Ladies and gentlemen, greetings, and welcome to the Ribbon Communications Third Quarter 2024 Financial Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joni Roberts, Chief Marketing Officer. Please go ahead.

Good afternoon, and welcome to Ribbon's Third Quarter 2024 Financial Results Conference Call. I'm Joni Roberts, Chief Marketing Officer at Ribbon Communications. Also, on the call today, Bruce McClelland, Ribbon's Chief Executive Officer; and John Townsend, who will shortly assume the role of Ribbon's Chief Financial Officer. Today's call is being webcast live and will be archived on the Investor Relations section of our website, rbbn.com, where both our press release and supplemental slides are currently available. Certain matters we'll be discussing today, including the business outlook and financial projections for the fourth quarter of 2024 and beyond, 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, including the supplemental financial information posted on our website. In addition, we'll present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measure are included in the earnings press release we issued earlier today as well as the supplemental financial information we prepared for this conference call, which again, are both available on the Investor Relations section of our website. And now I'd like to turn it over to Bruce.

Great. Thanks, Joni. Good afternoon, everyone, and thanks for joining us today to discuss our Q3 results and outlook for the rest of the year. First, as many of you know, Mick Lopez announced his plan to retire and will be with us through the end of the month. As I've stated before, Mick has been instrumental in maturing the operations of the company and accomplishing multiple strategic initiatives. Mick, thank you for your leadership and contributions to Ribbon, and all the best to you in your retirement. I'd now like to welcome John Townsend, who is joining us as Chief Financial Officer effective November 1. John is a proven financial leader with an impressive career that spans over 30 years, leading large, complex financial organizations for several of the industry's largest service providers in multiple countries. Given our focus in this area and the continued gains we're making, I'm really looking forward to the insight John will bring us. He'll be available in our Q&A session this afternoon. Now on to Q3 results. I'm very pleased with our performance in the quarter, highlighted by the return to growth in our Cloud & Edge business. As we indicated on our last earnings call, we have a number of tailwinds that will support and underpin this business for years to come and will have a positive effect on the overall margins for the company. And while IP Optical Network sales were lower year-over-year this quarter following the suspension of product sales to Eastern Europe beginning last quarter, we are growing in other areas. In fact, we're having a very strong second half in the U.S., where our cross-sell strategy is working well, and we have numerous projects focused on expanding rural Internet availability and capacity. We also continue to see more opportunities related to competitive shifts in the market where customers are assessing their options to replace incumbent suppliers, and we have very good opportunities to gain market share. One of the most notable areas of growth for us across both businesses is the federal and defense industry. Year-to-date, sales have grown 60% as compared to 2023 and accounted for 13% of overall sales so far this year. Our portfolio of secure communication applications and network infrastructure is a great fit for this important market. In the U.S. Defense segment, we have developed a very strong position with multiple branches of the Armed Forces as they replace legacy systems with modern cloud-based voice solutions that provide the security and survivability needed to carry out their combat and peacekeeping missions. And in Europe, our secure IP and optical data networking platforms are widely deployed in countries such as Israel, Switzerland, and Finland. Our combined portfolio has brought applicability across many more federal agencies and countries, creating opportunity for significant further growth. In the third quarter, overall sales were $210 million, increasing 3.5% year-over-year and 9% quarter-over-quarter, led by the growth in Cloud & Edge. Earnings were once again very solid and at the top end of our guidance with adjusted non-GAAP EBITDA of $30 million. Non-GAAP gross margin of 55% exceeded expectations and was at the high end of guidance with a positive mix of product sales and good execution from our Professional Services team. Non-GAAP operating expenses were $90 million in the quarter, up slightly year-over-year, mostly due to midyear employee compensation adjustments. Year-to-date, profitability for the company has increased $15 million or 32% on an adjusted EBITDA basis as compared to 2023. Trailing 12-month adjusted EBITDA is now $106 million. Now a little more detail on our operating segments. In the Cloud & Edge business, as expected, sales to Verizon increased substantially in the quarter, reaching 15% of overall company sales. The initial 3-year phase of the voice network modernization project we announced earlier this year is fully underway, and the combined Verizon and Ribbon team are executing very well. Our revenue run rate is now exceeding $100 million per year with this key customer and is expected to grow in 2025. In the U.S. federal market, we announced an important project win to modernize and secure the U.S. federal softswitch backbone with our state-of-the-art voice communication infrastructure. We now have deployments in 4 branches of the U.S. military as we continue to expand our presence in defense networks across the globe. One of the key drivers behind the improved gross margin this quarter was the increase in SBC sales and the greater software mix. This is one of the best quarters for SBC sales that we've had in several years, up more than 60% from the third quarter last year. This included sales across a number of markets, including U.S. and international service providers, U.S. federal, and a number of large enterprise customers. Also, as I mentioned earlier, we're in active discussions with a number of customers regarding the replacement of Microsoft Metaswitch platforms. We have a large funnel of opportunities, and we've closed several initial deals this quarter. We also closed a sizable project with our partner, JSC, to provide a full IMS voice platform, leveraging our SBC and policy solutions along with their IMS core. This is a relatively new area for us and has the potential for us to gain share in a portion of the market where we've not fully addressed in the past. Overall, Cloud & Edge revenue in the third quarter was $128 million, up 11% year-over-year and 16% quarter-over-quarter. Non-GAAP gross margin neared an all-time high at 68% and non-GAAP adjusted EBITDA contribution grew 20% year-over-year to $38 million or 30% of revenue for the quarter, also near an all-time high. Book-to-bill was very strong at over 1.4x with an increasing backlog associated with network transformation projects. In summary, this was a great quarter for our Cloud & Edge business and sets us up for an even stronger performance in the fourth quarter. In our IP Optical segment, the highlight of the quarter was certainly the increased business in the U.S. As mentioned in our last earnings call, we had very good backlog entering the quarter in the U.S. market, particularly with regional and rural broadband providers. This resulted in our strongest quarter ever in the U.S., with revenue increasing more than 100%, both quarter-over-quarter and year-over-year and accounted for more than 20% of IP Optical sales. We expect the momentum in the U.S. to continue in the fourth quarter across a number of use cases and customers, including U.S. rural and regional broadband Middle Mile transport, TDM circuit emulation with an increasing number of service providers, as well as critical infrastructure providers such as American Electric Power. And we anticipate further growth in 2025 as larger service providers accelerate their modernization of the TDM infrastructure and leverage our IP routing technology. IP Optical sales to operators in India, including Bharti and Vodafone Idea, increased 16% quarter-over-quarter, but are tracking a little below last year's level. We continue to expect the fourth quarter to be the best of the year in this region with the second half approximately 30% higher than the first half of the year. This is in large part due to the renewed investment being made by Vodafone Idea to upgrade their network infrastructure. In Europe, IP Optical sales in the quarter increased 15% year-over-year and are up 17% year-to-date. Central Europe continues to be our strongest region, including Germany, Austria, and Switzerland, where we have a good mix of critical infrastructure, service provider, and defense customers supporting the business. We also have a good pipeline of opportunities with service providers in Southern Europe, including Italy and Spain. Finally, from an innovation perspective, at the recent next-generation optical networking event in Paris, we demonstrated the industry's first 400-gig ZR+ module that supports field upgradability to 800-gig ZR+. This enables operators to cost-effectively support both metro and long-haul transport on a single module, enhancing performance and cost efficiencies with an open interoperable architecture. Our new Apollo 9408 compact modular platform provides industry-leading density with 25.6 terabits per 2 rack units and an impressive low power consumption of less than 0.07 watts per gigabit. This is a great platform ideally suited for growing data center demand. From a financial perspective, IP Optical revenue in the third quarter was $82 million, down 6% year-over-year and flat to the second quarter. But excluding sales to Eastern Europe, revenue from all other customers was up 4% year-over-year. As expected, gross margins were lower at 36% as a result of the change in mix. Book-to-bill was 1.0x in the quarter after adjustments associated with Eastern Europe. Non-GAAP adjusted EBITDA for IP Optical was negative $8 million, down $4 million from the prior year. Year-to-date, adjusted EBITDA is $21 million improved over the first 3 quarters of last year. Now let me wrap up on our third quarter results with a few key operational metrics that Mick would normally comment on. John will pick this up next quarter. Cash from operations was a negative $15 million, and we ended the quarter with cash and cash equivalents of $40 million. This was lower than anticipated due to approximately $25 million of accounts receivable collections expected at the end of September that were delayed into October, increasing our quarter-end AR by approximately $40 million. More than half this amount was already received in the first 2 weeks of October, and we expect positive cash generation this quarter with AR staying at a similar level due to significant increases in shipments this quarter. Interest expense in the quarter was $10 million, reflecting our new credit facility, but we will benefit from the 50-basis-point SOFR rate reduction recently implemented. We also invested $7 million this quarter as we prepare to relocate an R&D facility and $2 million in typical CapEx investment. We now estimate a non-GAAP tax rate for the full year of approximately 40% given shifts in regional profit and loss contributions. Now a few comments on the fourth quarter and outlook for 2025. The operating environment continues to improve and presents an excellent opportunity for us to maintain our momentum, growing revenue and profitability. Specific trends influencing our business include the following key areas: First, network modernization to drive down cost and retire obsolete infrastructure is a key factor behind the increasing investment from service providers, enterprises, and federal agencies to upgrade their voice communication infrastructure. Legacy TDM and copper networks are increasingly expensive to support, and programs such as the Verizon voice core modernization project are clear evidence of the priority now being placed on this part of the network. We have a growing number of sizable projects with other large service providers that will drive further growth in our Cloud & Edge secure communications business in 2025 and in years to come. Second, as I mentioned earlier, we're having very good success in federal and defense sectors in the U.S. and Europe. Mission-critical applications that rely on highly secure networks that are always on and never fail. This is an area where Ribbon really differentiates from the competition. Third, there continues to be substantial investment to improve Internet availability and performance for underserved segments of the broadband market. This is an area where we're really executing well on our cross-sell strategy and the upcoming U.S. BEAD program will further increase funding across the entire ecosystem. And finally, the shifting competitive environment is creating further opportunity for Ribbon to win new accounts across multiple regions. In the IP optical space, the merger of Nokia and Infinera introduces supply chain concerns that we expect to capitalize on. And Microsoft has generated significant uncertainty around the Metaswitch installed base that introduces substantial replacement opportunities for us. The focus we have on cross-selling the entire portfolio to our broad base of customers continues to generate results as highlighted by the success we're having with U.S. rural broadband providers. And the integration of our Neptune IP router with our voice transformation portfolio has opened doors across the entire U.S. service provider landscape to modernize the aging TDM voice network, leveraging our IP routing technology. While it's still early, we expect the combination of these opportunities to enable us to grow revenue in 2025 in the mid-single-digit range even after accounting for the reduction in sales to Eastern Europe. We do not anticipate significant changes in operating expenses, enabling the majority of the incremental margin to contribute directly to earnings, where we expect to grow at a double-digit rate. In the fourth quarter, we continue to expect an excellent finish to the year with sequential growth in both businesses. Voice modernization programs with Verizon and multiple other carriers will continue to ramp, and we anticipate several new awards with U.S. Federal Defense agencies. We expect the momentum in the U.S. rural broadband segment to continue at similar levels to the third quarter. And we expect a seasonally strong quarter with enterprise customers as we renew annual enterprise license agreements. Our guidance for the fourth quarter projects year-over-year sales growth of approximately 8% at the midpoint, reflecting all of these positive trends. We anticipate gross margin to be slightly higher than the notable level we posted in the third quarter due to the expected higher mix of Cloud & Edge sales. Based on this, for the fourth quarter, we're projecting revenue in a range of $235 million to $255 million, non-GAAP gross margins in a range of 55.5% to 56% and non-GAAP adjusted EBITDA in a range of $46 million to $52 million. We certainly recognize that our guidance for the fourth quarter implies significant sequential growth. But as I've outlined, we have good momentum across multiple areas, along with strong bookings in the third quarter that provide good visibility and confidence for an excellent finish for the year. Overall, we're making good progress on our key strategic goals, including returning to growth in our telco voice infrastructure business, diversifying and expanding sales in enterprise market verticals, including financial, health care, energy, transportation, and government information security, cross-selling the entire portfolio, particularly in the U.S. and achieving sustainable profitable growth in our IP Optical business and accelerating innovation and capturing cost efficiencies with the full integration of our product teams.

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

Good quarter. I'm curious if you could provide more information on the Metaswitch opportunity. You mentioned it being substantial and indicated that Microsoft is moving away from the platform. Is there a dollar value for the installed base and a reasonable market share percentage that you believe you could achieve moving forward? Any additional insights on the potential of this opportunity would be appreciated.

Yes. Christian, so there's a couple of different metrics, I think, to look at. There's quite a range. They're deployed in kind of a broad range of smaller regional rural operators and then quite a few of the Tier 2 operators. Frankly, places where we're not, they are sort of thing, right? There's a lot of kind of distribution across the footprint between the 2 of us. So these deals can range from a few hundred thousand dollars to several million dollars or larger depending on the scale and the scope. One of the metrics to look at is the last public filings that Microsoft maintains in the U.K. for that business. And just the ongoing maintenance revenue stream is pretty substantial from that installed base. I forget the exact number, but in the $75 million range or more. So I think it's a fairly substantial footprint. Of course, some of that will just continue to operate the way it is. Some of it will get upgraded and replaced. And I can tell you, we've got a lot of focus on it. It's an opportunity that doesn't come along very often to go capture some of that real estate, that footprint.

Great. And then my second question has to do with the BEAD program. It sounds like you're seeing some revenue. Nokia on their conference call talked about recognizing their first revenue in the December quarter. That seems a little bit earlier than a lot of people were thinking given the slow start to all the state approvals. Would you expect that 2025 could be a stronger uptake of movement of spending BEAD dollars? Or do you think it will be kind of gradual in '26 is the big year?

Yes. I think it's gradual, particularly for us given we're not on the access layer of the network. I am kind of pleased to see the progress, though, over the last few months. I think I was actually doing some reading this morning. I think there are now 9 states that have opened up their grant application windows, and some are already processing applications. And you could even see perhaps the first awards before the end of the year. So that's good progress compared to where we were, say, 6 months ago. And again, I think the first half is pretty modest and kind of getting started on the construction portion of some of these programs and then accelerating in the second half. And again, our piece is a little bit later in the process as they start to build out the interconnectivity in the Middle Mile portion. But it's good to see the progress finally being made here.

Yes. Bruce, an encouraging quarter, and we go through all of the geographies and the segments, that's really, really promising data points. But I guess can I just start by asking where, if anywhere in the quarter did not go to your expectations? Was there anywhere where you were sort of slightly disappointed by the demand?

Well, I'm really pleased with the profitability. Obviously, the mix, the margin, the performance of our services team was really outstanding in the quarter. So it was great to see that come through. Obviously, we were $1.5 million or $2 million below the midpoint of guidance. So we were a couple of million shy of where I thought we would be and maybe a few deals in Europe, in particular, that could have happened in the quarter. Good pipeline for the fourth quarter here, though, obviously, good momentum and outlook and the margin mix even a little better in the quarter. So really looking forward to a strong finish.

Yes. So following up on that, I mean, for the fourth quarter, it really looks like the U.S. is going to be the star again, but you made positive comments about India as well. I guess how should we think about Europe in the fourth quarter? Should we think about some positive seasonality? Or is there anything showing fundamental signs of improvement in the fourth quarter in Europe?

Yes. I think the way I describe that region is really seasonality, the way you just described it. The combination of critical infrastructure and service providers, the service provider piece tending to be a little more seasonal. So I do think we have a stronger fourth quarter, which we typically do in that region. The U.S., I think, will be the strongest region. I think we shifted back to the U.S. being more than 50% of revenue in the third quarter and probably the same in the fourth quarter. And on India, last year, we grew substantially. We were up 30% last year in India. This year, as I talked about on the last call, we're down about 20% compared to last year, but the fourth quarter will be the strongest quarter of the year. So we've continued to improve as the year progressed. And with Vodafone Idea beginning to reinvest in their network and build out both 4G and 5G infrastructure, that's good for the whole vendor community. So looking forward to a stronger year going into next year as well there.

Just one last question for me. Looking at it from the outside, I know it's just started, but it appears to be one of the most promising times ever for softswitch architectures and your Cloud and Edge business. I might not be recalling sufficiently about something good that occurred 10 or 20 years ago in the market, but there seems to be something fundamentally important happening now. Is this the best time ever for Cloud and Edge? If so, why?

Well, in that portion of that business, it's certainly the best that I've been here. I think we've gone through some fairly major upgrade cycles in this space back, say, 7, 8 years ago for kind of the first phase of some of the modern softswitch architectures. There's a lot of focus on pulling cost out of the network operation. And there's a bit of an issue around aging knowledge-based knowledge workers in this space. And so I think the motivation has really picked up. Of course, the other part of our business in this space is around unified communications, deploying session border controller and policy management to support Microsoft Teams and Zoom and those sorts of migrations, and we've had a number of really strong years around that part. But the whole kind of network infrastructure upgrade process that we're seeing service providers and U.S. federal agencies go through, it feels pretty unique for sure.

Congratulations on the quarter. I wanted to follow up on your guidance for mid-single-digit growth for calendar '25 and explore some of the factors influencing that. You've seen declines in IP Optical this year, and it seems that what you expected to be flat or slightly positive now appears to be down in single digits. Given the strength in the U.S., do you anticipate a strong recovery in that area? Additionally, there are many significant orders and opportunities in Cloud & Edge. How do you foresee the segments performing relative to the mid-single-digit target? I'll have further questions after that.

Yes. Tim, thank you. So there's a number of moving parts here, obviously, to get to an overall corporate average growth for next year. As you point out, we have been on an approximately 10% per year growth rate on the IP Optical the last few years with the Eastern European business suspension that we implemented last quarter, year-over-year going into 2025, we have to make up, if you will, the shipments that we had in the first part of the year in that region. And you estimate that in the $25 million range. So to grow next year in that business, we've got to kind of make up that amount and then grow from there. So that gets us to the kind of mid-single-digit range around that business. In the Cloud & Edge business, voice infrastructure business, a portion of our total revenue there is obviously maintenance revenue, and that tends to be fairly flat year-over-year. So to get to a mid-single-digit growth rate around that, we have to grow at a faster rate on the product and service portion. And again, so that the implied growth rate around the product side is actually higher than the mid-single-digit range. So between those two kind of pieces of the model, that gets you to an overall average in the mid-single-digit range. Yes. It would be challenging to find another opportunity as significant as the Verizon project, which is currently the largest in our pipeline. We have also publicly announced a few other projects, such as Brightspeed, which we discussed last quarter as they work on modernizing their legacy voice infrastructure and separating from Lumen’s infrastructure. Additionally, I mentioned some projects in Africa with operators like MTN, where we are establishing a new voice interconnect hub. There are several other projects in Europe that we have not disclosed yet but are similar in nature. In the U.S., there are also larger opportunities for network modernization. However, each network differs, especially those in rural areas with smaller line counts, where the return on investment for upgrading doesn’t always justify the costs. It often makes more sense to keep operating those systems as long as possible. Nevertheless, there are larger networks where upgrades do make financial sense, and we have a solid pipeline of service provider opportunities in North America and Europe that we are actively pursuing for next year. Of course, you add to that the U.S. federal that I commented on quite a bit around those types of opportunities, very similar. They're building out their own secure communication infrastructure. The DISA project that we announced in the third quarter, basically replacing and modernizing that softswitch backbone that operates the DoD, basically interconnect network for voice communications. Yes, just a good pipeline of those types of opportunities that are driving growth for the business. The other part of your question around the IP Optical pipeline and comment on the competitive environment. So certainly, as we saw in the third quarter here with 20% of our revenue in the U.S. for the first time, we're having good success, particularly in the regional and rural operators, helping build out and add more capacity into the network. We've got a good pipeline for the fourth quarter, and I think those programs continue into next year. And then as the BEAD funding actually starts to move into our portion of the network, I think those are '26, '27 opportunities for us. So good runway going forward there. The other area we haven't talked too much about in the U.S. is around critical infrastructure. That's a real platform for our business in Europe has not been a big driver so far here in the U.S. We announced American Electric Power earlier this year, the sixth largest energy transportation company here in the U.S., that builds out their own secure transport and IP routing network. And we're having a really good program with them this year, helping modernize some of that. So those are some of the other related opportunities. The Nokia-Infinera opportunity specifically, I think, takes a little longer time to develop. It's not so much in North America. The opportunities we see are more in Asia Pac and in Europe to some extent. And typically, it's an operator that has either both of them deployed in the network today or we're perhaps migrating in a particular direction and for whatever reason, aren't sold on the combined roadmap or the strategy there. I think the window of time is between now and when that closes and they bring together a clearer roadmap. So while that uncertainty is in the market, we're really hustling to go try and find some new wins in that space. Yes, I think that's a real opportunity. I haven't been able to quantify it yet, but we don't do much voice business there today with Frontier other than some maintenance. They haven't invested significantly in modernizing that part of their network. There has been considerable focus on successfully expanding fiber. I believe there's a good chance Verizon will consider a similar approach when examining the Frontier infrastructure. We won't know for sure until they're further along in the process, but that's certainly something we are looking at for around the 2026 timeframe, which could serve as an additional catalyst for us.

In regards to the impressive triple-digit growth rate year-over-year in IP Optical, aside from the cited rural broadband fiber initiatives, you guys talked about the success with the cross-sell motion. Could you just unpack what's kind of driving that success there?

Yes. So I guess 2 thoughts on that. The rural portion of the business, we think of as cross-sell. Many of these customers, we actually have an installed base of voice infrastructure with them already today. And they're not investing a lot in that, but it's an ongoing support and maintenance and commercial relationship with them. They rely on us to help operate that network. And so it's given us a bit of an unfair advantage in some ways to be able to go in and compete for this new business as they're investing in these new areas. Many times, the decision-makers are the same people that we work with already on the other part of the business. And so that part of the cross-sell has really worked well. The other part is really being able to use the IP routing technology, the routing platforms that we have to be able to do replacement of TDM and SONET infrastructure with a broader set of service provider customers. And so we have a pretty active base now of customers that provide interconnect services in the U.S. between the different operators that help interconnect both data traffic and voice traffic, and the cost of these interconnect networks, these traditional TDM networks and SONET networks is going up every year like disproportionately. And so there's been a lot of interest in using our routers as basically a replacement for doing circuit emulation. And again, that's a great example of cross-sell where we've got a new technology, a new platform that we're going to existing customers and selling into the new space. So several examples like that, Russ, that we're focused on.

As there are no further questions, I now hand the conference over to Mr. Bruce McClelland for his closing comments.

Yes. Thanks very much, Ryan. Thanks again for everybody being on the call and for your interest in Ribbon Communications. We look forward to speaking with many of you at our upcoming investor conferences and keeping you updated on our progress. So operator, thanks very much. This concludes our call.

Thank you. The conference of Ribbon Communications has now concluded. Thank you for your participation. You may now disconnect your lines.