Greetings, and welcome to the Ribbon Communications First Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Tom Berry, Investor Relations for Ribbon Communications.
Thank you. You may begin.
Afternoon, and welcome to Ribbon's Q1 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 Q2 and full year 2021 are forward looking statements.
Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those These risks and uncertainties are discussed in our documents filed with the SEC, including our most recent Form 10 ks. 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 measure are included in the earnings press release we issued this afternoon as well as in the supplemental slides we prepared for this conference call, which again are both available on the Investor Relations section of our website. As previously noted, we completed our acquisition of ECI Telecom on March 3, 2020, and completed the sale of Kandi Communications on December 1, 2020.
These transactions affect comparisons to prior periods. Further, in the Q4 of 2020, we began segment reporting for our Cloud and Edge and IP Optical Networks businesses. 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 first quarter 2021 results and our outlook for the remainder of the year. We had a strong start to 2021 from a profitability perspective, with both adjusted EBITDA and non GAAP earnings per share at or above the high end of our guidance ranges.
We also had very good bookings in the quarter with the book to revenue ratio, excluding maintenance, of 1.14x And the maintenance bookings for the year are now at nearly 80%. This gives us very good momentum towards our financial targets for the year. In our Cloud and Edge business, we posted strong gross margins along with an 18% reduction in our non GAAP operating expenses year over year, resulting in EBITDA nearly tripling compared to Q1 2020. Sales were essentially flat after adjusting for the sale of the candy business. Demand for our core SBC portfolio remains strong, growing 12% year over year, offset by continued weaker demand for the on premise enterprise edge platforms during this prolonged work from home environment.
Last month, Microsoft announced a new operator connect service, which we already support with our session border controller products. We believe this new service offering will reduce the friction for enterprises to Easily deploy high quality voice capability via the Teams platform and plays to our strength given our broad deployment base with mobile and fixed service providers. This new service will complement the current direct routing alternatives already available, including our new RibbonConnect as a service offering that includes support for legacy PBX interoperability in partnership with our channel partners. We have a growing pipeline of partners embracing this new platform and are currently onboarding more than 60 resellers to the program. This is an important initiative as we build our base of recurring revenue.
Last week, we announced that our partner program received a 5 star rating in the 2021 CRM channel reseller network partner program guide. When dealing with Ribbon, our customers expect innovative products and strong collaboration, and this announcement offers further proof that we're meeting those standards. We had strong bookings in our network transformation business in the Q1 with multiple intelligent network modernization projects In North America and Asia Pacific, including expansion orders with 3 of the largest North American Tier 1 carriers, totaling over $40,000,000 during the quarter. We were also awarded a 3 country multiyear deal in Europe to replace a legacy Huawei system, building on our momentum from last quarter. And we signed over $3,000,000 in STIRSHAKEN robocalling deals in the quarter.
In our IP Optical segment, Sales grew 22% year over year on a pro form a basis, adding 13 new customers in the quarter. Bookings were strong in Europe with both service providers and Critical Infrastructure Organizations. Sales in India were very consistent with the last several quarters, Deployment levels are roughly 60% of where they were prior to COVID and we look forward to a strong second half recovery. We had new wins in other regions, including in the Middle East, where we signed an incumbent carrier to completely replace products from their current supplier And with Cinea, a network operator based in Finland that operates a fiber optic network in Northern Europe, providing secure for international businesses and government organizations. In the United States, we continue to leverage our existing Ribbon relationships to earn 4 new IP optical wins in the U.
S. Rural infrastructure market. Globally, we have a very active pipeline of opportunities and are currently finalizing contract negotiations on a meaningful Huawei WDM replacement deal. We are also in the final of several significant mobile and fixed operator cross sell opportunities in North America, Russia and Asia Pacific. We completed 19 large scale proofs of concept in the Q1, a mix of both WDM transport and IP networking opportunities.
We continue to introduce new innovative products with the successful deployment of the Apollo 9,901 In our IP Transport Neptune portfolio, we introduced 2 new access products that are directly focused on the 5 gs cell site router and critical infrastructure markets. Available in both Fully redundant and non redundant versions, these products addressed operators' needs to rebuild backhaul networks to handle 5 gs traffic, Leveraging pluggable coherent optics. The platforms also support the precision timing requirements of 5 gs networks as well as Flex C hard slicing to reliably segment different types of traffic. I'll now turn it over to Mick to provide additional detail on our results for the quarter, I'll come back on to review our guidance and provide additional details on our plans for the remainder of the year. Mick?
Thank you very much. As Bruce stated, we had a strong start to the year with continued revenue growth and 1st quarter profitability that exceeded our expectations. We generated revenue of $193,000,000 which was in line with our guidance and adjusted EBITDA of $20,000,000 which was above our guidance of to $18,000,000 This led to an adjusted earnings per share of $0.03 which was at the high end of our $0.01 to $0.03 guided range. As always, please refer to our Investor Relations website for supplemental slides with graphs and tables summarizing our Q1 2021 and historical financial performance. Let's start with some commentary about our GAAP results for the quarter.
Our GAAP earnings included a $24,000,000 non cash loss associated with the quarterly mark to market of the company's investments in American Virtual Cloud Technologies, known as AUVCT, from the sale of our Kandi Communications business last year. This was partially offset by $1,500,000 in Paid in kind interest income earned on the convertible debt from the same transaction for a net negative impact to GAAP income of of $22,000,000 or $0.15 per share. This was in sharp contrast to the large positive impact of $114,000,000 to income and $0.74 to earnings per share in the Q4 of 2020. As we mentioned on last quarter's earnings call, These items related to the Kandi asset sale from our non GAAP results. In addition to the usual other factors Contributing to the difference between our GAAP and non GAAP results for the quarter, such as the amortization of intangible assets and non cash compensation, We incurred $6,000,000 in restructuring expenses related mostly to continued downsizing of our real estate footprint and $1,000,000 in integration expenses.
On an adjusted non GAAP basis, Q1 2021 results were as follow. Total revenue was $193,000,000 up 22% from the Q1 of 2020. Non GAAP gross margin was 57% were $95,000,000 in the quarter as we continue to drive efficiency. We had favorability in our facility Expenses, travel and other discretionary expenditures. Non GAAP adjusted EBITDA was $20,000,000 in the quarter, up from $10,000,000 in the Q1 2020 due to product mix and favorability in our operating expenses.
Non GAAP diluted earnings per share was 0 point 0 $3 above our Q1 2020 non GAAP diluted earnings per share of 0 point Shares for non GAAP earnings in the quarter. Now looking at the results of our 2 business segments. In our Cloud and Edge business, 1st quarter revenue was $125,000,000 down slightly year over year but flat when adjusting for the sale of our Kandi business. Non GAAP adjusted EBITDA for Cloud and Edge was $28,000,000 nearly 3x $10,000,000 the business generated in the Q1 of 2020 with an EBITDA margin of 23%. The year over year change was driven by the Kandi sale, restructuring savings, minimal travel and other discretionary expense savings.
Here are a few additional points on the cloud and edge performance in the quarter. Product revenue was $50,000,000 while service revenue $75,000,000 Software accounted for 52% of total product revenue, roughly flat in the Q1 of 2020. Turning to our IP Optical business. We recorded 1st quarter revenue of $67,000,000 An increase of $37,000,000 from the prior period on an as reported basis. On a pro form a basis, the increase was $12,000,000 or 22% year over year.
We had good margins at this revenue level with non GAAP gross margin of 39%. Our IP optical business generated an adjusted EBITDA loss of $9,000,000 for the quarter. Now here are some consolidated key metrics for the company. Maintenance revenue represented 36% of total revenue in the Q1, increasing by approximately $8,000,000 from the Q1 of 2020. Top ten customers were 46% of total revenue in the Q1, up from 45% in the Q4 of 2020 and slightly above the 43% from the Q1 of 2020.
Service providers accounted for 77% of our revenue in the quarter, and enterprise customers represented 23%. International customers provided 59% of our total revenue in Q1, in line with a company record of 60% in the Q4 of 20 As Bruce mentioned, we are encouraged with the book to revenue, which excludes maintenance of 1.14x for the Q1. Turning to the balance sheet. We ended the quarter with cash and cash equivalents of $109,000,000 including $3,000,000 in restricted cash. This is a decrease of $27,000,000 from the previous quarter as expected due to annual variable compensation payouts and seasonal factors.
A $100,000,000 revolver still remained undrawn. As previously announced, we amended our credit facility in early March, Increasing our term loan A balance by approximately $75,000,000 using the proceeds to pay off the term loan B balance. Term Loan B carried an interest rate margin that was 500 basis points higher than Term Loan A. Now our effective interest rate has gone from 4.4% to 3.4%. The principal balance of the term loan A was $391,000,000 as of March 31.
Once again, we comfortably met our quarterly financial covenants. As per our credit facility calculations, in the Q1, Our leverage ratio was 2.35x versus a maximum of 4x and our fixed charge coverage ratio of 3 point 4x versus a minimum of 1.25x. Our debt net of cash was $275,000,000 as of March 31, which divided by the last 12 months adjusted EBITDA provides an accounting leverage ratio of less than 2x. From a cash perspective, the company used $6,000,000 in cash from operations in the quarter. Capital expenditures were $5,000,000 for the quarter, which had $3,000,000 of real estate leasehold improvements.
Now I'd like to turn the call back to Bruce to discuss our outlook for the Q2 and full year 2021. Bruce?
Thanks, Mick. While we continue to execute well in the near term, our focus is also on the longer term transformation of the company. This is a unique time in our industry with significant competitive shifts creating opportunity for Ribbon to gain share while benefiting from the strong significant federal funding initiatives to further improve the broadband infrastructure along with network upgrade investment to support 5 gs deployment and to modernize legacy TDM Networks. We are winning new business that is directly related to the combined portfolio of Ribbon and ACI, validating the merger strategy and growing both top and bottom line. I'm very excited about the strong pipeline of IP optical opportunities and in particular several late stage Tier 1 service provider evaluations, Leveraging existing strong Ribbon relationships.
Our portfolio differentiation is becoming more clear in the market and with our customers. Our highly optimized metro WDM platforms are perfectly complemented by a strong portfolio of IP MPLS switching and routing products. One of the key elements being evaluated in these opportunities is our new dual 400 gig ZR plus WDM solution. We expect to be one of the first to market with this new capability, with general availability planned for early in Q3. In addition to ultimately supporting vendor interoperability, this new technology represents significant bill of material cost savings.
A second key factor in these opportunities where we're seeing significant interest is our Muse multilayerdomain orchestration platform. This suite of tools enables orchestration and optimization across both the optical and IP layers of the network, supporting a multi vendor SDN operating environment. This is proving to be an important differentiator for the Ribbon solution and is in large scale deployment with Bardi in India today. With that as the backdrop, here are our expectations for the 2nd quarter. We anticipate revenue to be in the range of $215,000,000 to $225,000,000 with gross margins of 56% to 57%.
We expect adjusted EBITDA of $30,000,000 to $34,000,000 and non GAAP earnings per share of $0.09 to $0.11 per share. Our guidance for the full year remains unchanged. Once again, thanks to our employees for continuing to deliver during these challenging times. Operator, that concludes our prepared remarks, and we can take a few questions now.
Thank you. Our first question comes from Dave Latimore with Northland Capital Markets. Please state your question.
Hi. This is his brother, Mike Latimore calling in.
Hey, Mike.
So interesting on these late stage Tier 1 Did you say that they were with cloud and edge customers, 1, and also maybe what regions are they in? Yes.
So I was referring to the IP optical, Mike, not Cloud and Edge in that commentary. And It's in multiple regions. I think I mentioned Russia, specifically North America, specifically And Asia Pacific as well. So a number of different opportunities well down the pipeline basically to comment on them now. Yes.
And are they with current cloud and edge customers that are also looking at this or is it independent of that? Yes.
So several of them are, not all of them, but more than half of them. Okay.
And then it sounds like in India, obviously a lot more restrictions. I guess you sort of factor that into your guidance You're right. You're assuming it is a little tighter for a while?
Yes, exactly. I know, what I commented on, the Q1 was Pretty consistent with what we saw in the second half of last year. So it is it's more robust than what it was in the first half This year, but certainly not anywhere back to full deployment velocity. If you look at the Employment that we're seeing right now, it's about 60% of what we saw pre COVID. So there's plenty of room to run still and we've tried to take that into account certainly with our
On voice traffic volumes relative to pre COVID levels, I think you said they were like 30% above pre COVID at one point last year. I guess any Update on kind of what you're seeing in terms of traffic volumes?
I don't have an updated quote on that, but I will follow-up on it, Mike, and see if I can Some more detail on kind of latest traffic levels. I just don't have anything in front of me here right now.
Okay.
Thanks a lot. Great. Thanks,
Mike. Our next question comes from Dave Kang with B. Riley. Please state your question.
Thank you. Good afternoon. My first question is regarding the chip situation. Any impact To your Q1 results or Q2 outlook?
There was nothing substantive, Dave, that impacted Q1. It was obviously tight. We've definitely Seeing lengthening lead times and challenges on a variety of different types of components. But like many, I guess, we this coming. We're trying to get out in front of it as much as we could and had sufficient for Q1.
And right now, we're not anticipating big issues in the 2nd quarter, again, trying to plan ahead here. We'll see how the second half goes. The real issue comes down to any decommits kind of within Promised lead times that you end up with issues on deliveries, but so far so good. But it is it's pretty tight. It's got to be worked every day.
Also somebody, another equipment vendor reported earlier this morning, talked about Margins are getting hit because the prices are going up. What about you guys, any margin impact because of increasing prices?
There is a little pressure on prices. Certainly, on logistics, as an example, we've seen some elevated costs around that, which will which impacts a portion of our business. Of course, a lot of what we sell is software as well. So the direct effect on the overall profitability for the company might be a little less than somebody that's more concentrated on hardware.
Got it. And then I did have a question on India. So it's running about 60% pre pandemic. When do you Expect India to fully recover back to the pre pandemic level. Are you assuming second half or is there something Beyond second half this year?
Well, so what we believe happens is the second half of the year begins to strengthen from where we're sitting today. Obviously, it's a little hard to tell exactly when we're back to pre COVID levels, and it's a combination of factors around Funding for new projects and budgets, etcetera, but then just the logistics in the country and deployment velocity. And we're able to get pretty good visibility on the deployment of our products. We're directly involved from a service and logistics perspective in the country. And so the 60% number is pretty accurate based on what you're seeing right now.
And can you remind us what India was pre pandemic? Was it about 10% or?
Yes. So for ECI, it was about a third of the business prior To merging with Ribbon. So call it in the mix $125,000,000 range annual run rate range, something like that, Pre COVID.
Got it. Thank you.
Thanks. Thanks, Dave.
Our next question comes from Paul Silverstein with Cowen. Please state your question.
I've got a couple of questions. Why don't I start with India just to try to tie up any loose ends. Bruce, when you talk about, if I saw in the prepared remarks, you're talking about meaningful improvement in the second half. And I guess what I just heard you say sounds a little bit different than that, but if I could press you in terms of How much visibility do you have into the second half underlying your view? And what exactly is that view in terms of the degree of Strength you're expecting in the second half of the
year? Well, with the larger Service providers we're working with in India. We have a pretty tight planning relationship, given where lead times have gone on products and whatnot. We have to have good visibility and we sell a portfolio of products that has a whole variety of different configurations that we sell And you've got to have that right in the planning phase. So we go through a bit of a budgeting process and then an engineering process with Many of our customers to get to the bill of material, to be able to be driving things correctly.
So we get good visibility on, say, the next 3 months And the next 6 to 9 months beyond that, we have more planning directional information. So it's not 100% scientific, but it's pretty decent. And of course, Where you'll see variability is when we're bidding on new regions of the network or replacement of product and things like that. You don't know for sure how much you're going to win or if you're going to win, so there's some variability around those things.
Bruce, given that The spike in the pandemic appears to be a relatively recent vintage. I recognize it didn't just start yesterday, but It's also not 3 or 6 months old. Have you had real time communications in the last week or 2 that would Form you asked whether there's been a change in their deployment plans. I recognize you're not saying about a demand issue, but literally the physical ability of your customers or you won't be after Customers to deploy product. But have you had communications since it's been apparent that the pandemic spiked up And whether that's changed their planning with respect to those deployments in the second half of the year?
Well, given the timing of And providing guidance, we do a pretty thorough job in the couple of weeks leading up here to make sure we've got a reasonably accurate view. And we're not projecting significant growth in the Q2 here in India. If things tightened up dramatically, it would have an effect, I suppose, right, obviously. But on the other hand, the country has Living in some pretty tight restrictions for quite a while as well. So I think the answer to your question is yes.
We've had discussions and believe we've got an accurate view on what happens here in the Q2.
Bruce, my apologies. One last question on India. Looking beyond the second quarter into the second half of this calendar year, Has there been any change in their deployment plans in the past couple of weeks because of this spike up in COVID?
Not that I can put my finger on right now, Paul, but yes, that's the best thing to answer the question.
No, I appreciate that. And Bruce, to be clear, you're expecting See a strong increase in the second half of the year relative to that 60% number?
We are. We are. We are projecting the second half stronger than the first half. Part of it is Projects are parts of the network that we're already being deployed in and part of it is new wins that we're anticipating Given opportunities for market share gains in the market?
And these are primarily or exclusively optical deployments?
No, it's a combination of the IP MPLS portfolio and the optical portfolio.
Okay. I appreciate that insight. Let me move on. In terms of opportunities, you referenced Couple of times during the call, I want to make sure I fully understand. It sounds like you've already secured at least one particular deal, I think you characterized as $3,000,000 and I think it was on the voice side of the house.
And I think I heard you say that you also are close to finalizing the Hill To displace them in optics, although perhaps I misunderstood. But is there any new component site you could give us in terms of How many opportunities there are in total that you're in various stages of trying to win that are directly linked to Huawei displacement under awards? Many of those are in optics? How many of those are in voice or VoIP, unified communications, etcetera? And whether it's accelerating, whether it's now steady state, any insight on the opportunity?
Yes. So first to answer the first part, you characterized it correctly. I referred to a voice replacement opportunity In Cloud and Edge, and also referred to kind of close to the finish line on a replacement opportunity in IP optical. The opportunities we're seeing are both in the optical portion of the network as well as in the IP portion of the network. And certainly the India market is one of the key focus areas, as well as Several countries in Europe today.
And in general, I think these are fairly meaningful opportunities Worse, that will move the needle or I wouldn't mention or wouldn't refer to them sort of thing. So these are not dozens and dozens We're focused on a specific list of opportunities where we're either already currently deployed today and we can gain more share or new insertion opportunities new customers?
Bruce, well, I appreciate it's not dozens and dozens. Is it over a dozen or would it be more like 6 to 12 Even lower than 6 in terms of total potential opportunities that you're looking at?
The meaningful ones in the short term Are under a dozen. There's real focus around these things. It's not kind of a shotgun in a broad array. Would it be in
that 6 to 12 range?
Yes.
Yes, I appreciate that. Beyond Huawei, what are you if you had to tier what you're most excited about in terms of driving revenue growth specifically, What would be number 1, 2 and 3?
Well, the top 2 are Huawei opportunities, Well, top 3 Huawei opportunities. The second is recovery in the India market. And then the third is success in North America that we've Debota and the growth that we're targeting here in the North American market. Those three things all focused on the P optical portfolio are the areas that we believe will drive growth as the year progresses here this year.
All right. I've already asked about 2 of the 3 of those. I just have one question on this well, actually a broader question, Justin, North America. Matt, I think you heard you say you've got a number of opportunity service providers around the world, Russia, U. S, etcetera.
Again, I'm trying to get some granular insight. Can you characterize, is that also in the range of 6 to 12? Is that more than a dozen? Is it less than half a dozen? Any rough quantification you can give us?
Well, let me come at it a different way. I think the Q2 is going to be fairly significantly stronger in North America for us on IP optical. So we have a number of projects that are in flight already today that will recognize revenue on in the second quarter. So I think we'll see some meaningful improvement there. And as I referred to these Tier 1 opportunities, These are again, these are a very focused set of, call them, half a dozen opportunities that are meaningful to the company that we're focused on and believe we have a very good shot at winning some share in them.
And hopefully, we'll have more specific detail to share on the
Call.
Ladies and gentlemen, there are no further questions at this time. I'll turn it back to management for closing remarks. Thank you.
Great. Well, thanks again for everyone being on the call and your interest in Ribbon Communications. We really look forward to speaking with many of you at our upcoming virtual investor conferences and updating you on the progress on our next earnings call. With that, operator, that concludes our call.
Thank you. All parties may disconnect. Have a good evening.