A total of six wins at this stage, where we have now received orders are at various stages of early deployment and.
And at least eight additional highly active engagements that have potential for incremental revenue in 2023, along with a variety of other engagements in early stages.
This funnel is key to our strategy to drive longer term scale and growth for this business and incremental to the current base.
Product and service bookings were strong again this quarter keeping pace with increased shipments with a 1.15 times book to revenue in the quarter.
Optical bookings were particularly strong on the back of several new customer wins in Asia Pac.
Now some highlights from our cloud and edge business.
Sales in the fourth quarter increased 10% versus the third quarter, but were down 7% year over year. Despite.
Despite the lower sales adjusted EBITDA margin for the segment improved to 117 basis points versus the fourth quarter of 2021, primarily due to spending improvements implemented throughout the year and continued strong mix of software sales product.
Product and service bookings were strong at 1.15 times.
Our focus on the faster growing enterprise market segment showed positive results. Once again, this quarter with revenue growing 67% quarter over quarter and 7% year over year.
Reaching 37% of cloud niche product and service sales in the quarter.
Sales were distributed across a number of market verticals, including customers such as Liberty mutual insurance HCA in health care, J P, Morgan and Vanguard and financials and Qualcomm and technology.
We believe ribbon is uniquely positioned to meet the large complex communication needs of these fortune 500 companies.
Our business model and the enterprise market continues to evolve with an increasing mix of annual enterprise wide license agreement and as a service recurring monthly subscription revenue.
Multiple significant opportunities in the federal government segment continued to progress in the quarter.
We're working with a number of important channel integration partners, including Dell to provide a comprehensive pre integrated federal solution I remain very excited about the potential opportunity and expect revenue from these large complex projects to begin to build throughout the year.
From a product mix perspective sales of session border controllers and associated policy routing products were strong in the quarter, increasing 59% from the third quarter.
Shipments of both.
Core high performance Sbcs as well as enterprise edge appliances were strong serving both enterprise and service provider segments.
We also had a strong quarter with cloud communication partners, such as bandwidth Softbank, and telecom and Peerless and contact center provider such as in contact.
We also continued the momentum behind our analytics offerings, we have new international wins with Optus in Australia, and colt in France for our fraud, and Robo, calling prevention application.
By leveraging cloud technologies these customers benefit from a fast and seamless deployment experience, helping them protect customers from a wide variety of annoying and potentially malicious calls.
Shipments of our voice network transformation solutions were consistent with the previous quarter with a continued shift towards telco cloud solutions, such as our virtual see 'twenty call controller.
We were excited to announce a strategic win with Liberty Latin America as they consolidate multiple legacy platforms across their footprint onto a modern cloud based architecture, while also leveraging our advanced analytics application suite.
There remains a strong pipeline of similar network modernization opportunities that will provide a solid underpinning for the business in 2023.
Revenue with our largest customer Verizon once again exceeded 10% of our overall sales and was consistent with the third quarter.
Finally fourth quarter is our strongest period for renewing maintenance and support contracts and bookings were even stronger than usual and underpins the profitability and stability for this business.
Our focus on securing multiyear agreements as a key part of our strategy and we've broadened our offering to include a variety of value added services, including software upgrade assurance to further increase our value and attachment rate.
With that I'll turn it over to Nick to provide additional detail on our fourth quarter results and then come back on to discuss our outlook for the first quarter in 2023.
Thank you Bruce in the fourth quarter of 2020 to our financial results showed good improvement over the previous quarter and prior year with revenue growth momentum for our IP optical networks business and continued profitability and contributions from our cloud and edge business.
Please refer to our Investor Relations web site for supplemental slides summarizing our fourth quarter 2022 and historical performance.
Start with consolidated corporate financial performance in the fourth quarter of 2022 River generated revenues of $234 million, which is an increase of $3 million one 3% from the prior year driven by a 17% increase in IP optical networks that compensated for a 7% decrease in climate edge.
non-GAAP gross margin was 52, 4%, which is 150 basis point decrease from prior year entirely driven by the increased percentage mix of I B optical networks from 36% of total ribbon revenues in fourth quarter of 'twenty, one to over 41% in fourth quarter of 'twenty two gross margins were unchanged.
Year over year for Cognex at 64% and for IP out to go at 36%.
non-GAAP operating expenses were $97 million, a decrease of $5 million or 5% year over year as we continued to reduce labor costs, even in an inflationary environment and look forward to additional efficiencies in 'twenty two 'twenty three.
non-GAAP adjusted EBITDA was $29 million for the quarter, which is an increase of $3 million or 11% increase from prior year.
non-GAAP diluted earnings per share was nine cents higher than our guidance as a result of improvements in our global tax provision estimates are.
Our non-GAAP tax rate for the quarter was three 2% to reflect the modification of our quarterly tax provision our non-GAAP tax rate for the full year 2022 was approximately 31%, which is an 800 basis point reduction from 39% in the prior year and 2021.
Our cash taxes for 2022 were $16 million, which were in line with our 2021 cash taxes of $13 million. Our basic share count was 168 million shares and our diluted share count was 172 million shares for the quarter.
Now, let's look at the results of our two business segments.
In our cloud and edge business fourth quarter revenue was $137 million down 7% year over year and up.
10% quarter over quarter software as a percentage of total product revenue was 59% once again, the cloud and edge business contributed robust gross margins of 64%, which led to a $36 million EBITDA or 26% of revenues for the full year gross margins were 65%.
And $128 million or 25% of EBITDA margin, showing the resilient profitability and cash contributions from this business.
Let's turn to our IP optical networks business results, we recorded fourth quarter revenue up $97 million, which was an increase of $15 million or 18% quarter over quarter and 17% year over year.
non-GAAP gross margin for I B optical was 36%, which is 170 basis points lower than the previous quarter.
20 basis points higher than the fourth quarter of 2021.
As Bruce mentioned gross margins were below our projected level due to supply chain issues with expedite fees higher than initially projected and lower margins on several new customer projects associated with the initial infrastructure portion of the project.
non-GAAP EBITDA loss for the quarter was $7 million or 8% of revenues, while still negative are EBITDA improved every single quarter over the previous quarter in 2022.
Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $67 million. This is an increase of $11 million from the end of the third quarter as expected we returned to positive cash flow in the quarter as we had cash from operations of $16 million.
Our term loan is currently at $330 million outstanding as we have paid off $70 million or 17, 5% of the original balance or $100 million revolver remained undrawn at quarter end.
For the fourth quarter of 2022, we met our amended term loan covenant metrics given that we revert to the original leverage M.
And fixed charge coverage covenant metrics in 2023, we are exploring alternatives to ensure credit facility compliance such as paying down debt or raising additional capital while we have confidence in executing a plan to ensure a term loan covenant compliance as you may understand there's always a risk of noncompliance, which would.
Require us to reclassify the long term debt into current debt for the year end 2020 two balance sheet.
Ribbon enjoys the benefit of a fixed rate swap, which is valued at about $25 million on our balance sheet.
Our effective LIBOR rate to only 90 basis points compared to the current one month spot rate of about 450 basis points. Please.
Please note that we are working with our banking syndicate to change our base rate from labor to so for the secured overnight financing rate.
Even though short term rates were up significantly we kept our interest rate total charges flat to 2021, two debt repayments in our swap hedge instrument.
Rubin was also very effective at managing other expenses under our control in spite of increased inflation supply chain disruptions and higher labor costs, we were able to contain or 2022 operating expenses to almost the same level as previous year, while simultaneously investing more in IP optical research and development.
Finally, we were able to decrease our non-GAAP annual effective tax rate as we said by 800 basis points with changes to our global tax provision.
Now I'd like to turn the call back to Bruce to provide more comments on our outlook for 2023.
Great. Thanks, Nick.
As we enter 2023, the operating environment for the telecom industry remains healthy despite a variety of macro pressures, including higher inflation and operating costs consumers.
Continue to rely heavily on the services provided by our customers in order to enable a digital mobile lifestyle and competition for consumer dollars remains fierce.
It is imperative for our customers both service provider and enterprise to invest in their communication infrastructure in order to stay competitive.
There are a number of common themes that we hear from our customers on how they are prioritizing their investment in 2023.
First and foremost mobile remains the top priority for the majority of operators. The adoption of <unk> has hit a tipping point with mass market adoption exceeding 50% in many countries.
The higher speeds and improved coverage enabled by <unk> technology greatly increases the data traffic on the network.
This in turn is a major catalyst for the deployment of increased fiber capacity from the radio head to the core network and broader deployment of IP mpls to the edge of the network.
The next major priority is to increase the capacity and reach of the fixed broadband network avail.
Availability of fiber to the home Internet access for the majority of consumers is an imperative for practically all countries, reflecting the adoption of hybrid work and education practices.
Significant federal funding is supporting more aggressive business plans and a supercharged investment cycle.
These first two priorities as an even higher level of attention on total cost of ownership the third key focus area incur.
Increased competition and impacts from inflation puts a premium on every dollar spent in a spotlight on the cost of maintaining both new platforms and legacy infrastructure.
Solutions that lower support costs reduce power consumption and decreased real estate needs have grown in importance as a result.
Finally, there is a clear recognition that all aspects of business can yield significant benefits from adoption of our digital or cloud first approach.
Service providers and enterprises are reinventing all aspects of their business leveraging the power of cloud to reduce cost accelerate service availability and improve overall quality of experience.
This includes practically all of the traditional voice and data communication functions.
We believe the products and solutions provided by rhythm are extremely well in line with these investment priorities and provide us confidence that we're in one of the few parts of the economy that will remain robust despite macro environmental pressures.
For ribbon, we're in a significantly improved position from a year ago.
Sales in our IP optical segment increased 36% in the second half of 2022 compared to the first half.
And we anticipate this growth to continue in 2023 on the strength of incremental investment we've made in new products and associated new customer wins in.
In particular, our focus and investment in IP routing provides a significant opportunity to realize our strategy of becoming a major supplier of IP optical solutions.
From a regional perspective, we significantly diversified and strengthened our customer base.
In Europe , we have a broad range of customers across multiple market verticals, we have a strong presence with critical infrastructure providers, where theres, a relentless focus on security and reliability.
Well positioned to continue to grow and take share in this market. A recent example is the multiyear extension we have reached with the Israeli defense force to provide critical support and product supporting their unique communication requirements.
In the telecom industry is proving very resilient across Europe , and we have significant opportunities with several of the major carriers in the region.
There is a critical focus on supplier diversity, given the shifting political landscape and importance of supply chain assurance.
Presence, we have with our cloud managed portfolio in this region is a major asset as we build confidence in our expanded portfolio.
Developing markets such as Africa also present, a major growth opportunity in the region as major carriers, such as MTN Airtel Eddie slot in our Orange make significant investments alongside major content providers, such as Facebook, Google and Microsoft.
Fiber networks, both subsea and terrestrial are the fundamental building blocks for these networks and we're very excited by the early success. We've had in the region. In 2022. This will be a major focus for US again this year.
And we expect the India market will also be a major source of growth for us. This year building on the new wins, we've achieved with BARDA in the last several months.
The investment we've made in new products is paying dividends as we expand our presence and gain market share in both optical and IP networking.
In the broader Asia Pacific region. We've also gained share with new customers such as Softbank Eastern Telecom and many then the hotel, Taiwan mobile and others.
They are all new accounts over the last year and provide us an opportunity for additional extensions and sales of our entire portfolio.
And in North America, we continue to win new regional service providers as they invest in additional network capacity to support broadband and mobile growth.
We've also identified multiple multiple entry points with the major carriers and are making good progress towards breakout wins in this critical region.
We also believe that we have made the right investments in our cloud and edge segment to maintain revenue and profitability and to ensure our portfolio of secure voice communication products are positioned to gain share in both enterprise and telco market segments.
With a strong recurring revenue base of critical maintenance services that underpin this part of our business.
And the U S Federal voice modernization opportunity as a large multi year investment cycle, where we're very well positioned.
We continue to make progress on our core strategy to cross sell our entire portfolio to existing customers, where we have a track record of success and have built a strong level of trust more.
More and more of our customers are purchasing products from both operating segments and in some cases are being deployed as an integrated solution, which is a major differentiator for us.
So our primary focus in 2023 isn't on improving the profitability of the business our.
Our strategy is focused on four key elements.
First we expect a major improvement in profitability from the IP optical businesses revenue growth this year.
We expect to be able to continue to grow and gain share in the multibillion dollar optical transport market and recent wins such as the party long haul award highlights our portfolio competitiveness.
We expect this will continue to improve with the launch of a new platform called the 9400 later this year.
Even more significantly we're very encouraged by the growth we're seeing in our IP routing business on the strength of our new Xdr 2000 portfolio and believe this will be a major factor in improving profitability in 2023.
Second we're focused on several key areas of our cloud Mitch addressable market to maintain revenue and profitability in this business.
This includes continued growth in the enterprise market, including winning a significant share of the large debt will voice modernization opportunity.
We're also encouraged by the pipeline of new telco cloud transformation projects that directly contribute to lowering operating costs, a major priority for our service provider customers.
Third we anticipate the impact from global supply chain challenges to continue to moderate improving product cost and operational flexibility. In addition, we have a number of product redesigns that will further reduce our reliance on problematic components and technology and eliminate the majority of issues.
And finally, we're targeting a reduction of operating costs of $25 million to $30 million, which will yield approximately $20 million of in year savings net of inflation on other costs.
To help achieve this target we've recently implemented a series of organizational changes under the banner of ribbon Threet auto.
Our current business unit structure served us well during the initial integration of ribbon and ACI, providing separate empower teams focused on the unique aspects of each portfolio.
We're now seeing a growing number of areas, where closer collaboration and coordination would be beneficial and is therefore combined leadership of the business units under Sam Buchi as Chief operating officer.
Similarly, with the recent addition of Dan Redington from Juniper, we have combined our global sales organization under Dan emphasizing the importance of IP networking to our growth strategy.
In many ways. This is the next logical step in the integration of ribbon and <unk>, reflecting the ribbon three dot O branding.
From a program perspective after a surge of investment the last 18 months, we're moderating R&D investment in IP optical somewhat as multiple new products reached completion.
A part of this is related to our new partnership with finalizing with Tech Mahindra.
We're very excited to be working with tech M to collaborate in the development and deployment of an advanced cloud based multi domain multi vendor orchestration and management platform that Leverages ribbon technology and Tech Mahindra is global market presence, we plan to formally announce our engagement at the upcoming mobile World Congress in Barcelona later this month.
With that backdrop, we expect overall company revenue to grow in 2023, with a range of $840 million $870 million with cloud and edge revenue relatively flat year over year.
Optical revenue growing greater than 15%.
Increased sales along with modest improvement in gross margin and lower operating costs combined to significantly improve projected adjusted EBITDA for 2023 in the range of <unk> $95 million to $110 million.
Our business has an element of seasonality with the second half typically much stronger than the first half as we experienced in 2022, we anticipate a similar pattern in 2023 with the first quarter being the lowest points of the year, but we were in a much better positioned from a momentum and visibility perspective.
As mentioned, we do expect component shortages to limit shipments this quarter by approximately $10 million. So for the first quarter, we're projecting revenue in a range of $180 million to $190 million non-GAAP gross margins in a range of 46% to 48% and non-GAAP adjusted EBITDA in a range of minus $6 million to plus one.
<unk> million dollars for the quarter.
The upper end of our guidance includes several million dollars benefit from the potential Tech Mahindra partnership that we expect to close in the quarter.
I'd like to thank the entire ribbon team and our partners for a strong finish to 2022 and look forward to our continued progress in 2023.
Operator that concludes our prepared remarks, and we can now take a few questions.
Thank you we will now be conducting a question and answer session. If you would 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.
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 sarkies one.
One moment, please while we poll for questions.
Thank you. Our first question is from Tim <unk> with Northland Capital markets. Please proceed with your question.
Okay.
Hi, good afternoon.
Question on.
<unk>.
The win you announced with Bharti.
Also a follow up on that on the pipeline.
And you've made some comments.
In the prepared remarks, which were along the lines of what I was thinking which is this is a new <unk>.
Area.
For ribbon in terms of the long haul.
I Wonder if you can give us a sense of how significant that well I think it's significant from a competitive standpoint, if you can talk about that competitive environment and how you are able to translate.
From backhaul to long haul.
And then.
In terms of the business how.
Incremental.
That is too to what you're doing with them.
Airtel right now I think there was.
I think the word massive appeared somewhere in this press release, so maybe expand on that as well.
Yes, Hey, Tim well, thanks for joining us for sure.
So we're obviously pretty excited about the opportunity to expand the business with with Bharti Airtel as you highlighted our business traditionally has been more around the access aggregation layer of the network.
Letting a lot of what we've been doing has been IP mpls.
At the layer two layer three layer of the network.
In order to.
Moving into the long haul portion of their network. There was additional product development work required to.
To meet some of their requirements and so thats been a work in progress for the last year or so.
Going through <unk>.
CS and field trials, etcetera, and culminating finally with.
With the award and the initial deployments starting here in this year. So it was quite a process to to become one of those selected vendors. It's a portion of their network, we've never been in before and.
As I mentioned I think it really does kind of reinforce the competitiveness of the portfolio. So.
No from a kind of a.
Incremental or or scale perspective, it's certainly meaningful for us.
The initial.
Purchase.
Double digit million level as we scale here. This year. So we'll see we'll see how that grows over time, but it's one of those kind of major tier one things that were.
Very strategic for us and where our focus has been.
I think from a competitiveness perspective.
As operators in that part of the region region of the World and others look at different alternatives from a supply perspective.
It's given us the opportunity to gain some market share and expand what we're doing.
Great and congrats on that.
And in your last comments there lead me into my next question, which is you know youre looking for tier ones and <unk>.
Specifically.
I don't know if it was six or eight but you put a number on the number of opportunities that you're pursuing in North America.
Also made reference.
To multiple and I think the comment was about tier ones in terms of opportunities in Europe I Wonder if you might just give us.
An update on the.
The state of the pipeline in terms of.
I mean, maybe extend that to Asia and make make the comment global with regard to opportunities pursued and how you've seen that develop over the last little while.
Yes, so obviously I'm trying to provide some level of forward.
Indicators of future success here in the engagements with.
What I would call tier ones. These are major operators in different regions of the world and so.
Obviously.
Already we are able to announce here in India.
Mentioned, a few others like eastern telephone and and then sitting down who are major major operators and they're part of the region of the world or MTM Global connect operating out of Africa. So you know those are all the types of examples that maybe aren't.
Top of top names known in North America, but theyre clearly major major operators internationally.
So that pipeline.
This is still very active of additional opportunities that we're working on either from an RFP or or a proof of concept perspective.
Several in North America, several in Europe in several in Asia Pacific, So, it's pretty well balanced and.
A real a real key part of our strategy, obviously to grow that business provide a more stable source of revenue more predictable allows us to be more predictable from a supply chain perspective improved cost all those things that I think are.
It really required to to have enough scale to be a really strong competitor in the space and they they span both optical and IP.
Both are key focus areas for us to find those entry points and kind of land and expand once we're inside these major accounts.
Great. Thanks very much.
Yes, Thank you Tim.
Thank you. Our next question is from Greg Matthew with West Park Capital. Please proceed with your question.
Yes, Thank you and congrats on the results.
Thanks, Greg.
First question I wanted to ask you was the business the IP optical business in Europe , particularly the U K can you give us some indication as to what percentage of that business is Huawei replacement.
It's a little hard to put our finger on it.
I can't comment specifically on the UK I would say just to give you a sense, though Greg.
The majority of our business is more in continental Europe than it is in the U K today from an IP optical perspective.
We've mentioned before <unk> is one of our customers more on the access side.
More traditional portion of the network for our ACI that we continue but a lot of our business in Europe is either with the regional telecom providers <unk> a lot with the critical infrastructure and I mentioned a few names.
We're we're very active there today.
So I would say that's the stronger part.
Just to comment on your Huawei replacement question.
Certainly there are countries like like the U K, which have been pretty aggressive in their position around Huawei as part of their infrastructure as you get into other countries in Europe .
Less stringent requirement at this point, whether it's in Italy, or Spain, or Germany, there isn't quite as strong a mandate and so we do face Huawei and many of the countries that we compete in today and we really don't we don't win them all but we definitely have to compete against them in many of the cases, we are winning.
In an environment, where we're competing directly with them.
And turning to the cloud and edge business it.
It seems to me the session border controller market when you subdivided by carrier and enterprise has kind of gone through some shifts in the last couple of quarters in terms of both market share.
And relevant relative importance.
What are you seeing from kind of a macro view of that of that market in terms of carrier versus enterprise are you gaining in enterprise are you holding steady and carrier I mean, what what are the competitive dynamics, you're seeing there. Thanks.
Yeah. Good question Greg.
In the carrier space it can be a lumpy business.
Many times, we're selling it as it gets our capital.
Capex purchase either hardware and software together or a software license purchase.
Perpetual license and so we will sell capacity to one of our carrier customers in a quarter and maybe it'll be two or three quarters before they need more capacity again, and so we do see that kind of move around in one quarter could be up another quarter could be down some cases were selling sbcs alongside our voice infrastructure, our NTR busy.
<unk>.
And in other cases were.
We're selling sbcs and not always so it can vary.
Customer to customer.
I think we're holding our own very well from a market share perspective, I feel like.
Our portfolio is really well positioned with the carriers and when we get an opportunity we do pretty well.
As you know enterprise has been a strategic area for us to focus on and grow and gain share.
It's.
Part of the market, where we have not had as much market share traditionally and it's been a real focus the last 18 months too.
Above the portfolio as well as the go to market and the sales motion to gain more share.
In some cases now we're providing annual enterprise wide licenses that basically authenticate.
The amount of software and capacity that our customers can use.
In some cases, we're still selling.
Appliances and in fact, our.
Enterprise edge portfolio of session border controllers that really addresses small medium size business has been very robust selling through our carrier partners, but.
Long long answer to your question. The enterprise piece has got a real focus I'm really pleased to see the growth happen in the fourth quarter here.
Thanks, Bruce I'll pass it on.
Thank you very much Greg.
Thank you. Our next question is from Dave Kang with B Riley. Please proceed with your question.
Hi, Thank you nice quarter.
Perhaps.
You talked about bookings and book to Bill.
Wondering if you can provide some color on backlog I don't think you really talk about backlog.
Any color on backlog, whether it was up down and how should we think about or what's your expectation going forward.
Yeah. Thanks, Dave.
So from a as you said, we don't we don't disclose absolute numbers around backlog, but with the with the book to Bill or the book to revenue above one in the quarter directly implies that we were building some additional backlog.
Did comment that we would have shipped more in the quarter. If we could we were supply limited, particularly around our <unk>.
Access routers.
And upwards of $10 million or so would have shipped in addition in the quarter. If we could have built it and thats really carried forward into the first quarter and in fact, a lot of that backlog has really moved out into the second quarter as we continue to to be short on a specific component around that part of the portfolio.
As I mentioned in the comments, we because of all that I think we feel like we have better visibility in.
Better line of sight around the momentum in the business given the booking momentum in really both cloud and edge and in the IP optical business.
And so you gave the annual outlook of 843 17, just wondering if you can go over your assumptions as far as bookings.
Bookings do you expect it and where the backlog will be.
Kind of a comment.
Yes, so the 840 to $8 70 at the midpoint is I think a little over 4% growth over what we.
As reported in 2022.
The assumptions around that are that the cloud and edge business is fairly consistent to what we did in 2022.
And there's obviously a lot of things going on there with enterprise growing.
The federal portion of the business that we're really focused on gaining share growing and maybe other parts.
<unk> less but overall, we feel like we have visibility to maintaining the level of business that we just did in 2022 and with some of the operational savings improving the earnings from from that part of the business.
Top line growth clearly, we expect to come from the IP optical networks portion of the business.
Again, we just we've now had two quarters of pretty solid growth Q3 and Q4.
Obviously, we've got some seasonality. So naturally Q1 is not at the same level as Q3 and Q4, but up we think up from the previous year and that'll be the large part of the top line revenue growth two to drive overall for the company of 4% plus.
Gross but.
That part of the business growing at a much faster rate.
Got it and my last question is.
On your gross margin outlook. So you are starting at 46% to 48% of first of all so it's gonna be down what.
Seven points sequentially from fourth to first quarter. Just wondering if you can explain whats driving that decline and then for you.
For you to hit 53 to 54 for the year, assuming you have to exit the year like I don't know if you could maybe 58%. So can you whats going to drive that margin expansion from 47 to 50 something.
First fourth quarter this year.
Yeah, no. It's a good question David.
First quarter gross margin is not indicative of what we think the year looks like.
In addition to just the lower revenue level kind of dragging down the gross margin fixed cost absorption.
The IP optical portion of the business, we think is down a little bit on margin in the quarter.
Some of these new wins I mentioned typically would have a lower margin at the early stages of the project as we deploy some of the infrastructure and it is kind of the gift that keeps on giving then as you add capacity in transponders and the network. The margins are better. So that's kind of the phenomenon going on in the first quarter.
With IP optical and kind of similarly, with cloud and edge. We think the margins are a little lower than they were a year ago.
We do expect to ship more of the enterprise edge equipment I mentioned in the first quarter, which has more hardware content so that combination.
Drives a lower expectation on margin in the first quarter again, we don't think obviously with the full year guidance.
Any indication of what the full year it looks like at all but.
We just.
We had fairly good margin results in Q3, and Q4 2002, and that's more indicative of what we think the rest of the year here it looks like.
Got it thank you.
Thank you Dave.
Thank you. Our next question is from Erik <unk> with JMP Securities. Please proceed with your question.
Yeah, Thanks for taking the questions and good quarter.
First off India has come up a couple of times as a as an active area on five G curious.
What what does the opportunity there outside of Bharti look like and then secondly could you I'm not sure if you commented but.
Can you comment a little bit in terms of the timing on on the new contract win that you had with Bharti.
What how that will ramp up over the course of 'twenty three.
Yeah, Hey, Eric Thanks for joining and good question.
It's hard not to get excited about where India is headed at this point of course, it's been a.
No.
A tougher area for the last couple of years, but obviously, we've seen incremental investment going on and it's not just in telecom, but you probably saw this morning the big.
Purchased around airlines.
Airplanes going into India, and I think that tells you something about the economy, it's pretty it's pretty hard at this point.
The investment we've made over the last few years, establishing the infrastructure that we have in India to support our customers hugely strategic for us.
You know part of the wind part of the differentiation I think we bring is that local presence as I've mentioned to you a few times, we've got resources across all the major metro areas throughout India supporting our customers with the deployment of the products and Thats, just a fundamental asset for us as a company.
Marty obviously is our lead.
Strategic customer in the region, but no the other operators such as Vodafone and even Tad are really important customers.
I think.
It's an interesting dynamic obviously with reliance geo being such a dominant force.
And creating a super competitive environment and so how each of the operators react I think will be a little bit different clearly bharti is.
Kind of doubling down on the investment and we will see what the other operators do and how we can expand our business in that region given the investment we've made there.
But it's a really exciting market right now.
And in terms of the new contract with Bharti did you what what comments did you make earlier about that how can we think of that in terms of twenty-three contribution.
Yes, so in the last two months or so we've announced two new wins there one around the cell site router portfolio or product, where we are.
Which is a brand new area for us, where we're providing that edge router kind of an access level router right at the edge of the <unk> Mobile network and then the new one we just announced yesterday it was really on the optical transport layer in the long haul.
The infrastructure investment, they're making around fiber both of these are significant wins for us multimillion dollars that.
You know that were now shipping against in the first half of the year.
We're simply execute well, we we hope to compete and continue that and grow that business going forward. So we're we're kind of in the early stages of deployment.
After a good start.
Very good thank you.
Thank you.
Thank you there are no further questions at this time I'd like to hand, the call back over to Bruce Mcclelland for any closing comments.
Yeah, great. Thanks, again for everyone being on the call and your interest in ribbon communications.
We look forward to speaking with many of you at upcoming Investor conferences, and we've got a big presence at major events, such as mobile World Congress in Barcelona, the optical fiber communication conference in San Diego and enterprise connect coming up in Orlando. So look forward to meeting many of you in continuing the discussion and operators.
Thank you as well this concludes our call.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Alright, Thanks, Paul.