Greetings, and welcome to the Ribbon Communications First Quarter 2021 Financial Results Conference Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Tom Berry, Investor Relations for Ribbon Communications. Thank you. You may begin.

Good afternoon, and welcome to Ribbon's First Quarter 2021 Financial Results Conference Call. I'm Tom Berry, 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 slides are currently available.

Great. Thanks, Tom. Good afternoon, everyone, and thank you for joining us today to discuss our first quarter 2021 results and our outlook for the remainder of the year. We had a strong start to 2021 from a profitability perspective, with both adjusted EBITDA and non-GAAP earnings per share at or above the high end of our guidance ranges. We also had very good bookings in the quarter, with the book to revenue ratio, excluding maintenance, of 1.14x, and the maintenance bookings for the year are now at nearly 80%. This gives us very good momentum towards our financial targets for the year. In our Cloud & Edge business, we posted strong gross margins along with an 18% reduction in our non-GAAP operating expenses year-over-year, resulting in EBITDA nearly tripling compared to first quarter 2020. Sales were essentially flat after adjusting for the sale of the Kandy business. Demand for our core SBC portfolio remains strong, growing 12% year-over-year, offset by continued weaker demand for the on-premise enterprise edge platforms during this prolonged work-from-home environment. Last month, Microsoft announced a new operator Connect service, which we already support with our session border controller products. We believe this new service offering will reduce the friction for enterprises to easily deploy high-quality voice capability via the Teams platform and plays to our strength given our broad deployment base with mobile and fixed service providers. This new service will complement the current direct routing alternatives already available, including our new Ribbon Connect as a service offering that includes support for legacy PBX interoperability in partnership with our channel partners. We have a growing pipeline of partners embracing this new platform and are currently onboarding more than 60 resellers to the program. This is an important initiative as we build our base of recurring revenue.

Thank you very much. As Bruce stated, we had a strong start to the year with continued revenue growth and first quarter profitability that exceeded our expectations. We generated revenue of $193 million, which was in line with our guidance, and adjusted EBITDA of $20 million, which was above our guidance of $14 million to $18 million. This led to an adjusted earnings per share of $0.03, which was at the high end of our $0.01 to $0.03 guided range. As always, please refer to our Investor Relations website for supplemental slides with graphs and tables summarizing our first quarter 2021 and historical financial performance. Let's start with some commentary about our GAAP results for the quarter. Our GAAP earnings included a $24 million noncash loss associated with the quarterly mark-to-market of the company's investment in American Virtual Cloud Technologies, known as AVCT, from the sale of our Kandy Communications business last year. This was partially offset by $1.5 million in paid in-kind interest income earned on the convertible debt from the same transaction for a net negative impact to GAAP income of $22 million or $0.15 per share. This was in sharp contrast with a large positive impact of $114 million to income and $0.74 to earnings per share in the fourth quarter of 2020. As we mentioned on last quarter's earnings call, fluctuations in ABC stock price affect our other income and expense line as we mark-to-market our investment. Due to this volatility, we have excluded these items related to the Kandy asset sale from our non-GAAP results. In addition to the usual other factors contributing to the difference between our GAAP and non-GAAP results for the quarter, such as the amortization of intangible assets and noncash compensation, we incurred $6 million in restructuring expenses related mostly to continued downsizing of our real estate footprint and $1 million in integration expenses.

Thanks, Mick. While we continue to execute well in the near term, our focus is also on the longer-term transformation of the company. This is a unique time in our industry with significant competitive shifts creating opportunity for Ribbon to gain share while benefiting from the strong secular demand for bandwidth and the increased adoption of cloud communication services. Over the next several years, we also expect significant federal funding initiatives to further improve the broadband infrastructure, along with network upgrade investment to support 5G deployment and to modernize legacy TDM networks. We are winning new business that is directly related to the combined strength and portfolio of Ribbon and ECI, validating the merger strategy and growing both top and bottom line. I'm very excited about the strong pipeline of IP Optical opportunities and, in particular, several late-stage Tier 1 service provider evaluations, leveraging existing strong Ribbon relationships. Our portfolio differentiation is becoming more clear in the market and with our customers. Our highly optimized metro WDM platforms are perfectly complemented by a strong portfolio of IP MPLS switching and routing products.

Our first question comes from Dave Latimore with Northland Capital Markets.

This is his brother, Mike Latimore, calling in. So interesting on these late-stage Tier 1 opportunities, did you say that they were with Cloud & Edge customers, one. And also maybe what regions are they in?

Yes. So I was referring to the IP Optical, Mike, not in Cloud & Edge in that commentary. And it's in multiple regions. I think I mentioned Russia specifically, North America specifically and Asia Pacific as well. So a number of different opportunities well down the pipeline basically to comment on them now.

Yes. And are they with current Cloud & Edge customers that are also looking at this? Or is it independent of it?

Yes. So several of them are, not all of them, but more than half of them.

Okay, right. And then it sounds like in India, obviously, a lot more restrictions. I guess you sort of factor that into your guidance here, right, that you're assuming it is a little tighter for a while?

Yes, that's correct. I noted that the first quarter was fairly consistent with what we experienced in the latter half of last year. It shows more strength compared to the first half of last year, but we are not yet back to the full deployment pace. Currently, the deployment level is around 60% of what we saw before COVID, which indicates there is still significant potential for growth. We have certainly considered this when providing our guidance for the second quarter.

At one point, you mentioned that voice traffic volumes were around 30% above pre-COVID levels at one point last year. Could you provide an update on what you're currently observing in terms of traffic volumes?

I don't have an updated quote on that, but I will follow up on it, Mike, and see if I can get some more detail on kind of latest traffic levels. I just don't have anything in front of me here right now.

Our next question comes from Dave Kang with B. Riley.

My first question is regarding the chip situation. Any impact to your first quarter results or second quarter outlook?

There was nothing substantive, Dave, that impacted Q1. It was obviously tight. We've definitely seen lengthening lead times and challenges on a variety of different types of components. But like many, I guess, we saw this coming. We're trying to get out in front of it as much as we could and had sufficient for Q1. And right now, we're not anticipating big issues in the second quarter, again, trying to plan ahead here. We'll see how the second half goes. The real issue comes down to any decommits kind of within promised lead times that you end up with issues on deliveries. But so far, so good. But it's pretty tight. It's got to be worked every need.

Another equipment vendor reported earlier this morning that margins are being affected due to rising prices. What is your situation? Are you experiencing any margin impact from increasing prices?

There is a little pressure on prices. Certainly, on logistics as an example, we've seen some elevated costs around that, which will impact a portion of our business. Of course, a lot of what we sell is software as well. So the direct effect on the overall profitability for the company might be a little less than somebody that's more concentrated on hardware.

Got it. And then I did have a question on India. So it's running about 60% pre-pandemic. When do you expect India to fully recover back to the pre-pandemic level? Are you assuming second half? Or is there something beyond second half this year?

Well, so what we believe happens is the second half of the year begins to strengthen from where we're sitting today. Obviously, it's a little hard to tell exactly when we're back to pre-COVID levels. And it's a combination of factors around funding for new projects and budgets, et cetera, but then just the logistics in the country and deployment velocity. And we're able to get pretty good visibility on the deployment of our products we're directly involved from a service and logistics perspective in the country. And so the 60% number is pretty accurate based on what we're seeing right now.

And can you remind us what India was pre-pandemic? Was it about 10% or?

Yes. ECI constituted about a third of the business before merging with Ribbon, translating to an annual run rate of approximately $125 million, something like that before COVID.

Our next question comes from Paul Silverstein with Cowen.

I have a couple of questions. Let's start with India. Bruce, when you mentioned the meaningful improvement in the second half in your prepared remarks, what I just heard seems to differ a bit from that. Could you provide more clarity on how much visibility you have into the second half that underpins your perspective? What exactly is your expectation regarding the level of strength for the remainder of the year?

Well, with the larger service providers we're working with in India, we have a pretty tight planning relationship given where lead times have gone on products and whatnot. We have to have good visibility and we sell a portfolio of products. There's a whole variety of different configurations that we sell, and you've got to have that right in the planning phase. So we go through a bit of a budgeting process and then an engineering process with many of our customers to get to the bill of material to be able to be driving things correctly. So we get good visibility on, say, the next 3 months. And the next 6 to 9 months beyond that, we have more planning directional information. So it's not 100% scientific, but it's pretty decent. And of course, where you'll see variabilities is when we're bidding on new regions of the network or replacement of product and things like that. You don't know for sure how much you're going to win or if you're going to win, so there's some variability around those things.

Bruce, given that the spike in the pandemic appears to be a relatively recent vintage. I recognize it didn't just start yesterday, but it's also not 3 or 6 months old. Have you had real-time communications in the last week or 2 that would inform you as to whether there's been a change in their deployment plans? I recognize we're not side about a demand issue, but literally the fiscal ability of your customers or you want to be after your customers to deploy product. But have you had communications since it's been apparent that the pandemic spiked up and whether that's changed their planning with respect to those deployments in the second half of the year?

Well, given the timing of earnings and providing guidance, we do a pretty thorough job in a couple of weeks leading up here to make sure we've got a reasonably accurate view. And we're not projecting significant growth in the second quarter here in India. If things tightened up dramatically, it would have an effect, I suppose, right, obviously. But on the other hand, the country has been living in some pretty tight restrictions for quite a while as well. So I think the answer to your question is yes. We've had discussions and believe we've got an accurate view on what happens here in the second quarter.

And Bruce, again, my apologies. One last question on India. Looking beyond the second quarter into the second half of this calendar year, has there been any change in their deployment plans in the past couple of weeks because of this spike up in COVID?

Not that I can put my finger on right now, Paul. But yes, that's the best I can answer the question, I think.

No, I appreciate that. And Bruce, to be clear, you're expecting a healthy, strong increase in the second half of the year relative to that 60% number?

We are. We are. We're projecting the second half stronger than the first half. Part of it is projects or parts of the network that were already being deployed in and part of it is new wins that we're anticipating given opportunities for market share gains in the market.

And these are primarily or exclusively optical deployments?

No. It's a combination of the IP MPLS portfolio and the optical portfolio.

Okay. I appreciate that insight. Let me move on. In terms of opportunities, you've referenced Huawei a couple of times during the call, and I want to make sure if I understand. It sounds like you've already secured at least one particular deal. I think you characterized it as $3 million. And I think it was on the voice side of the house. And I think I heard you say that you also are close to finalizing a deal to displace them in optics, although perhaps misunderstood. But is there any incremental sight you can give us in terms of how many opportunities there are in total that you're in various stages of trying to win that are directly linked to Huawei displacement of new awards? How many of those are in optics, how many of those are in voice or voice communications, et cetera? And whether it's accelerating, whether it's not steady state, any insight on the opportunity?

Yes. So first, to answer the first part, you characterized it correctly. I referred to a voice replacement opportunity in Cloud & Edge and also referred to kind of close to the finish line on a replacement opportunity in IP Optical. The opportunities we're seeing are both in the optical portion of the network as well as in the IP portion of the network. And certainly, the India market is one of the key focus areas as well as several countries in Europe today. And in general, I think these are fairly meaningful opportunities for us that will move the needle, or I wouldn't mention or wouldn't refer to them sort of things. So these are not dozens and dozens necessarily. We're focused on a specific list of opportunities where we're either already currently deployed today and we can gain more share or new insertion opportunities with new customers.

Bruce, while I appreciate it's not dozens and dozens. Is it over a dozen or would it be more like 6% to 12% or even lower than 6% in terms of total potential opportunities that you look at?

The meaningful ones in the short term are under a dozen. There's real focus around these things. It's not kind of a shotgun in a broad array.

Would it have been in that 6% to 12% range?

Yes.

I appreciate that. Beyond Huawei, if you had to rank what you're most excited about in terms of driving revenue growth specifically, what would be your top three?

Well, the Top 2, our Huawei opportunities. Well, top 3, Huawei opportunities. The second is recovery in the India market. And then the third is success in North America that we've talked about and the growth that we're targeting here in the North American market. Those 3 things, all focused on the IP optical portfolio are the areas that we believe will drive growth as the year progresses here this year?

I've already asked you about two of the three topics. I have one question regarding North America. You mentioned a number of service provider opportunities globally, including in Russia and the U.S. Can you provide some detail on whether those opportunities fall within the range of six to twelve, exceed a dozen, or are below half a dozen? Any rough estimation would be helpful.

I believe the second quarter will be significantly stronger for us in North America regarding IP optical. We have several projects already underway that will generate revenue in the second quarter, so we anticipate meaningful improvement. Concerning the Tier 1 opportunities, there are about half a dozen significant projects we are focusing on, and we believe we have a solid chance of gaining market share in them. We hope to provide more specific details in our next call.

Ladies and gentlemen, there are no further questions at this time. I'll turn it back to management for closing remarks. Thank you.

Great. Well, thanks again for everyone being on the call and your interest in Ribbon Communications. We really look forward to speaking with many of you at our upcoming virtual investor conferences and updating you on the progress on our next earnings call. With that, operator, that concludes our call.

Thank you. All parties may disconnect. Have a good evening.