Ribbon Communications Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2023

There are 8 speakers on the call.

Operator

And welcome to the Ribbon Communications First Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen only mode. A brief question As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bita Milanian, Senior Vice President, Global Marketing. Thank you, Bita.

Operator

You may begin.

Speaker 1

Good afternoon, and welcome to Ribbon's Q1 2023 Financial Results Conference Call. I am Beeta Mellanian, SVP of Marketing at Ribbon Communications. Also on the call today are Bruce McLennan, Ribbon's Chief Executive Officer and Mick Lopez, Ribbons, the Chief Financial Officer. Today's call is being webcast live and will be archived will be posted on the Investor Relations section of our website at rbbn.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 Q2 of for the Q3 and beyond are forward looking statements.

Speaker 1

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 ks. I refer you to our safe harbor statement included on Slide 2 of the supplemental slides of this conference call. Will be answered in the press release. Reconciliations to the applicable GAAP measure are included in the earnings press release we issued earlier today as well as in the supplemental slides we prepared for this conference call, which again are both available on the Investor Relations section of our website.

Speaker 1

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

Speaker 2

Great. Thanks, Pita, and thanks to everyone for joining us today. I'm very pleased with our performance to start off the year with financial results just above the midpoint of our guidance, building on the momentum from the second half of twenty twenty two. Overall, sales grew 7.5% year over year to $186,000,000 and adjusted EBITDA increased $6,000,000 to minus $2,000,000 in the quarter. Bookings were once again very strong with a product and service book to revenue of 1.23 times for the company.

Speaker 2

This represents a 14% increase in bookings generated this quarter versus the Q1 of 2022. Non GAAP operating expenses were lower by for the quarter was $4,000,000 or 4% year over year, in line with our strategy to reduce operating expenses and improve profitability. Gross margins were at the high end of our guidance for the quarter, reflecting consistent margins with our Cloud and Edge business and lower margins as expected in our IP optical business from customer and regional mix. We ended the quarter with cash of $46,000,000 with cash from operations of $11,000,000 and a total $80,000,000 reduction in our senior secured debt, following a successful capital raise, which Mick will go through in more detail in a minute. The key business highlights for the quarter with a 7.5% year over year increase in total revenue, a strong IP optical book to revenue of 1.6 times and a 62% growth in cloud and edge sales to enterprise customers.

Speaker 2

Now let me go through a little more detail on each of our operating segments. This was the 3rd quarter in a row that we've had double digit year over year revenue growth for our IP Optical segment and a book to bill well above 1.0 times. Sales increased 13% year over year and book to bill was 1.6 times in the quarter. Year over year sales growth included a 20% increase in IP routing products, a 14% increase in optical transport products and an 11% increase in maintenance and service revenue. The continued growth in sales is directly related to the increased investment that we've made in new products.

Speaker 2

In our IP routing portfolio, we've introduced our new XDR 2000 series that supports a variety of applications, including multi service edge aggregation and high performance metro routing. Based on the latest generation of merchant routing silicon, These built for purpose platforms compare favorably on a cost, density and power perspective with a routing feature set to address the large

Operator

comes from the line of Alex.

Speaker 2

The portfolio scales from 800 gigabit edge aggregation routers through to 3 terabit and 8 terabit modular redundant platforms for metro aggregation and IP transport. Our unique pay as you grow architecture allows additional switching capacity to be added as needed, providing a compelling total cost of ownership. Integrated optical interfaces, including 400 gig ZR and ZR plus coherent optical pluggables enables further convergence of the IP and optical layers of the network. We've also extended our Apollo optical platform to support additional long haul transport capabilities, further expanding our addressable market and resulting in several recent customer wins. Here are a few specific highlights from a customer and regional perspective Our business in India continues to gain momentum as we execute on previously announced wins with Bardi Airtel in both optical transport and IP routing as well as growth with other operators in the region such as Tata Teleservices.

Speaker 2

Sales in India increased 18% year over year as we scale production of the new optical and IP products, and we had a strong quarter for new bookings, primarily for our new products. We expect this region to continue to grow given the long awaited investment in deploying 5 gs technology and the continued exponential growth in Internet traffic. Our increased and answer session. Our next question comes from the line of Chris with Barclays. Please go ahead.

Speaker 2

Hi, good morning, everyone. I'm going to turn the call over to Chris. Hi, good morning, everyone. As we indicated last quarter, we're having good success in the EMEA region with sales increasing 10% year over year will be answered across a variety of critical infrastructure, telecom and defense customers this quarter. Bookings were particularly strong in the region as we closed a new 5 year agreement for products and services with our largest defense industry customer.

Speaker 2

The contract included a large $45,000,000 order, a portion of which is included in the quarter's bookings total and scheduled for delivery in 2023. The remainder of the order will book in future periods is scheduled for delivery or completion. This is a great validation by this key customer that places the highest priority on quality, service and security. In the U. S.

Speaker 2

Region, we're seeing continued growth in investment from U. S. Regional telecom and broadband providers, with multiple different federal funding programs benefiting the industry. Our IP optical sales in the U. S.

Speaker 2

Grew 78% year over year and reached a new high, with shipments to rural telecom providers nearly doubling, a trend that we expect to continue throughout the year. From a supply chain perspective, we continue to manage a number of component shortages, particularly related to the ramp of new products. This limited shipments by approximately $10,000,000 in the quarter, But more broadly, we've made good progress addressing other supply related issues. As we expected, IP Optical segment margins were below our normalized target this quarter as we ramp several new products and supply the infrastructure elements for several new DWDM optical projects. We expect modest improvements in the second quarter followed by more significant improvement in margin in the second half of the year.

Speaker 2

Now some highlights from our Cloud and Edge business. Sales in the Q1 increased 4% year over year with sales to enterprise comes from the line of customer's increasing more than 60% and related SBC sales increasing 24% versus the Q1 last year. Gross margins were roughly in line with Q1 last year at 61%, despite a higher mix of enterprise edge SBC hardware platforms. Combined with lower OpEx of 6%, adjusted EBITDA for the segment increased $5,000,000 or 20 is 8% year over year, a very good start for the year. Product and service bookings were 0.9 times following strong bookings last quarter for professional services that's converted into revenue over several quarters.

Speaker 2

From a regional question comes from the line of David. The growth in Cloud and Edge sales year over year was primarily in the U. S. And European markets, along with another solid quarter of business in Japan. Sales to service providers were flat year over year and enterprise sales accounting for the growth in the segment.

Speaker 2

Specifically in the U. S. Market, Cloud Nedge sales to our top Tier 1 service provider accounts were up 2.5% year over year. We expect overall sales to U. S.

Speaker 2

Service providers to increase sequentially in the Q2, but to be lower than last year's very strong quarter. From an enterprise perspective, we partnered closely with Bank of America this quarter to provide a significant upgrade to their core SBC and policy routing infrastructure. This is a marquee customer for us and we have a prominent role in their communications infrastructure. We also continued several is from significant voice modernization and capacity expansion projects with customers such as Qualcomm, Wells Fargo, Citigroup and ADT. We maintain good velocity with our service provider channel partners this quarter as we sell through a significant quantity of enterprise edge SBC servers to midsize enterprise customers for a variety of unified communications applications such as Microsoft Teams and Zoom, as well as hosted SentriX replacement.

Speaker 2

Enterprise Edge SBC revenue was up almost 60% year over year. Enabling our channel partners is a key part of our enterprise strategy, and we're supporting them as they transform their product offerings. Horizon, AT and T, SHI and ConvergeOne are strong examples of U. S. Partnerships where we're enabling managed service offerings, leveraging Ribbon products and services.

Speaker 2

Ultimately, the momentum in Enterprise resulted in a very strong quarter for is with our advanced analytics platform, supporting a variety of applications, including service assurance and fraud management. Will be answered by the end of the call. Our support services are also a key differentiator for us and our cloud and edge maintenance revenue continued to hold steady and was consistent with last year. We now have almost 90% of our projected maintenance revenue for the year already in backlog or under contract. With that, I'll ask Mick to come on and provide additional detail on our Q1 results and then come back to discuss outlook for the Q2.

Speaker 2

Mick?

Speaker 3

Thank you, Bruce. In the Q1 of 2023, Our financial results showed good improvement over the prior year with continued revenue growth for our IP optical networks business and sustained profitability from our cloud and edge business. From a financial structure perspective, we were able to improve our capital structure with an $80,000,000 reduction in our term loan is funded in part by a $55,000,000 preferred equity raise led by our major investors and an $18,400,000 gain from the sale of our fixed rate Please refer to our Investor Relations website for supplemental slides summarizing our Q1 2023 and historical financial performance. Let's start with consolidated corporate financial performance. In the Q1 of 2023, Ribbon generated revenues of $186,000,000 which is an increase of $13,000,000 or 7.5 percent from the prior year, driven by a 13% increase in IP optical networks and a 4% increase in cloud and edge.

Speaker 3

Non GAAP gross margin was 48.1%, will be recorded for $4,000,000 or 4 percent year over year. Our non GAAP net loss was $2,800,000 of $2,000,000 in the quarter, which is a $6,000,000 improvement year over year. Within the quarter, we sold our fixed rate swap for a cash gain of $18,400,000 a portion of the gain, dollars 7,300,000 was immediately is recognized in our income statement and is included as part of our non GAAP results in other income. The gain is not included in adjusted EBITDA. Non GAAP tax rate for the quarter was 30%.

Speaker 3

Our basic share count was 169,000,000 shares. Our fully diluted share count is now 175,000,000 shares for the quarter, which includes 4,900,000 warrants we issued in March. Now let's look at the results of our 2 business segments. In our cloud and edge business, 1st quarter revenue was is from the line of John. $114,000,000 an increase of 4% year over year, led by enterprise revenue growth.

Speaker 3

Software as a percentage of total product revenue was is recorded for the quarter. The CloudornEdge business had gross margins of 61.1 percent and operating expenses of $52,000,000 will be recorded in the quarter, resulting in an adjusted EBITDA of $21,000,000 or 18% of revenues. Let's now turn to our IP Opticals Network business results. We recorded Q1 revenue of $72,000,000 which was an increase of $8,000,000 or 13% year over year. As Bruce mentioned, this is the 3rd straight quarter of double digit revenue growth, reflects the momentum from new product introductions.

Speaker 3

Non GAAP gross margin for IP Optical was 27.2%, which is about 200 basis points lower than the prior year. The lower gross margin was primarily related to the initial shipments of chassis for several new optical DWDM projects, a higher mix of shipments into India and the ramp of new products. We expect that IP Optical gross margins will improve modestly this quarter and more significantly in the second half of the year. Non GAAP adjusted EBITDA loss for the quarter was $23,000,000 which is an improvement of $2,000,000 year on year. We had significant activity with our cash flows in the quarter.

Speaker 3

Cash from operations were a positive $11,000,000 which included $18,000,000 from the sale of our fixed rate swap. Free cash flow was a positive $9,000,000 including $2,000,000 in capital expenditures. Our cash flows from financing activities were a negative $30,000,000 driven by a repayment of $80,000,000 on our senior term loan and mostly offset by our capital raise of preferred equity and warrants for $55,000,000 total or approximately $53,000,000 net of discount. Will be answered. As a consequence, our cash and cash equivalents balance at the end of the quarter was $46,000,000 We have included a bridge chart in the earnings presentation that provides the summary of cash flows in the quarter.

Speaker 3

There were other noteworthy changes to the balance sheet. Ribbon's other current asset decreased from $68,000,000 to $53,000,000 reflecting mostly the $18,000,000 net gain from sale of the fixed rate swap. Deferred taxes increased partially to reflect taxable gain on the sale. Our senior term loan debt is now at $250,000,000 which is a decrease of $80,000,000 from the previous quarter and a decrease of $150,000,000 or 37.5 percent from the original amount as we continue to delever. Our revolver loan remained undrawn at quarter end.

Speaker 3

The $53,500,000 preferred equity and warrants are shown as a liability on the balance sheet due to our settlement features. Please note that their value will fluctuate each quarter as we are using the fair value method of accounting, which requires that we perform a quarterly mark to market evaluation to provide greater clarity and transparency to our accounting for these matters, we have also added an explanatory page in our earnings presentation. As part of the term loan debt repayment, we have paid a favorable amendment that allows Ribbon greater flexibility in our leverage and fixed charge coverage ratios. Our maximum leverage ratio increased from 3 times to is 4.5 times for most of 2023, while the minimum FCCR decreased from 1.25 times to 1.1 times. Per the bank covenant calculations, which include preferred equity and total debt among other adjustments, we comfortably met both of the mended term loan covenant metrics in the Q1 with a leverage ratio of 3.58 times and an FCCR of 1.61 times.

Speaker 3

The other key points of the amendment include a change to our base rate from LIBOR plus a maximum spread of 4.50 basis points will be from the line of Frankly, as well as a reduction in the size of our revolver from $100,000,000 to $75,000,000 The sale of the fixed rate swap hedge that provided a cap on LIBOR at 90 basis point merits some explanation. With the Federal Reserve slowing the pace of interest rate increases and likely pausing in the near future, in consultation with our financial advisors, We felt it was the right time to maximize the value of our interest rate swap. As a result, we sold a fixed rate swap for $18,000,000 gain before tax. The accounting treatment required $7,000,000 of the gain to be recognized in other income this quarter, while the remaining $11,000,000 will be amortized through interest expense over the remaining period of the term loan. As discussed in our last earnings calls, we have implemented a number of changes to reduce our expenses.

Speaker 3

Comes from the line of David. In the Q1, we reduced our operating expenses year over year by $4,000,000 from $99,000,000 to $95,000,000 and expect further efficiencies and lower quarterly operating expenses for the remainder of the year. Coupled with anticipated revenue growth, we are expecting a significant improvement in profitability for the year. Now, I'll turn the call back to Bruce to provide more comments on our outlook for the Q2.

Speaker 2

Great. Thanks, Mick. The Q1 was very active with a number of key industry trade shows and meetings with many of our customers across all regions. Mobile World Congress is, of course, the biggest show of the year and a great opportunity to meet with key executives from operators across Europe and Asia Pacific in particular. This was followed by an important optical technology conference is called OFC, where we unveiled our next generation optical platform, which received a lot of attention.

Speaker 2

It leverages the latest is from the line of our press release. Pluggable coherent optics technology, including a new 5 nanometer process node DSP to support the industry's first 1.2 terabit per second wavelengths. So we're very excited about the introduction of this new product later this year. Our customers' investment priorities that I highlighted on our last earnings call were underscored in practically all of our meetings: 5 gs Mobile Deployments, Broadband Internet Growth, Reducing operating costs and total cost of ownership and leveraging cloud technology to accelerate service availability and quality of experience are key focus areas as our customers prioritize their capital spending plans this year. As I mentioned on our last call, The introduction of new products in our IP Optical segment are directly targeted at the 5 gs and broadband investment priorities and are the catalysts behind growing revenues and bookings.

Speaker 2

Our expanded Neptune IP routing portfolio, including the XDR-two thousand series, addresses a wider range of applications, including 5 gs cell site routing and multi service edge and aggregation. And enhancements that we've made to our Apollo optical transport portfolio have positioned us to expand our share with wins such as the Barty Long Haul Project. As a result, new products accounted for more than 20% of the IP optical bookings in the Q1. We're still in the early ramp phase on several of these new products and are scaling supply chain and production over the next several months. With the further increased backlog created in the Q1, we remain on track to meet our target of at least 15% revenue growth in 2023 for the IP Optical segment and once again anticipate year over year growth of 25% or more in the 2nd quarter.

Speaker 2

In addition, we continue to will be from the line of our Investor Relations Officer. Please go ahead. Thank you.

Speaker 4

Thank you. Thank you. Thank you. Our next question comes from

Speaker 2

the line of Chris Worthington. As I mentioned in the last call, I'm excited about the potential to leverage our technology with major industry integrators and digital service consultants. From a margin perspective, our Q1 results were impacted by shipments of lower margin optical transport equipment associated with several new projects, along with a higher mix of shipments in India and the ramp of new products. We're expecting modest improvement in our IP optical margin in the second quarter and gross margins in the mid to upper 30s range in the second half of the year given the pipeline and projected customer and regional mix. Combined with the projected revenue growth and lower operating expenses, we continue to project profitability on an adjusted EBITDA basis in the second half of the year.

Speaker 2

From a Tier 1 or major mobile and telecom service provider perspective, we have a lot of focus on building on the wins we've already announced and landing and expanding with operators such as Barty, Rogers, Singtel, MTN Group, Telecom Italia and others. As mentioned in the last call, we have multiple additional IP and optical opportunities where we're at different stages deep in the evaluation and decision process that have potential for incremental revenue in 2023. Lead applications such as TDM to IP circuit emulation are becoming great entry points and leverage our experience and presence in the carrier's voice network to deploy our IP routing and optical transport solutions. In our Cloud and Edge business, growth in the Enterprise market segment is a key part of our strategy to maintain overall revenue and profitability. The adoption of cloud based unified communication solutions such as Microsoft Teams and Zoom to modernize voice infrastructure, will be from the line of Alex.

Speaker 2

We continue to receive very good feedback on the feature richness and flexibility of our secure voice communication solutions and believe we are gaining share, particularly with large enterprise question comes from the line

Operator

of our customers.

Speaker 2

One of the largest enterprise markets we're pursuing encompasses a number of U. S. Federal government agencies, both civilian and defense. We've made good progress on several of these large voice modernization projects and anticipate an initial award later this quarter. We're working closely with Dell and other integration partners to provide a comprehensive pre integrated federal solution.

Speaker 2

We continue to project significant revenue growth from the U. S. Federal market in the second half of the year. As I mentioned earlier, Sales of cloud and edge products to service providers in the Q1 were consistent with the Q1 of 2022, and we expect sequential growth in the Q2. However, last year's Q2 was one of the strongest quarters on record with strong voice modernization projects with U.

Speaker 2

S. Service providers, which makes the year over year comparison challenging. Based on our current outlook for the timing of service provider related projects, we anticipate cloud and edge sales in the 2nd quarter will be lower than last year, partially offset by growth in enterprise. Our current view of the second half of twenty twenty three continues to show modest growth in cloud and edge versus 2022, continuing to support an overall stable projection of the business for the full year. From an investment perspective, we've now implemented changes across the company to meet our reduced spending target of $30,000,000 yield an in year savings of $20,000,000 in OpEx and operating cost.

Speaker 2

This includes a reduction of approximately 200 positions or 6% of headcount. This will translate into a quarterly OpEx run rate of approximately $90,000,000 in the second half of the year, comes from $97,000,000 in the Q4 of 2022. With that as the backdrop, for the Q2, we're projecting revenue in a range of 2 is from the line of Alex. $205,000,000 to $215,000,000 non GAAP gross margins of 50.5% to 51.5 percent and non GAAP adjusted EBITDA in a range of $17,000,000 to $24,000,000 for the quarter. For the full year, we continue to maintain our previous guidance with revenue growth of 3% to 6% and a greater than 50% improvement in adjusted EBITDA.

Speaker 2

Operator, that concludes our prepared remarks, and we can now take a few questions.

Operator

Thank you. Our first question is from Eric Stupiger with JMP Securities. Please proceed with your question.

Speaker 5

Yes. Thank you for taking the question. First off, can you just comment on the service for the health of the service provider market? Cloud and Edge was relatively good, but can you speak to kind of comes from the last 90 days in service provider activity relative to expectations.

Speaker 2

Yes. Hey, Eric. Yes, thanks for joining the call. I think I commented that in the Q1, our large Tier 1s in the U. S, we were up about 2.5% in the cloud and edge business.

Speaker 2

I also commented on the rural telecom customers that we work with and have seen very strong growth, particularly with our IP optical portfolio year over year, almost doubling from what it was a year ago. So That part, that segment of the market, which obviously is supported by some of the federal funding initiatives, Particularly, RUS funding, which is really helping with deployments of broadband infrastructure has been really strong for us. Kind of more broadly in the international market. As I mentioned, India has just been almost on fire for us, very strong demand, good bookings momentum and good revenue increase year over year and that's with the large obviously the very large mobile operators in that region. So in general, it's been the start to the year has been pretty strong and we not only have had a kind of a good start from a revenue perspective, but the bookings even stronger.

Speaker 2

So, so far so good this year.

Speaker 5

And then on the new product front, I think you said that reached 20%, can you talk about that relative to expectations? How did that perform relative to your expectations?

Speaker 2

Yes, exactly right. So this is a combination of several of the new routing platforms, the XDR 2000 series. It includes the new cell site router product we're deploying with Bardi in India and also includes the enhancements that we've made to the optical portfolio around long haul transport. So those three categories contributed over 20% of the bookings in the Q1, Which I think was maybe a little stronger than I expected, but certainly directionally where we thought it was going to be, obviously given the investment we've made around enhancing the portfolio.

Speaker 5

Very good. Thank you.

Speaker 4

Yes. Thanks, Eric.

Operator

Thank you. Our next question is from Tim Savageaux with Northland Capital Markets. Please proceed with your question. Tim, is your line on mute?

Speaker 4

It is. Sorry about that. I wanted to follow-up on the rural opportunity And wonder if you could give us any comments as to how material obviously, you're growing really fast, but how material is that becoming Either in the context of IP optical in general or the overall company, and I'll follow-up from there.

Speaker 2

Question It's fairly material at this point, Tim. I want to say in the order of 10% or so of our IP optical sales are in that area. In fact, it was the strongest quarter we've ever had in the U. S. Market on the strength of a variety of those customers.

Speaker 2

So it's becoming a reasonably significant portion of the business.

Speaker 4

Right. And I guess you mentioned, as you look at the 15% plus growth target in IP optical, sounds like you expect that kind of rate of growth in rural to continue and then that's sort of built into your expectations, this sort of doubling. I guess beyond that, you mentioned a lot of opportunities out there that could positively impact 23 with additional Tier 1 Carriers, what are your kind of expectations built in on that front? Or is your growth outlook here mostly based on Kind of expanding with current customers and the order book that you have and funnel or is there an expectation of Meaningful new wins contributing to that growth.

Speaker 2

Yes. So the majority, the vast majority of question, the year over year projected increases with customers that we're already transacting with and doing business. And Yes, I feel really good about the momentum we've got here and off to just a really good start from a bookings perspective, obviously. Question And yes, your comment on the rural matches, I think, what I said that we expect that growth to continue and Ultimately, from a full year perspective, probably to double or more than double what we did last year in that segment. So good momentum in the U.

Speaker 2

S. Market at that level. Obviously, good momentum internationally in India with our large customers there and the new products. And then I mentioned a little bit about Europe. Again, the Europe, Middle East, Africa region continues to be our very, very strong market force Across that Critical Infrastructure segment and I mentioned the new expanded win with Defense customers, yes, so a variety of different places that provide a really good outlook for the rest of the year here.

Speaker 4

Okay. And I guess my final question is kind of focused on India, which described as almost on fire and it has been for a lot of the big base station guys as well. Although, I don't know if I characterize 18% year over year revenue growth is On fire, so are you kind of is that a reference to bookings? Can you give us any more specific color there? And Did or do you expect, any of the major India carriers, to make it on the 10% customer list

Speaker 2

Yes. So I think my comment was I had bookings in my head when I made the comment, Tim. Part of the strong bookings in Q1 clearly is coming out of that region with the new wins we've already announced and the new products we're ramping there. From a 10% customer perspective, we may end up a little short of that on the full year, But we'll have to see how the second half plays out. And certainly, we'd love to see that happen.

Speaker 4

And just quickly on that, did you how many 10% customers did you have in the quarter? Just kind of the usual or

Speaker 2

Yes, exactly. Same as you will. We had 1 Verizon was our 10% plus customer in the quarter.

Speaker 4

Got it. Thanks. And congrats on the quarter and the outlook. Thanks very much, Tim.

Operator

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

Speaker 6

Yes, thank you. My first question is Your booked bill for IP Optical 1.6, just wondering if it was due to any kind of order pull ins,

Speaker 2

describe it as building backlog for not just for this quarter, but for future quarters, Dave. Question I mentioned the one large federal defense industry booking. That was certainly part of the backlog that we're building, which will ship over the next 12 months. Question and then there's another portion of that that books as we go forward. So certainly that's building good backlog for the remainder of the year.

Speaker 2

Similarly, bookings out of the India region help us build backlog for future quarters. So I I certainly don't think of them as pull ins. They're simply giving us good visibility into demand in future quarters and it certainly makes the supply chain related activity is more predictable that way as well.

Speaker 6

Got it. Now I know that you don't quantify backlog, but just wondering if you can Provide additional color as far as the mix between IP, optical and SBC or CNE?

Speaker 2

Yes. So the bookings or the backlog obviously created in the Q1 were stronger around the IP and Optical portion of the question comes from the line of Jefferies. We have a very strong bookings position obviously around the maintenance portion of our Cloud and Edge business. As I mentioned, more than 90% of the projected revenue this quarter is already covered under backlog or secure contracts. We've got a pretty healthy backlog for the next couple of quarters here.

Speaker 6

Got it. And then you talked about selling more chassis in Q1 and that's why your Margins were below 50%, but then you're kind of guiding to mid-50s second half as You're going to sell more line cards. Is that one of the drivers for margin expansion?

Speaker 2

Yes. I think there's 2 or 3 drivers. So certainly that's one of them that some of the equipment that we're shipping last quarter and this quarter, as you know, is building out The optical underlay, the optical line for the deployments and those are always at lower margin. So as we fill that in with transponders, obviously that reverses question improves dramatically on the margins. That's the piece of it.

Speaker 2

The second piece is just regional mix. As we start off the year, obviously, there's always a mix of how much is in Europe, how much North America, how much India, etcetera. With India being stronger, That's pulled margins down somewhat in the first half and the visibility we have to growth in the other regions help improve The gross margin. And then the third factor is always around the volume of the business. As you saw In Q4, I think we did $97,000,000 of IP optical.

Speaker 2

As we get into the higher revenue level, that clearly helps with fixed cost absorption adds another 300 basis points or 400 basis points just from a pure volume perspective.

Speaker 6

Got it. And my last question is on India. I guess most of the revenues are coming from Airtel. What about the other 2 guys, Jio and Vodafone? Any opportunities, especially I'm assuming Huawei is in their either Jio or Vodafone.

Speaker 2

Yes. So we do business With all the operators there, Jio, Vodafone, IDEA, I mentioned Tata Teleservices on the commercial or the enterprise side, They're not at the level of business we're doing with Varty, and we do a mix of business in the region. Some of it's on our IP optical portfolio, But we also have a very good presence with our cloud and edge business as well. It's at a lower level of revenue, but it's a higher margin, higher profitable business. No, that blend helps us.

Speaker 2

And clearly, we have ambitions to grow our share in the region.

Speaker 6

Got it. Thank you.

Speaker 4

Thanks, Dave.

Operator

Thank you. Our next question is from Greg Mezaniah with Westpark Capital. Please proceed with your question.

Speaker 7

Yes. Thank you. Question on The margin guidance you gave for IP Optical and what you just reported, could you talk a little bit about Component pricing and how you're managing those inputs, Is there just an improving component pricing environment that you're dealing with? Or are you Attempting to redesign some of your products and design out some of the components that you may not need as much anymore?

Speaker 2

Yes, good question, Greg. So the last 18 months, we've seen almost no component or cost improvements. Normally, you'll see a 2%, 3%, 4% improvement on an annual basis just through negotiation just through cost improvements, etcetera. We haven't seen that for 18 months. We do anticipate seeing a little bit of that start to happen in the second half of the year and obviously you've seen the supply situation shift around pretty dramatically on Not only key components, but memory components, connectors, etcetera.

Speaker 2

So we do anticipate seeing some improvement in the second half. And again, as volumes just get higher, it gets better as well. So Yes, we'll see how the year progresses. But I think the other part of your question around designing out problematic components, That's definitely a part of the agenda that we've been working on, half a dozen or so designs that have been re spinning to will remove either short supply components or higher cost components and we see some of those designs start to kick in early in Q3 that helps as well.

Speaker 7

Got it. Got it. Now turning to cloud and edge, it looks like the weakest sort of component of your sales profile there is to the AT and Ts and Verizons of the world. Can you comment on that as far as What you're seeing, I know that business is lumpy and it could turn around and become a major boost as well. So if If you could just give us some color on that.

Speaker 7

Thanks.

Speaker 2

Yes, Greg, that's exactly right. These are kind of big projects that go through about 2 or 3 quarter progression to go to completion, where we're helping modernize the voice infrastructure, replacing a lot of legacy equipment, putting in a lot of software, And the timing of those projects can move revenue and profit around quite a bit. As I mentioned, we had a really strong quarter a year ago in the second quarter with that network transformation business, very, very strong quarter, and the timing on that looks a little later this year. It's not as prominent in the second quarter. And so we've reduced expectations around that for the quarter, but we do expect projects in the second half of the year.

Speaker 7

Good. Okay. Thank you. Thank you for that. Thanks.

Speaker 2

Thanks very much, Greg.

Operator

Thank you. There are no further questions at this time. I'd like to turn the floor back over to Bruce McClellan for any closing comments.

Speaker 2

Okay, great. Well, thanks again for being on the call this Operator, thank you as well, and that concludes our call.

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Earnings Conference Call
Ribbon Communications Q1 2023
00:00 / 00:00
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