Greetings, and welcome to Ribbon Communications Second Quarter 2021 Financial Results Please note this conference call is being recorded. I will now turn the conference over to Tom Barry, Investor Relations for Ribbon Communications. Thank you. You may begin.
Good afternoon, and welcome to Ribbon's Q2 2021 financial results conference call. I'm Tom Berry, Investor Relations of Ribbon Communications. Also on the call today will be Bruce McClelland, Ribbon's Chief Executive Officer and Mick Lopez, Ribbon's Chief Financial Officer. Today's call is being webcast live and will be archived on the Investor Relations section of our website at ribboncommunications.com, where both our press release and our supplemental slides are currently available. Certain matters we will be discussing today, including the business outlook and financial projections for the Q3 of 2021, full year 2021 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 the forward looking statements. These risks and uncertainties are discussed in our documents filed with the SEC, including our most recent Form 10 ks and Form 10 Q. I refer you to our Safe Harbor statement included on Slide 2 of the supplemental slides for this conference call. In addition, we will present non GAAP financial information on this call. Reconciliations to the applicable GAAP measures are included in the earnings press release we issued this afternoon as well as in the supplemental slides for this conference call, which again are both available on the Investor Relations section of our website.
As we've previously noted, we completed our acquisition of ECI Telecom on March 3, 2020 and completed the sale of Kandi Communications on December 1, 2020. Further, in the Q4 of 2020, we began segment reporting for our Cloud and Edge and IP Optical Networks Businesses. These items impact comparisons to prior periods. And now, I'd like to turn the call over to Bruce. Bruce?
Great. Thanks, Tom. Good afternoon, everyone, and thank you for joining us today to discuss our Q2 2021 results and our outlook for the remainder of the year. We had a strong second quarter from a profitability perspective with both adjusted EBITDA and non GAAP earnings per share well above our guidance ranges, and we had good cash generation. Revenue in the quarter was negatively impacted by the COVID situation in India and to a lesser degree supply chain challenges.
That said, for the 1st 6 months of the year, we achieved 10% year over year revenue growth. Adjusted EBITDA is up 60% and non GAAP earnings per share is up 133%, as we continue to benefit from stronger product margins and disciplined expense management. In our IP Optical segment, sales in the quarter grew 10% year over year. Our strategy to increase our presence in North America is really starting to take shape with revenue in the first half exceeding all of 2020 for this important region. We had a very exciting announcement earlier this week with Rogers Communications, a leading diversified communications and media service provider in Canada.
We were selected by Rogers to upgrade their national optical transport network, leveraging our new DWDM 400 gig ZR Plus platform for both metro and long haul applications. We were the first to market with this new technology and had initial shipments to a customer in Latin America in the quarter as planned. Rogers will also deploy our Muse SDN main orchestrator to design and analyze their optical network, Automate the creation of new services and ensure the network is running at peak efficiency. We also had Significant new customer wins outside of North America with Singtel in Singapore and Optus in Australia. At Singtel, we were awarded a portion of their DWDM backhaul network, supporting growing demand from their mobile, fixed and enterprise networks.
At Optus, we were awarded a new program focused on increasing access and metro DWDM capacity to support mobile backhaul and the interconnection points with Australia's national broadband network. Optus and Rogers are great examples of our cross sell strategy, leveraging the strong foundation built by Ribbon to gain access to and grow our share of the large IP optical addressable market. In addition, we added 12 new IP optical customers to our roster in the 2nd quarter, including Telehouse in France for data center interconnect, the Tom Bigby Electric Cooperative in Alabama, which is expected to leverage RDO funding once it's released as well as a significant win with a U. S. Wireless provider to replace an existing Huawei DWDM system.
Our emphasis on open interoperable networks is really resonating with customers and new technologies such as 400 gig ZR plus combined with our cloud native orchestration platform are a winning combination. In our cloud and edge business, Sales were very consistent with the Q2 last year after adjusting for the candy sale. Gross margins were strong And when combined with a 14% reduction in our non GAAP operating expenses, adjusted EBITDA increased 16% compared to the Q2 of 2020. Demand for our network transformation solutions was particularly strong this quarter across all regions, led by 16% year over year growth in our soft switch and media gateway products. Our new virtualized platforms are really the solution of choice for many operators modernizing their voice networks.
Session border controllers Sales in the quarter were consistent with the Q1, but down from the Q2 last year. Our large enterprise customers added significant We expect SBC capacity during the height of COVID in 2020, and we expect further growth later this year. We've begun to see a recovery in enterprise edge demand as businesses begin returning to the office. And we've had several new important wins with our RibbonConnect SBC is a service platform, including adoption by several of our service provider customers to support Microsoft Teams deployments. Our advanced applications team had a busy first half.
By the end of the second quarter, we had implemented robocalling mitigation services at 40 carriers in the U. S, including the deployment of STIRSHAKEN at Verizon. The sense of urgency increased as we approach the June FCC deadline for carriers to implement solutions to prevent rampant nuisance calling and we're starting to see demand for our CallTrust solutions in other countries. And finally, in our reoccurring revenue maintenance business, We had another strong bookings quarter and continue to maintain a very high renewal rate with bookings for the year now over 90% complete. I'll now turn it over to Mick to provide additional detail on our results for the quarter, and I'll come back on to review our guidance and provide additional details on our plan for
the remainder of 2021. Mick? Thanks. As Bruce stated, we were pleased with our performance from a profitability perspective in the quarter. We generated $43,000,000 in adjusted EBITDA and $0.17 in non GAAP diluted earnings per share, each well above the guidance range we provided in the Q1 earnings call.
While revenue came in slightly below expectations, we were able to compensate with robust gross margins and continued expense management to substantially improve our profitability and historical financial performance. Let's start with commentary of our GAAP results for the quarter. Our GAAP results this quarter included a $2,800,000 gain on the that was part of ECI when we acquired them. Our GAAP results also had a $12,000,000 non cash gain associated with the quarterly mark to market of the company's ABCT investment from the sale of our Kandi Communications business last year. Additionally, we received $1,200,000 in paid in kind interest income and on the convertible debt from the same transaction for a net positive impact to GAAP net income of $13,000,000 or $0.09 per share for ABCT.
Including the gain from the Qualitak sale, the impact is $16,000,000 to GAAP net income and $0.10 per share. As we have mentioned in the past, Fluctuations in ABCT's stock price affect our other income and expense line as we mark to market our investment. Due to this volatility, We have excluded these items from our non GAAP results. Other factors contributing to the difference between our GAAP and non GAAP results for the quarter We expect to include $3,000,000 in restructuring expenses related mostly to continued downsizing of our real estate footprint and $1,000,000 in integration expenses and the usual adjustments for amortization of intangible assets and non cash compensation. On an adjusted On a non GAAP basis, Q2 2021 results were as follows.
Total revenue was $211,000,000 up 2% organic year over year when adjusted for the sale of Kandi. Non GAAP gross margin was 61% in the Q2 of 2021, 2 percentage points above our gross margin in the Q2 of 2020 and above the 56% to 57% guidance range due to favorable product and geographic mix. Non GAAP operating expenses were $90,000,000 in the quarter, due in part to continued expense management and some onetime benefits. Excluding these onetime adjustments, operating expenditures would have been approximately $94,000,000 for the quarter. We expect modest increases in operating expenses in the second half of the year as we continue to increase investment in IP optical as well as revenue based variable compensation.
Non GAAP adjusted EBITDA was $43,000,000 up from $30,000,000 in the Q2 of 2020 due mainly to gross profit improvement driven by beneficial product and geographic mix. Non GAAP diluted earnings per share was $0.17 in the Q2 of 2021, more than double the $0.08 we recorded in the Q2 of 2020. Our diluted share count was 154,000,000 for GAAP and non GAAP earnings in the Now let's turn to the results of our 2 business segments. In our cloud and edge business, 2nd quarter revenue was $141,000,000
conference call, down 1% on an organic basis.
We continued to trend strong gross margins, increasing by 60 basis points on both a sequential and year over year basis. Non GAAP adjusted EBITDA for Cloud and Edge was $44,000,000 up from $37,000,000 in the Q2 of last year with an industry leading adjusted EBITDA margin of 31%. The year over year change was driven by higher product gross margins, the Kandi sale, restructuring savings and discretionary expense savings. Here are a few additional points on the cloud and edge performance in the quarter. Product revenue was $64,000,000 while service revenue contributed $77,000,000 the majority of which comes from our strong reoccurring maintenance business.
Software accounted for 56 Percent of total product revenue, up 4 percentage points from the Q1. Now turning to our IP optical business. We recorded 2nd quarter revenue of $70,000,000 an increase of 10% from the prior year period. We have strong margins at this revenue level with non GAAP gross margin of 48%. Margins benefited from higher software sales and lower warranty costs.
Expenses were lower by roughly $3,000,000 as a result of several one time accounting adjustments. Our IP optical business generated a small Adjusted EBITDA loss of roughly $500,000 for the quarter. Now here are some consolidated key metrics for the total company. Maintenance revenue represented 34% of total revenue in the 2nd quarter, increasing by approximately $4,000,000 from the Q2 of 2020. Service providers accounted for 78% of our revenue in the quarter and enterprise customers represented 22%.
International customers provided 52% of our total revenue in the Q2, in line with the Q2 of 2020. Our book to revenue, which excludes maintenance was 1.02 times for the 2nd quarter. Turning to the balance sheet. We ended the quarter with cash and cash equivalents of 100 of $15,000,000 including $3,000,000 in restricted cash. This is an increase of $6,000,000 from the previous quarter due to improved We met our quarterly financial covenants for our term loan.
Our bank leverage ratio was 2.17 times, which is below the leverage threshold ratio of 2.25 times. This will reduce our interest rate margin for the terms of the credit facility by 50 basis points from 2.5% to 2% plus LIBOR for the following quarter. From a cash perspective, the company generated $14,000,000 in cash from operations in the quarter. Capital expenditures were $5,000,000 for the quarter, which had a $500,000 of real estate leasehold improvements. We're really proud of the team this quarter for another Strong financial performance that delivered cash and earnings for our investors.
Now, I'd like to turn the call back to Bruce to discuss our outlook for the rest of the year.
Great. Thanks, Mick. Before discussing our guidance, I'd like to provide some commentary on current trends in the market and the operating environment. It's very satisfying to see our strategy gain momentum as we establish Ribbon as a significant contender in the IP optical networking space. Wins like Rogers, Optus and Singtel and others already in the pipeline will create momentum for further share increases and significant revenue growth in 2022 and beyond.
The four pillars of our strategy include focusing on products and technology that are crucial to meeting the challenge of delivering exponential bandwidth growth in both fixed and mobile networks enabled by investments in 5 gs, edge networking and cloud enabled applications. Competing in large addressable markets such as optical and IP networking, where there are opportunities for significant share growth and a favorable competitive environment with the global pressure on Huawei and other Chinese suppliers. Establishing Ribbon as a provider of new disruptive technologies such as 400 gig ZR plus 5 gs network slicing and disaggregated IP networking to contrast with incumbent legacy suppliers and leveraging the broader Ribbon presence and trusted partner status with large and small service providers to gain share in our target addressable markets. There's also clearly an opportunity for us to gain more share of the higher growth enterprise Unified Communications Market. To that end, we have recently restructured our enterprise go to market team and created a dedicated organization focused on this mission.
We plan to expand both technology and product partnerships as well as channel and distribution partners to address this opportunity more effectively. We believe we have the strongest SBC portfolio in the industry, and we want to see better results. From a macro perspective, There are 2 significant issues that are impacting many companies in the technology and telecommunications industry. 1st, The recent resurgence in COVID cases in many regions is highly concerning, and specifically our plans for growth this year in India are impacted. Deployment rates in the second half of the second quarter dropped significantly with our key customers in the region.
And while we have seen some recovery in July, we're not yet back to the levels we saw earlier in the year and certainly not back to pre COVID levels. As a result, I think it's prudent to adjust our expectations until it becomes more clear that the region is stabilized. Demand for capacity remains strong and we're winning share, but operationally, the country is still struggling. Secondly, Availability of semiconductors and other components has become increasingly challenging in recent months, especially for core silicon in our IP networking products. While we have good mitigation strategies for supply disruptions in place, we don't anticipate the situation improving materially this year, limiting our ability to respond rapidly to changes in demand.
Despite these near term macro issues, The strength of our diversified portfolio is really highlighted this year. We have proven our ability to generate very strong earnings and improved profitability, even while revenue growth has been limited primarily by the situation in India. For the full year, we are reaffirming our earnings guidance with projections for higher gross margins and lower operating expenses. The revenue target is more challenging to achieve For the Q3, our expectations are for revenue in a range of $215,000,000 to $225,000,000 non GAAP gross margins of 57% to 58%, non GAAP adjusted EBITDA of $32,000,000 to $36,000,000 and non GAAP diluted earnings per share of $0.11 to $0.13 As I look further out into 2022, We have a growing number of tailwinds as we begin to see the results from our new customer wins and the benefit of a broader global base. We're in a great spot to grow share in a very large total addressable market and have a proven strategy that we plan to repeat.
I couldn't be more excited about our path ahead. Operator, that concludes our prepared remarks. And now we can take a few questions.
Thank before pressing the star keys. Our first question is from Dave Kang with B. Riley. Please proceed.
Hi, yes. Thank you. Good afternoon. First question is regarding your concerns about macro issues. How much revenue was impacted in Q2?
And what about Q3 revenue impact? What would the guidance would have been If there were no component shortages as well as COVID remained mild.
Yes. Hey, Dave. Bruce here. So in the Q2, just to kind of give you a perspective, we've been running in India our business in India in In the $22,000,000 to $24,000,000 a quarter range. And we did, I think, something like $17,000,000 in the second quarter.
So and we'd expect a little bit of growth in the Q2 in India. So that certainly kind of bounds the impact in the second quarter. Fortunately, we were able to have a stronger mix in the quarter and resulted in being able to achieve the earnings that We did above expectations. And I think that just shows again kind of the power of the business model here and the diversification of the business. As we look into the second half of the year, as I think I mentioned in the remarks, I think it's prudent To be pretty cautious about the timing of recovery and deployment scaling in India at this point.
And so we're not anticipating a lot of growth off of that base, which really accounts for the lower projection for the Q3 for the most part. From a supply chain perspective, as I mentioned, it's not so much that it impacted a lot of revenue in the second quarter, but It did impact how flexible we could move to kind of shift where we ship product and whatnot. If we have components for one product line, but not for another, it's A little more difficult just to react quickly. So that was really the limit on being able to recover the revenue in the second quarter. And I think that certainly plays into as I think about guidance for the second half of the year and certainly for the Q3 just being a little more prudent and Just in the outlook there.
Obviously, we're still expecting a pretty strong second half, Particularly around the Q4, we've got a really strong funnel of opportunities and expect to finish pretty strong for the year.
Got it. Just regarding your second half outlook, I mean, if I back out the 1st three quarters, You're implying 4th quarter revenue of about $276,000,000 So that's about $55,000,000 $56,000,000 sequential increase. I mean, that's a pretty Sequential uptick from 3rd to 4th quarter, are you expecting that most of that growth to Come from optical and if that's the case then shouldn't we be more conservative with gross margin assumptions or maybe I'm wrong and maybe you're Expecting CNE to drive that most of that growth.
Yes. So your math is about right. It's about 10% growth or a little more off of the 4th Quarter of last year. And it's really a number of things. It's really strength across both businesses.
We expect a variety of critical infrastructure projects in Europe to come to fruition in the Q4. We're expecting more business in our Israel business with the IDF As the new government's been formed and budgets come to fruition, we expect stronger enterprise spending. I commented Enterprise being down in the quarter and capacity being utilized by some of our largest or larger customers in enterprise. So we expect that to increase. We have a variety of what we call network modernization programs, which are 6 to 9 months in duration that come to completion and we can recognize revenue towards the end of the year.
And in India, We were expecting a little more business as the year progresses, but not dramatically. So it's really a variety of different things that kind of come to Fruition in the second half of the year.
Got it. Thank you.
Thanks, Dave.
Our next question is from Paul Sorgeschi with Cowen and Company.
Thanks for taking the questions. Bruce, these wins at Rogers, Optus and Singtel in particular, can you give us any sense of The revenue opportunity associated with them over what period of time?
Yes. So I'm a little cautious in being able to share A lot more detail than we had in particularly the press release with Rogers. Obviously, it's pretty significant for us and Just a major step forward in our strategy here with these wins. These are big deals for us. I don't expect a significant amount of revenue in 2021.
I think we'll probably see some towards the end of the year. But these are Material in size and multi year in duration. And obviously, a pretty competitive process to win these. So really, really Proud of the team's work there and excited about partnering with these customers.
And I assume your comment applies to each one individually, that each one is meaningful inside.
That's correct.
Are they all in the rough same vicinity in size? Or is one without I understand there's customer confidences, But is one particularly larger than the others or they're all about the same size?
Yes. So I think Roger's footprint is certainly Merger and the number of connections both mobile and fixed is pretty significant. And of course, they're going through their own merger with Shaw up In Canada. So that'll just scale the footprint there. So I think that's probably the largest.
And again, without asking you to betray customer confidences, is there reasonable margins associated with these deals? Or did you have to give meaningful
Yes. So I think it was a competitive process. And what they're looking at, Obviously, beyond the technology and the product and everything is ultimately multiyear total cost of ownership. And in particular with both Rogers and Optus, these are existing Ribbon customers that we do considerable business with on the rest of the portfolio. And so I'm looking at this from an account profitability perspective, and I can just tell you that these are all good businesses for us.
So we're not going to as they roll out, we're not going to be hearing you and Mick talk about your margins that you meaningful hit because of the rollout of these big deals?
Well, it's going to be blended in with everything else. And that's about the only color I can provide you at this point on that, Paul.
Understood. Let me move on. With respect to India, is there one particular project that you're Expecting not to happen or is it more broad? Because if I heard you correctly, it's not that you're expecting your revenue go to 0. It's not that they're shutting down Project sites not allowing you and other vendors in, and so there's no revenue to be had.
It sounds like you're expecting at least The $17,000,000 you did in the quarter in a quarterly run rate, if not more. So what informs How broad in terms of COVID impacting the ability for you to get your equipment into the sites, which I assume is the issue, Unless there's some other issue above and beyond that.
Yes, that's correct. And I think I described a couple of times in the past, we have a Pretty extensive professional service team throughout the region, and are pretty deeply involved with the actual Deployment and management of the products as they go into the network. And so we do get good visibility on the actual deployment rate on a daily and a weekly basis. And what we saw in the second half of the second quarter as we got into late May timeframe, The daily deployment volumes went down. I mean, it just got so difficult to move around the country.
And I know I know we had a bit of a discussion on this in the earnings call back in late April, early May, and things changed a lot in 4 or 5 weeks. So what we saw was that the deployment rate go down considerably. It didn't go to 0, but it was close to 0 for several weeks. What we've seen in July is a recovery, not back to the full level of it was earlier in the year, but Certainly better than what it was for a few weeks there. And so, again, we get good consumption visibility and so we were able to anticipate demand.
We've received additional orders in July. So certainly, it's not going to 0. But as you know, I anticipated this business Not only being steady, but increasing as the year progressed as COVID started to wind down and spending started to increase in the year. And so I'm being a little more cautious at this point, obviously.
Bruce, I'm scratching my head. So they're not Shutting down all sites. Not all customers are shutting down all sites, but nor are they giving free and open access. Otherwise, you won't be talking about Your revenue at this run rate. So what exactly are they doing?
They're allowing access to some sites but not others? Or they're restricting the number of Staff that can get access, what is the limiting factor?
I think the way to think of it is everything just takes longer. Being able to navigate to get site access, to get approvals, some of these are construction programs. So it's just everything just takes longer and so your velocity is down from where it was. And again, Because we were able to see this almost on an hour by hour basis, we get a good view on what's happening there. And So it's like you just said, it's not 0, but it's not back to even where it was earlier this year yet.
And I don't yet know what the timing is on exactly how fast that recovers and what happens in the country. You've seen all the news. It's been a difficult environment for the last 2 or 3 months there.
Understood. One last question, if I may. Putting aside Demand measured by revenue, looking at forward metrics, in particular RFPs, RFIs, RQs, how would you characterize demand
Yes, I would say it's Pretty similar to late last year or earlier this year, where I commented on it being pretty intensive. I think that continues. Obviously, we're now having some success out of the back end of that pipeline, which is fantastic. And I
We are having technical difficulties. If we could just switch to the backup line, please.
No worries. So I apologize. You were about to say what the activity was like when you cut out?
I'm sorry. We've had a couple of issues here today. I think the activity say in the last 2 months has been pretty similar to what we saw earlier this year When I commented on it being pretty intensive, I think there's just a pretty significant engagement in a variety of areas. Obviously, some of these new wins drive even more activity. We're going to a lot of work going on to support these new customers and get them into deployment.
And when we go through an intensive RFP process like some of the ones we've now been successful One of the key things at the back end of that process is a pretty extensive channel check, where they're going and Talking to all of our as many references as we can provide them. And so these new wins become really, really important references in
And our final question is from Mike Latimore with Northland Capital Markets. Please proceed.
Yes, thanks. Great profitability and great win and Roger is there. In terms of the it sounds like Bruce, there's no real change in your cloud and edge outlook this year. Is that fair? And that's pretty much tracking as expected?
The one piece that I know we can do better on still, Mike, which I've probably said multiple times, It is around the enterprise side of that business. The service provider portion of our business is doing really, really well. And you can see that in some of the When you get a chance to go through it. What we've seen in enterprise is several of our larger accounts, financial institutions, etcetera, That took on a lot of additional capacity last year. It's taking some time for that to be absorbed and for them to need more capacity.
And so that portion of our business In the Q2 and even in our Q3 outlook is down year over year. That will certainly come back as more capacity is needed. The area that we continue to need to do better is around the mid market enterprise. And as I mentioned in the remarks, we've done some restructuring Our sales to get more focused on channels, channel enablement. We've got a great portfolio.
We've launched the new as a service package. And so there's just there's a variety of different ways to deploy the product. We've got to get a little better on how we serve that part of the market. And I know we can do better and we're probably not where I want to be at this point.
Okay. Got it. And then you talked about in terms of the Q4, there might be some of the network modernization deals getting completed. What type of Revenue did you recognize? Is that more software revenue when those get completed that you'd recognize?
Well, they end up Being a combination of software and hardware, but as you've seen with our margins, even when our hardware mix is higher, we're generating good margins on the way We've now priced platforms. So typically these modernization projects where you're going into a central office and You're upgrading a Class 4, Class 5 switching complex to next generation virtualized platforms. Even if we're providing the compute Platform that the software is running on. These are good margins and typically there's a pretty sizable sizable professional service element that comes with that as well. And some of that piece, you're realizing the expense throughout And then the revenue gets recognized in some cases, so that can help out on margins as well.
Yes.
And then just last one, you mentioned a Huawei replacement with the U. S. Wireless provider, was that a Tier 1 kind of wireless provider or smaller?
No, it's smaller than that. I probably would have shouted louder if it was a Tier 1, but it's a meaningful size wireless operator that Obviously, it leveraged Huawei infrastructure. That was a pretty meaningful win for us. And it's a great example Of the power of the platform, the competitiveness of the solution that we're bringing to market here.
Conference. We have reached the end of our question and answer session. I would like to I'll turn the conference back over to management for closing remarks.
Yes, thank you. Well, as I mentioned in the remarks, We get some real tailwinds to the business here and these new customer wins are pretty significant for the company. I really feel like we're in a great spot and the strategy is really starting to work. So really excited about the path ahead. Look forward to connecting with many of you at our upcoming virtual investor conferences and keeping you apprised of our progress.
With that operator, thank you. That concludes our call.
Thank you. You may disconnect your lines at this time and thank you for your participation.