Ribbon Communications Inc. (RBBN) Q2 2019 Earnings Call Transcript

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Ribbon Communications Inc. (RBBN -2.25%)
Q2 2019 Earnings Call
Jul 31, 2019, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Ribbon Communications second-quarter 2019 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Monica Gould, investor Relations for Ribbon Communications. Please go ahead.

Monica Gould -- Investor Relations

Good afternoon, and welcome to Ribbon's second-quarter 2019 financial results conference call. I'm Monica Gould, head of investor relations at Ribbon. And on the call with me today are Fritz Hobbs, our president and CEO; and Daryl Raiford, our CFO. 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 data are currently available.

I'd like to remind you that during this call we may make certain forward-looking statements. Such statements are based on our current expectations, forecasts and/or assumptions regarding Ribbon's business, financial results, growth, anticipated benefits from acquisitions, as well as our restructuring and cost containment activities, global economic conditions and other opportunities in the marketplace that include risks and uncertainties that could cause actual results to differ materially from the statements disclosed today. Any forward-looking statements are qualified in their entirety by cautionary statements contained in Ribbon's most recent annual report on Form 10-K and the company's other SEC filings. While we may elect to update or revise forward-looking statements at some point, we specifically disclaim any obligation to do so, except as maybe required by law.

For the last six quarters, in order to improve comparability, immediately following the GENBAND merger, we reported non-GAAP revenue calculated with the inclusion of revenue loss from purchase accounting adjustments. Going forward, from the second quarter, we have discontinued this treatment. We utilize various metrics to assess the performance of our business. Not all of these metrics are GAAP metrics.

And where our metrics are discussed on a non-GAAP basis, we have provided a reconciliation of GAAP to non-GAAP results in our press release and within the supplemental data on the investor relations section of our website. Statements of our profitability refer to adjusted EBITDA unless otherwise indicated, and is on a non-GAAP basis. And now, I would like to turn the call over to Fritz.

Fritz Hobbs -- President and Chief Executive Officer

Thank you, Monica, and good afternoon to everyone on the call. I will begin with a review of our results for the second quarter and key business trends, along with some of our achievements. I will then provide an update on our outlook for the remainder of the year before turning the call over to Daryl for a more detailed review of our financial performance and outlook. Our second-quarter financial results were in line with our expectations.

Revenue was a $145 million. Adjusted EBITDA was $22 million, a 12% increase from the second quarter of 2018, driven by improving software revenue mix coupled with our cost-reduction actions. There are two dynamics that warrant conversation about our quarterly results. The first dynamic is the pace of the shift to a software-driven model.

We have commented for well over a year that we were making investments ahead of competitors in terms of virtualizing our entire Session Border Controller portfolio. Further, we are making great progress in virtualized call control and virtualized application servers in support of network transformation and unified communications. Our customers are giving us feedback that they agree with our strategy, and we believe this is one of the drivers of Ribbon's achieving the No. 1 market share position based on revenue in the global SBC market in the fourth quarter of 2018.

Now we are beginning to see this software-driven model market movement. And in fact, we believe the pace of the shift is beginning to exceed our earlier expectations. We are encouraged with the revenue growth of our pure software products, which grew 33% in the first half of 2019 compared to the first half of 2018. While these signs of software shift accelerating are encouraging, it also causes a shift from our traditional products.

This has two effects. On the one hand, top-line revenue is dampened because we do not have the revenue uplift of attached appliance sales. But on the other hand, gross margins improved from the sale of pure software products. Balancing increasing software sales against lower appliance sales will require our attention over the next few years in order to maintain and grow our profitability.

Nevertheless, we believe the market will demand the benefits of our virtualized software offerings, and we are well positioned to respond. The second dynamic relates to the service provider market conditions, which we expect will remain soft, particularly in the United States through the remainder of 2019. Market reports of U.S. servers provider CAPEX suggest a decline in spending in 2019 specifically for investments not associated with 5G, which is being confirmed by our customers.

We are responding by continuing to focus on strategic initiatives while driving efficiencies in our cost structure. To this end, last month, we announced restructuring actions that included modest workforce reductions coupled with the consolidation of certain geographic locations. We remain on track to realize approximately $10 million in cost savings during the second half of 2019, which we previously stated we intend to reinvest in accelerating our software development efforts. We saw encouraging developments during the second quarter involving some of the world's largest telecom providers that validate the progress we are making.

I'd like to quickly review some key achievements during the second quarter. We continue to invest in our core products and have several key wins to report within Session solutions. In early July, we completed a significant software deployment milestone for Verizon by completing the major component of the customers' virtual SBC migration. This deployment provides connectivity between the carrier's mobile and broadband networks and replaces legacy competitor hardware-based products with Ribbon's carrier SBCs to run on the carrier's cloud platform.

We believe that this achievement is a key foundation pillar for us to expand our business with this customer going forward. A leading service provider in Japan continued its PSTN network migration to IP, an expansion of its Session capacity using Ribbon's software services. Our SBCs were certified as part of a combined Microsoft Skype for Business solution, and we are now available for deployment by the Department of Defense agencies and within the department's communication networks. The majority of our software and appliance-based SBCs are also certified for direct routing for Microsoft teams and Skype for Business outside of DoD deployments.

In terms of network transformation solutions, multiple tier 1 service providers in the U.S. and Europe chose Ribbon's network transformation solutions and services to modernize their fixed wireline networks. Uztelecom, the national telecom of Uzbekistan, selected Ribbon for a complete transformation of its nationwide communications services network using Ribbon's portfolio of core and session software solutions and services. During the last quarter, we continued to make progress in our applications and security solution space by providing cloud solutions to certain of our service provider customers.

In addition to our previously announced CPaaS arrangement with AT&T, a major global financial institution is deploying Ribbon's Session software and Kandy CPaaS solutions to secure and enhance its UC environments with an intelligent session layer for its network. We secured a win with Vodafone New Zealand for our Ribbon Protect analytics software platform, providing an enhanced network, insights and security in association with its communication service offerings. An Asia-Pacific-based service provider and a U.S. public sector enterprise customer chose Ribbon Analytics Solutions and Applications for enhanced network visibility and security.

As our service provider customers have success in ramping their offerings based on our Kandy cloud over the coming quarters, we believe this will create further opportunities in the applications, security and analytics space for our products. I'll now turn the call over to Daryl to take you through our full results and provide more color on our outlook.

Daryl Raiford -- Chief Financial Officer

Thank you, Fritz. As a reminder, slides detailing our historical financial performance are available on the investor relations section of our website. Turning to the second quarter, Ribbon produced solid financial results. In summary, our second-quarter 2019 financial results were as follows.

Total revenue was $145 million, non-GAAP gross margin was 63%, non-GAAP operating expenses were $71 million, non-GAAP diluted income per share was $0.14, and adjusted EBITDA was $22 million. Verizon was a greater than 10% customer in the second quarter of 2019. Ribbon cloud software and transformation solutions help power many parts of Verizon's major network, supporting wireless, enterprise and residential offers and carrying high-scale session traffic for Verizon's large deployed customer base. In the second quarter, we continued our deployments with our cloud software, transformation solutions and services associated with Verizon's mobile, fixed and business offerings.

Enterprise sales were 21% of the product revenue in the second quarter, up from 11% in the second quarter of last year, reflecting our investment in this space. Session Software Solutions accounted for 47% of product revenue in the second quarter, while Network Transformation Solutions represented 29%. And applications and security solutions were 9%. Turning to the balance sheet, cash and investments were $51 million at June 30, which was up $5 million from March 31.

Borrowings under our revolving line of credit and term loan were $85 million at June 30, compared to $82 million at March 31. During the second quarter, we repurchased approximately 976,000 shares of common stock at an average price of $4.65 for an aggregate purchase price of $5 million. We recognized $63 million of other income related to a royalty settlement with a competitor, which we excluded from our non-GAAP financial results, and collected approximately $38 million this past quarter. Turning to our outlook.

As a reminder, we discontinued the use of non-GAAP revenue as a metric, which means we will no longer increase GAAP revenue to add back the amount of revenue lost from purchase accounting and instead we'll solely report the lower amount of GAAP revenue beginning with the second quarter of 2019. As Fritz stated earlier, two dynamics are playing into our view of top-line revenue performance. One, the increasing pace of the shift to pure software; and two, soft conditions in the service provider market, which we expect to persist at least through the third quarter of 2019. So given these dynamics, we now expect full-year 2019 GAAP revenue to be lower than our non-GAAP revenue last year and higher compared with last year's GAAP revenue.

However, our growing virtualized software sales and higher software content mix, along with our improved cost structure, enable us to keep our full-year adjusted EBITDA guidance essentially unchanged. For the full-year 2019, our adjusted EBITDA guidance, now without the revenue purchase accounting add back, remains steady at approximately $92 million.

Fritz Hobbs -- President and Chief Executive Officer

Thank you, Daryl. That concludes our formal remarks. I want to leave you with this thought. We remained focused on managing the business to improve efficiencies and increase cash flow.

We continue to increase our market share position, and our product introductions in applications and security are gaining traction. As server providers and enterprises transition to virtualized and pure software-centric solutions, we believe that Ribbon is well positioned to capture additional market share. I want to thank all of you for your continued support of Ribbon. At this time, I'd like to turn the call over to the operator for questions.

Operator, we are now ready for your first question.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question today is coming from Mike Latimore from Northland Capital Markets. Your line is now live.

Unknown speaker

Hi guys. This is Phonam for Mike Latimore. During the prepared remarks, you have made a couple of comments about soft service provider outlook. Is your take on the FY '19 outlook the same, or has it improved or deteriorated from last quarter?

Daryl Raiford -- Chief Financial Officer

Hi, this is Daryl Raiford. It's nice to speak with you. I think our take on the full-year revenue outlook in terms of the service provider market, particularly in the United States, has pushed out at least through the third quarter into the fourth quarter. We expected to see some improvement in the back half of the year, which we're taking more of a view that, that improvement will push itself out at least through the end of the fourth quarter.

Unknown speaker

Got it. And regarding the Asian customer, can you quantify it or at least tell us if it was in line with your expectations? How should we think about it over the next few quarters?

Daryl Raiford -- Chief Financial Officer

Well, the Asian customer, meaning Uztelecom?

Unknown speaker

Yes.

Daryl Raiford -- Chief Financial Officer

Yes, OK. Very good. Yes, as Fritz said, we won a significant network transformation opportunity for the entire country modernization of in Uzbekistan with the client Uztelecom. We're very excited about that.

We've provided an initial deployment in the second quarter of software products and services or software products. And we'll be installing and deploying in the third quarter and fourth quarter going forward. So we're excited about that opportunity.

Unknown speaker

And regarding the guidance, which you have provided during the prepared remarks, like I could not hear it properly, what was the revenue guidance which you said like?

Daryl Raiford -- Chief Financial Officer

Well, as we remarked, our revenue guidance is dependent on software mix and our customers' buying behavior. And like we said, the buying behavior is really around the software, whether their buying behavior is focused on software with attached appliances or software only. So our experience rate is growing whereas we're dual bidding software with attached appliances and our newer NFV virtualized pure software products. Many of our customers are beginning to lean toward adopting the newer software products that have much higher margins than those with attached appliance sales.

And as the experience rate starts to shift, we're starting to take that into account in terms of our revenue guidance. So that along with the weakness or the softness in the market conditions in the United States have formed our revenue outlook of a range of something higher than our GAAP revenue last year but something a little less than our non-GAAP revenue last year. So within that range is where we're calling revenue. And then our confidence in our adjusted EBITDA is predicated on that range because as those appliance, as that software mix shifts within that range, the margin richness also shifts and we're able to have confidence in the adjusted EBITDA guidance.

Unknown speaker

Thank you.

Operator

Thank you. Our next question today is coming from Paul Silverstein from Cowen and Company. Your line is now live.

Daryl Raiford -- Chief Financial Officer

Hey there.

Operator

Hello, Paul, perhaps your phone is on Mute. Hello, Paul, your line is live. Perhaps your phone is on mute. [Operator instructions] We have reached the end of our question-and-answer session.

I'd like to turn the floor back over to management for any further or closing comments.

Daryl Raiford -- Chief Financial Officer

Well, with that, we want to thank you for joining us for our second-quarter earnings conference call. We look forward to seeing you at a number of different conferences coming up in the late summer and early fall, and we'll be back with you in the third quarter. Thank you, bye-bye.

Operator

[Operator signoff]

Duration: 20 minutes

Call participants:

Monica Gould -- Investor Relations

Fritz Hobbs -- President and Chief Executive Officer

Daryl Raiford -- Chief Financial Officer

Unknown speaker

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