Greetings, and welcome to Ribbon Communications Third Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Bruce McClelland, CEO. Sir, you may begin.

Good afternoon. And welcome to Ribbon's third quarter 2022 financial results conference call. I'm Bita Milanian, SVP of Marketing at Ribbon Communications. Also on the call today are 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 rbbn.com, where both our press release and supplemental slides are currently available. Certain matters we will be discussing today, including the business outlook and financial projections for the fourth quarter of 2022, are forward-looking statements. Such statements are subject to the risks and uncertainties that could cause actual results to differ materially from those contained in these forward-looking statements. These risks and uncertainties are discussed in our documents filed with the SEC, including our most recent Form 10-K. I refer you to our Safe Harbor statement included on Slide 2 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 measures are included in the earnings press release we issued earlier today, as well as the supplemental slides we prepared for this conference call, which again, are both available on the Investor Relations section of our website. And now, I would like to turn the call over to Bruce. Bruce?

Great. Thanks, Bita, and thanks to everyone for joining us today to discuss our third quarter results and our outlook for the remainder of the year. I'm very excited to report significant improvements in our IP Optical networks business this quarter. Revenues increased significantly to $82 million, up 20% sequentially and year-over-year. Perhaps more importantly, our product and service bookings increased over 90% versus the previous quarter with a book-to-bill of 1.4 times for this segment. Obviously, overall demand was not an issue, and we could have easily shipped more product in the quarter. However, availability of a small number of key components and general logistics challenges continued to limit overall output. The increased IP Optical revenue in the quarter resulted in a dramatic improvement in non-GAAP gross margin, returning to more historical levels at 38%. The 900 basis point improvement is equally partitioned between three factors: higher volume, lower supply chain cost, and overall customer and product mix. From a regional mix perspective, sales in Europe increased by more than 40% versus the second quarter, and North America increased by over 15%. Our IP Optical sales in India were down about 6%, which were limited by the supply of key components. We expect India to be stronger again in the fourth quarter. An extremely important element of our strategy is to focus on the large service provider IP routing market and the investment in an expanded portfolio of IP routing solutions. We've made great progress on this strategy in the third quarter, with bookings of our Neptune IP routing products more than doubling compared to the second quarter and making up more than half of the IP Optical segment product bookings in the quarter. We received a huge validation of the strategy with a major new 5G mobile cell site router win and large booking with Bharti Airtel in India, one of the largest mobile carriers in the world. This new win builds on the IP MPLS deployments we're already doing with Airtel in the access and aggregation layers of their network and extends our footprint to include cell site routing. Part of our recently announced XDR family of routing solutions, this flexible 64-gigabit IP MPLS cell site router includes advanced routing capabilities and is perfectly suited for aggregation of ever-increasing 4G and 5G mobile traffic. More broadly, we continue to make good progress on our pipeline of major Tier 1 mobile and telecom carrier opportunities. Of the 18 RFPs I mentioned last fall, we have wins and initial POs from four of them, and decisions are pending on three others and look very positive. We've been excluded from three of them. Ramping to significant revenue will obviously take time, but I'm pleased with the initial success. The incremental R&D investment we've been making in this segment and particularly in advanced IP routing software and hardware platforms is directly linked to the momentum building with these new major customer opportunities. Ultimately, what really matters is how this translates into a sustainable, profitable business. We have a clear path to profitability with the stronger sales and improved margins, and expect to close in on this goal in Q4. We are also planning additional cost improvement actions across the company to accelerate overall profitability in 2023 and increase cash flow. In our Cloud and Edge segment, AT&T was a real bright spot this quarter, and I'm very encouraged by the growing opportunity funnel resulting from their increased focus on network infrastructure and reducing operational costs. The combination of network transformation projects to significantly reduce operational costs along with great sell-through enterprise channel partnership resulted in AT&T once again becoming a 10% plus customer in the quarter. In several of the projects, we are now leveraging technology from our IP routing portfolio to enable the migration of TDM voice networks to IP, and other multi-service access integrations. This type of solution synergy is a real bonus on top of the original ECI acquisition strategy and one of the many ways we are finding opportunities to sell the IP Optical portfolio to existing Ribbon voice over IP customers. We were honored to have Scott Mayer, former AT&T Networks Engineering and Operations President, join our Board of Directors last quarter. He is providing great input on strategic direction, both from a technology and a business perspective.

Thank you very much, Bruce. Good afternoon to everyone. As always, please refer to our Investor Relations website for supplemental slides summarizing our third quarter and historical financial performance. In the third quarter of 2022, our financial results showed improvement over the previous quarter and were just slightly below our guidance range. Let's start with consolidated corporate financial performance. Ribbon generated revenues of $207 million, which would have been $2 million higher on a constant currency basis. Non-GAAP gross margin was 54.5%, also impacted $2 million negatively by currency changes. Non-GAAP operating expenses were $94 million, impacted positively by $2 million from strong US dollar. Therefore, the foreign exchange impact to Ribbon in the third quarter was effectively neutral to profits. Non-GAAP adjusted EBITDA was $23 million in the quarter, and non-GAAP diluted earnings per share was $0.02. Our basic share count was 159 million shares and our diluted share count was 163 million shares. Our non-GAAP tax rate for the quarter was 70%, which as we have stated before, is derived from jurisdictional income taxation. In August, we entered into a settlement agreement with AVCT that granted Ribbon perpetual royalty-free rights to Web RTC gateway technology that is integrated into some of our session border controllers and application servers. As consideration, the company paid cash and surrendered our shares and warrants in AVCT. Therefore, the investment in AVCT has been written down to zero in our balance sheet. Now, let's look at the results of our two business segments. In our Cloud and Edge business, third quarter revenue was $125 million, down 12% year-over-year and 9% quarter-over-quarter. Product revenue contributed $51 million, maintenance revenue was $56 million, and professional service revenue was $18 million. Software as a percentage of total product revenue was 61%. Our Cloud and Edge businesses experienced declines in revenue but were able to maintain their high level of profitability with non-GAAP gross margins up 65% and a non-GAAP adjusted EBITDA of $33 million, or an EBITDA margin of 26%. Let's turn to our IP Optical networks business results. We recorded third quarter revenue of $82 million, which was an increase of $14 million or 21% year-over-year and an increase of 20% quarter-over-quarter. Product revenue was up 30% compared to the third quarter of 2021. Non-GAAP gross margin for IP Optical was 38%, a 9 percentage point increase over the previous quarter and 1 percentage point higher than the third quarter of 2021. As Bruce mentioned, the significant improvement was driven equally by higher volume, lower supply chain costs, and overall product mix. Non-GAAP EBITDA loss for the quarter was $10 million, which was reduced by half from the previous quarter, driven by the increased revenues and margins with stable expense controls. Here are some consolidated key performance indicators for the company in the third quarter. Maintenance revenue was $72 million, which represented 35% of total revenue and was constant year-on-year. The top 10 customers were 46% of revenue and included both Verizon and AT&T as providing over 10% of revenues for the quarter. Service providers accounted for 70% of our product revenue, and enterprise customers represented 30%. International customers provided 58% of revenue, which is a higher percentage from the previous quarter, commensurate with the increase in IP Optical business as a percentage of total Ribbon revenues. We had healthy booked revenue ratios, excluding maintenance, of approximately 1.28 times for Ribbon, 1.45 times for IP Optical, and 1.13 times for Cloud and Edge. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $56 million. This is an increase of $18 million from the end of the second quarter. The main addition to the cash balance is our successful $50 million capital raise from some of our major investors including Neuberger Berman, JPMorgan, and Swarth Group. Our term loan is currently at $335 million outstanding as we have paid off $65 million or 16% of the original balance. Our $100 million revolver remained undrawn at quarter end. For the third quarter of 2022, we met our term loan covenant metrics as a result of continued profitability, a constant level of interest rate hedged by our fixed-rate swap, and application of the equity tier clause in our loan agreement. During these times of increasing interest rates, Ribbon enjoys the benefits of a fixed-rate swap that limits our LIBOR rate to only 90 basis points compared to the current one month spot rate of about 350 basis points. We had use of cash from operations of $18 million, driven mostly by the timing of deferred revenues and contract manufacturer payments. Major cash outlays included a $26 million reduction of accounts payable, a $7 million increase in inventory for strategic components to support revenue growth, a $7 million in capital expenditures including $3 million for the WebRTC perpetual license, and $5 million for debt paydown. We are expecting a return to positive cash flows in the next couple of quarters. In the third quarter, Ribbon continued to show resiliency in our profitability as we navigated through supply chain disruptions, global inflation, increases in interest rates, and US dollar appreciation. With the very positive indicators of revenue and bookings growth in IP Optical, we are beginning to see the benefits of our investments in our strategy.

Thanks, Mick. As we anticipated, the third quarter was a marked improvement in our IP Optical networks business in virtually all key metrics. A significant investment we are making in developing new products is beginning to show results, underlined by the recent 5G cell site router win with Bharti Airtel, and the very strong bookings in the quarter. Supply chain volatility continues to be a background challenge, but we mitigated much of the impact with some increase in working inventory, and expect gross margins in the fourth quarter to be consistent with the previous quarter. Overall, we expect further revenue growth in our IP routing and optical transport segment in the fourth quarter across the majority of regions supported by significantly higher backlog entering the quarter and approaching profitability on an adjusted non-GAAP basis. Similarly, we expect the fourth quarter to be a sequentially stronger quarter for our Cloud and Edge business, with good backlog and visibility with our traditional service provider and enterprise customer base. In particular, we anticipate a significant increase in session border controller revenue with increased shipments of high capacity SBC core platforms and capacity licenses to both service providers and enterprise customers, as well as enterprise SBCs sold primarily through our service provider customers and increasing usage of our as-a-service Ribbon Connect platform. The US Federal network modernization projects remain a large opportunity for us. However, we are taking a more cautious approach assessing the timing of awards and have taken that into account with our revised guidance. As we look into 2023, I remain very positive on the outlook for our diversified business and the momentum we continue to build with our expanded product portfolio. The recent successful equity investment in the company gives us the resources we need to realize our vision, and we are now starting to see results, and this is just the beginning. The telecommunications industry tends to weather macroeconomic recessionary effects better than almost all other industries. And it's imperative that service providers continue to invest in new technologies to keep pace with the exponential growth in traffic. However, we remain watchful of any signs of reductions in capital investment and need to be flexible to quickly react to the changing environment. From an operating cost perspective, we are planning to implement additional expense reductions going into 2023 to improve profitability and cash generation. In particular, I see market opportunities that would be more efficiently addressed by further functional integration across the company. And as we focus on the best opportunities for profitable growth, accelerating our path to improve profitability and cash generation. With that backdrop, our expectations for the fourth quarter are as follows: For revenue in a range of $220 million to $240 million, non-GAAP gross margins of 53.5% to 54.5%, and non-GAAP adjusted EBITDA of $30 million to $36 million. I'd like to thank the entire Ribbon team and our partners for navigating in a complex operating environment and look forward to a strong finish to 2022. Operator, that concludes our prepared remarks. And why don't we now open up for a few questions.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Paul Silverstein with Cowen.

I've got several questions starting with a high level and then building down. First off, can you tell us the book to revenue for the overall company? What was that?

I think it is 1.13 in the quarter, Paul.

So for the overall company, what was the book to revenue?

1.28.

And then in terms of trying to decipher demand, secular demand versus macro, I apologize if you've answered this in the prepared remarks, but what are you seeing in terms of demand trends in a macro weakness, especially outside of the US given FX and given Europe's exposure to energy in particular? It certainly doesn't seem to be adversely impacting your IP Optical business. But how much of the Cloud and Edge weakness, or your response in terms of what you're seeing in both businesses?

I guess, if I break it into two pieces, certainly, the demand perspective, the backdrop around IP Optical improved significantly in the third quarter, as we expected and as we have guided. It's a combination, obviously, of the momentum around the new products we're bringing to market. In particular, as I mentioned, the bookings in the third quarter increased around IP routing in particular, now being more than half the bookings in the quarter for that segment, was really good to see underpinned or underlined by this new deal with Airtel in India. I also, I think, mentioned the demand in Europe and the revenue in Europe, or Europe, Middle East Africa, kind of the whole EMEA region, was up pretty significantly in the quarter as well. Obviously, the Cloud and Edge business was down from the previous quarter, down from the previous year. I’ve mentioned, in particular, we had a great quarter with Verizon in the second quarter, and a lot of the activity in the third quarter was deploying some of those products. So revenue was kind of naturally down there, offset by real strength with AT&T and as I mentioned, now kind of once again becoming a 10% plus customer in the quarter. So those are some of the dynamics I think that affected third quarter. As we look into the fourth quarter, again, as I think about the two segments in the IP Optical business, what we're projecting is really some increases in each of the geographies around the world. For the most part, every one of them, we're expecting some level of increase. We don't think Europe is as strong from an increase perspective as what we saw in the third quarter. Obviously, part of the reduction in guidance here was around being a little more cautious around what happens in Europe in particular in the fourth quarter. As I also mentioned, we have some really significant opportunities in the federal space, but just trying to predict the exact timing of when some of the deals go into procurement and when they get closed and as they flow to our partners, it's just been challenging to nail down exactly. So I've tried to be a little more cautious in what we see happen in the fourth quarter.

Bruce, I appreciate that you are not the largest supplier in the world. So it would not be unusual if there was a divorce between these larger trends and what you actually see for better or worse. But relative to your commentary about US Federal, about Europe, and even beyond those two. Is the caution note about federal in Europe because either US Federal and/or European carriers or customers have communicated to you and your team that due to macro concerns, or in the case of Europe perhaps FX as well, that they're reevaluating, pausing, slowing, elongating purchasing cycles, any of the traditional warning signs that are not just about Ribbon but broader in terms of these broader trends? And again, the question is not just something special in Europe but general Asia-PAC. Any of your service buyers, to what extent causing you concern and the same thing on US Federal?

Yes, to elaborate specifically on Europe, much of our business there is with critical infrastructure providers across various sectors such as transportation, oil and gas, and railways. These customers are actively investing in projects to enhance their infrastructure. We have a solid pipeline of opportunities, and nothing significant has occurred that would cause these opportunities to vanish. However, I do think that decision-making on some projects may take longer due to the current macroeconomic environment. In the third quarter, we experienced considerable business growth in Europe compared to the previous quarter, and we anticipate that the fourth quarter will also be strong. Nonetheless, when assessing individual opportunities and trying to forecast their closure and revenue generation, I prefer to adopt a cautious stance. This reflects specifics about our sales activities in Europe rather than a broad comment about the macro service provider situation. The federal sector is somewhat comparable, with a range of programs being considered and bids submitted. As I noted in the last earnings call, there is a substantial legacy infrastructure involving TDM interfaces and products within federal communications that need to be upgraded to an IP infrastructure over the next few years. Those familiar with federal procurement know that the timeline for approvals can be unpredictable. Thus, I don't see any major changes, but accurately predicting the timing remains a challenge.

What it shows. I have several questions, if I may. On the IP Optical, it sounds like the strength is broader than Airtel. But let me ask you a question. How much of a significant increase in bookings is a function of Airtel, and how much of it goes well beyond your pocket?

Yes. So Airtel has been a significant customer for us for a while. Obviously, they are not a 10% plus customer, or they'd be listed that way. So there were a part of obviously the strength in the third quarter, but just a piece of it. So it's not like it was the dominant piece or anything like that. I mean, it was a portion of the growth, but just seeing the revenue numbers, obviously how the Europe tells you that there is strength elsewhere as well.

And that's also true to bookings comments, Bruce? You were up, what, 90% Q-over-Q in IP Optical on the bookings?

Yes, exactly. Same commentary on bookings.

And again, I appreciate that you are far smaller in size of business relative to optical, and so you wouldn't necessarily experience the problems they are. But from a supply standpoint, we’ve just had a peer last week say that demand for optical remains very strong, but supply chain remains very challenged. You said that back in early September, that doesn't seem to be restraining your growth. Again, I appreciate the numbers were smaller, and units are far less. Any insight you can share about what you're seeing there?

Starting with supply, we face daily challenges related to various issues. Frankly, I'm somewhat weary of discussing the supply chain. However, there are specific component areas that continue to hinder our production and shipping in any given quarter. I noted earlier that India, in the third quarter, did not meet my expectations, mainly due to specific component issues affecting the products we deliver to that region. This is still a concern. With the bookings from the third quarter, we could certainly have shipped much more if we had the necessary supply. General logistics also remains problematic, complicating the movement of products globally. As we finished the quarter, several shipments were still in transit, which affected our ability to have a stronger closing for the third quarter. All these factors play a role in our situation. I fully understand the broader sentiment regarding future demand, and I'm closely monitoring potential reductions in capital spending and budgets. I anticipate that decision-making regarding investments may take more time, with the current macro environment not favorable for overall capital allocation. Recently, both AT&T and Verizon mentioned that their capital spending plans would remain unchanged for the remainder of this year, though we will see how things develop in 2023. They have not announced any macro-level reductions that I'm aware of.

Bruce, to clarify, I understand your concern. Historically, this is not an indication that the carriers, in significant numbers, have communicated any plans to reduce their spending. Is your concern based on general apprehension or on specific discussions you and your team have had?

No, I think what we've heard is what they have said publicly. And again, I haven't seen any public statements around reductions in capital. But I don't think people put out their plans in detail for '23 yet. So that's where my cautiousness, I guess, comes in just trying to look a little further into the future. As far as this year capital spending, this seems to be pretty consistent.

One last question, I promise. On the India opportunity, you've just had announced that Jio had a far key deal. I'm not sure about Vodafone, but these are massive 5G buildouts, you are talking about imminently and they may have already started. The last time I checked Huawei, ZTE are out of the picture. And so it's essentially you I think seen in Nokia. What are you seeing in terms of optical in India, has already started? And Bharti Airtel, I trust that IP router you referenced is part of that. But are the funds already starting to flow in this 5G buildout, what's the outlook for the pipeline there or the opportunity over the next 18 months or so?

This new cell site router opportunity is directly linked to the investment around the 5G infrastructure buildout. As you know, they're just starting. So there's a long runway ahead there. That architecture in that series of products apply not just to Bharti, but to most of the carriers around the world building out 5G infrastructure. It's just one product in the portfolio, but it's the reason we've been making the investment we have. We really see a significant opportunity and a spot for us to grow the company. In addition to the optical business that we're doing, which also grew clearly in the quarter, the growth in IP and kind of the increased balance in the portfolio is really exciting to watch here.

Next question comes from Dave Kang with B. Riley.

My first question is, just wanted to clarify. Did I hear you correctly when you said, when you're talking about margins that one of the reasons margins increase was because your supply chain costs went down. Did I hear that correctly?

So you did, and there were essentially three reasons why the IP optical margins improved quarter-over-quarter. One was lower expedite fees that we were paying in the quarter. And of course, we just had a good discussion with Paul on the supply chain. But in a variety of areas, we've seen improvements. Obviously, we've also invested in incremental inventory and that's allowed us to avoid as much as possible any expedite fees, and that flowed through and was about a third of the improvement in the third quarter. The other two pieces were just overall volume and fixed cost absorption obviously improved the gross margin percentage in the quarter. And then the third was just general mix on what products and what regions we’re shipping into in the quarter.

And regarding expedite fees, is there more room to decline compared to like pre-pandemic situation? Where are we in terms of expedite fees?

So we are still paying some amount of expedite fees each quarter in both businesses. We make kind of a game time decision on, do we wait and ship a little bit later or do we pull in or accelerate and pay incremental fees. A lot of it depends on obviously the dialog with the customer and how soon they need the product and those sorts of things. So we are continuing to pay some amount of expedite fees. We anticipate paying some still this quarter around making sure we get products to customers.

And regarding the supply chain situation, it sounds like last quarter, meaning second quarter, I think you quantified that as about $10 million impact, looks like since you missed about $11 million this quarter, it was about $11 million as far as how much you left revenue on the table?

So I would say half of it is directly related to supply chain and logistics right at the end of the quarter, and could have easily gone either way. The other half, we have expected some of these federal deals to start to come to revenue in the third quarter, and that was the other piece of it, Dave. I will add, of course, with the incremental backlog that we've been able to accumulate in the third quarter, we have kind of a growing impact from supply chain. Clearly, we could have shipped a lot more in the third quarter given the bookings if we had been able to build more. I had not anticipated that in the guidance. So I don't call that a shortage relative to the projection. But we enter the fourth quarter with stronger backlog than we've had probably ever at this point. So a direct reflection on the bookings momentum in the third quarter.

And so just wanted to be clear. It seriously impacted C&E more than IP Optical. Is that correct?

I think the shortfall relative to our guidance was evenly split between the two businesses. Most of the impact on Cloud and Edge was the federal opportunities, and most of the impact on IP Optical was simply around components and logistics at the end of the quarter.

Just wondering, what's the rough mix between Optical versus IP? And I assume their margins are quite different? What's the margin differential between those two?

Just to comment directionally, I guess, because we don't break that out specifically. But in the third quarter, obviously, both IP and Optical grew from a revenue perspective. I've characterized it as 60/40, traditionally, and third quarter was similar in nature. I also commented though that from a bookings perspective, IP increased significantly, almost doubled quarter-over-quarter from a bookings perspective, and that they were more than half of the bookings in Q3. I expect given the expanding portfolio around IP routing, that's definitely a stronger growth area going forward. From a margin perspective, it'll be different between IP and Optical. In general, I expect over time the IP margins to be stronger than Optical margins. I will say it depends on the type of product that we're shipping and what region we're shipping it into as well. So it can vary days. But in general, that's a directional comment.

With a 1.45 book-to-bill sounds like you are building backlog. Can you just talk about the backlog situation? Albeit talking in a pretty significant increase in backlog, like some other NIM companies, just any color on backlog situation? Do you expect that to increase again in fourth quarter? If so, when does it peak and when do you start to convert that to revenues?

Revenue in IP Optical increased to $82 million in the third quarter, with the book-to-bill ratio rising to 1.45, indicating a significant increase in bookings. I view it as a positive momentum, as combining revenue and bookings shows this was our best quarter for IP Optical. Much of the bookings contribute to our backlog as we enter Q4, which we estimate is over 10% higher than in previous quarters. This improvement gives us better predictability for the outlook in the fourth quarter. We expect to continue building our backlog for 2023 in Q4 and anticipate a similar trend. We will monitor our performance, but that is our current outlook.

Next question comes from Greg Mesniaeff with WestPark Capital.

Bruce, towards the end of your prepared remarks, you said that you are anticipating additional expense reductions in 2023 and further functional integration, if I could pretty much quote you on that. Can you expand on that a little and tell us what you mean by that? Give us some color.

A number of the opportunities that we're seeing now include technologies and products from both portfolios from both the Cloud and Edge, voice, core technology, as well as in particular IP routing technology. As you see these networks transition from TDM interfaces to over to IP, we are able to leverage the technology coming out of the IP optical business. Today, we are organized around two business units and global sales teams, et cetera. We are looking at different ways to take advantage of what we are seeing as the market opportunities and bring these organizations more closely together, particularly around how we serve the customer, how we do professional services, how we do maintenance and support. I think there are opportunities to be more efficient and effective as we bring the organization more tightly together. You could think of it as kind of the next phase of integration after we brought the two companies together. We will have more detail on that, obviously, as we get into fourth quarter results and outlook for 2023, but that's kind of the color behind the scenes.

Just a quick follow-up to that same topic. As you do that, have you explored any possibilities of strategic partnerships with other vendors that may have complementary product fit and similar sales and marketing organizations?

Yes, that's actually a great question, Greg. There are a number of threads around that. As you think about the broadband access networks, for the most part, we are not in the access portion of the network. There are a number of companies there that I think are good partners for us as we have a complementary set of products. So that's one area that's fairly active. The other is really around the other end of the network as you think about automation and orchestration. Clearly, we are focused on the optical and IT domains that we are operating in, but that fits into a broader automation and orchestration environment that includes the RAN network and the Access network. I think there are some really interesting partnership opportunities to accelerate our vision around products like Muse that are kind of the foundation of orchestration for the entire network. So there are a couple of real good examples that we're exploring there.

Next question comes from Tim Savageaux with Northland Capital Markets.

A couple of questions here, but just wanted to follow up on something you just commented on, which is when you talk about expecting something similar in Q4 in IP optical, is that a 1.45 book to bill again or a 10% backlog increase, or what are you referring to there?

Maybe I should have been more clear, Tim. Our outlook for Q4 assumes growth in IP optical revenue, obviously. To do the math, it's 10% plus growth in revenue. If we think about the bookings target for Q4 from a dollars perspective, obviously something similar to what we've done in Q3 overall for the company, not necessarily a 1.45 bookings ratio.

Thanks for the update and the detail on the RFP pipeline. I think, if I recall properly, you had taken that number to 18 Tier 1s and I think you said you won four of them, or at least pieces of them. A couple questions on that, which is, one, can you give us any metrics around the aggregate value of those wins, either in total or annually? I think we’d characterize this pipeline as multi-hundred million in annual revenue in the aggregate. So relative to that, on the one hand, on the other, to what extent were those wins contributors to Q3 revenues, or is that more into backlog and into '23, should we think about that?

The Bharti cell site router represents a significant opportunity for us. The initial order will carry us through the first part of next year and is in the range of double-digit millions. Each of these deals is substantial, amounting to tens of millions of dollars each and will increase over time. For instance, with the Rogers deal, we have now fully deployed and have ramped up to that spending level on an annual basis. Each of these opportunities results in meaningful increases from our starting point.

I expect to see continued strong bookings in the fourth quarter, based on the backlog we have. Despite some supply constraints, we managed to achieve mid-single digit growth in IP Optical this year. I believe we can anticipate a notable acceleration in that growth rate in 2023, while being cautious not to set specific expectations too early.

Yes, without getting to the point of providing specific guidance for next year. Obviously, the investment we've made in this product line, we're expecting significant growth going forward. We've obviously said that for a while, we're now kind of seeing some of that start to come into play. In particular, the IP routing piece that we're investing in and the momentum there, I think, is a game changer. We're expecting good growth going into next year. What really matters is how do we get to better profitability, and that's part of the whole picture here, as well as we go into next year and help ourselves by lowering the operating costs a little bit and getting growth and margin improvement at the same time.

Last one for me, and I think you talked in the past about approaching 40% gross margins in IP Optical through the end of the year. You obviously got pretty darn close in Q3, just given what looks to be a little better than expected performance in Q3. Any update to those targets? And I guess I'll ask the same non-question about next year. I mean, I imagine, given the mix improving on the IP side, do you feel like 40% plus is a pretty reasonable target?

I think about nearer term, what we expect looking at the mix in the fourth quarter is gross margins on both businesses similar to what we just did in the third quarter. So call it 38% on IP Optical. There was room for improvement on those numbers, particularly around the supply chain costs. So if I look at direct margin and kind of exclude the expedite fees and things like that, I like what I've seen. We still need to see better improvement around what we have to be securing components, and then I think we close in on that target.

Next question comes from Erik Suppiger with JMP Securities.

First off, I'm trying to gauge the incremental change in the supply chain. Did it change from Q2, or how would you describe the status relative to the last couple of quarters?

So I would say we have had incremental improvements in the Q3. It’s more positive than it was in Q2. That doesn't mean we don't have issues and shortages in a variety of things. But in Q3, we were able to solve many of them. We had a couple of very specific Intel parts, as an example, that meant we couldn't build to the full level we expected. We ended up having material that at 99% of what you needed to build, but you missed one key component. So there was some of that in the quarter. But as I just commented on expedite fees and whatnot, obviously, they came down in the quarter so incrementally improved from where we were in the second quarter. Mick, what do you think? Thoughts on that?

I agree, and I think it has improved. We're still not out of the woods yet. In particular, the logistics and transportation costs are more stable, and we're able to move things around much better. The basic parts, which were spiking up and down in the beginning of the year, they're more readily available now. It's those special components that are still very dear and far out.

I'll just add one more comment to that. Ultimately, and I know some of our peers have commented the same, but we have to look at some design changes in some cases to move on to components that are more readily available. Of course, making hardware design changes, getting that cut in, getting approved by customers takes time. We actually see, as we get into kind of the second quarter next year, another step up in improvement in stability around the supply chain because some of the products that we know we're just going to continue to struggle on some parts will get designed on more readily available components.

So that relates to the next question I had is, how do you see the supply chain getting back towards normal? It sounds like it's going to be gradual, but Q2 of next year is when you start to see some incremental significant changes?

The issues that are still challenging for us lack clear visibility for improvement in supply availability. We will face constraints until we transition to another component, which we anticipate will occur in the second quarter. If I had to estimate when things will improve, and we are not currently discussing it, I would say it is likely within that timeframe based on our current observations.

What is the pricing environment out there for your product as you are dealing with the component costs moving around? Have you been able to pass much of that on or what is the pricing environment?

We really focus on two areas. One is around the product cost and then the other around the inflationary costs relative to employees and labor and everything that goes into facilities, et cetera. We are focused on trying to get prices raised around our maintenance business, which is a key part of obviously our revenue stream. So a lot of focus on as these contracts come up for renewal, press for higher prices around support. Obviously, we are trying to move the needle on pricing on products. I'd find that harder. We are out competing for new business, trying to get new wins, new insertion, and ultimately we have got to be competitive on price, and that we have less pricing control or pricing power I think around that.

Then last quick question. AT&T, it sounded like it's kind of a short-term dip. Would you expect them to return back to 10% contribution as they work through some of the deployments?

I think you probably referred to Verizon. Verizon continues to be our largest customer, our top 10, 10% plus customer, and I expect that to continue for the foreseeable future at this point. The projects I mentioned in Q3, again, there is a lot of activity with them, a lot of professional services, helping them deploy our products. We've shipped a lot in Q2, so we are still kind of absorbing a lot of that as we complete those programs. I think the opportunities with Verizon in addition to the network transformation upgrades that continue, I'm pretty excited about the work we are doing with them in federal. They are one of our key partners as we address the federal space. A big focus around that. And then around enterprise, they're a great channel partner for us as well as we help them grow their enterprise business. I think there's a number of different threads here to pull on to make sure we maintain a strong book of business with Verizon.

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

Okay, great. Well, thanks, Victoria. And thanks, everyone, for joining our call this afternoon. We look forward to speaking with many of you at upcoming investor conferences and obviously a strong finish to the year. So thanks very much operators. Thank you. That concludes our call.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.