Earnings Call Transcript - RBBN Q3 2025

Operator, Operator

Greetings, and welcome to the Ribbon Communications Third Quarter 2025 Financial Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Fahad Najam from Investor Relations. Thank you, sir. You may begin.

Fahad Najam, SVP, Corporate Strategy and Investor Relations

Good afternoon, and welcome to Ribbon's Third Quarter 2025 Financial Results Conference Call. I am 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 fourth quarter of 2025 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 statements 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, CEO

Great. Thanks, Fahad. Good afternoon, everyone, and thanks for joining us today to discuss our Q3 results and the outlook for the fourth quarter and full year. I'd like to start by highlighting our recent new product announcement that's getting considerable interest from customers. Acumen is our new powerful AIOps automation platform designed to help service providers and enterprises navigate the complexity of today's challenging operational environment and accelerate their transition to autonomous networks. Our recent announcement included the endorsement from Altice-owned Optimum, who are integrating the platform into their operation to enhance network reliability and performance. The Acumen platform is built to reduce deployment timelines and deliver customizable automation across the entire network life cycle. It ingests data from all layers of the network, providing end-to-end network observability across multi-vendor and multiple networks. Moreover, it combines out-of-the-box applications built on our Analytics and Muse products with a powerful agent builder capability that enables our customers to develop their own AI agents with various LLM integrations. Our deep protocol and networking experience uniquely positions us to help our customers build fully autonomous AI-driven networks. Beyond AIOps, our Cloud & Edge portfolio is becoming increasingly strategic to our customers' agentic AI platforms and roadmap. We had several very important awards in the third quarter, where we've been selected by leading technology providers, including one of the largest SaaS companies in the world, which is leveraging our cloud-native SBCs and WebRTC APIs deployed in AWS to enhance their customer service agentic AI operations. Another notable win in the quarter was with IBM, which is embedding our virtual SBC solutions within its Watson AI platform to enable support for multiple different formats, including voice to interact with users. These are just some of the examples of the new innovations our team is working on, with more to come. And I'm extremely excited about the convergence of AI and voice technologies and the significant opportunity ahead for Ribbon. Okay. Now on to our quarterly results. I'm pleased to report a solid third quarter with sales increasing 2% year-over-year even as we navigate short-term disruption related to the U.S. federal government shutdown. Year-to-date, revenue has increased 6% this year and EBITDA has increased 5% versus the same period in 2024. Excluding the impact of sales to Eastern Europe, revenue has increased more than 10% so far this year. Sales to service providers in the quarter increased 5% year-over-year with growth across multiple accounts, including Verizon, Bharti, and several other operators in North America. Sales to enterprise customers in the quarter were down approximately 3% year-over-year and were impacted by lower sales to U.S. government agencies. Excluding this segment, enterprise sales to all other customers were up almost 7% year-over-year. While the U.S. government shutdown officially started on October 1, it became a growing distraction in the last few weeks of the third quarter and delayed the procurement process on several projects that would have easily put us above the midpoint of our guidance for the quarter. The ongoing shutdown is obviously affecting many government activities with significant noncritical staff furloughed. This has become an important segment for us, contributing mid- to high single-digit percentages of our Cloud & Edge revenue in 2024. In any event, these projects remain a high priority for U.S. federal agencies and purchases are simply delayed, not lost. But given the uncertainty over when a resolution will be reached, we have removed the majority of U.S. government-related sales from our projection for the fourth quarter and now assume these purchases will occur in 2026. To be clear, no business has been lost, deployments and services are continuing, and we're supporting our customers' mission-critical needs. Notwithstanding this near-term impact, the fundamentals across our Cloud & Edge and IP Optical businesses remain strong. Continuing on the momentum built over the last several quarters, we're benefiting from very good demand across both service provider and enterprise customers as they continue to invest in modernizing their voice and data networks, and we're tracking well against our growth objectives. From a regional perspective, sales to Europe, the Middle East, and Africa were very strong this quarter, growing 26% year-over-year. Sales to Asia Pacific countries were also strong, growing 13% with India really leading the way. Sales in North America were impacted by the lower U.S. federal sales and declined approximately 10% year-over-year in the quarter. From a consolidated bookings perspective, product and professional services booking in the quarter were below 1x for the first time in almost 2 years. To some extent, this reflects the impact from the U.S. government shutdown. Bookings momentum so far in the fourth quarter has been good with more than $30 million of new enterprise and service provider orders received over the last few weeks. Now a little more detail on each of our operating segments. Sales in our IP Optical Networks business continued to grow, increasing 11% year-over-year, one of our strongest quarters in the last 5 years and compensating for lost sales to Eastern Europe. The higher sales, favorable regional and customer mix, and expense management resulted in a positive earnings contribution on an EBITDA basis, an important milestone for the business. Business in Europe and the Middle East increased almost 50% year-over-year with a variety of critical infrastructure and defense agency projects. This included several notable new data center interconnect projects in Central Europe. The first was in support of a large regional insurance provider to provide secure, high-speed connectivity between its data centers with a key focus on low latency and traffic encryption. The second was with a regional telecom operator building a new 400-gig Internet peering network connecting over 200 cities. I'm pleased with the growing pipeline of DCI opportunities that have opened up with our expanded portfolio of IP over DWDM solutions. We also had a very nice optical transport award with a new customer in Ukraine and are seeing several additional opportunities as this region continues to rebuild and modernize their infrastructure. In the Asia Pacific region, we saw IP Optical growth across multiple areas, including Japan, India, and Southeast Asia. Sales to India continued to grow, increasing 31% year-over-year this quarter, and are up 50% year-to-date. We had several new projects in Japan, including a new 400-gig long-haul transport win with a regional electric power company that provides Internet, mobile, and data center services throughout the region. While IP Optical sales in North America were lower this quarter, we were pleased to see our first rural broadband project award tied to a provisional BEAD award expected to be ratified shortly. With growing clarity around the new BEAD rules and process, I expect momentum to quickly increase over the next several months. To further underscore the progress we've made over the last several quarters of diversifying our IP Optical revenue, I'm pleased to highlight that revenue from IP Routing Solutions has grown by more than 20% year-to-date and represents approximately 50% of new product sales for this segment so far this year. Optical sales are down year-to-date, but entirely due to the suspension of shipments to Russia mid-last year. In our Cloud & Edge segment, despite the lower sales this quarter due to reduced U.S. federal sales, we generated solid revenue growth year-to-date with revenue up almost 9% year-over-year, primarily on the strength of voice network modernization projects. Excluding low-growth maintenance revenue, Cloud & Edge product and professional service revenue has grown almost 18% so far this year as compared to last year. We had another strong quarter with service provider customers, growing 5% year-over-year. In addition to another strong quarter with Verizon, where revenue grew approximately 20% year-over-year, we're seeing an increasing number of service providers beginning to invest in voice network modernization with 8 new projects initiated this last quarter. Cloud & Edge sales to enterprise customers, excluding U.S. government agencies, were up slightly from the second quarter, but down approximately 10% year-over-year. As we've moved more customers towards annual enterprise software license agreements, we see a larger concentration of revenue in the fourth quarter when we renew these recurring license agreements. As a result, the amount of our Cloud & Edge revenue, which is reoccurring in nature, including high-margin support and maintenance contracts, continues to increase. As mentioned earlier, Cloud & Edge sales to U.S. federal customers in the quarter were impacted by the impending government shutdown and were down approximately 60% year-over-year from our first half '25 run rate. However, in the third quarter, we did receive a significant first order from a new U.S. federal DoD agency that has started a major voice modernization project, and we continue to see the scope of opportunity growing within our U.S. federal customer segment. As I highlighted earlier, we're uncovering multiple new opportunities tied to our customers' agentic and generative AI roadmap, which is very exciting. I already mentioned 2 very notable wins in the quarter and our pipeline of opportunities related to agentic and generative AI platforms is growing. With that, I'll turn it over to John to provide additional financial details on our third quarter results and then come back on to discuss the outlook for the fourth quarter. John?

John Townsend, CFO

Thanks, Bruce, and good afternoon, everyone. Let's begin with Q3 financial results at the consolidated level. We generated revenues of $215 million in the quarter, an increase of 2% from the prior year, within the guidance range we discussed during our Q2 earnings. Third quarter non-GAAP gross margin was 52.6%, lower than we guided due to lower software sales to U.S. government customers, offset by stronger margins in our IP Optical segment. Overall, gross margin was up sequentially by 50 basis points, driven by higher margins in both segments. Non-GAAP operating expenses were $89 million in the quarter, up $1 million sequentially, principally due to increased employee expenses, but down marginally year-over-year, reflecting our continued focus on driving efficiencies within the business. This reduction was achieved despite the weaker U.S. dollar and foreign exchange headwinds of approximately $3 million year-over-year. 4Q expenses are expected to trend upwards marginally based on seasonally higher employee compensation costs. Third quarter adjusted EBITDA was $29 million, again, within our guidance range, a $1 million decrease from the prior year, driven principally by the lower gross margin I just noted. The non-GAAP tax rate for the quarter was 40%, higher than the 35% we had projected because of changes included in the One Big Beautiful Bill. From a cash tax perspective, as expected and indicated during our Q2 earnings call, we did not pay U.S. federal income tax in Q3 and expect no further payments for the rest of the year due to the ability to accelerate the deduction of R&D expenses. Interest expense in the quarter was $12 million, including amortization of debt issuance costs. Quarterly non-GAAP net income was $7 million compared to $8 million in the prior year. This generated a non-GAAP diluted earnings per share of $0.04, down from $0.01 in the prior year. Our basic share count was 177 million shares and our fully diluted share count was 181 million shares in the quarter. Now let's look at the results of our 2 business segments. In our IP Optical Networks results, we recorded third quarter revenue of $91 million, an 11% increase versus the prior year and up $7 million sequentially. This was driven by strong sales to India and EMEA. Third quarter non-GAAP gross margin for IP Optical was 39.4%, up 350 basis points sequentially and up 330 basis points from the prior year, reflecting better product and geographical mix as well as fixed cost absorption on higher revenues. The combination of higher sales and margin resulted in a positive EBITDA contribution of $1 million in the quarter, which was particularly pleasing. Year-to-date, IP Optical revenues have grown 2%, but excluding Russia, revenues are up 13%. We now move on to our Cloud & Edge business. We generated third quarter revenue of $124 million, a decrease of 3% year-over-year and down 9% sequentially. Non-GAAP gross profit was $77 million, producing a non-GAAP gross margin of 62.2%, an improvement of 27 basis points from the prior quarter. This improvement was achieved by tight commercial discipline and despite some higher-margin software-based deals pushing out from the quarter, as noted by Bruce. Margins were approximately 500 basis points lower year-over-year due to the mix of the revenues in the prior year as the Verizon network transformation commenced with larger product shipments versus higher service revenues in the quarter just closed. Adjusted EBITDA for the segment was $28 million or 22% of revenue in the quarter, down $10 million year-over-year, driven by the margin dynamics just discussed. Moving on to cash and capital expenditure. We remain disciplined and focused on managing our operating expenses and working capital and generated cash from operations of $26 million in the quarter, with a closing cash balance of $77 million, up $14 million from the end of the second quarter. We closed the quarter with a net debt leverage ratio of 2.2x. Total CapEx spend in the quarter was $5.5 million, including final payments associated with our new facility in Israel. During the third quarter, we repurchased approximately 900,000 shares under our previously announced stock buyback program for a total cost of $3.5 million. In summary, we produced a robust set of results in the quarter and continue to strengthen the company's balance sheet. With that, I'll turn the call back to Bruce.

Bruce McClelland, CEO

Great. Thanks, John. Looking at the final quarter of the year, we have solid momentum across the majority of our business other than the timing uncertainty related to the U.S. government shutdown. Despite this, we continue to expect Q4 to be the strongest quarter of the year with both our enterprise and service provider customers. In our Cloud & Edge segment, out of an abundance of caution, we're assuming the U.S. government shutdown will impact new purchases associated with our ongoing voice modernization projects this quarter. This may prove to be a conservative approach, but it will take time for the government to fully restart once the new spending bill is passed by Congress. The outlook for the rest of our Cloud & Edge business remains consistent with our previous guidance. In North America, we expect continued excellent execution with our Verizon projects and similar revenue to the recently completed third quarter. We're still early in the initial phase of this multiyear program with significant opportunity for multiple years beyond this as well as a large potential opportunity as Verizon completes their acquisition of Frontier. As I mentioned earlier, across the rest of North American service providers, we have an increased number of voice modernization projects that will begin to contribute in the fourth quarter. And we expect a seasonally strong quarter with enterprise customers as we renew several annual enterprise license agreements with multiple additional projects across financial, health care, and industrial verticals. We expect the increased mix of software and services to contribute to significantly higher Cloud & Edge gross margins in the high 60s in Q4, similar to the previous year. In the IP Optical segment, the solid third quarter results demonstrate that we're on the right path. In the fourth quarter, we're projecting sales to be at similar levels to the third quarter and increasing mid-single digit year-over-year. We expect India to remain one of our strongest markets, with sales increasing yet again both quarter-over-quarter and year-over-year. In addition to continued momentum with key customers such as Bharti and Tata Teleservices, we expect first revenue associated with the new rural India broadband project. In North America and Europe, we expect sales to be fairly consistent with last quarter and with fourth quarter 2024. And starting this quarter, we expect our IP Optical maintenance revenue to be lower due to the completion of a maintenance contract with a European service provider associated with legacy access equipment. As a result of all these mix changes, we anticipate IP Optical margins to be in the mid-30s in the fourth quarter. So based on these expectations for the fourth quarter, we're projecting revenue in a range of $230 million to $250 million and non-GAAP adjusted EBITDA in a range of $42 million to $48 million. As I mentioned earlier, while the U.S. government shutdown creates near-term timing uncertainty this quarter, the fundamentals have not changed. We are well positioned to benefit from the growing investment in data centers, critical infrastructure, and fiber networks to meet the exponential increase in data consumption. We expect the growth in our voice communications business to continue, with investment across a wide range of service providers, enterprise customers, and government agencies. And we've identified several new growth vectors for the company with the real-world adoption and application of AI technology to help our customers achieve autonomous network operation and the convergence of voice and agentic AI within the enterprise. Operator, that concludes our prepared remarks, and we can now take a few questions.

Operator, Operator

And the first question comes from Michael Genovese with Rosenblatt Securities.

Michael Genovese, Analyst

Bruce, at the start of the call, you mentioned software and AI. So my question is, do we see this as a factor influencing the growth rate of Cloud & Edge in the future? Or will automation in AI software emerge as a significant category for discussion? And if so, when will that happen?

Bruce McClelland, CEO

Yes. That's a great question, Mike. We view this as a new category in many respects. There are really two key elements to consider. One is AIOps, which is an AI engine that enables our customers to create their own smart agents for managing and operating the network. It builds on our existing investments in large analytic engines and management systems. This aspect spans both product categories, so you can think of it as a standalone category. The other area gaining momentum is the growing convergence between voice and AI in the enterprise. Our products effectively serve as a bridge between traditional voice networks and new AI environments, presenting a variety of use cases. Currently, we're reporting that revenue within the Cloud & Edge segment, but I'm conceptualizing it as a new category.

Michael Genovese, Analyst

Okay. Great. And then can you touch upon both for the quarter as well as the guide, just sort of characterize the Verizon Cloud and Edge business and the U.S. IP Optical business? Like just kind of summarize the third and fourth quarters, how those were in each of those 2 areas?

Bruce McClelland, CEO

In the case of Verizon, they account for over 10% of our customers. We will provide their specific information in our quarterly report when it is released. If I recall correctly, Verizon's revenue increased by about 20% year-over-year in the third quarter, although it was a decline from the second quarter, which was our strongest quarter with them. We anticipated that this quarter would focus more on services rather than products. Overall, it was a healthy quarter for Verizon with year-over-year growth. Last year in the third quarter, we were just beginning our modernization program. As John mentioned, we had shipped a significant amount of infrastructure products and started service deployment. This quarter, however, is more focused on services than on products. Regarding the U.S. IP Optical business, it can fluctuate due to the different types of programs we undertake. Much of this business comes from Tier 2 or Tier 3 regional operators and critical infrastructure customers, resulting in revenue changes quarter-to-quarter. We are more interested in the long-term trend and growth rate. I also mentioned the BEAD funding, which is beginning to enter the market. Many states have received provisional awards, and there is a review process to confirm those. It was encouraging to identify the first project clearly linked to the BEAD funding coming in.

Michael Genovese, Analyst

Great. And I'll just sneak one more in. Obviously, the reported numbers are what they are, and they're affected by the shutdown. So I have to take your word on this next question. But would you describe the situation without the shutdown? Do you think you would have been in line with expectations, or do you think you would have exceeded them? What would have happened if there had not been a shutdown?

Bruce McClelland, CEO

Yes. I mentioned during the call that we would have comfortably been at the midpoint or above it had it not been for the circumstances we faced. In the last week of the quarter, we typically close a significant amount of business, and it was clear that there were distractions affecting our operations. I spent several days in Washington that week, and it was obvious that our business was being impacted. Up until that point, we all believed the situation would not come to pass. As a result, the last 10 days of the quarter became quite chaotic. Our business with federal agencies has become quite significant; in 2024, a substantial portion of our Cloud & Edge business will involve voice infrastructure. Last year's fourth quarter was also strong for us in that area. Considering the ongoing government shutdown, I think it’s wise to exclude that from our outlook for the remainder of the year. I hope this is a conservative estimate, but I believe it's the right approach at this stage.

Operator, Operator

And the next question comes from the line of Dave Kang with B. Riley.

Dave Kang, Analyst

First of all, just wondering if you can quantify the impact of FX and tariffs. I think I missed that?

Bruce McClelland, CEO

Yes. So in the case of FX, John, I think in the quarter, we're about $3 million, I think, on OpEx. Is that right?

John Townsend, CFO

Yes. The year-on-year impact from foreign exchange is just under $3 million, primarily due to the shekel. The shekel has been relatively stable over the past couple of years, but after what occurred in April, we noted at the end of the second quarter a weakening of the U.S. dollar. Throughout the quarter, we observed some stability in that area, but with the war in Iran, we experienced another weakening as well. Thus, the shekel has been the main contributor to our foreign exchange challenges.

Bruce McClelland, CEO

And right now, nothing changes. I think it's kind of similar. And really, we're trying to compare year-over-year to give you a comparison here on if we had stable FX relative to a year ago, what's the impact? That's what we're trying to quantify here. So on the tariff question, yes, so it's still relatively small at this stage. We benefit from the U.S. MCA free trade agreement with anything we're manufacturing in Mexico, and there's some other provisions that we have for products that we're bringing in internationally. There are some additional costs associated more with cables and shelving equipment and things like that, steel, etc., that have tariffs attached to them. It's probably a $0.5 million a quarter headwind, something in that ballpark, Dave, at this point.

Dave Kang, Analyst

Okay. I just wanted to clarify if you mentioned mid- to high single digits regarding federal figures. Did you say it was mid-single to high single-digit for C&E, or does that apply to overall revenue?

Bruce McClelland, CEO

Yes. Based on what we are currently selling in the U.S., it all falls under C&E. I'm focusing on the C&E numbers, which last year generated about $504 million to $505 million in revenue. A high single-digit portion of that has now expanded into the U.S. federal sector. This is a strong business that helps us move away from traditional enterprise as well as service provider areas. It plays a crucial role in our overall operations.

Dave Kang, Analyst

Got it. And lastly regarding North America IP Optical, it declined. Can you provide more details? Was it the IP segment that was down, or was it the Optical segment, or were both of them affected?

Bruce McClelland, CEO

Yes. So the majority of what we're selling is either IP or IP over DWDM, where we're bundling basically routers with pluggables, with line systems, etc. So most of the projects look like that today. And as I mentioned earlier, it does tend to be a little lumpy. As an example, last quarter, we had a nice big project with a critical infrastructure provider here in the U.S. This quarter was more focused around rural broadband customers. We expect this quarter looks pretty good with the pipeline and the backlog we already have there. And as I mentioned, the BEAD program. We think, with that customer, we'll start to ship into that deployment. So it just moves around a little bit quarter-to-quarter. I did highlight, obviously, how strong EMEA was in the third quarter. It was up, I think, 50% year-over-year. And so that was really nice to see, and it really helps with the margins, which tend to be better than what we see in the Asia Pacific region.

Dave Kang, Analyst

And lastly, on India, it was fairly strong. Is that sustainable since India can be a bit unpredictable at times?

Bruce McClelland, CEO

It's been, I don't know, I think, 5 quarters in a row now where we've seen nice sustained momentum in India, and we have been diversifying to a little broader set of customers. I always love talking about India. We have such a great partnership with Bharti in the region. The service and deployment team that we have that partners with them closely out in the market helping deploy the products is so strategic. Unlike what you see with the investment around mobile infrastructure, which tends to be some big ebbs and flows, ups and downs as they activate new spectrum and then consume capacity. Most of what we're deploying there today is access and aggregation IP routing, and they're continuing to add more capacity to keep up with the growth in data. So it tends to be a more linear deployment. It's a little early to nail down next year yet, but it feels like we've got some good sustainable momentum there.

Operator, Operator

And the next question comes from the line of Timothy Savageaux with Northland Capital Markets.

Timothy Savageaux, Analyst

Just a couple of questions. I'll start with a focus on IP Optical. I think you had kind of a surprise positive EBITDA results. And given your guidance, it sounds like maybe you don't expect that to necessarily maintain in Q4, maybe a modest negative. But given the double-digit growth rate, which I think is finally apples-to-apples, and it looks like you're guiding to something mid-singles next quarter. As you look forward for IP Optical, I mean, can that business be a positive contributor or breakeven in '26? And what type of growth rate do you think you can see here and what appears to be a pretty strong end market environment?

Bruce McClelland, CEO

Yes, thanks, Tim. First of all, I want to express how pleasing it is to see a positive EBITDA contribution in the third quarter. A significant part of that success came from a strong performance in the European market. We know that with the right level of revenue and margin, we can achieve positive EBITDA, and we are currently positioned well at over $90 million with margins around 40%. However, I must note that the mix in the upcoming quarter doesn’t look as favorable, with increased contributions from India and reduced contributions from Europe, which affects our overall equation. Our goal is to ensure this business positively supports the company, which is why we're investing in it. This year, by the end of the third quarter, we have seen higher growth compared to last year, even without revenue from Eastern Europe, as we've successfully replaced that with new growth. It has taken us about a year to reach this point, and it's encouraging to have achieved this milestone. The next goal is to ensure a sustainable positive contribution from the business.

Timothy Savageaux, Analyst

Okay. Great. And before we leave that, I'd like to get an update on what you're seeing in terms of impact from mergers among your competitors or any other trends that are standing out? It sounds like a little more going on in the data center interconnect side in Europe. If you got anything additional to call out in terms of what's happening fundamentally across that segment?

Bruce McClelland, CEO

It was a relatively quiet quarter without significant changes due to the competitive environment. I don't have many notable examples from this last quarter. We introduced a couple of new products aimed at the data center market, specifically focusing on system sales for transport systems and IP aggregation rather than selling pluggable optics into hyperscale data centers. I mentioned a few positive developments in Europe, including a successful 400-gig optical transport win in Japan that involved acquiring data center traffic. Our main focus is working with our telco partners to address the data center and manage traffic from the increased investment in these facilities. As data centers become more advanced and spread into different regions, the demand for fiber transport increases. The timing of our new systems products is favorable, and we're beginning to see positive results and build momentum. Our approach is similar to our expertise in critical infrastructure, where low latency and the ability to encrypt individual data streams are crucial, and that’s where we excel.

Timothy Savageaux, Analyst

Great. Just a couple more quick questions. We saw very strong outlook plans for Q4 capital spending from AT&T this morning. I know they might not be on the 10% list yet, but they could be close. Whether it's just ongoing business or new projects, which you mentioned may start in Q4, do you have any comments on expectations there? Could they join Verizon on the 10% list sometime next year?

Bruce McClelland, CEO

Yes. So I know and I listening to their call this morning, John was pretty vocal and passionate around their plans to reduce operating costs and really drive efficiency across the network. Talked about their copper network plans multiple times. As you point out, they're a very important customer for us, one of our largest customers. And I think, again, where we're focused is helping reduce operating costs across the network. So it was good to see healthy returns for them and how they're operating. And hopefully, that translates into more growth for us as well.

Timothy Savageaux, Analyst

Okay. Great. Finally, I want to address the impact of the shutdown in both Q3 and Q4. Based on what you've mentioned, it seems like we are looking at a situation in the mid-teens million range in terms of impact, which suggests that without that, we would likely be within our original guidance. In Q3, I noticed that U.S. revenues fell by around $20 million sequentially. Verizon performed relatively well, but are we seeing some of the Q3 impact from the shutdown reflected in that figure? Are there other factors at play as well? Overall, regarding the effects in Q3 and Q4, am I estimating correctly with $10 million in one quarter and $15 million in the next?

Bruce McClelland, CEO

Yes. You're close, and I want to clarify this as much as possible. There was an impact in the third quarter, particularly in the last week. Without that, we would have exceeded our midpoint expectations for Q3. You can make a good estimate based on that information. We do not anticipate revenue to recover in Q4. Currently, we've effectively minimized the majority of new business and orders we might receive this quarter from U.S. federal agencies. This might be a cautious approach, but right now, nothing is progressing through the process. Many civilian employees are furloughed, which is causing delays or halting operations. As I noted last year, the U.S. Department of Defense made up a significant part of our business. The first half of this year maintained a similar pace. This situation will notably affect the fourth quarter, primarily contributing to the lower numbers. However, the rest of our projections align with what we indicated during the last earnings call.

Operator, Operator

And the next question comes from the line of Christian Schwab with Craig-Hallum Capital Group.

Christian Schwab, Analyst

Most of my questions have been answered, but I would like to follow up on the government business. The government will eventually reopen, and we will have a catch-up next calendar year. Excluding that catch-up, when do you anticipate the growth rates for your government program business to be in calendar '26 compared to '25?

Bruce McClelland, CEO

Yes. It's obviously the right question, and it's a little early to be able to clearly answer that, particularly when the government doesn't even have a budget at this point. Trying to answer it in a slightly different way. I mentioned that we did have a new win on a brand-new project basically with another top 3 U.S. government agency in the third quarter that is starting their own voice modernization program that's additive to the business that we've been having so far. So what we're obviously doing is expanding the deployments with current customers that are modernizing and then hunting for new ones, right, that will do similar programs. And that's what I think drives the growth next year. If we can bring on even one more new major agency, it moves the needle pretty well for us. So my obviously, my aspiration here for next year is this business grows at a really solid rate going into next year as we build on the programs that we already have.

Christian Schwab, Analyst

Great. And then just a follow-up on that. Can you help us with the typical yearly run rate that a new win for voice modernization of the government agency represents in a broad range?

Bruce McClelland, CEO

Yes, yes, sure. So there tends to be a combination of hardware systems. In a lot of cases, if you're going into an existing base, let's say, they're looking for survivability so they want capabilities both on-premise as well as running in their cloud data centers. And so there's elements of hardware we'll deploy. There's clearly a lot of software systems that will run inside their data centers. And then there's quite a bit of service support that goes into standing these up and deploying them. So those 3 elements. And of course, we'll recognize revenue on hardware shipment, we'll recognize some software, some ratably, some upfront, but some ratably, and then the service is all ratably over the program. So kind of getting to the answer to your question, a project will be multiple years in the making and on the larger ones, we're talking tens of millions of dollars over that period of time to go and modernize the infrastructure.

Operator, Operator

And the next question comes from the line of Rustam Kanga with Citizens.

Rustam Kanga, Analyst

Great to see the provisional BEAD awards. And Bruce, you kind of mentioned expecting to see momentum in the coming months. Just wondering, are you factoring any of that into your outlook? Or is that still a little bit too presumptuous and more on a wait-and-see basis?

Bruce McClelland, CEO

Rustam, yes, good question. So I've talked a few times, I've really, in some ways, discounted BEAD from a timing perspective, at least for us. A lot of the investment initially goes into construction, into optics, into driving fiber, etc. And the portion that we do kind of the middle mile aggregation and transport tends to be later in the program. So it was great to see kind of the first win and opportunity kind of come through here probably a little sooner than I expected. As you review all of the awards to each of the states now, there's a lot of money that's been provisionally granted and it will be interesting to see just how this process unfolds over the next few months on approving these and seeing programs go into execution. At this stage, I haven't figured out how to size this for us next year. I probably wouldn't have put much on it initially, but maybe I've been too conservative in my thinking there. So I have to learn a lot more over the next few months. In fact, we have a customer event coming up next month called Insights and one of the panels we're focused on bringing in some experts that focus all their time around BEAD and BEAD funding programs. So it will be interesting to get their perspective on how they see it rolling out.

Rustam Kanga, Analyst

Great, I appreciate that. I noticed in the supplemental slides that there was a significant increase in the direct versus indirect mix. Is there anything noteworthy to mention about that, or is it largely due to some shutdown dynamics?

Bruce McClelland, CEO

Yes, I'll have to go look just to double-check, but I'm certain it's tied to the federal business. All of those sales flow through a fairly complex set of partners to get to the end customer. So they'll be all in our indirect number.

Rustam Kanga, Analyst

Makes total sense. Last one for me, just talking about the new product with Acumen and the potential emergence of a new category. I understand it's currently falling into C&E, but is that an area that you continue to expect to announce new product innovation, and is it overly presumptuous to think that you might be telegraphing that down the road, you would view Ribbon as having sort of 3 segments to the business rather than 2?

Bruce McClelland, CEO

It's probably too early for me to make any predictions from a financial standpoint. However, this product indeed spans both business units and doesn't fit neatly into just one. We will need to consider how to manage that. Since we announced this product and our project with Optimum as our first lead customer, we've received a lot of interest. I've attended several industry events and conducted live demonstrations of this product, which allows customers to essentially create their own genetic agents. They can take information collected from the network and feed it into an LLM of their choice. It's an incredible capability that empowers people to build their own solutions. We're not sure yet how transformative it will be, but there has been considerable excitement around it in the first few months. From an economic standpoint, establishing the solution and network will require several million dollars, which indicates potential for significant scalability as we reach out to more customers.

Operator, Operator

And the next question comes from the line of Ryan Koontz with Needham & Company.

Ryan Koontz, Analyst

Just a couple of clarifications, if I could, Bruce. On the BEAD win, I assume that's for middle mile optical and aggregation. So you're selling into kind of the backhaul from these remote nodes?

Bruce McClelland, CEO

Yes, exactly, Ryan. So I'll call it middle mile, right, IP over DWDM type infrastructure or network design.

Ryan Koontz, Analyst

Is that typically handled by the local incumbent telco or by a third party, such as a consortium?

Bruce McClelland, CEO

Yes. In this case, it's not a consortium, but it is a number of operators kind of working together on the infrastructure, so, yes.

Ryan Koontz, Analyst

Yes, makes sense. And then on Verizon going forward, how should we think about that kind of mix of product and service going forward? Is it going to always be kind of seasonal? Or how should we frame that up over the next 18 months into next year?

Bruce McClelland, CEO

Yes. We'll try to provide as much visibility as possible. Alongside the modernization program with them, we have several other business aspects. Much of our current transactions involve software. So, even a small increase of $5 million can impact the overall numbers. It's important to consider that we have this consistent activity focused on modernization, and you’ll notice a few additional items coming in and out throughout the year, creating some variability.

Ryan Koontz, Analyst

A little more lumpy. Yes. All right. Great. And then lastly, just kind of a big question. You talked about agentic AI. And I assume you sell mostly session border controllers into these agentic AI applications. And how do you think about that TAM right now, obviously, very early in the market development?

Bruce McClelland, CEO

Yes, I believe the main component of our solution will be a session border controller. We've noticed significant interest in the cloud-native versions of our products, particularly in SaaS environments deployed in the cloud. The initial implementations we've completed have been based on AWS. We are leading in the cloud-native deployment not only of the SBC but also of related services, including policy routing, analytics, and management systems. Additionally, we offer a set of WebRTC APIs that provide programmatic access to telecom network functions. This creates a sophisticated array of solutions that integrate into the customer's agentic platform. The key focus is on leveraging agentic AI to enhance various services, such as contact centers or SaaS applications. I believe that as we move forward, the interface for these services will increasingly rely on voice, which positions us advantageously.

Operator, Operator

And there are no further questions at this time. I would like to turn the floor back over to Bruce McClelland for any closing remarks.

Bruce McClelland, CEO

Great. Thank you. Well, thanks again for being on the call and your interest in Ribbon. We look forward to speaking with many of you at upcoming investor conferences and updating you on our progress. Operator, thank you, and that concludes our call.

Operator, Operator

Thank you, sir. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.