Earnings Call Transcript - RBBN Q1 2026

Operator, Operator

Greetings, and welcome to the Ribbon Communications First Quarter 2026 Financial Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Fahad Najam, Senior Vice President of Investor Relations. Please go ahead.

Fahad Najam, SVP, Corporate Strategy and Investor Relations

Good afternoon, and welcome to Ribbon's First Quarter 2026 Financial Results Conference Call. I'm Fahad Najam, SVP, Corporate Strategy and Investor Relations at Ribbon Communications. Also on the call today are Bruce McClelland, Ribbon's Chief Executive Officer; and John Townsend, 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 second quarter of 2026 and beyond are forward-looking statements. Such statements are subject to 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 in the supplemental financial information posted on our website. 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 in 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 would like to turn the call over to Bruce. Bruce?

Bruce McClelland, Chief Executive Officer

Great. Thanks, Fahad. Good afternoon, everyone, and thanks for joining us today to discuss our first quarter results and outlook for the rest of 2026. As highlighted on our last earnings call, we ended 2025 with a broadening customer base and increasing backlog, and we continue to expect a much stronger second half with meaningful improvements starting this quarter. Our first quarter revenue was in line with our expectations and consistent with the industry dynamics we outlined back in February, causing us a slower-than-normal start to the year. Visibility into our customers' plans for the rest of the year and confidence in second-half growth has improved since the beginning of the year, particularly around the specific areas we highlighted where we were being cautious. Sales in the first quarter were near the midpoint of our guidance but with stronger-than-expected demand in India, particularly with Bharti Airtel, who was a 10%-plus customer in the quarter. This was offset by lower sales than we anticipated to U.S. Tier 1 service providers, which I'll comment on more in a minute. This shift in mix resulted in lower gross margins and earnings for the quarter. When comparing year-over-year, as we expected, sales were lower in both of our segments with Cloud & Edge down 8% and IP Optical Networks down 14% in the first quarter. From an end market perspective, the majority of the year-over-year decline was due to lower sales to service providers in multiple regions. Within the Cloud & Edge segment, sales to service providers declined approximately 5% year-over-year, primarily in the U.S. region across a number of smaller customers. Horizon remained a 10%-plus customer in the first quarter. And while voice network transformation activity was lower than we had expected, impacting our first quarter results, deployment rates are increasing, and we anticipate a much stronger second half in 2026. Expansion into the Frontier footprint remains a significant incremental opportunity. Within the IP Optical segment, sales to service providers in the Asia Pac region were down year-over-year following a strong performance from the region last year. Demand in India was stronger than we initially expected, and we are increasingly confident in our outlook in that region for the year ahead. IP Optical sales in Europe in the first quarter were lower year-over-year primarily due to the completion of a long-term support and maintenance contract with a Tier 1 service provider customer, reducing our IP optical maintenance revenue, partially offset by maintenance increases with our growing installed base. Importantly, IP optical bookings in the quarter were strong at 1.5x, indicating a much improved quarter ahead. Within the enterprise market vertical, aggregate sales to enterprise, defense and critical infrastructure customers declined approximately 6% in the first quarter versus last year, with lower cloud and edge sales to U.S. government agencies partially offset by increased IP optical business with international defense agencies. Voice network modernization projects with several U.S. federal agencies continue to progress towards full deployment in the coming months, and we expect further capacity expansion and new projects in the second half of the year. These modernization projects are mission-critical to our Department of Defense agencies as these legacy infrastructures are becoming increasingly expensive to maintain. Consolidated gross margin in the quarter was approximately 300 basis points below our expectations, primarily due to the lower network transformation professional services revenue with elevated service expenses. We believe voice modernization initiatives remain a strategic priority for service providers such as Verizon, and we expect activity to accelerate in the second half of the year. In order to support the increased work, we are deliberately retaining key resources and expertise, even though revenue is lower in the first half. While this decision impacts gross margins and near-term profitability, we believe it positions us well to execute efficiently as volumes increase later in the year. This is a deliberate investment in execution readiness. Adjusted EBITDA for the quarter was negative $8 million, below our guidance range due to lower gross profit dollars. Overall book-to-bill in the quarter was 1.1x with IP Optical at 1.5x, supporting the increased expectations in Q2 and the second half of the year. Now a few more highlights in each of our operating segments. In our IP Optical Networks business, we had a number of key wins in several strategic areas, including in the rapidly growing data center interconnect space. We had 3 new wins across multiple geographies, including Europe, the U.S. and Asia. Two of the projects involve a regional service provider expanding their network to support data center connectivity in their regions. And one of the projects is a major biotech company, connecting all of their major data center locations with a new high-capacity optical network. It's great to see our momentum picking up in this crucial high-growth area. Similarly, we had 5 new project awards in the quarter from major energy producers and distributors in countries such as Germany, Vietnam, Singapore and Colombia. They are all focused on building secure, private command-and-control networks to keep pace with the critical nature of their business. In fact, 2 of the new 400-gig networks are leveraging Quantum Key Distribution encryption for enhanced security using our Apollo optical transport platform. In Africa, we have received an award for a major fiber network expansion across 3 countries, which we expect will exceed $10 million with first revenue in the second quarter. And here in the U.S., we now have more than 30 customers who have already deployed our IP and optical products that have been awarded BEAD grants, where we expect incremental new business once funds are finally distributed. Similarly, in our Cloud & Edge segment, we had a lot of activity in the first quarter around several strategic areas. One of the key areas of focus for any enterprise and service provider customers is the adoption of cloud-native technologies to lower costs and reduce complexity, whether in their own private data centers or in public cloud. We reached full commercial deployment of our cloud-native SBC solution with a leading service provider in Japan in the first quarter and have a very extensive program underway with a Tier 1 provider in Europe. This is a fundamental shift in how networks are designed and how software is managed and deployed to achieve higher degrees of automation, elasticity and reliability. Public cloud is the ultimate destination for many customers, which is why we've established a new partnership with Amazon Web Services that we recently announced at MWC in February. Our first 2 customers are now live and providing commercial service with our cloud-native SBC running in AWS. This is an important strategic milestone and reinforces our leadership position in cloud-native secure voice infrastructure. Over time, we see opportunities to help enable emerging Agentic AI platforms to seamlessly support voice within their application environment. In the enterprise market, the financial services vertical is a key focus area for us, where we are widely deployed across many of the leading banks and insurance companies. Within the quarter, we were excited to further expand our presence in a new top-20 bank to our customer base in the U.S. As mentioned on our last earnings call, we had significant voice network transformation orders in the fourth quarter, and we are executing against these new contracts. These programs typically convert to revenue over 6 to 12 months or longer on large deployments, which positions us for a strong second half. Finally, we continue to make good progress preparing to launch our new AIOps and automation platform, Acumen, with lead customer Optimum, which we expect to go live later this quarter. We have a growing pipeline of customers spanning a number of different use cases, including mobile and fixed wireless services, emergency E911 services, fiber-to-the-home internet service assurance and several others. With that, I'll turn the call over to John to provide additional financial details on our results and then come back on to discuss outlook for the second quarter. John?

John Townsend, Chief Financial Officer

Thanks, Bruce, and good afternoon, everyone. Let's begin with financial results on a consolidated level. In the first quarter of 2026, Ribbon generated revenues of $163 million, a decrease of 10% from the prior year, driven by the factors Bruce outlined and which I will touch on shortly in the segmental discussion. Consolidated non-GAAP gross margin was abnormally low in the quarter at 45.8%, and down 280 basis points year-on-year, primarily due to lower professional services revenue with continued higher costs to support the anticipated ramp in the second half. Non-GAAP operating expenses were $87 million, an increase of $1 million year-over-year, driven by FX headwinds of approximately $4 million, offset by expense savings. This resulted in marginally higher R&D costs. Most of the FX impact was a result of the strong Israeli shekel. Adjusted EBITDA was a loss of $8 million, a $14 million decrease from the prior year, driven principally by the low revenues and gross margins. Net interest expense in the quarter was $10 million. Quarterly non-GAAP net loss was $8 million, $4 million worse year-over-year, this generated a non-GAAP diluted loss per share of $0.05, which was a decrease of $0.02 versus the prior year. Now let's look at the results of our two business segments. In our IP Optical Networks results we recorded first quarter revenues of $63 million, a 14% decrease versus the prior year, which was driven principally by lower sales in Asia Pacific and lower maintenance revenue. Encouragingly, we had stronger IP optical bookings in the quarter with a book-to-bill ratio of 1.5x, underpinning our expectations for improving top-line performance as we proceed through the year. First quarter non-GAAP gross margin for IP Optical was 28.4%, similar to last year, but lower than our target level due to the higher mix of India revenues and also fixed cost absorption. We expect this to improve materially in the second quarter and for the rest of the year. IP Optical Networks adjusted EBITDA for the quarter was a loss of $16 million, a $1.7 million higher loss than the prior year driven by the lower revenues. Now on to our Cloud & Edge business. We generated first quarter revenue of $100 million, down 8% year-over-year. Non-GAAP gross margins were 56.8% and down 575 basis points from the prior year, primarily due to lower professional services revenues while carrying higher service costs in readiness for the anticipated second-half ramp in voice network transformation deployments. As a result, adjusted EBITDA for the segment was $8 million or 8% of revenue and down $12 million year-on-year on the lower revenues and gross margins. Cash flow from operations was a usage of $22 million in the quarter, resulting from the lower billings and typical seasonal employee-related expenses. Closing cash was $70 million, and our net debt leverage ratio was 2.9x. Total CapEx spend in the quarter was $3 million, and this is in line with our normal run rate. In conclusion, we remain focused on operational execution and cost management and are confident that we will see meaningful growth in the second half of the year, improving both revenue and margins in both segments, which we expect to drive stronger profitability. And with that, I'll turn the call back to Bruce.

Bruce McClelland, Chief Executive Officer

Great. Thanks, John. As we move forward through the balance of the year, our confidence in the broader setup for the business continues to improve. While first half results remain influenced by customer timing dynamics, the demand environment across our core markets is strengthening, and our pipeline continues to expand. We are making targeted investments in execution readiness that we can capitalize on the opportunities already in front of us. Importantly, we ended the year with solid momentum reflected in the strong bookings over the last 6 months and a healthy pipeline across service provider, enterprise, EMEA and Asia Pac markets. Looking ahead to the second quarter, we expect meaningful revenue acceleration from enterprise and EMEA customers, continued sequential improvement at our major Tier 1 service providers and ongoing strength in India. In the second half, we anticipate growth across practically all regions and broad-based improvement across most of our markets, including a return to higher deployment levels at Verizon. Beyond that, we remain well positioned to capture incremental growth opportunity from increasing traction in key growth pillars of our business. The largest market opportunity continues to be the replacement of legacy voice communication infrastructure within service provider networks with modern cloud-based technology. In addition to the large Verizon project, in the fourth quarter, we had more than $50 million of bookings from more than a dozen service provider customers, where we were replacing legacy voice switch infrastructure with modern software-based systems. These projects will continue for most of the year, and we anticipate a reacceleration of our Verizon program in the second half of the year. In a growing number of cases, customers are choosing to move to a cloud-native technology stack, either deployed in their own private data centers or in a public cloud environment. Ribbon is certainly the technology leader in this area. The second key focus area of growth for Ribbon this year is in the enterprise and government market sectors where we are uniquely positioned with our voice and data portfolio. We expect this to be a very strong segment for us this quarter with a number of large enterprise projects across both our IP Optical and Secure Voice portfolio. Within the U.S. government sector, we have several large voice modernization projects underway where we are heads down in the first half of the year, migrating end users onto a new cloud-based platform and anticipate new opportunities and further capacity growth in the second half of the year. Our third major focus area this year is the exponential growth in data traffic and the massive investment in broadband infrastructure. We have a significant number of projects already underway in the second quarter as highlighted by the strong book-to-bill in Q1. This includes several major network upgrade projects in Europe and Africa, further growth in India, large projects in the Asia Pac region and continued strength with defense agencies in Europe. Finally, our Acumen AIOps initiatives continue to generate strong customer interest with several proof-of-concept discussions progressing well across multiple target use cases and integration of secure carrier-grade voice capability with emerging Agentic AI platforms is gaining traction. This is an area where Ribbon is uniquely differentiated. Our recently announced partnership with Amazon Web Services is an important strategic milestone and reinforces our leadership position in cloud-native secure voice infrastructure. This partnership is already generating increased customer engagement and pipeline activity. Overall, we remain confident in the broader setup for the year and continue to expect stronger performance starting this quarter. Based on the foregoing, for the second quarter, we expect revenue in a range of $185 million to $195 million and adjusted EBITDA in the range of $9 million to $14 million. In summary, the market dynamics we discussed 90 days ago were unfolding as anticipated, and we remain confident in our outlook for accelerating performance in the second half of 2026. Before we open up for questions, I just wanted to take a moment to highlight. We have also made an announcement this afternoon that John will be leaving the company for another opportunity back in the Telecom Services segment. While I'm sorry to see John leave and fully understand his decision, I'm very excited to announce the promotion of Rick Marmurek to the role of Ribbon Chief Financial Officer. Rick has been an important leader in the company for more than 15 years, playing a key role in building our global finance organization. He is absolutely the right person for the job and will help drive the next phase of execution for the company. John, we wish you well on your next endeavor.

John Townsend, Chief Financial Officer

Thanks, Bruce. And I'd really like to say I've enjoyed my time here at Ribbon. I remain confident that the company has a bright future. And Rick, I know you'll do a great job. Congratulations.

Rick Marmurek, Incoming Chief Financial Officer

Thanks, John and Bruce. I'm very excited about this new opportunity and look forward to continuing to work closely with the teams across the business to drive sustainable growth and operational excellence.

Bruce McClelland, Chief Executive Officer

Great. Well, thanks, Rick. And operator, why don't we now open up for a few questions?

Operator, Operator

Our first question is from Michael Genovese with Rosenblatt Securities.

Michael Genovese, Analyst, Rosenblatt Securities

First, let me just say, John, congratulations on the new opportunity. And it was nice working with you at Ribbon, and just look forward to staying in touch. I guess, Bruce, the question that I'll start with is you seem to have a lot of confidence of improvement in the second quarter. But then the Verizon cloud and edge sounds like it doesn't really get meaningfully better until the second half of the year. Can you just talk more about the timing of Verizon's being stronger in the second half of the year than the first half of the year and just more detail on that?

Bruce McClelland, Chief Executive Officer

Yes. Mike. John, who is with me, says thank you. I think you read it correctly. We don't expect a significant revenue increase in the second quarter from our top customer, although deployment rates should progressively improve throughout the quarter. Second-quarter growth is concentrated in several areas: we expect a very strong quarter from enterprise customers in North America, driven by programs in our Cloud and Edge business and our IP Optical business tied to critical infrastructure deployments. We also expect a pretty strong quarter in EMEA, including Continental Europe and Africa, and that's where the Q2 step-up is coming from. Looking to the third and fourth quarters, beyond growth from Verizon relative to the first half, we expect increases from the U.S. federal market and related capacity expansions, growth in the Asia-Pacific region, and an even stronger second half in Europe, so the opportunity is broad-based and we have a healthy funnel for the year.

Michael Genovese, Analyst, Rosenblatt Securities

Great. Okay. Great. I noticed on your presentation there is a slide about the number of data centers in rural areas, which I find interesting. But I'm wondering about the correlation, and it seems like what would be more compelling is not the location of the data centers, but how many are being built by regional service providers versus hyperscalers. So I'm just curious: is there a relationship between the location being rural and the regional service provider? I mean, are we supposed to draw that conclusion? Can you help me drive these conclusions?

Bruce McClelland, Chief Executive Officer

Yes. I think the correlation isn't so much the regional service providers building the data center, it's leveraging the network infrastructure they're putting in place for their fiber-to-the-home and capacity expansions to then pick up additional traffic and interconnect into more regional data centers as they build out into those areas. As you know, I think that's kind of our sweet spot is with the regional operators. And I even mentioned the growing opportunity around BEAD where funding is available to be able to build out middle-mile capacity. And then it's a matter of how do you put as much traffic on that as you can. And so we see that in the North American market. And then we see it in a variety of international markets as well, where the fiber connectivity is coming from an operator or a service provider, not necessarily just dedicated dark fiber circuits.

Michael Genovese, Analyst, Rosenblatt Securities

Great. And then finally for me before I pass it on, could you flesh out the Agentic opportunity and how you support and play into Agentic AI? It's a newer part of the story, so I'd like to be brought up to speed there.

Bruce McClelland, Chief Executive Officer

Yes, I think I'd like to think of it in kind of two different aspects. So one is certainly this new platform we're launching called Acumen where we're basically working with our current customers to add an Agentic AI-driven operations center, if you will, to help them manage their network, create their own agents to be able to automate what today is done in a more human way into a much more automated way. And we're building on top of a couple of different platforms we already have deployed in particular, our analytics platform, which is pretty widely deployed, collecting vast amounts of information off the network and then feeding that into an Agentic layer into a large language model and basically learning different characteristics of the network and being able to take advantage of that. So that's one aspect of it. And as I mentioned, we're launching late this quarter commercially with our lead customer Optimum here in the U.S. The second part of how we see an opportunity for us is as the use of Agentic AI becomes more prevalent in enterprises. We think the connection between the user and the Agentic applications will be voice-driven. And so there's a need to basically protect that boundary and be able to facilitate the voice traffic similar to what you would do in a Microsoft Teams or Zoom or Webex type application. And so we are able to repurpose our voice platforms into that type of use case and the first launch customers on the AWS deployment that I talked about are effectively using our session border controller in that way to interconnect into their Agentic AI applications. And so we think there's a real opportunity there as new types of Agentic AI platforms are deployed for us to have a play there, again, very similar to how UCaaS platforms are working.

Operator, Operator

Our next question is from Tim Savageaux with Northland Capital Markets.

Timothy Savageaux, Analyst, Northland Capital Markets

Sorry about that. You talked about, hey, a couple of the product drivers for the Q2, the sequential growth in Q2, but I don't know if you talked about that from a segment standpoint, whether you expect a meaningful difference in growth rate by segments you've had book-to-bills in each of them in the last quarter or two. But any color there and then I can follow-up.

Bruce McClelland, Chief Executive Officer

Yes. No, good question, Tim. So we expect growth in both segments here in the second quarter versus the first quarter. And as you just pointed out, the bookings over the last 6 months combined have been very solid for us. So we're expecting both segments to be growing. I do believe that IP Optical segment will grow more than the Cloud & Edge segment in the second quarter. As I mentioned, in North America, we've got a number of great opportunities for growth here in various different markets I mentioned. So I highlighted a number of kind of interesting wins in the first quarter that helped build the backlog some around data center interconnect as we start to deploy our new 948 optical transport platform into that market and then a number of critical infrastructure again, kind of a broad range of different customers, Colombia, Vietnam, Europe, Germany. So all of those are kind of contributing to the growth here in the second quarter. I think Cloud & Edge would obviously be growing faster as the Verizon deployments picked back up again, and that will be a key part of the growth into the second half of the year.

Timothy Savageaux, Analyst, Northland Capital Markets

Okay. Just as an aside, I want to check: those sound like absolute dollar comments, so I should go smaller. I also want to compare that to percentages. My main follow-up is, looking at Q1 results, is it fair to attribute the year-on-year declines in Cloud & Edge mostly to Verizon, or not at all? I know they stayed on the 10% list, and I assume they performed pretty well. And a bit more detail on the year-over-year IP Optical decline: I guess India was up, so what was the real weakness there?

Bruce McClelland, Chief Executive Officer

Yes. Three good questions. On dollars versus percentages for the second quarter, I think from a dollars or revenue perspective the IP Optical business will increase more, and that will likely translate into a larger percentage increase as well. We don't guide each individual segment, but that is the trend we expect to see in the second quarter. Regarding year-over-year declines in the first quarter, Verizon was probably the smallest contributor to the change from Q1 last year to Q1 this year. It wasn't one specific issue but a number of smaller projects with different service providers. Cloud & Edge was down about 5% to 6% in the first quarter, so it wasn't a big drop and it wasn't driven by a single customer. On the IP Optical decline, Asia Pacific, including India, was fairly consistent year-over-year, perhaps down only $1 million or $2 million, with India the strongest part of that market for us. The weakness was mainly in Europe and to a lesser extent North America, with Europe the largest contributor to the first-quarter decline. Our business in Europe is concentrated in a variety of critical infrastructure customers—railways, oil and gas, and defense—and those projects tend to be project-based, so revenue can be lumpy. The bookings metric was a real positive and positions us for stronger growth in the second and third quarters.

Timothy Savageaux, Analyst, Northland Capital Markets

And that was my last question actually, talking about that IP Optical, book-to-bill, and you guys highlighted what's happening, data center interconnect-wise, pretty significantly here in the report. Say you gave us an order of magnitude, I think, on this contribution from your big Africa deal. I wonder to what extent do you see either what you've booked order wise or the opportunity pipeline or however you want to term it in terms of additional color, how you would look at this DCI opportunity in terms of materiality relative to either book-to-bill or the overall IP Optical business?

Bruce McClelland, Chief Executive Officer

Yes. So the data center interconnect space was not a big focus area for us, say, three or four years ago. We really, as you know, have been very focused on critical infrastructure segment where highly secure, robust capabilities are really crucial. So that was a real sweet spot. And then building out our capabilities around middle-mile IP/MPLS in the access and aggregation layers of the network, which is one of the big strengths in our India deployments. So the third leg in the stool really for us is around data center interconnect, and we kind of started in full earnest last year with the launch of two new platforms, our 2700 series which is a very dense aggregation platform for aggregating 400-gig IP clients and the other optical transport platform, which was built for the data center, basically built for enterprise, different form factor, a compact modular design that allows us to leverage pluggable optics. So those were the two new products that we launched last year focused around data center. And so that's allowed us to start to generate wins and kind of grow into that market. Relative to the first two markets, it's small for us today, but we've improved our go-to-market to match the new products that have come out, and we do think it's a stronger growth path for us. It's a little hard for us to forecast revenue yet at this point because we're kind of building wins as we go. But I think you'll hear a lot more about it from us in the future. Obviously, there's a ton of spend going into data centers, and we want to be able to go after that market, both through our service provider customers as well as direct into different types of data centers.

Operator, Operator

There are no further questions at this time. I would like to turn the floor back over to Bruce McClelland for any closing remarks. Our next question is from Rustam Kanga with Citizens.

Rustam Kanga, Analyst, Citizens

Is it fair to say, Bruce, that visibility into the sustainability on the India CapEx side has improved since last quarter, and that's largely intact now?

Bruce McClelland, Chief Executive Officer

Yes. On the last call, I talked about really three different areas that we were being cautious on around the growth in India, around plans with Verizon and others around network transformation. And we feel like we've got better improved visibility. Clearly, the India market is remaining very strong. In fact, it was a catalyst for us to do well in the revenue line for Q1. So I think we're feeling better. I think the enterprise market, both critical infrastructure on our IP Optical side, and then large enterprise around our secure voice looks really robust for the rest of the year. And then the final area that I've been just cautious on is around the U.S. federal space. I mentioned we have a couple of large programs that need to get into full deployment, so we can start adding capacity to that. So those were the areas that I think we were more cautious on and feel better about all of those as we sit here kind of 90 days later.

Operator, Operator

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Bruce McClelland for any closing remarks.

Bruce McClelland, Chief Executive Officer

Well, great. Thanks to everyone joining us today. Just to reiterate, I guess, the key messages here. We, as we just summarized, feel like we have good visibility going into the rest of the year, starting with improvements here in the second quarter, and look forward to keeping everyone updated. We have a whole slate of investor conferences over the next couple of months and look forward to keeping you updated on our progress. Thank you.

Operator, Operator

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