Ribbon Communications Inc. Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by. Our conference will begin momentarily. Once again, ladies and gentlemen, thank you for standing by. Our conference will begin momentarily. Greetings, and welcome to the Ribbon Communications Second Quarter 2020 Financial Results Conference Call. As a reminder, this conference is being recorded.

Good afternoon, and welcome to Ribbon's Second Quarter 2020 Financial Results Conference Call. I'm Monica Gould, Investor Relations of Ribbon Communications. Also on the call today will be Bruce McClelland, 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 at ribboncommunications.com, where both our press release and our supplemental data are currently available. Certain matters we will be discussing today, including the business outlook, financial projections for the third quarter 2020 and the proposed sale of the Kandy Communications business 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 the 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 our safe harbor statement included on Slides 2 and 3 of the supplemental slides for this conference call. In addition, we will present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measure are included in the earnings press release we issued this afternoon as well as the supplemental slides for this conference call, which again, are both available on the Investor Relations section of our website.

Thank you, Monica, and thank you, everyone, for joining us today. We're very pleased with our performance in the second quarter as we navigate this challenging time. Before we go through the details of our second quarter performance and talk about our outlook for the second half of the year, I'd like to make a few comments on the announcement we made today relative to our Kandy advanced communications business. As part of the portfolio assessment that I've been doing since joining earlier this year, it became clear that a different path would be beneficial to realize the full potential for Kandy. As announced, we have signed an agreement to sell the business to American Virtual Cloud Technologies, or AVCtechnologies. AVCtechnologies is a publicly traded IT services company with a strong management team focused on assembling a world-class portfolio of unified cloud communications, managed services, and cybersecurity technologies and services. We believe the all-stock transaction will unlock the value of our Kandy Communications business and allow Ribbon shareholders to benefit from the potential upside while reducing the ongoing investment that is needed to ensure the full potential is achieved. In the first half of 2020, we estimate there would have been a $9 million improvement to Ribbon EBITDA had we excluded the Kandy operation. AVCtechnologies will be an important customer for Ribbon. And as a minority investor, we will be completely aligned on prioritizing the success of our mutual customers and our most important asset, the employees. The deal is structured as an asset purchase with AVCtechnologies acquiring the ongoing Kandy business, including certain intellectual property, customer contracts, and ongoing operations. Key customers include AT&T, IBM, Etisalat, the city of Los Angeles, and many others. Ribbon will receive 13 million shares of AVCT, an approximate value of $50 million based on the current AVCtechnologies share price. We expect the transaction, which is contingent on financing, AVCtechnologies shareholder approval, consent from our lenders under our credit facility and other customary closing conditions, to close before the end of 2020. I'm very excited about this new direction for Kandy and the potential for this business as well as the increased focus this will give the Ribbon team on our core service provider and enterprise strategy. Now on to other highlights in the second quarter. We reported total sales of $210 million, a 45% increase from the same period last year, reflecting the inclusion of a full quarter of packet-optical sales from the ECI acquisition. Excluding ECI sales, the traditional Ribbon business on a stand-alone basis remained very solid, with sales increasing to $147 million from $145 million in the same quarter a year ago. Sales from organic Ribbon software-based products increased 39% in the second quarter compared to the same period last year, which had a very positive effect on our profitability. We continue to make good progress on our strategic objective to diversify and grow our enterprise business. Overall, sales to enterprise customers accounted for 30% of our product revenue, up from 21% in the year-ago quarter. The stand-alone Ribbon cloud and edge enterprise sales increased 42% year-over-year and 38% quarter-over-quarter despite lower sales of our on-premise SBC solutions arising from the shift to working from home. We are starting to see the benefits from restructuring activities and other cost-containment actions we took in the first half, with non-GAAP operating expenses declining approximately 11% quarter-over-quarter on a comparable basis. Combined with the higher sales and stronger gross margins, overall profitability grew by 31% year-over-year with adjusted EBITDA of $30 million in the second quarter. For the first half, we've delivered $39 million of adjusted EBITDA, almost double the $20 million achieved in the first half of 2019. Like many companies, the majority of our employees continue to work very effectively from home. We have started to slowly phase back to the office with a small percentage of employees in certain locations. We've maintained extensive employee engagement and have great examples of initiatives by Ribbon employees to support the local community. Our customers continue to see elevated traffic levels related to work from home, driving network capacity augmentation and continued focus on transitioning legacy networks to IP. Customers are prioritizing solution certainty and speed of deployment over evaluating new technologies. In some regions, such as India and Japan, there remain logistical challenges that have slowed down certain types of projects and delayed new product testing and certification. But overall, our engagement level with customers has increased and is very similar to pre-COVID levels. Visibility in the business has improved, and we currently have no significant supply chain restrictions. Lower travel and marketing activities contributed to our lower operating expenses in 2020. We had quite a few notable customer accomplishments in the second quarter. On the 5G front, we were very excited to announce that Bharti Airtel went live with a new IP/MPLS network, utilizing our Neptune platform with a specific focus on readying their network for 5G services. We have a great partnership with Airtel, and this deployment of thousands of network elements is a great affirmation of the differentiation designed into our packet-optical portfolio. Airtel is also leveraging our mobile analytics platform to further manage the performance of their network. A little closer to home but still on the 5G theme, we had an important win with a major U.S. mobile carrier with a new VoLTE voice transcoding platform to support both 4G AMR Wideband voice codecs and next-gen 5G Enhanced Voice Services, or EVS, codecs. This was a $10 million initial deal with deployment in the third quarter and potential for future growth. While these two wins are obviously very different, they emphasize the importance that 5G will have in network modernization and investment going forward. Our core SBC business had a very good quarter with both enterprise and service provider customers. We were proud of the work we did with bandwidth to rapidly increase system capacity, leveraging a cloud-based deployment on the AWS public cloud platform as the stay-at-home order created significant traffic growth. We went live with a new customer in Japan to support their 4G mobile launch as they pioneer commercialization of the OpenRAN standard. Despite the work-from-home operating model, we had a very busy quarter as we partnered with Microsoft to train hundreds of their global One Commercial Partners on the use and deployment of Direct Routing to support off-net calling within the Teams environment. We continue to see momentum building with our Microsoft engagement and believe this will be a growth driver in the second half of the year and into 2021. Our Kandy business had several notable accomplishments in the second quarter. We launched a new IP toll-free click-to-connect capability with AT&T in their API Marketplace that provides customers with the ability to simply add inbound voice-over-IP toll-free calling. This is particularly powerful for call center environments, operating in multiple locations or migrating from legacy TDM systems. Together with one of our Tier 1 carrier-partners, we were awarded a UCaaS opportunity with a nationwide health care services company, covering over 80,000 end users in over 100 locations. During the quarter, we surpassed 200,000 seats on the Kandy business services platform, a significant milestone.

Thank you, Bruce. I am honored to join the Ribbon leadership team and especially grateful for the warm welcome. As Bruce mentioned, our second quarter showed good performance considering our challenging economic environment. We have provided supplemental slides on our website with graphs and tables to assist our investors. Total revenue of $210 million in the second quarter was comprised of $147 million for cloud and edge and $64 million for packet-optical. To repeat again for the sake of clarity, Ribbon acquired ECI on March 3, so the first quarter of 2020 had one month of packet-optical revenue of $30 million, while the second quarter has a full quarter included for $64 million. As previously mentioned, as we continue to integrate, we will transition to providing business unit performance rather than legal entity financials. Given the recent ECI acquisition, all year-on-year comparisons are against Ribbon stand-alone unless otherwise noted. The second quarter 2020 GAAP financial results were as follows. Total company revenue was $210 million. Gross margin was 53%. Operating expenses were $111 million. Loss per share was $0.06. Please note that last year, we had a $63 million gain from a litigation settlement included in the company's GAAP financial results, which added $0.57 to earnings per share. For Ribbon as a total company, our non-GAAP second quarter performance was total revenue of $210 million. Non-GAAP gross margin was 59%. Non-GAAP operating expenses were $99 million. Non-GAAP adjusted EBITDA was $30 million compared to $22 million last year. The improvement in adjusted EBITDA was driven by higher software mix in cloud and edge and continued cost containment efforts across the company. Non-GAAP diluted earnings per share was $0.06 compared to $0.14 last year, which reflects the higher share count from the ECI acquisition. Our diluted share count for the second quarter was 151 million shares compared to 111 million shares in the prior year, primarily driven by the ECI acquisition. The packet-optical network business recorded Q2 revenue of $64 million, which was down 26% versus the prior year due to challenging operating environments in regions such as India. From a profitability perspective, our ECI entity achieved gross margins of 39%. By controlling expenses, we were able to minimize the EBITDA loss to $7 million. In the cloud and edge business, Q2 revenue was $147 million, reflecting growth of 1% from the previous year, driven by demand from our enterprise customers. Strong growth in software revenue resulted in better gross margins for cloud and edge of 67% versus 63% in the previous year. Our non-GAAP operating expenses of $64 million decreased 10% from the prior year, driven by restructuring savings, temporary employee salary reductions, and minimal travel and other discretionary expenses. Cloud and edge non-GAAP operating margin was 23%, which is 10 percentage points higher than last year. Non-GAAP adjusted EBITDA for cloud and edge was $37 million, which is $15 million higher than last year and reflects an adjusted EBITDA margin of 26%. Now some additional perspective on cloud and edge. There was $72 million of product revenue and $75 million of services revenue. In the second quarter of 2020, cloud and edge software product revenue increased by $12 million compared to the same period last year. Software was 60% of total product revenue in the second quarter of 2020 compared to 43% in the second quarter of 2019. We would like to provide some of our key metrics for the second quarter. Book-to-bill ratio excluding maintenance was 1.12x. Our solid pipeline is providing us with much better visibility into sales in the second half of the year. Software revenue was 39% of total product revenue across the total company. Maintenance was 33% of total revenues, which is fairly consistent with the prior year. Our top 10 customers accounted for 47% of total revenue, which compares to 52% last year. Service providers accounted for about 70% of our revenue in the quarter and enterprise customers represented 30%. This compares favorably to the second quarter of 2019, which had 79% of revenue from service providers and 21% from enterprise customers. While in last year's second quarter, international customers accounted for 42% of revenues, as a result of the ECI acquisition, international customers represented 52% of revenue in the second quarter of 2020. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $94 million, including restricted cash of $13 million. We anticipate using approximately $8 million of restricted cash over the next year to pay certain real estate taxes associated with the ECI merger. The principal balance of our term loan was $397.5 million as of June 30, 2020, which is down $2.5 million, reflecting a quarterly principal payment. Our revolver of $100 million remained undrawn. The effective interest rate on our term loan was 3.9% for the second quarter of 2020. The leverage and fixed charge coverage ratio covenants were comfortably met. From a cash perspective, the company used $3 million of cash in operations for the second quarter. If we were to adjust for unusual items, including payments of $25 million for acquisition-related costs from the first quarter and positive $9 million in receipts from the Metaswitch settlement, our cash from operations would have been a positive $13 million. We anticipate spending approximately $7 million in the second half of 2020 for restructuring and acquisition-related expenses. We received an accelerated payment of $16.7 million from Metaswitch in July that completed their payments to Ribbon. Capital expenditures were $9 million for the quarter, which was $5 million higher than normal due to real estate leasehold improvements in our North Dallas and Japan facilities. In summary, we had a good quarter with strong performance by cloud and edge and recovery in the packet-optical network business.

Great. Thanks, Mick. Let me add a few more thoughts on each of our businesses and our outlook for the third quarter. Our cloud and edge portfolio is a broad set of voice-over-IP-related products and services deployed with many of the major carriers and enterprises around the world. Continued investment in these products is driven by the adoption of IP technologies to reduce cost and enable advanced collaboration services. The recent work-from-home transition continues to be a tailwind for the business given the increase in network utilization. A significant portion of the addressable market growth for cloud and edge is within the enterprise vertical, particularly as unified communications solutions, such as Microsoft Teams, Zoom, and Amazon Chime become commonplace. As use of these UC platforms expands beyond collaboration use cases and begins to replace traditional network or PBX voice systems, secure scalable SIP trunking becomes a critical ingredient. This is an area where we are laser-focused, and we are expanding our solutions to support the growing UC market. This week, we launched Ribbon Connect, a portfolio of subscription-based as-a-service offerings. This Ribbon Connect offering supports Microsoft Teams Direct Routing and enables carrier-grade voice calling capabilities in minutes. Microsoft Teams is one of the fastest-growing unified communication platforms in the world with more than 100 million daily active users. Ribbon Connect provides a seamless way for service providers, value-added resellers, and system integrators to quickly tap into this rapidly expanding market by easily adding voice calling capabilities to Microsoft Teams. We're taking a partner-first route to market with this offering, supporting a best-of-breed approach to the solution. Ribbon Connect for Microsoft Teams Direct Routing is the first of several subscription-based offerings designed to rapidly accelerate time to market for real-time communications. We also continue to have good traction in the financials vertical with nine global financial institutions, increasing capacity on our session management solution in the last quarter, illustrating the significant role we play in these global enterprise networks as they continue to modernize and optimize their IP-based communications network with our software and premise-based solutions. With a broad array of public or private cloud and on-premise SBC solutions, we really have the market covered. With security top of mind for many consumers, our leadership in defining and deploying Call Trust and identity management solutions continues to gain momentum with service providers. Our new Call Trust offering utilizes machine learning models to determine a caller's intent and reputation in real-time for every call and enables the service provider to determine how each call should be handled, greatly reducing the number of unwanted robocalls and fraud calls. In the second quarter, we secured two Tier 1 North American customer wins for this offering. Our cloud and edge business is underpinned by a strong recurring maintenance revenue stream, supporting many of the largest telephony networks around the world. In the second quarter, we had two satisfying win-backs with customers that had discontinued support from us in favor of another third-party only to return and renew coverage. Overall, we continue to expect year-over-year sales growth of 2% to 3% for the cloud and edge business with improving earnings from a stronger software mix and lower operating expenses. Growth related to enterprise communications will outpace other areas and pace the overall growth of the business. Turning to our packet-optical networks business, we saw some recovery in sales as customers renewed projects paused during the early stages of COVID-19. In particular, we had a solid quarter in European and former Soviet Union countries. The business in India is still impacted by both COVID delays as well as the ongoing adjusted gross revenue fee dispute between several wireless carriers and the Department of Telecommunications. However, there is a significant Supreme Court hearing on the case planned for next week, and we're optimistic that clarity will be reached and service providers can move forward with certainty in their business. From a general activity perspective, we have seen deployments recover in July to approximately 50% of the pre-COVID levels and expect this trend to continue to improve. Engagements related to 5G network planning are very robust, and we expect this to be a significant driver for our business in 2021. In addition to our Bharti Airtel announcement, our portfolio was ranked very strongly by a recent global data report that focused specifically on 5G transport solutions. In particular, we had market leadership ratings in areas such as timing and synchronization, network slicing, programmability, and power efficiency. This affirmation underlines the technology differentiation and competitiveness of the portfolio. Our timing is perfect, given the increased global pressure on Chinese competitors in certain markets, creating opportunity for new wins and market share gains. One of our highest priorities is to penetrate the North American market, leveraging the strong Ribbon presence and relationships. During the quarter, we added additional sales executives with deep experience in the North American optical market to address the opportunities that we are seeing with current ribbon customers. While it will take time for the strategy to play out, we have a broad set of opportunities in the pipeline. Overall, we expect our packet-optical business to continue to improve in the second half of the year and to be poised very well for growth in 2021. We expect to further benefit from the integration efficiencies and increased scale of the combined company. As a result of the improving visibility and solid backlog, we are providing financial guidance for the third quarter. We anticipate sales in the range of $210 million to $220 million with a slightly higher mix of hardware sales. Our outlook for adjusted EBITDA is in a range of $25 million to $29 million and non-GAAP earnings per share of $0.05 to $0.07. This outlook excludes any potential effects of the sale of Kandy. While we continue to face near-term challenges, we have a lot of opportunities, and I'm confident in our ability to adapt and position the company for profitable growth. That concludes our formal remarks. I do want to personally thank the entire Ribbon team around the globe for their hard work this past quarter and the excellent progress we've made on integration as well as cost containment. I want to give a special thanks to our sales team that had very solid results during the challenging pandemic. At this time, I'd like to ask the operator to come back on the line and open up for questions.

Our first question comes from Paul Silverstein with Cowen. Paul, can you check if your line is on mute?

I should learn how to use this cellphone. I apologize. Two big picture questions, if I may. First, regarding the ECI packet-optical. I want to confirm your comment, Bruce. The 50% recovery you mentioned, was that specific to India? Or did that apply to the overall packet-optical revenue, considering India was a significant part from a geographic perspective?

Yes. Sorry, I wasn't clear, Paul. That was specifically around the deployments we're doing in India with the large carriers there. We're deeply involved with them doing the service element of deploying the product, and we get pretty good visibility into what's going on, and we're kind of more than halfway back to where we were earlier this year in deployment velocity.

Bruce, I am trying to understand the opportunity or risk. How significant is India as a part of your business? I assume India is mostly packet-optical now rather than traditional. What percentage of your optical revenue does India represent currently?

Yes. So we do a little bit of cloud and edge there, but the larger portion is packet-optical, and it's about 1/3 of the business, something like that for the overall packet-optical sales.

And the bulk of the balance would be Russia, Eastern Europe, Israel, Middle East, Africa?

You got it. Yes.

All right. And as a general proposition, if we think beyond India, what are you seeing in terms of recovery on the packet-optical piece, before I ask about cloud?

Yes. So the European region and the countries we sell into in former Soviet Union saw a more significant recovery in the second quarter, particularly as we get to the end of the quarter. So we had pretty solid results there. As the deployment velocity continues to increase in India and of course we get through solving the adjusted gross revenue fee dispute, hopefully, next week, we're optimistic that India really starts to reaccelerate. The announcement we did with Bharti here this week is a good indicator of how significant a presence we have over there.

All right. And 1 more question, if I may, on packet-optical before I get to the cloud. And I apologize if I asked you this 90 days ago, but obviously, you could take advantage from an acquisition perspective, whether Acacia, Neo and Inphi on a coherent DSP. But as a general proposition, given the level of competitive intensity in optical and given the nature of the competitors, where you have some very fine and much, much larger entities with significantly greater assets, and you're somewhat resource-constrained. I'm just curious, Bruce. I know it wasn't under your watch. I know you're coming in. You just made a strategic decision with respect to Kandy. But from a long-term perspective, the challenge versus opportunity of having sufficient resources, especially given that the cost of technology and the technical complexity of that technology hand-in-hand go up dramatically with each line rate. And as fine as ECI has been historically, extremely good supplier from a technology product perspective, but how do you, from a long-term perspective, beyond managing quarter-to-quarter, what's the likelihood from your perspective, the puts-and-takes of being able to feed that and be successful? I don't mean to be cynical, but again, looking longer term, and again, you're the new sheriff in town. What are your thoughts on how you navigate that very challenging, the factors look?

Well, I think, Paul, it's a lot around focus. We're trying to do everything for everyone. That's when you have a challenge. In fact, the decision we made around Kandy is a perfect example of really focusing on where we're going to invest and where we're going to be successful. This global data report we just saw highlights the technology strength in the portfolio and the thought leadership we're gaining particularly around 5G networking and the evolution towards private networking. I understand the skepticism, but that's exactly our advantage. We're coming in as a bit of a disruptor with a differentiated technology approach. We've proven we can be successful selling directly head-to-head against the major industry names. The strategy is fairly simple here, right. As we've talked about, is to take that technology advantage and then leverage the footprint and the relationships and go head-to-head and win the business. We're not afraid to go do that. We need to prove it. We've got to show you, obviously, that the strategy is going to make sense. But no, I'm very confident in our ability to do that.

I understand your perspective. I’d like to discuss your cloud business. I recognize you weren’t there previously, but the trends you've mentioned in enterprise, SIP trunking, and Teams are not new and have been present in the market for a while. For instance, AudioCodes has a distribution of 70-30 between enterprise and service providers and has concentrated on the enterprise segment for some time. Going back, whether it was Sonus or Ribbon, there was a focus on acquiring a private company before your time, emphasizing the Microsoft enterprise opportunity. There has been considerable discussion about enterprise over the years. What has changed now? What are the essential elements that need to shift for you to effectively take advantage of the significant enterprise opportunity presented by Teams and the current environment?

Yes, Paul. When you break down the enterprise market, you'll see there are various addressable markets. We've had significant success with major enterprises; for instance, nine major financial institutions invested in our SBC product just last quarter. This isn't just for unified communications but for their own SIP trunking needs between offices and network interconnects. There's also the small and medium-sized business market, along with the unified communications market, which require different technical solutions to address the entire market. We offer best-in-class appliance-based products and cloud-native solutions, and we recently launched an as-a-service product, in addition to scalable on-premise solutions for all company sizes. We have been enhancing our capabilities and catching up in part of the market, but in larger enterprises, we are leading. Recently, there's been significant growth in unified communications. For example, Microsoft Teams has over 100 million daily users, yet only a small number use it for telephony needs like PBX replacement and off-net calling, highlighting the need for secure SIP trunking SBC platforms. We believe adoption is shifting from mere collaboration to using that platform for all communication needs. This represents a significant change in how enterprises will utilize these products. With our expanded portfolio and the addition of as-a-service capabilities, we are well-positioned to capture market share as this sector grows.

Bruce, is the Teams opportunity the one you're most excited about, or is there another opportunity that excites you even more?

Yes. We've mentioned Teams a lot, but there are several additional outstanding UCaaS collaboration platforms out there that all do similar things and all need this secure off-net phone connection. So it's Microsoft, it's Zoom. There's a handful that are really leading the industry. We are focused on all of them, not just on Microsoft Teams. But as we've seen the momentum build there, we'll put more and more effort around that and partner pretty closely now with their sales team to position ourselves better. A lot of work, Paul, has gone in the last six to nine months to improve our position there. It's not just doing the same thing, hoping for a different outcome.

Yes, great. In terms of the Kandy sale, I just wanted to make sure I got the number right. Did you say that EBITDA would have been $9 million higher in the first half of the year absent Kandy? Is that what you said?

That's right. That's right, Mike. Exactly.

Any revenue color on that as well?

Yes. It kind of goes up, down a little bit every quarter, but you could model it as between $3 million and $4 million a quarter in revenue in the first half of the year.

Great. The work-from-home trend emerged strongly and quickly, leading to a clear increase in customer demand for your services to manage traffic. I'm curious if this resulted in any premature capacity purchases that might not occur later in the year, or if the elevated traffic simply means that ongoing investment will be necessary throughout the year.

Yes, it’s a bit challenging to pinpoint exactly, but it seems more like incremental growth rather than pull-forward. There is a continuous development of the business to maintain capacity, along with a transition to support more unified communication and collaboration, which we believe is not a temporary situation. We see this as a long-term growth driver for the business.

Got it. And then this may be in the details somewhere. But in terms of SBC versus gateway sales, has there been a notable shift, kind of, recently because of these work-from-home trends? Or is it a pretty consistent pattern there?

Yes. When you say gateway, I think you're talking about the on-premise universal CPE-type platforms, right, for enterprise. We have seen a bit of a decline in deployment level. It's not massive, but it hasn't been growing, which we account to, obviously, the work from home. If you're not forming new businesses and adding new locations, you're not adding a lot of on-premise equipment. We have seen the traffic shift to the cloud and the additional capacity around networking for that use case.

Okay. And with regard to the former Soviet Union, it sounds like that's kind of coming back to a normal level. Is that the right interpretation there?

Yes, particularly towards the end of the quarter and even in the third quarter, the business has been pretty solid. I don't know if it's quite back to where it was, but it was pretty solid, Mike. We were pretty pleased to see that come back, probably a little stronger than I thought it would.

Great. And then just last one. Maybe just an update on how you're thinking about debt repayment and the plans around that.

Yes. I think, obviously, we're really focused on integration and cash generation. I'm not sure we're at a point where we're thinking about accelerated debt repayment and things like that. But we're certainly thinking, in the midterm, there's going to be a focus around use of cash to pay down debt.

Our next question comes from Fahad Najam with Cowen and Company.

I have a couple. First, on the Kandy strategic sale, can you elaborate a little bit more? I would have assumed that Kandy was probably one of the more promising portfolios in your product portfolio that had the most promising growth prospects. Can you walk us through your rationale for the sale of Kandy assets now?

Yes. Thanks, Fahad. I appreciate the question. I think we're still pretty excited about the potential for the business. But a couple of factors, I think, come into play. I believe that continued significant investment around that business is needed to really realize the potential. We're competing against a variety of larger players investing a lot around sales and marketing. I felt like if we were really going to see the potential, we were going to have to double down more around that and really focus on investing there. We have three or four other product lines in the company that need focus as well. Some of the earlier discussions centered on deciding where strategically we're going to invest and how we're going to be a significant player in these markets is all critical to the strategy. I feel like we can unlock the value of that asset and still benefit from the potential upside longer term with an equity investment in somebody that is focused on that market 100%. So it feels like we get the benefit of both in some ways. We get the potential upside of business that we believe in. They become an important customer for us. We continue to sell them products that enable the Kandy service, and we lower the short-term investment and increase focus. It seems to check off a lot of important things for the company.

Got it. Now, with regards to the technology and demand trend, especially in light of the COVID-19 pandemic, do you agree that as Zoom has become so widely used, the need for traditional UCaaS services might be quite limited? For instance, in-app communication is increasingly becoming a more effective way to communicate, such as with teledoc services that require direct communication. How do you see the long-term implications for the UCaaS market, particularly when other players beyond UCaaS are becoming more prominent in the work-from-home and remote working landscape? Do you believe that this market has been permanently affected or somewhat diminished for traditional UCaaS providers?

That's certainly a big-picture question. I do think there's room for multiple winners in this space. I'm not sure there's a one-size-fits-all. Everything moves to a best-effort over-the-top service, if you will. I think there's plenty of room for premium solutions in the market still today. There's room for on-premise solutions. There's room for terminal devices on people's desks. I just think it's a big market, and I'm not sure picking one winner or two winners makes sense. Obviously, we're trying to continue to expand the portfolio to meet the customer where they are in the market. If they want high performance, carrier-grade, robust, highly fault-tolerant platforms, we've got the best in the world. If they want to spin up an instance in AWS or Azure, we've got that. So yes, I guess that's the way I think of it, Fahad.

I guess what I was trying to ask was, in a different way was that prior to COVID-19, let's say the UCaaS market was a $1 billion TAM. But post-COVID-19 with Zoom and other in-app-based applications kind of eating away some of the opportunity. Would you agree that the UCaaS TAM has somewhat decreased or maybe shrank as other modes of communication have become more prevalent?

Yes. So I guess maybe my definition of UCaaS is a little broader, perhaps. I think I see what you're saying; the traditional enterprise kind of in-building, primarily in-office UCaaS platforms. Has that shifted permanently towards a work-from-home, over-the-top type solution? There probably has been a shift. From our perspective, we're trying to serve both those markets, if you will. To me, it's expanded our addressable market, but it's probably created some competitive shifts for others.

So can you elaborate more on how you're pivoting to this new over-the-top cloud-delivered applications? How do you see this market for you? Can you provide any anecdotal data points that support how your solutions are being levered or utilized?

With a Zoom collaboration platform or Microsoft Teams or similar other products, the moment that a connection moves off of the collaboration platform to a traditional PSTN connection, you need an interface, and that's where we come in. We're providing that SIP trunking interface, the security, and the robustness around that. If the world went to 100%, everybody stays within a proprietary collaboration environment, you wouldn't need that. But I'm not sure that's a world any time soon.

Based on your EBITDA comment on Kandy, the $9 million first half, am I in the ballpark that from an OpEx perspective, Kandy was costing you something on the order of $8 million a quarter? Or am I way off on that? Can you just give me the number?

Yes. That's a little higher. It's probably more closer to $5 million a quarter, Paul.

$5 million a quarter. So you'll derive at least $5 million per quarter savings just from Kandy alone, just on that business.

Thank you. We have reached the end of our question-and-answer session. I'd now like to turn the call back to Mr. McClelland for any closing remarks.

Yes. Thank you, Michelle. That concludes our call. I look forward to updating everyone on our progress next quarter. Hope to see many of you virtually in our upcoming investor conference over the next 30 days. Thanks very much, and have a good evening.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.