Q2 2023 Ribbon Communications Inc Earnings Call
[music].
Greetings and welcome to the Ribbon Communications second quarter 2023 financial results Conference call. At this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Joni Roberts Chief Marketing officer. Thank you Joni you may begin.
Good afternoon, and welcome to ribbon second quarter 2023 financial results Conference call I'm, Tony Roberts, Chief Marketing Officer at Ribbon Communications.
Also on the call today, Bruce Mcallen Ribbon, Chief Executive Officer, and Mick Lopez ribbons Chief Financial Officer, today's call is being webcast live and archived on the investors relations section of our website at our B B N 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 third 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 and Form 10-Q, I refer you to.
Two our safe Harbor statement included on slide two and the supplemental slides for this conference call. In addition, we will present non-GAAP financial information on this call reconciliations to the applicable GAAP measure are included in the earnings press release, we issued earlier today as well as in the supplemental slides we prepared.
For this conference call, which again are both available on the investors section of our website.
And now I'd like to turn the call over to Bruce Bruce.
Great. Thanks, Tony and welcome to the ribbon team and thanks to everyone for joining us today.
I am pleased to report a very solid quarter with financial results above the midpoint of our guidance.
Our focus on growing enterprise and cross selling of our IP optical portfolio was working with growth in both sales and earnings for.
For the first half of the year sales have increased 5% year over year and earnings have improved 66% or $8 million on an adjusted EBITDA basis.
In the second quarter sales increased two 3% year over year to $211 million with continued growth in India, resulting in sales in Asia Pacific increasing 21%.
EMEA sales were up 1% and overall North American sales were down 2%.
In the optical segment, we continued our trend of double digit year over year growth for the fourth consecutive quarter with sales increasing 24% year over year.
In the cloud and edge segment as expected sales were down approximately 9% year over year, primarily due to lower sales to Verizon as compared to the record sales a year ago.
This was offset by continued strength in our enterprise business with product sales, increasing 94% year over year.
A new high of 44% overall cloud niche product sales in the quarter.
This includes revenue from our very strategic win in the U S. Federal space. The first of what we believe will be many voice modernization projects Gov.
Government agencies need to transform their legacy communications infrastructure to modern cloud based unified communication platforms with high levels of security and survivability. This initial project includes product and services exceeding $10 million.
And so a portion of which was recognized this quarter.
As a result of the overall mixed in the quarter gross margins were strong at 52% and above the high point of our guidance.
Combined with lower operating expenses adjusted EBITDA was also towards the high end of guidance at $23 million.
Products and services booking to revenue for the first half of the year was 1.15 times with the second quarter at 0.9 times following strong bookings in the first quarter.
Now a little more detail on each of the operating segments.
Financial performance for the IP optical segment continued to improve in the second quarter with sales of $85 million and margins increasing quarter over quarter and year over year to 31%.
This resulted in a $10 million improvement in adjusted EBITDA as compared to last year.
The growth in sales is directly related to the investment we have made in developing new products, resulting in a strong funnel of projects and projected continued growth with a target of being breakeven on an adjusted EBITDA basis in the second half of the year.
Our focus specifically on IP routing continues to show strong results with sales of IP routing products, increasing 46% quarter over quarter and 41% year over year.
Our expanding portfolio of routing solutions directly addresses a very large addressable market in multi service edge aggregation and metro eroding for both fixed broadband and mobile networks.
Sales of optical transport products increased 21% year over year, and maintenance and services revenue increased 1%.
India was once again, our strongest market with sales of IP optical products, increasing 30% year over year, reaching the highest level since the acquisition of ACI in 2020.
Shipments included a number of new products, including our <unk> cell site router, Neptune Xdr routers and Apollo long haul optical transport.
Deployments of the new CSR road or more than doubled in the second quarter versus Q1, as we scale the program.
We expect margins in these new products to improve as volumes increase and the mix of infrastructure and capacity cards is more balanced.
Our cross selling strategy continues to bear fruit in several regions.
IP optical sales in North America reached a new high increasing 94% year over year and representing more than 15% of overall segment sales in the quarter.
Following the trend in the first quarter investment by World broadband providers funded in part by Federal programs was very strong with sales more than tripling versus last year.
This has become a strategic market segment for us where we're leveraging the great presence and reputation that ribbon is established.
Our strong IP routing and optical transport portfolio is very well suited for these growing networks.
Federal funding programs will increase dramatically over the next several years as existing programs such as art Austin, We can act our augmented by the much larger 45 billion dollar bead funding program.
Another region, where we have successfully implemented our cross selling strategy leveraging the local presence and relationships established by ribbon is Japan.
Following several strategic wins sales of IP optical products in Japan exceeded 5% of overall IP optical sales in the second quarter up from essentially zero in the first out to 2022.
Finally in the EMEA region sales grew 6% in the first half of 2023 across a variety of critical infrastructure telecom and defense customers.
We have a strong pipeline of projects planned for the second half across the region.
From a supply chain perspective issues remain localized to a particular new high demand products, where we're still ramping production. We expect continued improvement in the second half of the year and start to see some benefit from cost improvements and full eliminate shouldn't have a remaining expedite fees.
As expected IP optical segment margins improved from the low point in the first quarter, but are still below our normalized target. We expect further improvement in the third and fourth quarter from both fixed cost absorption from higher sales and improving mix.
Now some highlights from our cloud and edge business.
Overall club net sales increased 9% quarter over quarter, but were down 9% year over year after a record quarter with Verizon a year ago.
Excluding Verizon sales in the quarter actually increased year over year.
Margins were very strong at 67% with a favorable mix of software licenses and enterprise sales in the quarter.
Product and services book to revenue was one times 1.0 times for the quarter.
As I mentioned, we were very excited to close a significant voice modernization deal for a major U S Department of Defense agency in the quarter.
We anticipate this to be one of several projects. Starting this year is federally gnc's transition from legacy on premise T. D. M P B X or IP centrex infrastructure to cloud based unified communication solutions.
The unique security and survivability requirements and multi site complexity is very well suited to ribbons broad portfolio of session border controllers telephony application servers media gateways and advanced analytics.
Ruben's expertise and experience is also a key differentiator.
The sales process for these projects is certainly lengthy and complex, but working with key integration partners such as Dell and multiple managed service partners will allow us to scale and standardize common solution for the market.
The federal project helped contribute to the very strong quarter for sales to enterprise customers.
The leading market vertical was once again financials with multiple projects, including a six a significant expansion project at J P. Morgan and other projects at Goldman and Bank of America and Barclays.
This helped to contribute to a solid quarter for SBC sales with shipments of core S. P C platforms, increasing 25% year over year.
In addition, the service provider sell through business also remained strong with sales of enterprise edge S. P. C products up 8% year over year following the almost 60% increase in the first quarter.
In addition to the high activity level with enterprise customers, we've seen an increased level of engagement with service providers evaluating options to modernize their voice infrastructure we.
We were recently awarded significant projects totaling more than $10 million with four major service providers in multiple regions, including the U S. Europe Middle East and Africa that are all focused on replacing legacy voice infrastructure with modern software centric platforms that provide immediate operating cost benefit and significant feature advanced.
Yes.
In the case of these four operators they have not made significant investments in this part of their network for years, but this is now a key part of their strategy to improve operating efficiency.
The urgency to replace aging copper tdm networks with modern fiber based IP networks, while minimizing service disruptions continues to grow.
With that I'll turn it over to Mick to provide additional detail on our second quarter results and then come back home onto discuss outlook for the second half.
Thank you Bruce good afternoon, everyone. The second quarter of 2023, our financial results showed continued improvement over the prior year bolstered once again double digit revenue growth in our IP and optical networks business.
Please refer to our Investor Relations page of the web site for supplemental slides summarizing our second quarter 2023, and historical financial performance.
Let's begin with solid beta corporate financial results.
Second quarter of 2023 ribbon generated revenues of $211 million, which is an increase of $5 million or 2% from the prior year and $24 million, 13% increase from the first quarter non.
non-GAAP gross margin was 52%, which is about 300 basis points lower than prior year, mostly due to the change in business segment revenue mix and a 400 basis point improvement from the previous quarter, driven by revenue increases and product mix.
non-GAAP operating expenses were $90 million, a decrease of $6 million or 6% year over year and down $5 million from the previous quarter as announced earlier. This year, we implemented a strategic restructuring plan to streamline operations reduce costs and focus our growth areas we have <unk>.
Optimized real estate renegotiated supplier terms and driven head count synergies, we definitely are on track to exceed our operating expense reduction target of $20 million year on year.
Our non-GAAP net income was $8 million, which generated a non-GAAP diluted earnings per share of four sites.
Our non-GAAP tax rate for the quarter was 30% or.
Our interest expense for the quarter was $6 $8 million, which is a $2 million increase from the previous year.
GAAP EBITDA was $23 million in the quarter, which is a $2 million or 9% improvement year over year, and a positive change of $25 million from the previous quarter.
Our basic share count was 117 million shares and our fully diluted share count was 175 million shares for the quarter.
Now, let's look at the results of our two business segments.
Cloud edge business second quarter revenue was $125 million, a decrease of 9% year over year. As you may recall second quarter of 2022 was the highest revenue for the year for cloud niche led by strong sales to our largest customer.
Software as a percentage of total product revenue was 57%, which is in line with prior year and a 16 percentage point increase from 41% in the first quarter.
The cloud and edge business had a non-GAAP gross margin of 67% slightly down from 68% in the prior year and up 540 basis points from the first quarter adjusted quarterly EBITDA was $35 million or 28% of revenues.
Let's turn to our IP optical networks business results, we recorded second quarter revenue of $85 million, which was an increase of $17 million or 24% year over year, and $14 million or 19% versus prior quarter led by growth in North America, India and Japan.
non-GAAP gross margin for IP optical was 31%, which was about 350 basis points hired under previous quarter, and 200 basis points higher than the prior year.
Fixed cost absorption is a key factor in IP optical networks gross margin at current levels for every $10 million of incremental revenue to gross margin improves by about 200 basis points for example.
If revenue grows $10 million from the current level of $85 million to $95 million.
Current gross margins of 31% will improve by 200 basis points to 33%.
With more revenue increases and improvements in product mix, we can achieve our target gross margins in the mid to upper 30 percents for IP optical networks.
non-GAAP adjusted EBITDA loss for the quarter was $12 million, which is an improvement of about $10 million year on year and over previous quarter.
With revenue growth in the second half.
<unk> mix of products and lower operating expenses, we continue to describe for profitability in this business segment.
We ended the quarter with $35 million of cash and cash equivalents, which is a decrease of $11 million from the previous quarter. Our revolver remained undrawn at quarter end.
Cash used for operations was $3 million capital expenditures were just $2 million and we made our quarterly 5 million our term loan repayment, we expect to have higher working capital requirements in the third quarter as we grow the business in the second half.
Our senior term loan balance is $245 million and our preferred stock and warrants are valued at $55 million per the bank covenant calculations, which include preferred equity and total debt among other adjustments we comfortably met both of the amended term loan covenant metrics in the second quarter.
Now I'll turn the call back to Bruce to provide more comments on our outlook for the third quarter.
Great. Thanks Mick.
I look into the second half of the year, it's clear that our strategy to diversify the company has become increasingly important and is working.
From an industry perspective enterprise has become a significant new growth vector for the company the counterbalances variances in service provider spending.
From a portfolio perspective. The addition of IP routing and optical transport is open major new opportunities such as the U S Rural broadband segment.
And from a geography perspective, the company is very well positioned in high growth areas, such as India and Africa.
Our financial projections for the second half of the year benefit from this strategy and are based on four key assumptions.
First in the North American service provider market, we expect the elevated spending by U S Rural broadband providers to continue and likely inquiries over the next several years as new funding sources become available are.
Portfolio is a great fit and we're taking share.
We expect the rural broadband opportunity to offset more constrained spending by tier one U S service providers in 2023 with increased spending anticipated in 2024 for voice network modernization, given the compelling business case to reduce operating costs.
As I mentioned earlier, we've also seen increased activity in this area across multiple regions with service providers, who have not made this a priority in the past.
Second we will continue to gain share in the enterprise market vertical as investment in communication and collaboration platforms enables companies to improve their efficiency and effectiveness.
This includes several major U S federal opportunities that we anticipate being awarded in the second half, where we are very well positioned and expect to generate significant revenue.
Where it makes sense, we're transitioning the business model with enterprise customers away from perpetual licenses to subscription models that will create a more predictable recurring revenue stream for the business.
Third the growth we've experienced in India and several other countries in the Asia region will continue as five G deployments accelerate and the strategic wins, we've announced in the region enable us to gain share in both IP routing and optical transport.
I expect a number of new opportunities to mature and create further growth in 2024 in this region.
And finally in the EMEA region, the second half of the year looks strong with increasing investment from critical infrastructure providers in Europe and service providers in Africa, and the Middle East.
Underpinning our strategy is the investment we've been making to expand our portfolio and introduce new products that enable a more open architecture and ecosystem.
As we announced at the OFC optical conference earlier. This year, we're very excited about the new Apollo 9400 platform that will be first to market with industry, leading 1.2 terabits per second wavelengths leveraging the latest in five nanometer DSP silicon.
The 9400 uses less than half the power per bit of competing solutions with industry, leading density and a compact modular plug a bull form factor, we expect to be in customer testing this quarter and early production in the fourth quarter.
In our IP routing portfolio, we continue to expand our Neptune H C are 2000 series with new variants that significantly expand our addressable market and the types of networks, where we can be deployed the latest.
New product that begins to ship. This quarter is the Neptune 2400, which is a perfect fit for Metro networks supporting mobile ex all applications and broadband aggregation.
Equally important is the growing set of IP routing protocols supported by the platform, including next generation segment routing capabilities and advanced features such as E. P. M.
The significant investment we have made in expanding our IP optical product line has resulted in 19% growth in the first half of 2023.
We expect to continue that trend in the second half supporting the 15% plus growth target for the year.
We also continue to target profitability on an adjusted EBITDA basis for this segment in the second half of 'twenty, three as higher volumes enable improved margins and better regional mix.
And our cloud and edge segment, the strong growth in enterprise sales in the first half is mostly offset lower U S service provider spending.
We expect third quarter financial performance to be similar to the second quarter.
All led by our typically seasonally strong fourth quarter.
For the full year, we expect cloud niche earnings contributions to be higher than 2022, primarily due to lower operating expenses.
Our early view on 2024 indicates a recovery in spend by North American service providers for voice network modernization, which would be additive to the continued growth in enterprise and federal.
Based on the above backdrop and assumptions for the third quarter, we're projecting revenue in a range of $215 million to $225 million non.
non-GAAP gross margins of 51, and a half to 52, 5%.
And non-GAAP adjusted EBITDA in a range of 26 million to $32 million for the quarter.
For the full year, we continue to believe our revenue guidance range of $840 million to $870 million is achievable.
Operating expenses are on track to exceed the lower spending targets we established.
Due to the overall projected mix adjusted EBITDA is currently tracking to the lower half of our $95 million to $110 million range, which will be a significant 50% improvement year over year.
We have a great pipeline of opportunities and as with most years, we expect the fourth quarter to be the strongest quarter of the year.
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'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line it in the question queue.
You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Yeah.
Thank you. Our first question is from Christian Schwab with Craig Hallum Capital Group. Please proceed with your question.
Hey, congratulations.
So.
Bill.
Yeah.
Okay.
Okay.
Yes.
A Christian I apologize, you're breaking up I think.
Hello.
Try again Christian.
I'm sorry about that I was asking on rural broadband could you tell us how big that could be over.
Right.
Yeah. So thanks.
Thanks Christian good to connect again.
So obviously, we've seen that grow substantially here. This year I think we're up about three times from what we were doing last year.
I think there are some upper bounds just from a construction resource perspective are in the in the whole industry.
So it's hard to predict exactly what the growth looks like next tier it's not a lack of funding at this point, particularly as bead funding starts to flow in in the second half of next year I think the limitations are going to be more at the pace that they can do construction and drive fiber but.
The funding envelope increases the amount of addressable market for us certainly is going to expand so I expect it to grow pretty pretty well going into next year.
And then on the.
On the IP optical business you know.
Could you tell us how many customers.
<unk> currently and what we should anticipate.
The number of customers to expand to say by the end of 'twenty four.
Introductions come out.
Yes, that's a good question I don't have a number off the top of my head in a particular quarter. The majority of the revenue will come from several dozen customers within the quarter, let's say and we are definitely adding customers every quarter a number of our projects are with critical infrastructure.
<unk> or or operators and so every quarter, there's somebody new being added we do try and kind of keep it a good cadence of.
Press releases every quarter on some of the more strategic adds when we've had within a quarter. So I think that gives you an indication of kind of the velocity every quarter of new names being added at.
Of course summer smaller projects and some can account for much larger revenue stream in the future.
Okay.
Great and then my last question I know you guys have talked about for some time.
[noise] material business.
Nickel side.
With the top tier one carriers do you have any update.
Whereas on how that's going or is that something you're enthusiastic for.
Next 12 months.
Yeah. So there's there's definitely a healthy pipeline here in three primary regions, North America, Europe and Asia Pac.
Obviously, we've announced some already with the expansion with party with the the wins in Africa with MTN sing Tel Optus in different regions are Rogers in Canada, We're clearly kind of building momentum.
In my in my remarks, I talked about Japan, as a market that's new for us but.
Again, that's a region, where a ribbon had a great presence with our voice infrastructure products and although we haven't announced any names. There I think those are pretty significant opportunities and wins for us and I think as I mentioned it was about 5% of revenue in the third quarter.
So.
Stay tuned we're definitely focused on that part in addition to kind of building the momentum with regional telecom and with with critical infrastructure providers.
Excellent no other questions. Thank you.
Yes, thanks very much Christian.
Thank you. Our next question is from Tim <unk> with Northland Capital markets. Please proceed with your question.
Okay.
Hey, good afternoon.
Couple of questions maybe following on some of that.
Recent discussion.
And I think you talked about.
You asked for IP optical U S at 15%.
I assume you know rural is.
The vast majority of that I think he talked about U S rural being 10% of IP optical revenue.
Last quarter.
And it's clear do you expect that to grow my question is how should we and you've talked about Japan.
Should we relate that to India.
You know and you talked about growth in India I assume that's your single largest market in EG greater than greater than the U S.
From a country standpoint, not a region standpoint.
But is there a is there a scenario with its rural broadband growth out a couple of years.
Can that become.
Bigger than some of these big markets Youre talking about now can you just kind of maybe size, India, where it is right now and.
And what sort of margin implications does that U S rural broadband growth have for the segment.
Yeah, great all good questions. Tim So are the 15% of sales with a was a north American number and rural broadband.
Broadband a significant portion of that as you recall we've got.
A number of other customers in North America, including Rogers up in Canada that all contribute to that 15% of sales, but the world broadband portion was more than half of that certainly in the quarter.
As you kind of compare it to India, India is still significantly larger than North America today.
I think more than two times make right in that ballpark. So again of course, we have one one large customer in India with Bharti that we.
We enjoyed a good growth year this year as I mentioned getting.
Back to maybe where we were a few years ago was our strongest quarter. We've had since we merged the companies together.
So back to your final question on how big can rural B.
You know it well.
In some ways. We're just getting started I mean, we've had some really good success.
With customers that know us well that are that have other products from us deployed today and that's allowed us to start to build a good pipeline with new customers.
I don't know if it can be bigger than India, India is a 1.2 billion people.
Three major operators there that I think are going to drive a lot of scale.
We're deployed in enterprise markets in India, as well with <unk>.
With.
Our partners like Tad, a tele surfaces and folks like that so I think that's going to remain a really significant market for us.
Great and maybe similar question around Japan.
I think youre, implying your yeah.
And theres likely with tier one carriers, but how significant can that get for you over time.
Again, where we're kind of just entering the market I mean, it was great to see some of the momentum there with several operators a number of different use cases, both in optical as well as in IP, So I'm pretty excited about that market.
We've got a great infrastructure in place in Japan. It was one of the kind of strategic.
Elements to the combination several years ago and are focused on cross selling its taken us awhile to to go through the vetting process go through the testing process now into commercial service.
So it'll it'll add another plank to the to the operation here for us for sure.
Okay.
Last question for me, obviously after a very strong Q1, IP optical orders came down pretty significantly in Q2, I guess, how would you characterize that and what are your expectations for orders in IP optical in the second half.
Yeah. So there were two reasons why the order velocity was lower in the second quarter all related to the strong first quarter.
I had mentioned previously that part of the bookings in Q1 was a large.
A multi year agreement with defense operation in Europe .
A portion of those orders were for the second quarter. So we were shipping those in the second quarter normally we would've gotten those bookings in the second quarter, but they were all they were all accelerated into Q1.
And then the other part was around.
Some of the expansion market share expansion in India with Bharti and some of the larger orders that were shipping against in the second and third quarter, So I'm not although.
Obviously numerically the numbers down in the second quarter for the first half I think we're at a 1.15 for IP optical for the first half of 1.1 for some number like that so no I still feel good obviously for the second half of the year, we're still projecting growth going into the second half I think to achieve our 15.
Percent plus annualized gross in the gross number the second half will grow more than 10% versus last year. So.
We're feeling we're feeling good about the velocity in the second half here.
Great. Thanks.
Thank you Tim.
Our next question is from Dave Kang with B Riley. Please proceed with your question.
Thank you good afternoon.
First question is on on the IP optical just wondering if you can talk about there their EBIT.
EBIT trajectory in second half and into next year I mean.
Will they be positive then and.
Just wondering if it.
It will dip into negative in first quarter next year before becoming positive in second quarter I guess, if you can help us out.
Yeah. So I think if you do the modeling on on the business here with assumptions on margin and Opex and whatnot.
The target for the second half is to get to EBITDA breakeven and positive. So that's what the whole team's focused on.
That's the reason we've we've done the acquisition this business needs to contribute.
You need to be in the 100 million dollar plus range per quarter with where margins are projected to be there and that's that's what the target is for the second half we do find that the first quarter tends to be a lower quarter every year.
So whether we'll be at that level or not in the first quarter is a little too early for me to to provide additional commentary on but the focus here is on the second half and making sure we get to that Mark.
In the third and fourth quarter combined.
Got it and then I believe regarding the supply chain situation.
I think that impacted your revenue by about 10 million in first quarter, just wondering what that was in second quarter.
Yes. It was it was very similar Dave.
Really the same sort of issues as we're ramping.
In particular, our long haul products and our cell site router products, we could have shipped more in the quarter again.
Not on not unlike others I'm sure right. So I didn't comment on it this time, but a.
Very very similar in the second quarter I do think we're where we get more caught up in the third quarter on some of the longer lead time parts on the new products.
As I mentioned I think as we get into the second half of the year. The majority of those existing issues are behind us who knows what new surprises we find them in the future.
So should we expect something like maybe 5 million impact in third quarter or is it connected.
Zero.
Okay.
It's in that ballpark, probably Dave Theres always something that that ends up kind of hanging out to the next quarter. So it's probably in that in that ballpark yes.
Got it and then.
Just wondering what the split is between I know you gave your IP routing.
Growth just wondering if you can split.
What what IP versus optical is and what's there.
Margin differential between IP and in optical.
Yeah, So I think we.
We've talked historically that the split is in the 35% to 40% range for our IP routing, obviously thats been increasing over the last several quarters with the growth rate round around IP.
Think we're I think it's over 40% now from a product revenue perspective with.
With the recent growth that you've seen both businesses grow I think optical grew about 20% and it grew about 40%. So optical is not standing still either it's growing well.
But I think the mix continues to shift more towards IP routing and that's what we expect to see over time as well.
And what what's their margin differential.
About 510% something like that.
Yeah. So we don't we don't break that out.
It varies by region and the type of product if you're if it's a higher volume cell site router type product that tends to be a little lower margin. If it's more of a high performance.
Four terabits routing platform, that's much better margin. So it can vary a little bit Dave just depending on the mix and the type of products. We're shipping in the quarter in general the trend is towards higher margin on the IP products.
Got it and my last question is actually a clarification did you say you are a C and D. A.
It will be kind of flat this year or maybe I misheard.
Yeah, So I'd characterize the third quarter as being similar to the second quarter with a stronger fourth quarter.
And overall in the second half earnings contribution will be up from last year, So I've kind of given those two data points.
Got it thank you.
Okay. Thanks, Dave.
Thank you. Our next question is from Greg mezzanine with West Park Capital. Please proceed with your question.
Thank you my question is on the cloud and edge segment, you had mentioned in the call that.
You are in the process of transitioning our.
Your revenue model from one of our perpetual license to a subscription based model and I totally understand.
While you're doing that namely too.
Smooth out the Lumpiness.
This business has had.
Can you kind of give us a little more color as.
As to what the steps are.
Or to kind of proceed down that path and where you are in that process. In other words are you keeping your existing customers on perpetual licenses.
Starting new ones with a subscription model or are you.
Winning the older customers off the perpetual license to a subscription model.
And then I have a quick follow up thanks.
Yeah, Hey, Greg Good question. So most of it's first of all it's mostly in the enterprise space not in the service provider or the carrier space.
Most of the acceptability or interest in is in the enterprise side, there's a couple of different models there.
There is if you look at our our ribbon connect offer as an example, which is.
A completely cloud based.
Multi ucas platform for Microsoft teams or zoom or Cisco Webex.
It's a per subscriber per seat per month.
Our pricing model and that's a fairly small business today, but thats, obviously, a typical as a service type revenue stream small but growing the other.
<unk> kind of approach to a subscription licenses is moving from a perpetual license for let's say an SPC.
To a term license and.
And perhaps at an enterprise wide type of license and Elas that includes software licenses that includes maintenance includes professional services and Thats a much more kind of a significant transition that we're in underway and it provides the ability to.
Renew those licenses every year or whatever for period that you set up the <unk>.
The term license for and.
That's probably the most significant transition and it's a combination of both news new customers and existing customers.
Many many of the products like our session border controller or analytics platforms, which are.
Highly software high software content that really lend themselves to that model and we're finding a lot of interest in moving in that direction.
Our customers being receptive to this transition would you say, especially the legacy and larger ones.
On carrier.
I wouldn't describe it as we're trying to force it.
We will meet the customer wherever your economics are our best.
To to meet their needs.
So most of the cases this is not just a receptive thing the customer is very interested in that type of approach again, it's mostly around enterprise not so much around the carrier side, although the ribbon connect platform as I mentioned.
Is used by a number of carriers and it supports their managed service offering to enterprises, so it fits that model pretty well.
Great. Thank you.
Thanks, Craig.
Thank you. Our next question is from Erik <unk> with JMP. Please proceed with your question.
Yeah. Thanks for taking the question couple of questions first off.
Did you see.
Believe Verizon was a 10% customer.
Did you see some of the.
Adjustments to inventory that that were noted by the likes of Ericsson and Nokia in terms of from these carriers.
Working down some of their inventories or with Verizon and the range that you had been expecting.
And then secondly, your guidance implies.
Q4 gross margins.
Picking up a fair amount is that just a normal seasonal uptick or is there anything in Q4 that are left.
B.
Particularly beneficial to gross margins.
Yeah, Thanks for the questions Eric.
So from a Verizon perspective, we had just a great quarter a year ago in the in the second quarter of 2022, we have a variety of of.
Voice modernization programs with them, all basically going to revenue in the second quarter. So in a lot of ways. It's not a it's not a fair comparison is the best quarter, we ever had with Verizon a year ago.
And so the step down year over year is pretty substantial.
As I mentioned, though if you excluded Verizon from our revenue in both ends the service provider business was actually up year over year. So it was just it's primarily a phenomenon is the strong quarter a year ago.
So it wasn't what youre hearing I don't think from others around inventory build and those sorts of issues Eric It. It's really just the year over year comparison, that's a little tough.
And it ended up exactly where we predicted it was going to be in the quarter and very consistent to the previous quarter.
You I think if you see our 10-Q that will come out you'll you'll be able to see the percentage of revenue that we report for our 10% plus customer there.
From a from.
From a Q4 margin perspective, yes, we do expect Q4 margins to be stronger.
And both businesses as Mick mentioned pretty pretty at a lot of detail.
The increased margin around IP optical a lot due to just the increased level of revenue in the fixed cost absorption driving a higher gross.
Gross margin percentage.
In cloud and edge.
It tends to be the mix, obviously, the velocity makes a difference as well the revenue level, but.
But we have a.
Good pipeline of larger deals both enterprise and service provider in Q4.
We have as I mentioned this kind of transition on models towards more annual elas that benefit us and just the software mix in general stronger in Q4, but Youre model sounds correct.
Okay, and then lastly last quarter, you had discussed new products contributing about 20% of.
IP optical revenues.
Can you provide any update or any any any color that you can add to that.
Yeah, I think it's it's similar Eric Unfortunately, I don't have that number in front of me so I'm going to have to go do.
More research on it I apologize.
Okay. That's fine thank you.
Thanks, Sir.
Thank you. Our next question is from Tim <unk> with Northland Capital markets. Please proceed with your question.
Hi, sorry about that.
I just wanted to follow up and it looks like in the subject is kind of profitability.
IP optical.
It looks like in Q2.
You brought your cost base down pretty significantly in terms of the breakeven revenue run rate in IP optical in particular.
I don't know five 6 million Bucks something like that.
And that's reflected in your overall opex performance as well so.
I guess the question is is that is that about right is that where you expect it to stay when it looks like youre forecasting.
Your EBITDA loss at IP optical too.
The cut in half or maybe a little more again here in Q3.
I'm assuming that.
Revenues.
Increasing gross margins as Mick described and kind of flattish.
Sort of Opex and that kind of high 30% range.
A reasonable way to look at things and then obviously another quarter that youre looking to be EBITDA positive in Q4.
Yeah, So I don't want to parse the Q3 guidance too much. It's directionally correct. What you said is absolutely directionally correct.
In order to get to breakeven in the second half. It's a combination of Q3 and Q4 and I think the Q4 volumes are higher so the profit will be higher.
The cost improvements the spending improvements that we've made.
We're ahead of.
Plan were ahead of what we committed we were going to do for the year.
A portion of that is benefiting both the businesses.
I remember writing Q2, I think were about $3 million better on Opex in IP optical but theres also some savings above the gross margin line and in the cost of service and what not as well.
We do think that as that plays forward at that level certainly at the company level I think Nick we were at $90 million of Opex in Q2, and we expect to be in a similar range plus or minus 1 million sort of thing in Q3, and Q4 and that would get us to greater than the $20 million net savings for.
For the year in Opex.
Great. Thanks very much.
Alright, Thanks, Tim.
Thank you there are no further questions at this time I would like to turn the floor back over to Bruce Mcclelland for any closing comments.
Okay, great well thanks, Paul.
Everyone for being on the call here with US again today your interest in ribbon communications.
We have a number of upcoming investor conferences. So we look forward to to meeting everyone, there and and continuing the dialogue.
Thanks, very much operator, I appreciate your help and that concludes our call.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Okay. Thanks, Paul.