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Ribbon Communications Inc. (RBBN) Q4 2020 Earnings Call Transcript

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RBBN earnings call for the period ending December 31, 2020.

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Ribbon Communications Inc. (RBBN -4.32%)
Q4 2020 Earnings Call
Feb 17, 2021, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings, and welcome to the Ribbon Communications fourth quarter and full-year 2020 financial results. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tom Berry, investor relations for Ribbon Communications. Please go ahead, sir.

Tom Berry -- Investor Relations

Good afternoon, and welcome to Ribbon's fourth quarter and full-year 2020 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 first quarter of 2021, the 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-K 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. Reconciliation to the applicable GAAP measure 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 previously noted, we completed our acquisition of ECI Telecom on March 3, 2020, and completed the sale of Kandy Communications on December 1, 2020. Further, in the fourth quarter 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 would like to turn the call over to Bruce. Bruce?

Bruce McClelland -- Chief Executive Officer

Great. Thank you, Tom. Good afternoon, everyone, and thank you for joining us today to discuss our 2020 results and outlook for 2021. We announced preliminary results on January 25 as we felt it was important to communicate the stronger performance relative to our guidance and also due to the typically elongated fourth-quarter reporting schedule.

Before reviewing the details of our fourth-quarter results, I wanted to take a minute to discuss our 2020 full-year accomplishments. I am very proud of the company's achievements during such a challenging and extraordinary year. When the COVID-19 pandemic began early last year, our sales organization quickly transitioned to remote selling and virtual product proof of concepts. This rapid response enabled us to grow revenue on an organic basis for the year, even with the challenges presented by the pandemic.

And we have significantly increased our global presence with sales outside the U.S., now well over 50% of total sales. From a product and technology perspective, we continue to work through our transition to a more software-centric portfolio with new products, such as our virtualized C20 Call Session Controller, our Call Trust robocall mitigation platform and Ribbon Connect, supporting SBC as a service for Microsoft Teams deployments. And despite the challenges of dealing with COVID, we were very successful in the integration of ECI, repositioning Ribbon to participate in the very large IP optical systems market. As part of the integration, we streamlined the organization and realigned our portfolio to improve profitability and shift investment into higher-growth areas.

We've successfully completed the sale of our Kandy UCaaS business, improving our short-term financial profile, preserving the ability to share in the upside value creation from the business. The combination of these structural changes, along with good execution on our strategy, means Ribbon ended 2020 much stronger than where we started, and we're well-positioned for growth in 2021 and beyond. Shifting to the details of our fourth quarter. We're very pleased to report strong results that exceeded our expectations and further demonstrate that we're progressing on our strategy.

We're seeing the benefits of combining a strong software business with a higher growth IP optical business, driving strong profitability and increased diversification by selling our expanded portfolio to a broader range of customers. This quarter, we again achieved a new record level of adjusted EBITDA as we realized the benefits of the combined cloud and edge and IP optical businesses. Total sales increased 6% quarter over quarter. I'm very encouraged by the improvement in our IP optical business with revenue increasing 15% versus the third quarter and a positive adjusted earnings contribution for the second consecutive quarter.

With the growth in IP optical sales, we further diversified our geographical presence by generating 60% of our total revenue from customers located outside of the U.S. I'd like to highlight some notable customer activity in the quarter, beginning in North America. In our IP optical business, as reported in our last earnings call, we secured our first win with the top four cable MSO, Altice and extended that momentum with new business from five regional telco carriers. We leveraged our existing Ribbon relationships for customer wins in all but one of these cases.

Our IP optical revenue in North America was up 105% from third quarter of '20 -- fourth-quarter '20 revenue from the region, nearly matching ECI sales for all of 2019. It's still early, but we're seeing clear signs of our strategy working. In the cloud and edge business, we continue to benefit from the migration to cloud communications with our session software solutions. A recent report that we commissioned shows a greater than 100% increase in interest among small and medium-sized businesses in deploying Microsoft Teams, and 70% of those surveyed indicated that they will implement direct routing for Teams, requiring certified SBCs to enable this connectivity.

We continued with a variety of network transformation projects and SBC capacity expansion activities in the fourth quarter with over $35 million in new orders from North American Tier 1 service providers across our call processing, media gateways, SBCs and services solutions. In Latin America, we embarked upon a network transformation project with a Tier 1 carrier using our new virtualized C20 Call Control platform, starting in four countries, with further expansion into three more countries planned this year. It's noteworthy that projects in two of the countries are rip and replace of Huawei systems. We're also pleased to announce wins with our software-based SBCs in Brazil with Claro, part of América Móvil Group; and Vivo, Telefónica's Brazilian operation.

In Europe, we worked with a systems integration partner in the region to secure the first large-scale deployment of our new optical 9901 metro edge platform, our large defense customer. This is a multimillion-dollar project, and we shipped over 400 units in the fourth quarter. We announced this new product in Q4, and it efficiently extends OTM switching from the network core to the high-demand metro access network. Additionally, we continue to sell to and sell through divisions of Telecom Italia.

We're working with them to implement metro optical networks, replacing legacy SDH networks with our multiservice platform in more than 20 cities worldwide. We're collaborating with them to win new regional enterprise optical opportunities in Europe. In India, overall sales in the fourth quarter were very consistent with the previous quarter with improvements in several accounts. It's still too early to predict the timing of substantial spending recovery, but the new fiscal year starts April 1, so we're hopeful that momentum will pick up for the second half of 2021.

We are benefiting from our Bharti Airtel contract signed last summer with multiple purchase orders in the quarter and more expected as they prepare their network for 5G. These are multiyear contracts and will help propel our growth in 2021 and beyond. Initially, Vodafone Idea is utilizing our Neptune platform for their 4G rollouts as they shift away from Huawei products, and we expect more business as part of this transition. Also in India, we continued our normal business with Tata, generating significant enterprise connectivity bookings.

In Japan, we saw the culmination of a long sales cycle with several significant cloud and edge wins with Tier 1 service providers valued at over $10 million. These projects are now under way and will conclude throughout 2021. Now I'll transition from a regional commentary to some additional detail on our product portfolio. For full year, revenue in our core SBC portfolio grew 18% versus 2019.

Overall, SBC revenue grew 6% in 2020 as growth in the core products more than offset the decline in our on-premise enterprise edge CPE products, where demand was negatively impacted by the COVID-19 pandemic. Additionally, we launched our Ribbon Connect Direct Routing for Microsoft Teams service and currently have seven distributors signed up and going through onboarding and another nine in the pipeline. Our product sales to enterprise customers grew 3% quarter over quarter and represented 27% of total product revenue in the fourth quarter and 30% for the full-year '20. Sales were particularly strong in the defense segment in the quarter.

In addition, at the end of the year, we had booked nearly 60% of our maintenance renewals for 2021 across approximately 900 customers. By the end of January, we completed almost 70% of renewals for the year, and many of these contracts are multiyear in duration, derisking our plans for 2021 and beyond. Our renewal rate for the business remains in the high 90s percent for direct customers. In the IP optical business, we had a surge in proof of concepts and demos, evaluating our unique 5G capabilities late in the year.

We are laser focused on converting these opportunities into sales in 2021. We've also progressed to the final stages on several important metro optical Tier 1 service provider opportunities outside the U.S., giving us a clear path to share gains in 2021, leveraging the strong historical Ribbon presence. Now a few updates on our continued transformation efforts. We are making great progress on the integration of Ribbon and ECI, and we are implementing organizational efficiencies across the company.

During the fourth quarter, we enabled automated cross-selling processes and consolidated our sales CRM platforms. We also streamlined many of our other internal processes and tools, including security platforms and information systems. Last month, I announced that Steve McCaffery had joined Ribbon to lead sales in our EMEA and Asia-Pac regions. He brings over 30 years of experience, helping carriers and enterprises evolve their business communications and previously managed a $2.4 billion international business, addressing both carrier and enterprise customers at ARRIS.

And in December, Sean Matthews was appointed our EVP of corporate development and strategy. Sean has extensive experience in successfully leading corporate strategy and business development for global companies. And prior to joining Ribbon, [Inaudible] for TiVo and ARRIS. I'm very excited to have both Sean and Steve join the team and look forward to partnering with them as we drive new growth initiatives to expand the presence of our cloud and edge and IP optical businesses.

In December, we announced that we've completed our sale of the Kandy Cloud Communications business to American Virtual Cloud Technologies. And just this week, we announced a deal to sell a small product compliance and reliability testing business called QualiTech that is part of our Israeli operation. We're happy with the progress we've been making in shaping the Ribbon portfolio and sharpening the focus on our core strategy. Additionally, we are designating Plano, Texas as our global headquarters.

Given our global operations and the changes in the business following the ECI acquisition last year, we believe the time is right to make this change. We recently opened a new facility in Plano that will serve as headquarters, and we're in the process of consolidating our research labs from several other locations. This move reflects how we have effectively been operating for the last six months, including the consolidation of offices to help reduce costs. Although the headquarters is relocating, we expect to continue to have a strong presence in Westford, Mass.

Lastly, I'd like to note that we published our first global sustainability report earlier this month. We are committed to providing our stakeholders with increased visibility and responsiveness, and our report is a key milestone in that effort. You can read the report on our website and see how we account for our ESG performance through 2019 and 2020, as well as our support of the United Nations' Sustainable Development Goals. I'll now ask Mick to comment in more detail on our Q4 and full-year 2020 performance, and then I'll come back on to talk about our outlook for the business.

Mick?

Mick Lopez -- Chief Financial Officer

Thank you. As Bruce stated, we had a strong second half of the year and an outstanding fourth-quarter financial performance that exceeded our expectations. We recorded a second consecutive quarterly adjusted EBITDA record, generating $49 million in the quarter and $131 million for the full year of 2020, a 53% increase from full-year 2019. We also generated $36 million in cash flow from operations in the fourth quarter to end the year with $136 million in cash.

Please refer to our Investor Relations website for the supplemental slides with graphs and tables summarizing our fourth-quarter performance. In our ongoing efforts to improve our investor disclosures and to assist the analyst community in evaluating our business, we have made three significant enhancements in our financial statements. First, we have formally established two business segments within the company, and we'll be reporting additional disclosures on these business segments going forward. Our cloud and edge business includes legacy Ribbon products, and our IP optical networks business includes ECI products.

These segment results are broken out in both our 10-K and in our earnings presentation. Second, for greater clarity, we will be showing the amortization of intangible assets in a separate line within operating expenses rather than within cost of product and sales and marketing expenses. We incorporated this change into the fourth-quarter results and have recast prior periods for historical reference. Last, we will report our non-GAAP quarterly taxes by computing an annual global rate for the company.

We will apply that single rate for each quarter rather than multiple rates by jurisdiction for the overall quarterly results. We expect this to provide a more consistent rate throughout the year and to enable investors to better understand the impact of taxes on the company's results. We are also recasting the 2019 and 2020 non-GAAP results using this methodology. Now back to our performance during the quarter.

We had a record GAAP earnings quarter, reflecting the sale of our Kandy Unified Communications business on December 1. In our other income line, we recorded $115.5 million of income associated with the fair value of the convertible debt and warrants received from the sale of Kandy. Fluctuations in AVCT's stock price will also affect other income and expense line in future periods as we will use the equity method to provide quarterly mark-to-market estimates. Note that we will evaluate AVCT over a much longer period than the quarterly fluctuations in the stock price.

And due to this volatility, we excluded the results of the Kandy asset sale and end-of-period valuation in our non-GAAP results. Our non-GAAP fourth quarter and full-year 2020 performance was for the fourth quarter, total revenue of $244 million, up from $231 million last quarter and at the high end of our guidance range of $235 million to $245 million. For the full year, total revenue of $844 million, increased 50% from $563 million we recorded last year. Organic growth for our cloud and edge business was 4% for the year.

Non-GAAP gross margin was 59% for both the full year and fourth-quarter 2020, similar to our non-GAAP gross margin in third quarter of 2020. Non-GAAP operating expenses were $100 million in the fourth quarter and $382 million for the full year. Fourth-quarter opex came in below our guidance of $105 million, due, in part, to savings from the Kandy divestiture and lower discretionary costs. Non-GAAP adjusted EBITDA was $49 million in the fourth quarter, compared to $43 million in the third quarter and was above our guidance range of $36 million to $40 million.

The sequential improvement in adjusted EBITDA was due to higher sales and gross profit in both cloud and edge and IP optical networks, as well as savings from the Kandy divestiture. For the full year, non-GAAP adjusted EBITDA was $131 million, up from $86 million in 2019. Non-GAAP diluted earnings per share was $0.18, above our guided range of $0.12 to $0.14 and was $0.43 for the full year. Our diluted share count was 153 million shares in the fourth quarter and 145 million for the full year.

Now looking at the results of our two business segments. In our cloud and edge business, fourth-quarter revenue was $155 million, while full-year 2020 revenue was $583 million, reflecting a growth of 4% from the prior year, driven by strong demand from our service provider customers. Non-GAAP adjusted EBITDA for cloud and edge was $47 million, which is $3 million higher than last year and reflects an adjusted EBITDA margin of 30%, 3 percentage points above our third-quarter adjusted EBITDA margin of 27%, driven by the Kandy sale, restructuring savings, minimal travel and other discretionary expense savings. Here are a few additional points on our cloud and edge performance in the fourth quarter.

We recorded $74 million of product revenue and $81 million of services revenue. Software accounted for 64% of total product revenue in the fourth quarter of 2020, compared to 51% in the fourth quarter of 2019. For the full year, software was 62% of cloud and edge product revenue, up from 47% in 2019. Turning to our IP optical business.

We recorded fourth-quarter revenue of $89 million, an increase of $12 million or 15% from the third quarter. Non-GAAP gross margins were 44% for the quarter, and IP optical again generated positive adjusted EBITDA for the quarter. Now here are some consolidated key metrics for the company. Maintenance represented 29% of total revenue in the fourth quarter.

Our top 10 customers accounted for 45% of total revenue in the fourth quarter, down from 49% in the third quarter of 2020. Service providers accounted for 73% of revenue in the quarter, and enterprise customers represented 27%. As previously mentioned, international customers represented a greater percentage of revenue, generating 60% of our total revenue in the fourth quarter of 2020 as compared to 55% in the third quarter. Our book-to-revenue ratio, excluding maintenance, was 1.02 times for the full year of 2020.

Turning to the balance sheet. We ended the quarter with cash and cash equivalents of $136 million, including restricted cash of $7 million. This is an increase of $25 million from the previous quarter. Our $100 million revolver still remained undrawn.

The principal balance of our term loan was $393 million as of December 31, which is down $2 million, reflecting a quarterly scheduled principal payment. The effective interest rate on our term loan was 4.4% in the fourth quarter of 2020, similar to the rate in the third quarter. We are now in the process of refinancing a portion of our credit facility to further lower our effective interest rate going forward. We again comfortably met our quarterly financial covenants.

As per our credit facility calculations, in the fourth quarter, our leverage ratio was 2.45 times versus a maximum of four times and our fixed-charge coverage ratio of 3.97 times versus a minimum of 1.25 times. Our net debt of cash was $258 million as of December 31, 2020, which, divided by the last 12 months adjusted EBITDA, provides a leverage ratio of less than two times. From a cash perspective, the company generated an exceptional $36 million of cash from operations in the fourth quarter. For the full year, Ribbon generated $102 million of cash from operations, which included $26 million in receipts from the Metaswitch legal settlement.

We anticipate approximately $7 million for restructuring and acquisition-related expenses in the first quarter of 2021. Capital expenditures were $8 million for the quarter, which included $2 million of real estate leasehold improvements. For the full year, capital expenditures were $27 million, including leasehold improvements of $13 million for our new Plano headquarters and Tokyo offices, with $10 million of that reimbursed by the landlord. Now I'd like to turn the call back to Bruce to discuss our outlook for the first quarter and full year of 2021.

Bruce?

Bruce McClelland -- Chief Executive Officer

Thanks, Mick. Before reviewing our guidance, I would like to provide some broader commentary on the marketplace and how we're thinking about 2021. Our cloud and edge and IP optical businesses are well-positioned to benefit from the multiple market trends, including distributed network applications, 5G transport, edge computing and increasing enterprise workloads that are presenting a large shift in the performance requirements of communications networks. Despite the ongoing travel restrictions, our engagement level with customers remains strong.

We continue to see significant RFP activity and remote proof-of-concept product demonstrations in place of on-site lab evaluations. Visibility in the business remains solid, and we have not experienced significant supply chain constraints. Lower travel and marketing activity also contributed to our lower operating expenses in 2020, and we project this to continue in the first half of 2021. We expect the shift toward working from home to continue for years to come.

This will emphasize the importance of great broadband networks. Broadband will be a key part of government infrastructure priorities. And funding opportunities, such as RDOF in the U.S., will be a catalyst for more investment in the types of solutions provided by Ribbon. Perhaps for the first time in the last 20 years, the competitive playing field has shifted and is becoming more balanced.

The sentiment toward Chinese equipment providers has turned very negative, ensuring significant market share shifts in Europe and multiple Asia-Pacific regions. And we believe the ability of focused, specialized providers, such as Ribbon, is a competitive advantage against larger competitors attempting to compete across a broader range of technologies. With that as the backdrop and consistent with our fourth-quarter results press release a few weeks ago, we're providing additional visibility on our expectations for full-year 2021 and the first quarter. As noted in our press release, we expect growth of roughly 10% in 2021 relative to our performance in 2020 on both the top and bottom lines.

We also expect typical seasonality in our results with momentum growing throughout the year and the first quarter representing roughly 21% of annual sales. For the full year, we anticipate sales to be in the range of $925 million to $945 million, adjusted gross margin of 55% to 56% and adjusted EBITDA of $145 million to $155 million. For the first quarter of 2021, we're projecting sales to be in the range of $190 million to $200 million, adjusted gross margin of 55% to 56% and adjusted EBITDA of $14 million to $18 million. We're also providing additional visibility on our expected interest and income tax expenses for the year.

Please refer to the presentation on our website for additional details. With the many strong industry dynamics working in our favor, a focused strategy and strengthened leadership team, we're very excited about the year ahead. Operator, that concludes our prepared remarks, and we can now take a few questions.

Questions & Answers:


Operator

[Operator instructions] The first question is from Paul Silverstein, Cowen. Please go ahead, sir.

Paul Silverstein -- Cowen and Company -- Analyst

Thanks. I appreciate the detailed disclosure. Bruce, I've got a handful of questions, but they're all very discrete. I'm hoping you all can answer.

First off, in terms of quarterly opex in March and the balance of 2021, taking into account the disposition of Kandy, any insight you could offer about what you're planning for expenditure levels?

Bruce McClelland -- Chief Executive Officer

Yes. Paul, I think for first quarter, we're in the 95% to 98% range, some sort of ballpark like that with a little bit of variability. And then as the year progresses, we think we'll be under $100 million a quarter or right in that range, give or take a few million dollars.

Paul Silverstein -- Cowen and Company -- Analyst

All right. I appreciate that. Secondly, on your IP optical business, I think I heard you referenced 20 wins. How many total customers does that business have at present? What are the nature of the wins, the use cases? Do they run the gamut or are they focused on plain, old transport? And what's the mix among Tier 1 service providers, other service providers and enterprise and other customers? Or however you want to -- how would you think about the mix in that particular business?

Bruce McClelland -- Chief Executive Officer

Yeah. So a bunch of questions there. I don't have the exact number of active customers. It's in the hundreds.

Maybe Mick could do some research. We need to get back to you or look it up on the call here, but it's a long list of customers. It is fairly evenly balanced between what we think of as enterprise, critical infrastructure-type customers and service providers. And obviously, there is a number of what we think of as Tier 1 service providers in certain geographies like India and Russia.

Obviously, a little less slow, obviously, in North America today, but there is a reasonable mix of both.

Paul Silverstein -- Cowen and Company -- Analyst

OK. And how -- I think I heard you say that India was solid. It was flattish. I don't want to put words in your mouth.

But as we look forward for that business, it sounds like you're confident/optimistic. How much of your growth expectations is tied to rebound in India and Russia, and other such, for a lack of a better way to put it, emerging markets that were a big piece of the story before the global downturn a year or two ago in those regions?

Bruce McClelland -- Chief Executive Officer

Yeah. Well, so I think you heard it right. India was very consistent in Q4 to Q3. We did see purchasing from a different mix of customers, which I think was really good, and we're not projecting a snapback, certainly, in this quarter.

As I mentioned, the start of the fiscal year starts April 1 there. So as they kind of finalize their budget planning and we get into the summer months, we hope we start to see spending similar to the level that was in 2019. Overall, at the end of the year, kind of year to date at the end of 2020, I think the -- our business in India was down something like 44% versus 2019. So there's plenty of room for recovery, even getting partially back to where we were in 2019.

And that is certainly part of the expectation as we grow this year. That's certainly part of the story. Other regions, Europe was very strong in the fourth quarter, just across the board, across the entire business, and former Soviet Union was pretty solid. I think, overall, for the entire year, was essentially consistent with 2019.

Paul Silverstein -- Cowen and Company -- Analyst

Bruce, I know you're on a relatively small size, better than optical. But thinking about in demand, putting aside competitive dynamics, would you characterize the demand environment went large? Again putting aside individual regions, would you characterize it as healthy, meaningfully improving, status quo? How would -- let me just ask you the open question. How would you characterize demand relative to 90 days ago relative to 180 days ago?

Bruce McClelland -- Chief Executive Officer

Yeah. Good question. As we got into the last month or two of 2020, we were really almost maxed out in the number of trials and activities and proof-of-concept work that was going on. Ultimately, that's going to translate into business for us or for someone else, but the demand environment looked really healthy as we ended the year.

Paul Silverstein -- Cowen and Company -- Analyst

All right. And one last question. I apologize to you and others on the call, but real quick. With respect to Huawei.

I heard -- I think I heard you referenced that you had two wins that were directly related to Huawei cutbacks. How many active opportunities are out there? And are these both in optical and in your cloud and edge, SBC or other platforms? So is it mostly optical or the other?

Bruce McClelland -- Chief Executive Officer

Yeah. So the two that I mentioned in Latin America were in our cloud and edge business. These were replacements of existing call -- voice over IP call control systems basically. But -- so we're seeing -- obviously, we're seeing an opportunity in cloud and edge in certain markets more broadly.

Certainly, there's going to be opportunity for some share shift happening this year in Europe and in several countries, in Asia Pacific, for sure. And that's where we're focused, right? If we get a piece of that much larger spend, that will be very meaningful for us.

Paul Silverstein -- Cowen and Company -- Analyst

I appreciate your responses. Thank you.

Bruce McClelland -- Chief Executive Officer

Thanks, Paul. Appreciate it.

Operator

We have a question from Dave Kang, B. Riley. Please go ahead, sir.

Dave Kang -- B. Riley Securities -- Analyst

Thank you. Good afternoon. First question is on the -- you provided North America optical sales increased 105% sequentially. Can you provide similar numbers for Europe and Asia?

Bruce McClelland -- Chief Executive Officer

Dave, yes. So in Europe -- Mick, you probably have the numbers handy from Q3 into Q4. Again, Europe was up pretty strongly overall for us in Q4. Do you have that handy, Mick?

Mick Lopez -- Chief Financial Officer

Yeah. So we have, for the three months ended in September, Europe -- Russia was up by about $1 million. Most of Europe was up by almost $9 million from $46 million to $57 million.

Dave Kang -- B. Riley Securities -- Analyst

$46 million to -- what was the final number, $46 million to what?

Mick Lopez -- Chief Financial Officer

$57 million.

Dave Kang -- B. Riley Securities -- Analyst

$57 million. Got it. OK. And do you have numbers for Asia, too?

Mick Lopez -- Chief Financial Officer

Let me add them up right here real quick. So we basically went from like $38 million to $46 million on optical.

Dave Kang -- B. Riley Securities -- Analyst

Got it. Very helpful. And then just regarding for both March quarter, as well as for the whole 2021, can you share what your assumptions are regarding C&E versus optical? I'm just curious because you're guiding gross margin to be down about 3 percentage points this year. What's driving that? Is it -- are you expecting optical to be stronger than C&E, and that's why your gross margin will be about 3 points lower?

Bruce McClelland -- Chief Executive Officer

Yeah. Thanks, Dave. For the first quarter, again, we've kind of almost always see the first quarter being the weakest quarter of the year. So we expect both segments to be down versus the fourth quarter in the first quarter.

And given the -- particularly the margin richness around cloud and edge, that definitely has an effect on the overall margin. And then for the entire year, you've got it right. I mean, we expect to see disproportionately higher revenue growth from the IP optical piece. And with that being a little lower gross margin than cloud and edge, that affects the overall blend for the company.

So it's really a mix shift as opposed to a shift in gross margin for either of the portfolios.

Mick Lopez -- Chief Financial Officer

Yeah. I'd like to add, please also take into consideration there is some seasonality to our revenues, and that certainly impacts our gross margin.

Bruce McClelland -- Chief Executive Officer

Sorry, Dave, it sounds like we're getting a lot of noise there.

Operator

Mr. Kang, are you still on the line?

Dave Kang -- B. Riley Securities -- Analyst

Yes, I'm here.

Bruce McClelland -- Chief Executive Officer

We hear you well, Dave.

Dave Kang -- B. Riley Securities -- Analyst

OK. My -- actually, my last question is on QualiTech. Has that been factored out in the first quarter as well as this year's revenue outlook? Or should we take it out after the transaction is closed?

Bruce McClelland -- Chief Executive Officer

Yeah. So we wouldn't take it out until we're closed. It's a relatively small business. It's sub $5 million in revenue and $1 million or less in earnings, so not a big needle mover on the numbers.

But it is -- it's a good size, a good indication of how we're really making sure we focus on the core strategy for the company and this is a nice little business, and we'll continue to work pretty closely with that group actually on product certification and testing and whatnot. And we'll be able to benefit from just a little more focus.

Dave Kang -- B. Riley Securities -- Analyst

Got it. Thank you.

Bruce McClelland -- Chief Executive Officer

Thanks, Dave.

Operator

We have a question from Mike Latimore, Northland Capital Markets. Please go ahead, sir.

Mike Latimore -- Northland Capital Markets -- Analyst

Thanks. Congratulations on the great execution this year. In terms of the cloud and edge business, I guess generally speaking, do you view that business as being stable, growing a little bit, declining a little bit this year? And then what about the dynamic of software? Do you think software grows faster than the overall cloud and edge business this year?

Bruce McClelland -- Chief Executive Officer

Yeah. So obviously, we grew year over year at 4% in 2020. And if you account for taking kind of Kandy out of the mix, we're still targeting a bit of growth this year. In particular, we think enterprise should grow.

And as we kind of get back into a more back-in-the-office mode, the enterprise edge portion of our business should come back as those deployments start to pick back up. So we definitely -- we want to grow that business this year.

Mike Latimore -- Northland Capital Markets -- Analyst

Got it. And then on the enterprise side of, I guess, cloud and edge, how influential is Microsoft Teams to that business? Is it over 50% of demand or under? Just trying to get a sense because that seems to be a pretty high grower.

Bruce McClelland -- Chief Executive Officer

Yeah. I think it's still less than 50% of our SBC business. Again, as I've kind of described a few times in the past, sometimes it's hard to tell when our SBCs are being used for enterprise or for carrier applications. And so sometimes, it's hard to put a complete -- a fine point on it.

But I think the Microsoft piece is pretty significant, but I don't think it's at 50%. Again, it's hard to put an exact number on it.

Mike Latimore -- Northland Capital Markets -- Analyst

OK, OK. And then maybe any just general guidance on capex or really kind of what free cash flow is implied in the guidance for the year?

Bruce McClelland -- Chief Executive Officer

Yeah. Mick, why don't you take that one, please? Yeah, Mick may have had trouble with his connection. That might have been where the noise was coming from. We think --

Mick Lopez -- Chief Financial Officer

I got it. I got it.

Bruce McClelland -- Chief Executive Officer

Here we go.

Mick Lopez -- Chief Financial Officer

I got it. This year, we had capex, we stated, of $27 million, of which $13 million was real estate. Then we got reimbursed for about $10 million of that. So our number, if you normalize that, it's about $16 million.

As we stated before, it's $4 million to $5 million a quarter. So we would expect that going forward into next year that $16 million to $20 million range would be acceptable to us as we invest in our labs and product development, in particular. And so far as cash flow for next year, the only thing you should take into consideration for modeling is that we expect a growth in the IP optical and particularly those customers as they have a longer type of payment cycle in emerging markets, so there's going to be some use of cash as -- for working capital.

Mike Latimore -- Northland Capital Markets -- Analyst

Got it. Yeah. That makes sense. And then just last on product development.

What should we think about in terms of key product enhancements on cloud and edge and IP optical this year?

Bruce McClelland -- Chief Executive Officer

Yes. So in cloud and edge, there are several important programs, kind of the final virtualization of some of the call processing platforms. I mentioned this virtual C20, so there's still some work going on that. And then there's investment around as-a-service models for SBC as a service we call Ribbon Connect, as well as our analytics platform.

And I mentioned on, I think, on -- Mike, maybe on your call back a few months ago, we're doing some exploratory work around MEC, where we can really leverage the kind of real time-critical software development skills from cloud and edge with some of the networking products and technologies from the HDI business, so that's an interesting area. In IP optical, we have a pretty robust road map this year. There's quite a bit of investment around additional routing protocols, enhancements for TDM to IP migration and then a variety of optical-related investments, including a VR-plus introduction this year and a standardized four-gig interpoint or gig interfaces and a few new platforms coming out, so a pretty active program this year.

Mike Latimore -- Northland Capital Markets -- Analyst

OK, great. Thanks. Good luck.

Bruce McClelland -- Chief Executive Officer

OK. Thanks, Mike.

Operator

Gentlemen, we have reached the end of the question-and-answer session, and now I'd like to turn the call back over to Bruce McClelland for closing remarks. Please go ahead, sir.

Bruce McClelland -- Chief Executive Officer

Yeah, great. Well, thanks very much, and appreciate everybody's interest. Again, just to reiterate, we're really proud of the accomplishments here in 2020 and even more excited about the outlook here for '21, and really focused on the core strategy. So look forward to updating you in the progress throughout the year and some of the conferences that we have coming up shortly.

Thanks very much. Have a good evening.

Operator

[Operator signoff]

Duration: 47 minutes

Call participants:

Tom Berry -- Investor Relations

Bruce McClelland -- Chief Executive Officer

Mick Lopez -- Chief Financial Officer

Paul Silverstein -- Cowen and Company -- Analyst

Dave Kang -- B. Riley Securities -- Analyst

Mike Latimore -- Northland Capital Markets -- Analyst

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