Ribbon Communications Inc. (RBBN) Earnings Call Transcript

Greetings and welcome to the Ribbon Communications Second Quarter, 2026 Financial Results Conference At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operating assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Fahad Najam, head of investor relations. Thank you. You may begin.

Good afternoon and welcome to Ribbon's second quarter 2026 financial results conference call. I'm Fahad Mujam, SVP Corporate Strategy and Investor Relations at Ribbon Communications. Also on the call today are Bruce McLuhan, Ribbon's Chief Executive Officer, and Rick Marmorek, 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. 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 third quarter of 2026 and beyond, are forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in these forward-looking statements. These risks and uncertainties are discussed in the documents filed with the SEC, including our most recent Form 10-K. I refer you to our Safe Harbor Statement included in the Supplement of 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 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. Great. Thanks, Fahad. Good afternoon, everyone, and thanks for joining us today to discuss our second quarter results and outlook for the second half of the year. We had a solid second quarter with key financial metrics above the midpoint of our guidance. Revenue grew 18% sequentially to $192 million and earnings improved by $20 million to 12 million with improvement in both of our operating segments. Including maintenance, product and services revenue increased 28% sequentially. Following a similar pattern to the first quarter, bookings in our IP optical segment were very strong. In fact, product and service bookings were an all-time high in the quarter, with a book-to-bill of 1.6 times revenue. overall IP optical backlog has increased more than 60% so far this year. This includes several new data center interconnect projects and one of our strongest quarters ever in the U.S. market, supporting mission-critical networks and broadband services. The U.S. enterprise market segment was also a real highlight in the quarter. We expanded several strategic customer relationships, including voice and data projects with multiple Fortune 100 companies, including one of the nation's largest financial institutions. and another project with one of the nation's largest energy producers. During the quarter, we announced a very significant and material partnership with Salesforce to accelerate time to market of its new agentic AI contact center offering, AgentForce Contact Center, which integrates Ribbon's secure carrier grade voice capabilities. We believe this validates a new market segment, enabling enterprise customers to securely deploy AI-powered applications while leveraging the resiliency and reliability of carrier-grade communications infrastructure. Thank you. I'll expand on this very important partnership in more detail shortly. When comparing year over year, as we expected, sales in our Cloud and Edge segment in the second quarter were down 19% year over year. primarily as a result of lower sales to Verizon. It's important to remember that the prior year included record shipments and deployment activity associated with Verizon's voice network transformation program, creating a particularly difficult year-over-year comparison. IP optical results in the second quarter were very consistent with the previous year, growing modestly after accounting for the completion of a long-term support and maintenance contract. So in summary, solid performance in the second quarter with progress against several of our strategic growth objectives and meaningful improvement versus the first quarter. Looking into the balance of the year, we continue to expect sequential revenue growth and improved earnings in Q3 and Q4, supported by the strong IP optical bookings momentum in the first half and a strong pipeline of new projects. There are a number of larger opportunities within our IP optical business that could drive additional growth. Therefore, we have a wider range of potential outcomes for the second half of the year, which I'll comment on more later. Voice network modernization deployments with US Tier 1 service providers have improved, but more slowly than we expected, moderating our second half growth rate while increasing the backlog and opportunity in 2027. Looking at the broader market environment, we continue to see healthy investment across communications infrastructure, especially tied to building and expanding mission-critical networks, data center interconnectivity, and adoption of cloud-native technology to be able to innovate more quickly, improve cybersecurity, and support agentic AI voice deployments. From an end market perspective, as expected, sales to both service providers and enterprises in the second quarter were up significantly versus the first quarter. Total enterprise sales, which includes large enterprise, critical infrastructure, and government and defense agencies, increased 42% sequentially. Year over year, sales were essentially flat, with growth in large enterprise offsetting lower sales to federal and defense in the quarter. Total service provider revenue increased 9% sequentially in the second quarter, with both Verizon and Vardy remaining 10% plus customers. Consolidated gross margin in the quarter was in line with our expectations, with IP optical revenue and margins a little stronger than expected. Growth in the U.S. market contributed to the significant sequential improvement in IP optical margins in the second quarter. Cloud and edge margins also improved sequentially, reflecting the higher product revenue offset by continued lower professional service revenue. Adjusted EBITDA for the quarter was $12 million, a $20 million improvement versus the first quarter and above the midpoint of our guidance. Now a few more highlights in each of our operating segments. Starting with our IP optical networks business, as I mentioned, we had our strongest bookings quarter ever since the acquisition of ECI in 2020. Demand was broad-based across multiple customer segments and geographies, giving us increasing confidence as we moved through the second half of the year. Product and services revenue increased 36% sequentially in the quarter, with the largest increase coming from our optical networking Apollo solutions, which increased over 70% sequentially. Geographically, the strongest growth in the quarter was here in the U.S. with a combination of regional service provider, data center, and critical infrastructure projects. One of the most encouraging growth opportunities continues to be data center interconnect. During the quarter, we doubled the number of new projects as compared to the first quarter. These projects span multiple regions and customer types, including a new major award in Africa, where we will be helping our customer build an optical fiber backbone, spanning several regions. several countries, connecting data centers and other services. Mission-critical infrastructure also continues to be a key area of strength and differentiation for our IP optical solutions. Utilities, transportation providers, and government agencies continue to invest in highly secure private communications networks, where reliability and resiliency remain paramount. During the quarter, we had a significant number of projects in the U.S. and EMEA regions, including the major expansion project I mentioned with one of the largest energy providers in the U.S. continue to expand our portfolio to address this key market segment. Our solutions are a great fit with significant differentiation. And we have a strong position with multiple defense agencies across Europe and the Middle East where it's imperative that they continue to modernize and expand their secure command and control networks. Okay. Fence-related revenue increased nearly 60% sequentially and year-over-year, reflecting the growing importance of secure optical transport and IP networking in these environments. To continue addressing the significant opportunities within the defense market, we recently announced the commercial availability of our Network in a Box product offering, targeting critical network infrastructure requirements in highly challenging and rugged environments. And in the Asia-Pacific region, our business in India remains strong with good visibility into the second half and significant additional growth opportunities in 2027, including a very substantial optical networking expansion project. We also closed additional opportunities across Southeast Asia in countries such as the Philippines, Vietnam, and Japan, and expect further growth in the second half. Overall, demand across our IP Opticals business remains healthy and increasingly diversified. The mix of opportunities includes higher value applications, including data center interconnect, mission critical infrastructure, and secure communication networks, which we believe represent attractive long-term growth opportunities. Turning to our cloud and edge business, product and services revenue increased 19% sequentially, with sales to both enterprises and service providers increasing quarter over quarter. majority of the sequential increase resulted from a number of new projects with large enterprise customers. In the quarter, we closed two significant voice communication infrastructure deals with major Fortune 50 companies. As I mentioned earlier, the first is a global Microsoft Teams deployment with one of the nation's largest financial institutions. It leverages our entire portfolio of SBC, policy routing, analytics, and management products. deployed on premise across multiple data centers around the world. With the increased awareness and focus on cybersecurity, our ability to constantly monitor threats and proactively address vulnerabilities via a new SecOps offering was a key factor in our selection. This will be one of our largest Microsoft Teams deployments to date. The second is a new customer win and competitive replacement with one of the largest US car manufacturers. They're initiating a global voice communications upgrade and selected ribbon to replace the legacy platform. The other major announcement we had in the second quarter was the partnership with Salesforce, who are leveraging our cloud-native portfolio to bring voice capabilities to its agent-force platform. This win is highly strategic, as we believe there is a new market forming with the integration of AI applications and voice communication. Thank you. With Salesforce, we'll benefit from the growing traction agent force is enjoying in revolutionizing the contact center market across the entire spectrum of small, medium, and large businesses. As AI agents augment or even replace human agents and tasks, we expect a dramatic increase in total voice call sessions, as contact center capacity will no longer be limited by human agent capacity and instead will be driven by available GPU compute capacity. should drive strong demand for our cloud native SBCs, serving as voice firewalls for each AI agent. In fact, another important and long-term customer bandwidth also called out the favorable tailwinds they expect from serving voice agents globally on their platform, which also leverages ribbon technology. The cloud-native ribbon session border controller and SIP routing engine is integrated into the AgentForce contact center application and deployed across multiple AWS instances to support rapid deployment and scalability. Public cloud is increasingly becoming the infrastructure of choice for these types of applications, and we added five additional customer wins in the second quarter where AWS is the chosen deployment platform. So overall, we continue to advance our strategy of broadening the base of solutions within our cloud and edge segment beyond traditional voice modernization into a broader secure communications portfolio supporting cloud native networking, AI enabled communications, and mission critical enterprise infrastructure. With that, I'll turn it over to Rick to provide additional financial details on our results and come back on to discuss outlook for the third quarter. Rick.

Thanks, Bruce. Good afternoon, everyone. Let's begin with our consolidated financial results. In the second quarter of 2026, ribbon generated revenue of $192 million, up 18% sequentially and down 13% year over year. Consolidated non-GAAP gross margin was 49.3%, increasing 350 basis points sequentially and down 280 basis points year over year, primarily due to lower margins in our cloud and edge segment and approximately $1 million of higher component and logistics costs, as As we indicated on our last earnings call, we continue to expect a stronger second half, which would drive additional margin improvement. Non-GAAP operating expenses were $88 million, up one million year over year, While we continued to face FX hen wins from the stronger Israeli shekel, we were able to offset most of that impact through targeted cost savings. Adjusted EBITDA was $12 million, up $20 million sequentially, and down $20 million from the prior year. Net interest expense was $11 million in the quarter. Non-GAAP net loss was $5 million, a $15 million decline year over year. This resulted in a non-GAAP diluted loss per share of $0.03 down $0.08 compared to the prior year. Now let's turn to the results of our two business segments. In our IP Optical Network segment, second quarter revenue was $82 million, increasing 30% sequentially with significant growth in North America. Year-over-year sales were down 2%, primarily due to lower sales in Europe, reflecting the end of a legacy maintenance contract in the fourth quarter of 2025, partially offset by higher sales in the America region and our European defense vertical. We delivered another strong bookings quarter with a book-to-bill ratio of 1.6 times, positioning the segment for continued growth in the second half. Second quarter non-GAAP gross margin was 35.2% of 680 basis points sequentially and down 70 basis points year over year. Sequential improvement was driven by a combination of product and geographic mix, as well as improved fixed cost absorption from higher revenue. IP optical networks adjusted EBITDA was a loss of $6 million, improving $11 million sequentially and down $1 million versus the prior year due to slightly lower revenue. Now turning to our Cloud and Edge business. Second quarter revenue was $111 million, up 11% sequentially and down 19% year over year. Non-GAAP cloud and edge gross margin was 59.8%, improving 300 basis points sequentially and down 210 basis points from the prior year. As we noted on our first earnings call, we had retained key resources to support anticipated higher service deployments, which we have now adjusted and expect improved services margin in the second half. Adjusted EBITDA for the segment was $18 million, or 16% of revenue, improving $10 million sequentially and down $19 million year-over-year. Cash flow from operations was a use of $12 million in the quarter, driven by lower billings and lower second quarter adjusted EBITDA. We ended the quarter with $45 million in cash, and our net debt leverage ratio was 4.0 times. As revenue and earnings grow sequentially in the second half, we expect our cash balance to improve. Capital expenditures totaled $5 million in the quarter. In conclusion, as expected, our second quarter results improved substantially from the first quarter. We remain focused on growing both revenue and adjusted EBIT in the second half while maintaining cost discipline, including the ability to flex our services cost structure up or down based on the timing of deployments. With that, I'll turn the call back to Bruce.

Great. Thanks, Rick. As evidenced by the stronger IP optical sales and bookings trend, we're incrementally positive on the outlook for the business for the balance of the year and beyond, which I'll discuss more in a minute. Thank you. As I mentioned earlier, we're also having very good success growing our market share in secure voice communication for enterprises. across multiple use cases, including unified communications, contact center, desktop, and agentic AI applications, a solid backlog and pipeline of projects for the second half of the year. We continue to work closely with Verizon to re-accelerate voice switch upgrades within their network and have good alignment and engagement, although there is still more work to do to achieve the higher velocity that we're mutually targeting for the rest of the year and even higher deployment rates in 2027. There is a sense of urgency to go faster and capture the significant cost savings associated with the investment. also exploring additional catch products with several of our customers that enable even further cost savings by moving the TDM to IP conversion right out to the subscriber edge, completely eliminating the legacy copper infrastructure. The large voice modernization projects we have underway with several U.S. defense agencies are also progressing, and we are still confident in reaching full commercial deployment this year, opening the opportunity for additional expansion business in the new government fiscal year. There's a very good pipeline of additional projects across civilian and military organizations where ribbon is highly differentiated and we expect new wins later this year. Given the latest view on these key voice modernization projects, we have moderated our expected revenue increase for the second half of the year, but expect a good setup for 2027. To be clear, there's still a large market opportunity over the next several years to replace legacy voice communication infrastructure with modern cloud-based technology and retired TDM voice networks. And we're positioned to capture a significant portion of the capital and operational spend. provides a great platform to expand our base of solutions beyond traditional infrastructure into a broader secure communications portfolio supporting cloud-native networking, AI-enabled communications, and mission-critical enterprise infrastructure. As mentioned on our last earnings call, we're seeing solid momentum in the other areas of our business, which are becoming increasingly meaningful contributors and key growth pillars as our customer base broadens and communication networks continue to evolve. The first key focus area of growth for Ribbon is in the critical infrastructure and government market sectors, where we're uniquely positioned with our voice and data portfolio. We continue to add new logos and improve our win rate across this segment both internationally and in the U.S. with numerous energy companies and transportation providers. Sales to government and defense customers in the second quarter represented 10% of overall revenue, and we're working closely with a number of large system integrators and specialized channel partners to address this large and growing market, and we believe our product and service offerings maintain meaningful differentiation. The secure communications market has very unique requirements and is in the early stages of a multi-year investment cycle, replacing legacy voice and data communication infrastructure with modern software and IP networking technology. Our second major focus area this year is targeting the exponential growth in data traffic and the massive investment in fiber and wireless network infrastructure. Here in the U.S., we've been very focused on regional service providers who are investing in fiber-to-the-home services, which contributed to our strong bookings in the second quarter. Thank you. In many cases, these providers are now designing their metro transport networks to also support data center and enterprise traffic as construction moves to areas of the country where there's lower permitting risks, plentiful power availability, and lower cost of cooling infrastructure. While BEEF funding has been slow to materialize, this additional funding will only accelerate investment in this area. Similarly, many of our international IP optical deployments are multipurpose fiber transport networks, supporting fiber internet access, mobile backhaul, enterprise services, and data center interconnect. Finally, we believe there's a new category emerging as the adoption of AI increases within the enterprise, similar in nature to the widespread use of unified communications platforms such as Microsoft Teams and Zoom. As customers begin integrating AI into customer engagement, collaboration, and business workflow applications, secure carrier-grade voice communications are becoming an increasingly important part of the overall architecture. While it's still early, we're seeing growing customer interest in cloud-native communication platforms that can securely connect people, applications, and AI services. This is an area where we believe Riven is well positioned. Our cloud native communications portfolio, together with our strategic partnership with AWS, provides a strong foundation to support these next generation deployments. We have a solid pipeline of innovation related to AI voice with a focus on enhancing the security feature set of our platforms to ensure our customers can deploy AI capabilities with confidence. While still early, customer engagement around these opportunities continues to increase and reinforces our confidence in the long-term direction of the business. Taken together, these growth drivers represent an important evolution of ribbon. While voice network modernization remains a large revenue opportunity, our business is becoming increasingly diversified across enterprise, digital infrastructure, mission-critical networks, and AI communications. We believe this diversification expands both our customer base and our addressable market while creating a more balanced growth profile over time. In summary, we're operating in a dynamic market with fresh tailwinds and momentum in the strategic growth areas of our business, offsetting timing delays in other areas. We remain confident in meaningful sequential improvement for the rest of the year and a stronger 2027. With that backdrop, for the third quarter of 2026, we expect revenue in a range of $215 to $230 million and adjusted EBITDA in a range of $26 million to $31 million. And for the full year, we're updating our outlook and now expect revenue in a range of $810 to $840 million and adjusted EBITDA in a range of $78 million to $88 million. Our guidance assumes approximately $2 million per quarter in increased product cost associated with higher components and logistics expenses with the potential to partially offset through targeted price increases. And consistent with the broader industry trend, we do anticipate supply limitations in the second half of the year, given the increasing demand environment for key technologies. Operator, that concludes our prepared remarks and we can now take a few questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star key. One moment please while we poll for questions. Our first question comes from the line of Ryan Kuntz with Needham & Company. Please proceed with your question.

Thanks for the question. If you could expand a bit on the supply chain you referenced there at the end, about $2 million a quarter in cost impacting you. you're probably contemplating you know some surcharges and such maybe for customers but can maybe peel that back a little bit in terms of where you see the most sensitivity around supply whether it's you know optics or memory or high end silicon I'm sure it's any number of whack-a-mole areas thanks.

Yes, hey Ryan, thank you for the question. Yes, to your point, it's a number of areas. It does depend on the product to some extent. So if I kind of give three different examples, in our Cloud and Edge business, we're many times running our software on commercial off the shelf hardware, Dell servers, HP servers. certainly seen an inflation around those types of products. You know, in that case, it's really a complete pass through where we're reselling those platforms integrated with our software. And so we're, you know, minimizing any impact around that and reducing, you know, price guarantee timelines and things like that. to make sure we protect ourselves and our customers at the end of the day. You know, a second example around our IP routing platforms, the core silicon in that case, you know, dominates a lot of the product costs and, you know, we've certainly seen inflation around core silicon expenses as the core manufacturing costs have gone up and so, you know, having kind of a long-term agreement with those suppliers and managing that care. is really important. Memory obviously plays into that as well as there's considerable amount of memory in those products. And then And then finally, as you mentioned, in our optical products, it's really around the core optical transceiver technology and managing those costs. So we're taking a fairly, I'll call it surgical approach around how to manage those inflationary costs and working with customers to pass on some of those expenses. You know, it's not a kind of one size fits all. We've got to be careful in how we manage it out into the market.

Really helpful. Thank you, Bruce. And maybe follow up, you mentioned a new initiative around subscriber edge, IP voice. You know, I wonder how you're thinking about that relative to this kind of fiber or wireless offerings. I assume you don't want to be in the CP hardware business. So how would you, how would you, you know, add value at that level? Was it some kind of embedded software, or how do you think about that?.

Yes, so it's mostly focused around enterprise edge as opposed to subscriber or residential edge. That's in general not a space we're in, but we're definitely in the enterprise edge and have a portfolio already there today that we sell to our customers. either a sell-to or a sell-through model. So we've expanded that portfolio and have a number of new products where, and even a larger enterprise now can preserve the legacy TDM services and move that DMARC point right to the edge at the enterprise so that the legacy copper or sonnet infrastructure can be completely removed. And, you know, we're providing a set of interfaces facing the enterprise to preserve that. So that's a business we're already in today. Now we're expanding that with some new enhanced products. And, you know, the early indications are they should be pretty popular in the market and enable kind of the, you know, the full. elimination of copper at that point. That's great. Thanks so much. Thanks, Ryan.

Thank you. Our next question comes from the line of Christian Schwab with Craig Hallam Capital Group. Please proceed with your question.

Great. As it relates to Verizon, were they a 10% customer in Q2? Yes, they were. They and Barty were both 10% plus customers again in the quarter. Okay, great. And then as we look to the second half of the year and the increased growth with the moderating expectation of Verizon, will Verizon still remain a 10% customer in the second half of the year?.

Yes, we believe so. You know, the first half has obviously been a slower deployment rate, as we've talked about multiple times below the 2025 levels. We expect Q3 to be stronger and Q4 to be stronger. So we expect those to continue to increase. And, you know, we expect them to increase at a rate similar to the growth in the overall business such that they would remain a percent plus. We'll see how it plays out, but that's the visibility we have today.

Great. And then as far as non-GAAP gross margins in the back half of the year in the IP optical business, would you assume that that remains kind of at the levels that we saw in Q2 or one of the pluses and minuses there? Yes, that's exactly right. So I think we're modeling it very, very consistently.

consistent with Q2. Maybe it's down a hair just depending on the mix, you know, what the regional mix is. Obviously, we're absorbing some of these additional component costs and passing some of them along as well. But, you know, the overall blend we expect is pretty consistent with the second quarter.

And then moving to the cloud and edge and the non-GAAP gross margins and then, you know, the improvement there, would we expect that to improve in the second half of the year from that level again or remain consistent?.

Yes, so we do expect some improvement in the second half of the year on cloud and edge. Obviously, there was a big step up Q1 to Q2, but we're still below the, you know, kind of lower to mid 60s that we were last year. And we expect continued improvement in Q3 and Q4. You know, one of the key drivers there is just incremental professional service revenue. We've talked about that, you know, it'd come down as the deployment rate had slowed down. And we expect that to help recover margins in the second half.

Great. And then it sounded like, you know, last quarter you talked about, you know, 30 customers, you know, with existing ribbon IP optical deployments have been awarded bead grants, but then I thought I heard you say it's kind of been slow to happen or slow to be bookings and orders. Did I hear that right? or maybe just give us a quick update of what you're seeing in Bede for the second half of 26.

Yes, no, you heard correctly on both cases. So, you know, we have over 30 customers that we know – you know, have programs lined up that they'll do with us once they secure BID funding. And it's been, I don't know what others have seen, but what we've seen is it's been a very slow adoption rate, even though approvals have gone through NTIA and through NIST, there seems to be, you know, friction in the environment or the process to get money out into the hands and spent. And whether that's... something on the funding side or resistance on the operator's side to leverage that funding given the restrictions or the conditions that come with it, it's a little unclear. we have not seen a lot of bead funding, you know, flow into the market so far and are not really expecting much in the second half of the year.

Okay. Thank you for that clarity. And then my last question has to do with, initial guidance at the beginning of the year at the midpoint to your current midpoint of guidance despite optical or maybe you assumed optical was going to be as strong as it's turning out to be with a the book to bill, et cetera. But if we just go midpoint to midpoint, is that shortfall almost entirely Verizon? Yes.

The majority is certainly our U.S. Tier 1. I think the IP optical, all things being equal, is playing out stronger in the second half than we'd initially projected. And if you just look at Verizon's numbers in the first half, and We report that in our queue. They're probably down about $25 million in the first half of the year. So that accounts for a pretty significant amount of the reduction in the full year guidance that we're giving at this point.

Perfect. Thank you for that clarity, Ruth. No other questions. Thank you. Thanks, Christian.