Ribbon Communications Inc.
Q3 2017 Earnings Call Transcript

Published: 30 Oct 2017

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Sonus Networks Third Quarter 2017 Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. As a reminder, this conference is being recorded Monday, October 30, 2017. Now, I would like to turn the conference over to Sara Leggat, Head of Investor Relations. Please go ahead, ma'am.

[Sara Leggat:]

Good morning. I'm very pleased to introduce you to Ribbon Communications and to welcome you to our third quarter 2017 financial results conference call. On the call with me today are Ray Dolan, our CEO; Daryl Raiford, previous CFO of GENBAND and now CFO of Ribbon; and Susan Villare, former Interim CFO of Sonus. Today's press release and supplementary data have been posted to our IR website at sonus.net. A recording of this call and the transcript will be available on our IR website shortly after the call. During our prepared remarks, we'll be referring to a presentation with supporting information. Please take a moment to locate these documents on our IR website. As shown on slide two, please note that during this call, we'll be making forward-looking statements regarding items such as business strategy, future market opportunities and the company's financial outlook. Actual events or financial results may differ materially from these forward-looking statements and are subject to various risks and uncertainties including, without limitation, economic conditions, market acceptance of our products and services, the timing of customer purchasing decisions and revenue recognition, our ability to successfully integrate GENBAND and Sonus now that our merger is completed, difficulties leveraging market opportunities and the impact of cost containment efforts. A discussion of these and other factors that may affect our future results is contained in each of Sonus Networks' latest annual, quarterly and current report on Form 10-K, 10-Q and 8-K, as the case may be, in the joint proxy statement filed by Sonus Networks with the SEC on September 22, 2017 and in today's earnings release, all of which are available on our IR website. Additionally, many risks and uncertainties could cause actual results to differ materially from these forward-looking statements. While we may elect to update or revise forward-looking statements at some point, we specifically disclaim any obligation to do so. During our call we'll be referring to certain GAAP and non-GAAP financial measures. A reconciliation of historic non-GAAP measures to comparable GAAP financial measures is included in our presentation on our website and in our earnings press release issued today. With that, let me turn it over to our President and Chief Executive Officer, Ray Dolan.

[Raymond P. Dolan:]

Thanks, Sara, and welcome to everyone on the call today. This marks my 29th earnings call as your CEO and the first one as the CEO of our newly combined company, Ribbon Communications. Ribbon Communications is formed from the combination of Sonus and GENBAND and was announced in a press release this morning, which was issued subsequent to our earnings release. We will continue to trade on NASDAQ using our current symbol, SONS, for a short period. In the near future, we will announce the date upon which we expect to transition to our new ticker symbol, RBBN. We anticipate this transition to take place in the fourth quarter of 2017. The logic behind our new name is simple, Ribbon Communications will provide secure, flexible end-to-end solutions to service providers, enterprises and cloud players. Our new name reflects a more agile, nimble and software-centric company. With greater scale and a broader set of products to offer to our customers, Ribbon Communications will provide a more complete solution. Since the day we announced this merger, the feedback I've received from numerous customers has been very positive. Now let me shift to the results for Q3 and I'll do this in two parts

[Operator:]

Certainly. Thank you. And we'll get to our first question on the line from Dmitry Netis with William Blair. Please go ahead.

[Dmitry G. Netis:]

Okay. Thank you. Congratulations, guys, for closing this merger.

[Raymond P. Dolan:]

Thanks, Dmitry.

[Dmitry G. Netis:]

Okay. I have a couple of questions. First, on the $7 million order, this is not a one-time thing. It sounds like you did get expansion orders. Can you just quantify how lumpy this particular customer may be going forward? Is that a continuum with sort of expansion opportunity for you as far as the project that's going on there and consistent upgrades or is that a one-time offer with (17

[Raymond P. Dolan:]

Yes, Dmitry. Thanks. So that order, that expansion order is about half of the initial order and I expect expansion orders to continue every few quarters, maybe more often than that. There's plenty of opportunity to continue to evolve that network beyond where there's Oracle presence and continue to convert that to a Ribbon network.

[Dmitry G. Netis:]

Okay. Great. And then on the gross margin side, I noticed GENBAND's gross margins came in nicely at 55%. Is that a result of cost rationalization? Or is there something else going on? And should we expect that level of gross margin to continue out of GENBAND, or maybe on a combined basis, which would be an upside obviously?

[Raymond P. Dolan:]

Yeah. So, we – you saw in my prepared remarks that we guided the GENBAND gross margin 55% to 56%, as the progress continues. Daryl is here and can get into details if you'd (18

[Dmitry G. Netis:]

Okay. Very good. And then maybe if I could kind of go back to the preannouncement initially and kind of the reduction in the GENBAND's guide, which came down about $20 million from the initial thought when you filed your S-4. Would you sort of explain what happened there and maybe you're still early (20

[Raymond P. Dolan:]

Sure, Dmitry. So most of what we've seen so far, I'd say at least half, if not more, has been some deceleration on the SBC side in orders where companies have looked for – they're just paused because they anticipate that the Sonus SBC will displace at least a number of opportunities going forward, where GENBAND anticipated winning some SBC business. I did say in my prepared remarks, and I would like us to wait another quarter for us to come back to you with a more comprehensive review of the full year takedown, which is in the range of about $20 million. Here's what I would suggest though. This – revenue is critical because you can't get to bottom line until you start at the top, right? But this to me has never been just about revenue trajectory. GENBAND has been flat to declining. We've been flat to declining. Both companies are stabilizing, but there's a huge – this has always been about synergies, margin improvement and EBITDA. And I'm glad to confirm that I feel just as comfortable, if not more so, today, looking forward to $100 million of EBITDA exit run rate in 2018. But we'll come back to you on the February call with a more comprehensive review as soon as we can get the teams fully integrated.

[Dmitry G. Netis:]

And should we expect your next quarter also to give us kind of a sense of what products are going forward, which ones are getting maybe put on the shelves and which ones are going to be go-to products for you, is that – as far as the product rationalization of your portfolio, is that something you will be prepared to discuss next quarter?

[Raymond P. Dolan:]

Yes. There'll be some high-level discussion on the earnings call, Dmitry, we'll (22

[Dmitry G. Netis:]

Okay. My last question if I may. On the network transformation deals, Ray, when can we start to see some evidence of those large transformation projects? You may already have those, but I know you kind of indicated there were some 14,000 (22

[Raymond P. Dolan:]

Yeah. We'll give you some examples. Coming out of our fourth quarter results, Dmitry, we should have some evidence in there that we'll be able to pick out and use as examples, and then we'll look forward and give you some sense as to how that looks in 2018.

[Dmitry G. Netis:]

Okay. I'll jump off the line (23

[Raymond P. Dolan:]

Thank you.

[Operator:]

And we'll get to our next question on the lines from the line of Paul Silverstein with Cowen. Please go ahead with your question.

[Paul J. Silverstein:]

Ray, I've two basic questions, one, and I apologize if you've reviewed this before, but I don't recall hearing it, which is a simple question of what is the revenue complexion for GENBAND by products in terms of media gateways, SBC and Kandy and whatever else actually may be selling? If you can review that for us? I don't think I've heard you go through it before. And then my other question is the $50 million of synergies that you're expecting, how much of that is OpEx? How much is on the COGS side? Thanks. Or I assume it's all OpEx. Go ahead.

[Raymond P. Dolan:]

Well, It won't all be OpEx, Paul, because some of the services components will be rolled into COGS. So there's a pretty good piece of synergies that will drive COGS, which will drive margins. I would say that that's probably about 20% and the rest will be in OpEx spread between sales and marketing, G&A and R&D. So – and on the first piece, we haven't really broken out the pieces of SBC versus application server, but Daryl, if you want to just – you're here, can you speak to Paul's question as to the general makeup of the GENBAND revenue? (24

[Daryl E. Raiford:]

Sure, Paul. Paul, it's nice to speak with you on the phone. It's important to emphasize again our previous disclosures, which is GENBAND's bulk of its revenue is in its NTr product portfolio sold as a (25

[Paul J. Silverstein:]

Daryl, so given what you said, is it possible to come up with an approximation of what your SBC and application server revenue is in dollars as a percent (26

[Daryl E. Raiford:]

In terms of our VoIP product revenue that we've disclosed, I would say roughly 70% – 60% to 70% of our VoIP product revenue is softswitch and media gateways. Telephony application server, unified communications as a software only and SBCs would be the remaining.

[Paul J. Silverstein:]

Sorry, I just want to make sure I have it right, softswitch and media gateways 60% to 70%, SBC, being the balance?

[Daryl E. Raiford:]

Along with telephony application server, unified communications, which is a software-only sales, those would be the makeup, and then there will be some minor products after that (27

[Paul J. Silverstein:]

I appreciate that. Thank you.

[Operator:]

Thank you very much. We'll get to our next question on the line from Mark Kelleher with D. A. Davidson. Please go ahead with your question.

[Mark Kelleher:]

Great. Thanks for taking the questions. First, just on the share count. Can you tell us what the fully diluted share count is right now, the number that we should be using into next year?

[Raymond P. Dolan:]

Next year would be 102 million.

[Mark Kelleher:]

Okay. And then maybe you could talk a little bit about the competitive environment with Cisco announcing their BroadSoft acquisition? What do you think of that? And what do you think of the competitive situation right now?

[Raymond P. Dolan:]

Well, on the competitive situation right now, I couldn't be more thrilled that we've brought the two companies together under the Ribbon brand. I think we've got one of, if not, the best product suite and the most focused product suite with regard to virtualization and CPaaS. With regard to BroadSoft's decision to sell to Cisco, I actually think it's a huge opportunity for us because I think Cisco will probably do what Oracle did to Acme, which is very, very hard to take a focused successful company like BroadSoft and integrate it into a very broad suite of UC when, in fact, the company's orientation is really around layer three and below. That's still the critical mass of where (28

[Mark Kelleher:]

Okay, great. Thanks.

[Operator:]

Thank you very much. We'll get to our next question on the line from Greg Mesniaeff from Drexel Hamilton. Please go ahead.

[Greg Mesniaeff:]

Yes. Thank you. Ray, I was wondering if you can give us some additional color on GENBAND's revenue profile, particularly as it relates to revenue recognition now that you've gotten the chance to see it in detail. Is their revenue profile more turns-oriented or more backlog-oriented vis-à-vis Sonus' revenues? Thanks.

[Raymond P. Dolan:]

Thanks, Greg. Yes. There is a greater backlog component to GENBAND than there is to Sonus. There is a greater professional services component because they live on the edge of their network. So actually that will give us a little bit more visibility in quarter (30

[Greg Mesniaeff:]

Got you. Okay, that's very helpful. Thanks.

[Raymond P. Dolan:]

Sure. Thank you, Greg.

[Operator:]

Thank you very much. And we'll get to our next question on the line from Mike Latimore with Northland Capital Markets. Please go right ahead.

[Michael Latimore:]

Yeah, great. Thanks (31

[Raymond P. Dolan:]

Hey, Mike. We're not providing any color on that. I'd like to just use the balance of the fourth quarter to get our arms around both companies, but it would probably be in that ballpark. We'll probably be there ourselves as Sonus. I haven't characterized the GENBAND for 2018 yet.

[Michael Latimore:]

Right. And then, obviously, a lot more service revenue in the mix with the combined companies. Any thought on service area, is that a flattish kind of business too or stable or...?

[Raymond P. Dolan:]

Again, I'm going to go ahead and take a pass on that, Mike, for now. I just want to get my arms around the projects that are underneath all of this revenue. We haven't been able to do that for competitive reasons at this point in time. I don't expect there to be drastic changes. But I also don't want to put a marker out there that we have to move away from if we decided to shift it all. I do feel good, though, that the strategic direction that GENBAND had leading up to our announcement and throughout our integration process remains completely aligned with what we expected as we brought the two companies together. And I think we've got some opportunities to do some great global expansion as a combined company under Ribbon.

[Michael Latimore:]

Great. And then, just a housekeeping question. What is the cash and debt level right now post close?

[Raymond P. Dolan:]

I don't have a number post close? But are you looking at a trough level, you're saying (33

[Michael Latimore:]

No. I'm just kind of curious what the current cash and debt level is, I guess (33

[Raymond P. Dolan:]

Okay. Yeah, we'll be about $55 million net cash.

[Michael Latimore:]

Net cash. Okay. Right. And then just on – yeah...

[Raymond P. Dolan:]

Sorry. That's gross cash.

[Michael Latimore:]

Okay, gross. And then the debt. Okay, got it. And then just last, you mentioned some interesting prospects for Kandy, I think in the first half of 2018. Can you talk a little bit about just the applications there? Is the service provider going to sort of operate its own APIs (33

[Raymond P. Dolan:]

Sure, Mike. I'll go ahead and just give you a high level answer now. As we come together as a team, I'll ask David to join us and talk a lot more about that strategically, because I'd like to save some of that for 2018 as we articulate our revenue outlook and get underneath the used case – the specific used cases. But I think there's a tremendous opportunity to start in the enterprise for them to just look at their workflows, look at their architecture and technology in a multi-vendor environment and create a much more simplified telecom IT architecture and a much more simplified cross functional workflow, all right? There's just a tremendous amount of power in that. And from the service provider's point of view, I think what they can do is provide into the enterprise everything from ease of setup of SIP trunks to a complete redesign of their workflows as well, where they end up becoming a much more value-added service provider and system integrator than just providing circuits. So as we get closer to our proofs of concept, what we'd like to do is describe what those objectives are and give you a sense as to how we can really step in and not only compete with, say, for example, a BroadCloud, BroadWorks environment under Cisco, but actually eclipse that (35

[Michael Latimore:]

Great. Thank you.

[Raymond P. Dolan:]

Thank you.

[Operator:]

Thank you very much. We'll get to our next question on the line from Steve Cohen with Provo Partners (35

[Unknown Speaker:]

Hi, Ray, congratulations on closing the deal. Two questions that are sort of interrelated. First would be slower than, I think (35

[Raymond P. Dolan:]

Sure, Steve (36

[Unknown Speaker:]

Thanks.

[Raymond P. Dolan:]

Just as a reminder, we started that journey from about a stable 56% gross margin number. We had Acme out there as a comp in a pure-play model where they were really selling – terminating (38

[Unknown Speaker:]

Remember that well.

[Raymond P. Dolan:]

Thank you.

[Operator:]

Thank you very much. We'll get to our next question in the line and it's our follow-up question in the line of Paul Silverstein from Cowen. Please go ahead.

[Paul J. Silverstein:]

Ray, I heard your response on the Verizon that you think you could – the extension orders are 50% and you expect – of the original and you expect once you read (39

[Raymond P. Dolan:]

Yeah. Thanks, Paul. So the initial project was in the $10 million range. We've disclosed that on a prior call. The extension order is just below half that, close enough to call it half. So that's how it's played out so far. I don't know that it's created a stable pattern yet but the way I would look at it is my hope would be we continue to engage strategically with them as we do with all of our other customers, and we'll continue to see expansion both in the current project as well as additional projects coming our way if we can continue to innovate. They are, by the way, very strategic with what was GENBAND. GENBAND's done extensive NTr with them. GENBAND's done a tremendous job getting integrated into FiOs. The former GENBAND has done a tremendous job beginning to work with them on Kandy. And so there's a tremendous amount of energy for Ribbon to bring to not only Verizon but AT&T, CenturyLink and a number of other Tier 1s around the world globally as we bring what I believe is the best product suite together with the best talented workforce together to help them migrate these networks to the cloud.

[Paul J. Silverstein:]

The $5 million of extension, you expect to recognize all of that in the fourth quarter?

[Raymond P. Dolan:]

Yes.

[Paul J. Silverstein:]

And is Verizon a 10% customer to GENBAND stand-alone?

[Raymond P. Dolan:]

Yes.

[Paul J. Silverstein:]

Does GENBAND have any other 10% customers?

[Raymond P. Dolan:]

Daryl?

[Daryl E. Raiford:]

AT&T.

[Raymond P. Dolan:]

AT&T.

[Paul J. Silverstein:]

And what was AT&T and Verizon individually or collectively?

[Daryl E. Raiford:]

Paul, that's in the merger – that's in the S-4, specifically in our MD&A, and so I'll point you there.

[Raymond P. Dolan:]

Yeah.

[Paul J. Silverstein:]

All right.

[Raymond P. Dolan:]

And the call backs (41

[Paul J. Silverstein:]

That's fine.

[Daryl E. Raiford:]

I don't want to give you a wrong definition on (41

[Paul J. Silverstein:]

Thank you.

[Raymond P. Dolan:]

Thank you. If there's no further questions, operator, are there any others?

[Operator:]

We do have a follow-up question from the line of Steve Cohen from Provo Partners (41

[Unknown Speaker:]

Yeah. Ray, one further thing. On last quarter's call, you had talked about a, I believe, was a non-U.S. Tier 1 maybe in the fourth quarter, can you give us an update on that?

[Raymond P. Dolan:]

A non-U.S. Tier 1. Well, we did say that it was a Latin America Tier 1 for an Oracle replacement to Sonus in the core (42

[Unknown Speaker:]

Okay. That was the one. Thanks.

[Raymond P. Dolan:]

We also referred to the cable industry and the MSOs, and I'll just highlight that we continue to score a substantial amount with the Comcast, Charter types of names throughout this year and I expect those wins to continue into next year. So pretty good opportunity for us to come together with a common Ribbon product suite portfolio there and continue to penetrate the cable industry on a global basis.

[Raymond P. Dolan:]

Thanks to everyone for your attendance this morning. Hope you have a great week. Happy Halloween. Thanks for covering both Sonus and GENBAND, and we look forward to sharing our results as Ribbon Communications. Have a good day.

[Operator:]

Thank you very much. And thank you, everyone. Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask you to disconnect your lines. Have a good day, everyone.