Ribbon Communications Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 24, 2024

There are 9 speakers on the call.

Operator

Greetings, and welcome to the Ribbon Communications Second Quarter 2024 Financial Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joni Roberts. Thank you. You may begin.

Speaker 1

Good afternoon, and welcome to Ribbon's Q2 2024 Financial Results Conference Call. I'm Joni Roberts, Chief Marketing Officer at Ribbon Communications. Also on the call today, Bruce McCullen, Ribbon's Chief Executive Officer and Mick Lopez, Ribbon's Chief Financial Officer. Today's call is being webcast live and will be archived on the Investor Relations section of our website, rbbn.com, where both our press release and supplemental slides are currently available. Certain matters we'll be discussing today, including the business outlook and financial projections for Q3 of 2024 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 in the supplemental financial information posted on our website. In addition, we'll 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 the supplemental financial information we prepared for this conference call, which again are both available on the Investor Relations section of our website.

Speaker 1

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

Speaker 2

Bruce? Great. Thanks, Joni. Good afternoon, everyone, and thanks for start this afternoon with a short recap on the progress we've made over the last 18 months, executing against our strategic goals and improving the foundation of the company. In early 2023, we initiated the final phase of integration of the ECI acquisition by restructuring the organization and integrating common functions such as R and D, operations, customer support and deployment services.

Speaker 2

This allowed us to capture significant savings and better execute on programs that leverage products and technologies from both our business units, such as the significant investment being made in expanding broadband to more rural regions across the U. S. That will only accelerate with the $42,000,000,000 allocated in the Inflation Reduction Act for rural broadband. The investment that we've made in new products allowed us to capture additional share in regions such as India with the long haul and sell site rudder programs with Bardi Airtel, increasing our revenue in India by 30% last year. We expect to continue to see these benefits of the new operating structure for years to come.

Speaker 2

We've also been very successful in growing our business with enterprise customers as they modernize their communication infrastructure and leverage public cloud platforms. Similarly, we won a series of significant multi year voice modernization projects with U. S. Federal Defense Agencies that are now underway and will continue well into the future. Financial results have improved significantly, particularly in the IP Optical business where we have now had 8 straight quarters of year over year higher earnings contribution from the business, resulting in trailing 12 month adjusted EBITDA for the company once again above $100,000,000 in 2024.

Speaker 2

This allowed us to go to market in the Q2 and complete the refinancing of our credit facility, giving us the financial foundation to continue to execute on our strategy. We couldn't be more delighted with our new financial relationship with HPS and WhiteHorse their interest in supporting our growth initiatives. As we look forward to the second half of the year and beyond, we have multiple strong tailwinds supporting the business. The recently announced 3 year Verizon voice network modernization contract and the potential for similar projects with other service providers such as Bright Speed, which we announced last week, along with growth in enterprise and U. S.

Speaker 2

Federal give us high confidence that the CloudNedge business will return to growth. In addition, the recent announcement by Microsoft to suspend development on the Metaswitch portfolio creates an excellent opportunity to further expand Ribbon share in the global carrier voice infrastructure and unified communication space. Similarly, recent industry announcements including the Nokia Infinera combination and the HPE Juniper deal create disruptions that we intend to capitalize on. These types of consolidations create significant distraction for their businesses and inevitable roadmap realignment changes that open the door for alternative solutions. The one area that will create a near term headwind is business we have in Eastern Europe, supporting telecom operators in the deployment of Internet access in this troubled region.

Speaker 2

As the war in Ukraine continues into its 3rd year, it's become increasingly challenging to operate in Russia and continue to provide products. We therefore suspended new shipments and lowered our expectations with a more conservative outlook for the region for the rest of the year. This also had an impact at the end of the second quarter. In order to offset the profit contribution shortfall, we're phasing in additional cost saving over the next several months and we continue to target profitability for the IP optical business, although it will take a little longer than originally projected. 2024 is still expected to be a significant improvement over 2023.

Speaker 2

Now on to Q2 results. Revenue came in below our guidance range for the quarter at $193,000,000 In addition to lower shipments to Eastern Europe, the largest shortfall was a significant Cloud and Edge deal with a U. S. Federal agency that was expected to close in Q2, but slipped out of the quarter. That deal alone would have put us in the revenue guidance range for the quarter and well above the top end of guidance on earnings.

Speaker 2

Predicting the timing of these U. S. Federal projects continues to be challenging, but we are expecting this deal to close this week and is included in our outlook for the Q3. We are building momentum in this large and critical market segment where we have leadership and substantial differentiation. We did close and ship an additional large project in the Q2 to another U.

Speaker 2

S. Defense Agency. Despite the lower sales, earnings were very solid in the quarter with adjusted non GAAP EBITDA of $22,000,000 Gross margins were at the high end of our guidance with strength in both business units. Our continued focus on driving down expenses also contributed to the solid earnings result. Year to date profitability for the company increased 65% on an adjusted EBITDA basis as compared to 2023.

Speaker 2

Now a little more detail on each of our operating segments. As a result of lower sales to Eastern Europe, IP optical revenue in the 2nd quarter was down $3,000,000 year over year to $82,000,000 the 1st year over year decline we've had in 8 quarters. Excluding sales to Eastern Europe, revenue from all other customers was up 4% year over year and up 35% quarter over quarter. Book to bill was positive at 1.09 times. Excluding Eastern Europe, the EMEA region was the strongest market for IP optical solutions again this quarter, increasing 30% year over year and 9% quarter over quarter.

Speaker 2

This includes significant deals with defense agencies such as the Israeli Defense Forces and the Swiss Armed Forces. The Asia Pac region outside of India was also strong in the quarter with sales increasing 32% year over year. This includes a number of projects we announced this week with long standing customer Converge ICT in the Philippines, the leading fiber broadband provider in the region. The new deployment leverages our new 1.2 terabit per second Apollo 9,400 to expand fiber network capacity to support exponential traffic growth from hyperscale and AI applications. Sales to India in the first half of twenty twenty four were down approximately 20% year over year following strong shipments last year when we ramp supply of cell site routers and initial long haul optical deployments.

Speaker 2

However, we expect significant growth in the second half of the year with continued better margins. IP optical sales in the U. S. Were down this quarter as we work closely with customers and engineering firms to deploy products shipped in previous quarters. But we have a very strong pipeline of U.

Speaker 2

S. Rural broadband opportunities in the second half. In fact, backlog is currently higher than the entire amount we shipped in the first half of the year. The overall customer mix, along with continued improvement in supply chain costs, resulted in gross margins in line with our expectations at 39%, up year over year and down just slightly from the Q1. Non GAAP adjusted EBITDA for IP Optical was negative $4,000,000 in the quarter, a significant improvement year over year and sequentially better than the Q1.

Speaker 2

In our Cloud and Edge segment, sales were down year over year primarily due to the timing of the large U. S. Federal deal that moved to Q3. Sales to service providers, including U. S.

Speaker 2

Tier 1 carriers stabilized and were down only slightly year over year. We expect strong growth from service providers in the second half of the year. The team is fully engaged in operationalizing the new Verizon Advanced Voice Network Platform project. We received initial product orders and This will accelerate rapidly over the next two quarters, and we are on track to deliver the This will accelerate rapidly over the next two quarters, and we are on track to achieve our $100,000,000 per year run rate with Verizon by the end of the year. Overall activity in the voice transformation area continues to increase highlighted by our announcement with Bright Speed last week.

Speaker 2

They are leveraging our portfolio of voice solutions to modernize their legacy central office equipment, which includes our multi service routing platform, the Neptune 1250. We initiated a similar project with another U. S. MSO this quarter and expect several more this year. The reported Microsoft announcement to discontinue their work on the Metaswitch portfolio has also created significant and interest as operators evaluate options to continue to provide these critical voice services.

Speaker 2

Our CloudNedge recurring maintenance business remained strong this quarter and we expect a modest increase in revenue in the second half. More than 90% of our projected revenue for the year is already booked and we closed a significant 3 year renewal in excess of $60,000,000 with one of our larger customers in the last quarter. With that, I'll turn it over to Mick to provide additional detail on our Q2 results and then come back on to discuss outlook for the rest of the year. Mick?

Speaker 3

Thank you, Bruce. Good afternoon to everyone. We were pleased again with Ribbon's ability to meet adjusted EBITDA earnings guidance, driven by strong product gross margins and continued focus on operating expense management. On a trailing 12 month basis, our consolidated adjusted EBITDA remained over $100,000,000 Most notably, our IP optical networks is getting closer to sustained breakeven profitability with the last 12 months adjusted EBITDA of negative $5,000,000 or just under 2% of revenue. Meanwhile, we continue to manage the cloud and edge business, resulting in strong EBITDA margin performance of 24% for the last 12 months.

Speaker 3

With our expectations for revenue growth in both segments in the second half of the year, Ribbon's financial performance will only improve. As always, please refer to our Investor Relations page on the Ribbon website for supplemental financial information. Let's begin with financial results at the consolidated corporate level. In the Q2 of 2024, Riven generated revenues of $193,000,000 which is a decrease of 8.5 percent from the prior year and below the low end of our guidance. Non GAAP gross margin was 54.4 percent, which is at the high end of our guidance.

Speaker 3

This is a 240 basis point improvement over prior year due to a positive product and regional mix in IP optical networks. Non GAAP operating expenses were $86,000,000 an improvement of $4,000,000 year over year and quarter over quarter, driven by continued reductions in R and D and sales expenses from last year's restructuring efforts. This is the lowest operating expense level since the merger of Ribbon and ECI in 2020. Non GAAP net income was $9,000,000 which is a $1,000,000 improvement from the previous year. This generated non GAAP diluted earnings per share of $0.05 which is an increase of $0.01 versus prior year.

Speaker 3

Our non GAAP tax rate year to date was 35%. Our interest expense for the quarter was $4,000,000 42 percent less than the previous year. This was mostly driven by $6,000,000 of non cash accounting charges caused by the refinancing transaction, which included previous debt issuance costs from 2020 and the gain from the sale of the interest rate swap in 2023. Adjusted EBITDA was $22,000,000 in the quarter, right in the middle of our guidance. It is slightly down $1,000,000 from the prior year and up $10,000,000 from the Q1.

Speaker 3

Adjusted EBITDA year to date is now $33,000,000 and trailing 12 months is $104,000,000 Our basic share count was 174,000,000 shares and our fully diluted share count was 176,000,000 shares for the quarter. Now let's look at the results of our 2 business segments. In our cloud and edge business, 2nd quarter revenue was $111,000,000 a decrease of 12% year over year, driven by lower enterprise product sales, primarily due to the delayed U. S. Federal defense deal.

Speaker 3

We are increasingly confident that we can grow our revenues for this business segment, especially with the incremental opportunity from Verizon's network modernization program. Cloud and Edge had strong 2nd quarter non GAAP gross margin of 66%, consistent with the previous quarter and prior year. Software sales were solid once again and made up 64% of total product revenues. Product and services bookings were good in the quarter at 1 point 0 four times revenue. Cloud and Edge continues its steady cash and profit contribution with an adjusted EBITDA of $26,000,000 or 23% of revenues.

Speaker 3

Let's turn to our IP Optical Networks business results. We recorded 2nd quarter revenue of 80 $2,000,000 or a 4% decrease versus the prior year. While we had good revenue growth across most of Europe, this was mitigated by substantial year on year decrease of about $6,000,000 from our Eastern European operations. Also, as Bruce mentioned, sales to North America and India were lower this quarter, but we anticipate a significant increase in the second half of twenty twenty four. Non GAAP gross margin for IP optical networks was 39%, up about 800 basis points from the prior year, mostly driven by lower product costs and better regional mix from EMEA sales.

Speaker 3

This resulted in gross profit of $32,000,000 which is a $6,000,000 improvement from previous year. Actually, our last 12 month non GAAP gross margin is over 40%, driven by a better product mix, cost of goods sold enhancements and royalty reductions. Adjusted EBITDA for the quarter was only a loss of $4,000,000 which is a great improvement of $8,000,000 from the Q2 last year. This is the 8th straight quarter of year over year improvement in profitability for the IP optical networks. Now let's discuss total company cash flows and capital structure.

Speaker 3

Cash flow from operations for the quarter was a negative $10,000,000 but that includes a 1x7000000 dollars preferred equity dividend, which is classified as interest. On a normalized basis, cash flow from operations was a negative $3,000,000 for the quarter and a positive $7,000,000 for the first half of the year. Ribbon's capital structure was greatly enhanced in the 2nd quarter. As we had committed, were able to successfully refinance our Term Loan A before the end of June. With the proceeds of a new $350,000,000 5 year term loan on June 21, we repaid $230,000,000 of the existing term loan and redeemed in full for $64,000,000 of preferred equity.

Speaker 3

Additional detail on the transaction is in the Q2 presentation available on our Ribbon Investor website. As a result of the refinancing transaction, our liquidity has also improved significantly. We increased our cash balance over $36,000,000 from the Q1 to finish at $67,000,000 of cash and cash equivalents at the end of the second quarter. In addition, we have an untapped $35,000,000 new revolving credit facility. All in all, this positions ribbon well into the future with a strong foundation, solid capital structure, enhanced liquidity, less restrictive covenants and especially a new strategic banking group relationship.

Speaker 3

We are fortunate to be financed by HPS Investment Partners and WhiteHorse Capital due to their financial strength, business acumen and long term partnership perspective. With them, we will have the financial flexibility to address growth opportunities. Now I'll turn the call back to Bruce.

Speaker 2

Great. Thanks, Mick. Now focusing on the second half of the year, we're expecting significant growth with revenue increasing approximately 25% as compared to the first half. We expect margins to remain relatively consistent with the first half and with continued OpEx control, bottom line earnings are expected to more than double, very similar to the profile of the business in 2023. There are a number of specific tailwinds supporting the business and our outlook for the second half.

Speaker 2

First, the Verizon program is off to a great start and the combined team is fully activated. The first phase of sites to be upgraded have been identified and detailed designs are underway. We're scaling the deployment teams and ramping production on the necessary hardware components and installation material. Revenue on hardware and software is recognized as we ship and the professional service revenue is recognized as the work is performed on each site. Sales to Verizon in the 2nd quarter once again exceeded 10% of sales, increasing 40% quarter over quarter, and we project sales in the second half of the year to increase approximately 50% versus the first half.

Speaker 2

2nd, we expect a strong second half with rural and regional service providers in the U. S, building out fiber networks using both our optical transport and IP routing solutions. We have a very strong pipeline and growing backlog that projects significant growth versus the first half and to approximately double year over year. We've increased the number of network engineering and consulting firms we're working with and broadened our geographic coverage to more areas, which has helped further increase our opportunity funnel. Approximately 50% of the projects are benefiting from some form of incentive funding, such as RDOF and Reconnect.

Speaker 2

In addition to traditional telecom service providers, we're also seeing a growing number of opportunities with utility providers. 3rd, we expect a strong second half with enterprise and U. S. Federal and defense agencies with revenue growing more than 50% the first half of the year. This includes a number of larger annual enterprise license agreement renewals with financial institutions that provides a solid base of recurring revenue.

Speaker 2

4th, we expect the business in India to grow approximately 30% in the second half versus the first half of the year on the strength of stronger fiber network deployments and long awaited increased network spending by Vodafone Idea. The return of this strategic customer is a major opportunity given the shift away from Chinese manufacturers in this large region. And finally, excluding Eastern Europe, our business in the EMEA region is expected to follow a seasonal trend with sales increasing approximately 30% in the second half. This is a very strong market for our IP optical business with a base of repeat customers. The combination of all these trends provides us good visibility in the strong growth in the second half of the year.

Speaker 2

In addition, as I mentioned earlier, recent changes in the competitive landscape definitely creates opportunities to expand our business with both existing and new customers. In particular, the reported decision by Microsoft to discontinue development on the Metaswitch portfolio and significantly reduce sales and engineering staff is a major opportunity for us to replace existing deployments of session border controllers and voice soft switch and media gateways. We believe the majority of the Metaswitch footprint is with telecom service providers in North America and Europe. In many cases, the Metaswitch deployments are with customers where we don't currently have a footprint or where we have a minority share position. This is a great opportunity to provide customers with a migration to a state of the art feature rich software platform that's deployed at scale with the largest service providers in the world.

Speaker 2

Our second half projections do not yet include upside from this major market opportunity. Of course, we'll have some headwind from the suspension of shipments to Russia. We estimate this at approximately $20,000,000 to $25,000,000 of revenue in the second half. However, we are implementing a number of expense reduction actions to mitigate a significant portion of the profit shortfall and the additional tailwinds I outlined support the growth we're projecting in the second half. In summary, we continue to be focused on our key strategic goals, including achieving sustainable profitability in our IP optical business, returning to growth in our telco voice infrastructure business, diversifying and expanding sales in enterprise market verticals, including financial, healthcare and government information security, and accelerating innovation and capturing cost efficiencies with full integration of our product teams.

Speaker 2

From a guidance perspective, for the Q3, we expect continued sequential growth in both of our businesses. We expect gross margins to be consistent with the 2nd quarter, although perhaps down approximately 100 basis points given the expected mix of shipments. And we expect OpEx to be up a few $1,000,000 versus the Q2 due to variable employment expenses, but then to reduce further in the Q4 given the cost actions underway. Based on this for the Q3, we're projecting revenue in a range of $205,000,000 to $220,000,000 non GAAP gross margins of 53% to 53.5 percent and non GAAP adjusted EBITDA in a range of $25,000,000 to $30,000,000 For the full year, after accounting for the reduced sales to Eastern Europe, offset by growth across multiple other areas and continued expense management actions, we believe we're still on track to be in our original guidance range, although more towards the bottom of the range. Therefore, we thought it was prudent to revise our guidance for the full year as follows: revenue in a range of $830,000,000 to $850,000,000 non GAAP gross margins of 54% to 54.5 percent and non GAAP adjusted EBITDA in a range of $105,000,000 to $115,000,000 In conclusion, we are well positioned to benefit from the growing investment in fiber networks to meet the exponential increase in data consumption, and we expect a return to growth in our voice communications business as key customers such as Verizon accelerate modernization of their infrastructure.

Speaker 2

We're effectively managing things that are in our control and as we continue to significantly improve our overall profitability, this should translate into significant value creation for our investors and employees. Our original strategy behind the combination of Ribbon and ACI to cross sell the entire portfolio of voice and data products to a broad common customer base continues to progress and creates a strong foundation for the business to grow in 2025 and beyond. Operator, that concludes our prepared remarks, and we can now take a few questions.

Operator

Thank you. We will now be conducting the question and answer The first question is from Michael Genovesi of Rosenblatt Securities. Please go ahead.

Speaker 4

Okay. Thanks very much. First, congratulations on the strong margins and EBITDA and what sounds like a robust second half revenue outlook across a bunch of end markets. It's good to see all that.

Speaker 2

Thanks Mike.

Speaker 4

But I want to tie a bow on the Q2 and just understand the Q2 a little bit more. We got what you said about enterprise, about federal and that basically edge and cloud would have been in line, if the federal deal hadn't slipped. I want to quantify the shortfalls in optical in 2Q a little bit more. Like how much was Eastern Europe versus it sounds like the U. S.

Speaker 4

Was soft in the second quarter, but will be stronger, in the second half of the year? Thanks.

Speaker 2

Yes. Thanks for the question, Mike. So the first part, I think you've got right. The largest shortfall was this federal deal, which was significant in size. I think as I mentioned in the remarks that it would have gotten us to the guidance range.

Speaker 2

So, we were at $193,000,000 total with the bottom of the range at $200,000,000 So it gives you an idea of the size of that deal. And obviously, the incremental contribution from that given it's essentially software would have resulted in earnings being even much, much stronger above the guidance range just with that deal alone. On the optical side, I think Nick mentioned the year over year change in Eastern Europe was about negative $6,000,000 So that gives you an idea of the shortfall from Eastern Europe in the quarter, give or take a few $1,000,000 So, I hope that makes sense.

Speaker 4

Yes. And then, I mean, if we think about the guidance change for the whole year, is the primary moving piece there Eastern Europe? Is that the way we should think about it?

Speaker 2

Yes. From a negative perspective, it's all Eastern Europe. And I frame that in the $20,000,000 to $25,000,000 range, again, offset by the other tailwinds I mentioned across the board, really a whole variety of different things. So we have a pretty strong outlook for the second half despite the fact that we're reducing shipments into Eastern Europe. And I think that's in line with what we've seen from others, the pickup in the second half and then some of the things a little more specific to us around the Verizon project around U.

Speaker 2

S. World broadband expansions, all driving the growth in the second half of the year for us.

Speaker 4

Okay. And now it comes to a couple more for me. So we've got the Verizon new deal is already kicking in and you guys announced Spritespeed the other day. Those are pretty impressive names. And should we think about there's something going on in the industry where this is a trend and we can expect to see more of the same going forward with other customers?

Speaker 4

Yes.

Speaker 2

It certainly feels like that, Mike. The other one we talked about earlier in the year was with MTN Group in Africa, even with a modernization of their voice infrastructure. And so there's been a series of these. I also referenced another U. S.

Speaker 2

MSO program. And I think as people look at the investment in their network infrastructure and how do they get more efficiency, drive down cost be able to feed the growth in fiber and in mobile, it's a really great area to look. And we've done some work to drive down costs and the ROI and getting some good momentum. You kind of overlay that with the opportunity around the Metaswitch footprint, which is pretty substantial in the market and gives us some really good momentum around the cloud and edge business and the return to growth there.

Speaker 4

Great, great. And then finally, the OpEx with OpEx coming down so much, I mean, it's we like to see it, but I guess I just want to ask the question about sort of the R and D requirements of the business, what the R and D intensity looks like right now? How do you protect R and D as you're restructuring this aggressively? Thanks.

Speaker 2

Yes. Thanks, Mike. So we're pretty careful about that. I mean, R and D is the fuel. It's the engine of the future for sure.

Speaker 2

We've gotten at it by really coming at it structurally and being able to get the most out of the combined set of resources in the company with the reorganization we started about 18 months ago. And the area we're focused on is really around sustaining engineering. How do we get really, really efficient around the cost structure for supporting the installed base? We've actually implemented some really interesting technology that helps our customers upgrade their networks more efficiently and get them on a common software base. And that allows us to obviously get more efficient in how we support them as well.

Speaker 2

So there's a whole series of things that we've gone after there to keep the engine strong. So but thanks for all the questions, Mike.

Speaker 4

Perfect. I'll pass it on.

Operator

The next question is from Christian Schwab from Craig Hallum Capital. Please go ahead.

Speaker 5

Hey, good afternoon guys. So a lot of the questions were kind of answered there, but I'm just on the rural broadband, a lot of people aren't really talking about rural broadband or the bead money yet. You kind of mentioned the other programs. Is the strength that you're seeing for rural broadband on the OTN and optical side getting ready for those money to be released? Or are there a few states where you guys are really well positioned where money is getting into the market a little bit faster than say broadly based?

Speaker 2

Yes. Hey, Christian. So the Bead program is not contributing anything yet today. So it's not the source behind the programs we have this year at all. I mentioned, I think about half the programs, we estimate half the programs have some sort of federal assistance or state assistance behind them.

Speaker 2

But it's not the new BEE program. It tends to be RDOF or reconnect funds or a few other sources of funding. It's interesting that our participation in the middle mile portion of the network is probably a spend that's staged a little later than the initial investment around driving fiber, putting in the fiber access equipment, etcetera. And then as that infrastructure gets put in place and the traffic grows, then they have to upgrade the middle mile portion of the network. And so I think it may be just a reflection of the timing on how that works and where our participation is.

Speaker 2

And yes, we've just got a great funnel of opportunities in second half here, some of them a little larger that really helped obviously drive growth. And then the final thing I'll add is we're participating in the optical transport layer as well as the metro IP routing layer. And so that gives us access to a good source of the program or size part of the program as we have a little broader addressable market.

Speaker 5

And then on the disruption due to M and A, I mean, are there more opportunities here in the United States kind on Infinera. I know Infinera's opportunities were more data center centric, which I don't and more long haul ish type of applications. But where what products in both of those acquisitions, the Hewlett Packard Juniper, the OKEA, Infinera, what products that you have that you think you have the opportunity to be disruptive in the marketplace and maybe take share as roadmaps or questions and employees are let go?

Speaker 2

Yes. So in the case of the Nokia Infinera deal, it's squarely in the optical transport arena. And as you rightly pointed out, it's not so much in the North American kind of hyperscale data center portion of the market. It's more in Europe and Asia Pac. And typically, it's in cases where maybe both Nokia and Infinera have a share of deployments at a customer and they want to make sure they have a diversified customer base or a supplier base.

Speaker 2

And so it prevents opportunities for others to come in and win some of that share. In the case of the HP and Juniper deal, it's squarely in the IP routing space, really in the metro, middle mile and access aggregation layer, where perhaps Juniper had a position with a telecom operator and it's an opportunity for us to go in and provide an additional source. And given the focus that we have on the telecom market in particular and the products that we've designed specifically for that type of network, I think it gives us a good position to take more share there as well.

Speaker 5

Great. And then my last question, I'll sneak in here, Bruce, is on the on Bright Speed that you just announced, you've done a good job of quantifying the Verizon opportunity at $300,000,000 over the next few years, exit at kind of $25,000,000 ish in Q4 of this year. Can you give us any color on what the multi year opportunity at Brightspeed could be?

Speaker 2

Yes. Just directionally, not to talk too specific about an individual customer, But obviously, Bright Speed's footprint is smaller than the larger Tier 1s fixed line providers like AT and T and Verizon. I think the footprint they picked up was about 6,000,000 lines. And obviously, there's a transition to fiber and IP across the network. But there's quite a substantial footprint of legacy TDM lines there.

Speaker 2

And I think we've worked really successfully to justify the ROI in modernizing a portion of that network at least. And these programs do take time to modernize a switch location. It doesn't get done overnight, so it kind of stretches over a period of time. And hopefully, we can continue to grow in the footprint that we're already deploying in and then identify some of these new customers as well that we can get on board for the similar program.

Speaker 5

Great. No other questions. Thank you. Thanks, Christian.

Operator

The next question is from Tim Savageaux from Northland Capital Markets. Please go ahead.

Speaker 6

Hey, good afternoon. Let's stay on that one for a second, because that would be an obvious kind of guidepost to try and at least get a sense of what BrightSpeed could mean. And it is a smaller footprint, but it's not that much smaller. I think Verizon is what, dollars 17,000,000, dollars 20,000,000 lines, something like that. Is that a fair way to look at it in terms of proportional understanding they've got a big business network over there at Verizon and anything.

Speaker 6

I guess overall without pressing you too hard, it seems material or

Speaker 4

like it could be, is there to say?

Speaker 2

Yes. Hi, Tim. Yes, no, I think it's very meaningful and it's very strategic. I mean, BrightSpeed is an innovator here in the market and we love to be partnered with them here. I guess what I would say kind of a little more generally about this switch modernization, there are some uniqueness depending on the configuration of the switch, how many legacy lines are left, what the split is between businesses and residential and then what region of the market they're deployed in.

Speaker 2

The cost of power in California is a lot higher than the cost of power in other regions. So you really got to kind of roll up your sleeves and figure out what portion of the installed base has an ROI that makes sense to make the upfront investment. And so again, I don't want to comment too much more on Brightspeed specifically, but I would just say more generally, you've got to really kind of look at the details on each one. And so the comparisons aren't just they've got a particular number of lines and so it scales proportionately. And I know I'm not helping you a lot, but that's kind of the nuances behind the scenes.

Speaker 6

No, that's helpful. Off the top of your head, you think, hey, maybe these rural markets have actually more voice lines or more traditional voice than the bigger ones as well. While we're on the topic, what about can you talk to us about where you stand or if you see any opportunity at the kind of sister company where BrightSpeed spun out of, the old CenturyLink, the current lumen is would you put that on a a and maybe you're already there to some degree, I don't know, but any thoughts there?

Speaker 2

Yes. So we not surprisingly, we've got a large installed base across many of the operators here in the U. S. And Lumen being one of them. Nothing specific to talk about around their plans around that portion of the network, but we definitely have a large footprint that we're continuing to help support and maintain that's across the network there.

Speaker 6

Okay. I think I'll take a break from uncomfortably mentioning customer names and move on to a higher level discussion, which is I think, Nick, that you said you expect growth in both segments in the second half on a year over year basis. Just want to confirm that. And it seems like that would put you for the year in IP optical, maybe flat to up a touch. Am I kind of looking at that the right way?

Speaker 2

Yes, let me jump in. Mick can comment on this as well. So, the with the obviously, the change in the business in Eastern Europe, the year over year growth on IP optical is a little less than what we've started the year projecting. I think if you kind of back into it with our new full year guidance, it's up a bit, a tad year over year. And the cloud and edge business up 2% to 3%, something like that, maybe a little more.

Speaker 2

So I think you could back into those numbers directionally.

Speaker 6

Right. And any update you've given this, I think it was last quarter called out a certain amount of enterprise growth either for the quarter or expectation for the year, which sort of implied some continued declines in service provider, and this is cloud edge now. Given the strength that you're seeing in the second half or expect to see, and I think that was borne out from what we've seen from the carrier reports thus far, Is there any update in terms of those dynamics kind of Tier 1 versus non Tier 1 and how you're seeing that progress moving forward in CloudEdge?

Speaker 2

Yes, I think you got the math very accurate there, Tim. So I think in the Q2, service provider for Cloud and Edge was very consistent with a year ago, down a few $1,000,000 and the Tier 1 portion of that very stabilized. So, great to see, I'll call it kind of bottoming out. We said that last service provider piece. So the decline in cloud and edge in the Q2 year over year was essentially mostly enterprise and within enterprise it was mostly the one federal deal that contributed most of it.

Speaker 2

So, it's unfortunate, right, if that had just closed inside the quarter like we planned, we would have had a really strong number in the 2nd quarter, particularly on the earnings line, would have been outstanding.

Speaker 6

Okay. And last one for me. I do think this kind of shifting competitive landscape is really intriguing and makes a lot of sense. Anecdotally, can you give us anything in terms of immediate customer reaction in the wake of the recent Infinera deal or with regard to the Microsoft apparent news, is that something that's happening real time from your perspective? And is there anything you can share with us in terms of reaction you're getting across the customer base?

Speaker 2

Yes. So it's definitely happening in real time kind of not just supposition, I suppose, right? We have a couple of specific examples where and again, we're obviously focused on going and trying to And we want to be the alternative there, providing that supplier. And we want to be the alternative there providing that supplier assurance. So several specific examples like that.

Speaker 2

They don't translate into revenue overnight. It does take time, obviously, but there's several specific examples just like that. On the Metaswitch side, given kind of the abrupt approach taken around the transition there, There's a lot of discussions with customers where maybe they felt comfortable sweating the asset in the network for a continued period of time, but now kind of concerned over what the future holds and so discussions around replacing product that's deployed or transitioning from an on premise solution to more of a cloud based solution, it just opens up funnel of opportunity in a pretty broad way. So we don't have any of that in our projections for the year because again, I think it takes time to translate that into wins and revenue, but it's an area we're pretty focused in.

Speaker 6

Great. Thanks.

Speaker 2

Yes. Thank you, Tim.

Operator

The next question is from Dave Kang from B. Riley Securities. Please go ahead.

Speaker 7

Thank you. Good afternoon. My first question is, I was wondering if you can talk about Neptune's ramp at AT and T and other Tier 1s. I think you mentioned MSO, maybe provide more color on that customer.

Speaker 2

Yes. Hey, Dave. So we pointed out even with the Bright Speed migration that we're doing, it leverages our Neptune router as part of that solution. And it's involved in a couple of different ways kind of as a standard router as well as being able to support what they call TDM circuit emulation, being able to remove legacy TDM circuits or SONET infrastructure and carry it all over an IP fiber network, really helps reduce the cost of supporting all this legacy infrastructure. So that concept, that solution that we're using at a bright speed, same sort of approach that we talked about with AT and T last year.

Speaker 2

And it's actually a key enabler in this whole migration. So we want it to become really a standard element of the voice network modernization. And that's the entry point at a number of carriers, large and small. So I don't want to get into specific commenting on a specific customer, but it's an integral part of that solution now. And really that linkage between the portfolio that we acquired from ECI and have been investing in and how that combination makes a lot of sense for us.

Speaker 7

And can you just talk about the ramp, the trajectory? Like is it going to peak in maybe Q4 or next year? And any color on that?

Speaker 2

Well, we definitely have a strong second half. And in fact, I think as you do the analysis on the numbers, a very strong Q4. And again, it's similar to what I've heard from others. I know Nokia said something similar this week that the 4th quarter is expected to be unusually strong, if you will. I don't think of that as a peak.

Speaker 2

I think it's a peak for this year, obviously, but it creates a foundation for us to grow into 2025. And clearly, we think that's what we'll be able to do despite the reduced business out of Eastern Europe. We're able to as the growth we've been able to experience over the last couple of years, be able to continue that trajectory even with that coming out of the view for next year. So that's what we're here for. We want next year to be a significant improvement over this year.

Speaker 2

And I think the foundation we've created, the wins in some of these larger accounts now really provide us the ability to do that.

Speaker 7

Got it. And then last quarter, you talked about APOLLO9,500, sounds like a number of trials. Just wondering if we can get an update, any kind of potential wins in the pipeline?

Speaker 2

Yes, exactly. So that new the I think, on Tuesday this week with Converge over in the Philippines is using that new platform. So we're able to dramatically improve or increase the capacity on the existing fiber network by migrating from a 400 gig infrastructure to 800 gig basically with that new optical platform. And that's a perfect example, Dave, of a new win with a key customer that we're really helping expand. And if you go check the press release out, they talk about the growth that they're seeing from the hyper data center build out and AI applications.

Speaker 2

So I think that's an indication of the future opportunity here with this new platform, which has been adapted to be more data center centric, right, the different form factors and the ability to aggregate 400 gig client size interfaces on this platform is pretty unique. So we're excited about where that goes. And we had a good second quarter continue to grow on the deployments at a similar rate as what we saw in the Q1.

Speaker 7

Got it. And my last question is regarding Vodafone Idea. It looks like they got capitalized. Can you just remind us what kind of customer, how big they were, what kind of products yours providing? And going forward, what kind of opportunity should we expect from these guys?

Speaker 2

Yes. Thanks for that question, Dave. So the India market was in excess of $100,000,000 annually for ECI. Vodafone was probably 30% or so of that. And we're obviously not ramped back to that level, but the second half, we see a meaningful improvement in the investment they're making on the optical platforms that we have as well as the IP and PLS platforms that we provide into the market.

Speaker 2

So it's tens of millions of potential incremental business for us as we go into 2025. And it's just it's great to see them kind of back on their feet. And we've done a lot of work to support them over the last couple of years to make sure the network continues to operate successfully and hopefully that will translate into new business for us going forward.

Speaker 7

Just to be clear, do you still have that relationship or you have to go through back to square one and get redesigned in and all that? Do we have to go through that or you're just you are one of the incumbents just waiting for purchase in the POs?

Speaker 2

Yes. We're one of the incumbents, and have continued to do a little bit of business with them every quarter to help support keep new ads, new businesses, new revenue streams where they can they find the money to kind of continue to make those investments. And we continue to support them on local resources, helping operate the network. So there's no rebuilding required at all. We're on the ground ready to roll.

Speaker 7

Got it. Thank you.

Speaker 2

Yes. Thanks, Dave.

Operator

The next question is from Trevor Walsh from Citizens JMP. Please go ahead.

Speaker 8

Great. Thanks for taking my questions. Bruce, maybe a quick one for you around the Eastern Europe business. It seems like that was probably maybe kind of a building type of occurrence kind of happening over time, just seeing challenges and troubles there. So just curious if there was anything in particular that something that broke the camel's back or a change that allowed that kind of caused you to stop operations there?

Speaker 8

And then secondarily, what's required for that business to kind of come back or to return? Is it essentially like ending of hostilities or kind of what's the outlook from that perspective?

Speaker 2

Yes, thanks for that question, Trevor. So just to kind of recap our approach there, we have a small number of customers, telecom operators that basically provide Internet access and access to information to the people of the region. And we felt like that was something that was important that we would continue to participate in. There's a whole set of regulations and sanctions you've got to be able to manage through in order to be able to do that. And given the heritage of our products coming out of Israel, we were able to continue to support the business there.

Speaker 2

Those restrictions have recently increased and focused around telecom equipment and those sorts of areas. And so after we finished analyzing the changes, we came to the conclusion that we would suspend shipping new product into the region. It is subject to change, those rules change periodically. And so we'll just watch that carefully. And but at this point, we've basically removed it from our view for the rest of the year impacting approximately $20,000,000 to $25,000,000 in the second half of the year.

Speaker 8

Got it. Appreciate the color. Mick, maybe jumping over to you. Good to see the continued improvement on the IP optical profitability front. Is there anything kind of in any given quarter that might kind of trip you up in terms of just seeing that and continued drive towards profitability that you see?

Speaker 8

Or is it really just kind of just continuing to execute and nothing necessarily that can be out of the ordinary in that kind of continued positive progression?

Speaker 3

As you well know, we've been working on improving about less than 2% of total revenues. And it's really on the back of customer satisfaction, selling to our customers at higher margins and they value that. There's been a regional mix impact, of course, that's very positive. And we've also been optimizing our R and D. So we continue committed to bringing this business segment to profitability and a lot of it is going to be contingent on its continued growth.

Speaker 8

Great. Maybe just one more. With the refinancing of the cap structure, is there anything kind of on the go forward now from an investment perspective or investment kind of priorities that you kind of have now have access to or opened up to that you might not have before or anything you can kind of give us perspective on in terms of areas that you're looking at that has now changed the game just given that new set of funds

Speaker 3

liquidity? We are very fortunate to have these strategic partners and I think that we now have very solid capital foundation base. We're focused on executing to our plan. There's nothing really major in the near term that we're focused on. It's really executing the plan that we and our strategy that we talked about.

Speaker 2

Yes. And Mick, just to jump in for a sec here, I think it's fair to say that having 1 or 2 lenders that we can have strategic discussions with just enables us to kind of move a little more There's just There's just a lot more flexibility in this cap structure than what we had previously. That's absolutely right.

Speaker 8

Great. Appreciate the questions.

Speaker 2

All right. Thanks, Trevor. Appreciate it.

Operator

There are no further questions at this time. I would like to turn the floor back over to Bruce McClellan for closing comments.

Speaker 2

Great. Well, thank you. Thanks for everyone joining our call here today. We have a couple of great investor conferences coming up over the next 6 weeks. So we look forward to talking to many of you individually and keeping you apprised of our progress.

Speaker 2

Thank you very much, operator. Thank you as well.

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Earnings Conference Call
Ribbon Communications Q2 2024
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