Ribbon Communications Inc.
Q1 2013 Earnings Call Transcript

Published: 1 May 2013

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2013 Financial Results Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded, Tuesday, April 30, 2013. And it's now my pleasure to turn the conference over to Ms. Patti Leahy, Vice President, Investor Relations. Please go ahead.

[Patti Leahy:]

Thank you, and good afternoon, everyone. Welcome to Sonus Networks First Quarter 2013 Operating Results Conference Call. Thank you for joining us today. As a reminder, a recording of this call will be available on our website at sonus.net. Also, for your convenience, we will post today’s prepared remarks on the Investor Relations section of our website shortly after the call. Also posted on our website is supplementary financial and operational data. Speakers on the call today are Ray Dolan, President and Chief Executive Officer; and Moe Castonguay, Senior Vice President and Chief Financial Officer. Todd Abbott, Executive Vice President of Strategy & Go-to-Market, is also here to address questions at the end of our prepared remarks. Please note for purposes of Safe Harbor provisions that during this call, we will make projections and forward-looking statements regarding items such as future market opportunities and the company’s financial outlook. Actual events or financial results may differ materially from these projections or 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 revenue recognition, difficulties leveraging market opportunities, the impact of restructuring activities and our ability to realize benefits from the NET acquisition. A discussion of these and other factors that may affect future results is contained in our most recent Form 10-K filed with the SEC and in today’s earnings release, both of which are available on our website. While we may elect to update or revise forward-looking statements at some point, we specifically disclaim any obligation to do so, unless required by law. During our call, we will be referring to certain GAAP and non-GAAP financial measures. A reconciliation of the non-GAAP to comparable GAAP financial measures is included in our press release issued today, as well as in the Investor Relations section of our website. It’s now my pleasure to introduce the President and Chief Executive Officer of Sonus, Ray Dolan. Please go ahead, Ray.

[Raymond P. Dolan:]

Thank you, Patti, and good afternoon, everyone. Today, Sonus announced solid first quarter results, which reflect a strong start to the year and position us very well for the full year. Revenue, OpEx, EPS and cash were all better than our expectations and gross margin was in line with our expectation. We continue to make significant progress toward our core goal to transform Sonus to an SBC-centric, profitable company. Our results today reflect crisp execution of our strategy that is resonating with our customers and partners around the world. Moe will review our results and outlook in a moment, but I'd first like to highlight some of the progress we're making against the key operational milestones we laid out for you last quarter. Before doing so, I would also like to mention, as previously committed to you, that we are providing new disclosures beginning today and expect to do so going forward each quarter. These are the important indicators of our continued success and include

[Maurice L. Castonguay:]

Thank you, Ray, and good afternoon, everyone. Total revenue for the first quarter was $63.3 million compared to $75.1 million in the fourth quarter and $64.3 million in the first quarter of 2012. Total SBC revenue, including products and services, was $30 million in the first quarter, $26.1 million in the fourth quarter and $17 million in the first quarter of 2012. Our top 5 revenue customers represented 50% of revenue this quarter, up from 45% in the fourth quarter of 2012, and down from 66% in the first quarter of last year. We reported revenue from 541 customers in the first quarter. This compares to 504 customers in the fourth quarter. Looking at revenue geographically, domestic revenue accounted for 69% in Q1 compared to 51% in Q4 and 75% in Q1 of 2012. Before I go into further details on our financials, I'd like to point out that the following are non-GAAP numbers that exclude

[Raymond P. Dolan:]

Thanks, Moe. We believe the proof of our transformation toward a profitable, SBC-centric company is becoming increasingly clear. This quarter, 62% of our total product revenue was derived from SBC solutions. This is a record high for Sonus. We are pleased that our most important drivers of value, including SBC revenue growth, new customer growth, revenue growth from the channel and the enterprise and the progress towards improved profitability are all tracking consistent with our expectations. Turning to profitability. I want to make it clear that our crisp focus on profitability is not limiting our growth potential. We believe we are already uniquely competitive with the industry's most comprehensive SBC portfolio. And I am confident that the continued investments we are making will ensure that we are increasingly relevant and strategic to our customers and partners. Infonetics expects the total SBC market to grow in the mid-teens in 2013. We continue to expect to grow our SBC product revenue by approximately 50% this year, implying continued share gain. In short, Sonus is playing an important leadership role in the evolution of our industry and I'm thrilled to be part of this journey. I'd like to thank our team for their continued hard work and for the continued support from our shareholders. And with that, I'll now turn the call over to our operator for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Subu Subrahmanyan.

[Natarajan Subrahmanyan:]

First, a question on the enterprise revenue, Ray. Can you talk about -- if repeat some of the numbers you had mentioned and gave some context, are those as percentage of product revenue and 57% of SBC I thought I heard, was that weighted -- or was it higher because of the government business? What should more of the steady-state be for the company?

[Raymond P. Dolan:]

Okay. So the enterprise revenue, as a percentage of -- and same with the channel, as a percentage of its total, Subu.

[Patti Leahy:]

Total product revenue.

[Raymond P. Dolan:]

The channel is 17% and it should normalize on an annualized basis in the 20% to 25%. The enterprise was unusually high this quarter at 45% of total product and 56% of SBC product. And it will normalize in the 22% to 25% range of our total product revenue. And we gave you the dollar value of that so you can just do some of the math of $35 million to $40 million. So that's a restatement of what -- or a repeat, I should say, of what we just discussed. So if you have a question on that, I'm happy to take it.

[Natarajan Subrahmanyan:]

Is there any 2012 number that you can give us just for context, what percentage of product revenue it represented?

[Raymond P. Dolan:]

No, there really isn't.

[Natarajan Subrahmanyan:]

Okay. And then, on gross margin, Moe, can you talk about the progressions through the course of the year? Obviously, given your full year numbers and the second quarter guidance, should expect some fairly sharp increases. How much of that is related to mix versus cost? Can you talk about that?

[Raymond P. Dolan:]

It's those 2 things, Subu, mix and cost. And Moe referred to the way our margins move based on software content and mix, that's definitely some of it. You'll see some of it also coming from our cost structure as we're designing for manufacturing and improving our cost structure from the standpoint of our overhead. And I would say it's probably an even balance between the 2 throughout the rest of the year.

[Natarajan Subrahmanyan:]

And the final question on just capital spending environment. First of all, how do you view that for 2013 and how relevant is it to Sonus in terms of -- with some of the growth calls that you have?

[Raymond P. Dolan:]

So I've always felt that we need to take it down to the sector level because we're not a big enough company to be a call in the capital spend, if you will, of the total environment. But if you look at our sector, we think that the mid-teens growth rate for the SBC category in general, is a solid forecast. We can underpin that based on what we see as trends in the marketplace and we like our opportunity to gain share there, all right? So I think a lot of the trends in the SBC category, specifically at the subset of the total CapEx spend, are very favorable to us.

[Operator:]

Our next question comes from the line of Catharine Trebnick with Northland Securities.

[Catharine Anne Trebnick:]

My question has to do more on the carrier side and the enterprise. You really pulled it together. Are there other types of technology, like, there's a big discussion on WebRTC and certain types of that technology. Do you see that impacting any SBC growth or do you see it enabling SBC capabilities? And do you have any comments on that technology and where it's headed?

[Raymond P. Dolan:]

Sure. I'll give it a shot, and I also welcome Todd to join me answer toward -- when I give it. So here's how I look at that, Catharine. One, it is an enabler in the enterprise, for sure, on the SBC space in general. It will be a driver of UC, and it will be a driver -- it'll be a complementary driver with SIP trunking of UC, all of which will drive the SBC growth. So I think we're in good shape there. Remember, our heritage is as real-time as you can get. Even though there's a lot of perception that Sonus was a voice company, there is no more rigorous real-time app than voice. So we've got all the skills to port those real-time capabilities into a broader suite of UC applications as WebRTC takes off. So we see it as a real net positive.

[Catharine Anne Trebnick:]

Okay. And then, my follow-on question is just in general on the enterprise partnership, I mean, is there a way to extrapolate how well you are doing with Microsoft Lync or Aero or some of the other partners that you have, I mean, out of the 25 or 30 Gold Partners? Are there maybe a few of them that have been able to deploy more of your SBC technology into the enterprise, sort of a general commentary on how well you're doing with your partners that seems to be picking up?

[Raymond P. Dolan:]

So we are picking up with our partners, just some really healthy signs there. And both of them and others are important partners to us, but we don't plan to report out our revenue based on any one or group of partners there, Catharine. All of them will be strategic to us, and they'll come in and out of our revenue profiles based on their own business strategies.

[Operator:]

Our next question comes from the line of James Kisner with Jefferies LLC.

[James M. Kisner:]

I guess, my first question -- I'm just really kind of surprised to see government pop up as a 10% customer. Obviously, that would mean it was up sequentially, I think. So we just some -- a couple of companies in our space have very negative things to say about the federal government, and I'm just curious if you could try to provide any texture there? Is it a broader initiative you're benefiting from to save on voice expenses or what's really kind of driving the streak there?

[Raymond P. Dolan:]

It's Ray. I wouldn't put it in any broader context there. This is an important project for us and for the U.S. federal government, driving SBC and a number of UC applications in their network. But I would not connect it, if you will, to any macro sequestration, positive or negative. So I think it just stands on its own merit. It's really outside the context of the major government shifts that are going on right now. It's a net positive for us, it's certainly a good strategic component of the outcome of our NET acquisition, and it's a good way for us to leverage the entire breadth of our portfolio in the SBC space with the federal government.

[James M. Kisner:]

Could they become a 10% customer again? Do you think this is sort of a one-time large project or a big piece of a larger project? Could you give us any color there?

[Raymond P. Dolan:]

Well, it's always possible, I wouldn't forecast that. For this year, I wouldn't forecast them being that again, but we'll certainly disclose it if, in fact, it happens, okay?

[James M. Kisner:]

Okay. And here's a sort of separate question on just your revenue guidance for the year. I mean, you've done, obviously, a great job in Q1 and your Q2 guidance is pretty strong. And I'm just curious, why would you not raise the year at this point? And is it -- are you seeing anything about the environment and is the visibility the same as it was a quarter ago or you're just being conservative? Just you got any texture of why you wouldn't, sort of, commit to an additional upside into your annual guidance?

[Raymond P. Dolan:]

This is Ray again. It's really right down the middle. I think it's premature for us after a solid Q1 and a good outlook into Q2 to do anything for the year. We're trying to be as transparent as we possibly can. And so it's as simple as that. As we get greater and greater visibility into the back half of the year, we'll certainly let you know what that looks like on our next call.

[Operator:]

[Operator Instructions] Our next question comes from the line of Steve Cowen [ph] with Bravo Partners.

[Unknown Analyst:]

This quarter -- great job, by the way, this quarter on -- particularly on the SBC side that came in significantly better than what was included in your guidance, which implies that the legacy business came in a little bit soft in the first quarter, yet it seems like you're expecting a pretty good uptick on that in the second quarter and you were adamant that the 30% down for the year on product -- legacy product revenue was sufficiently pessimistic. Is there some sort of a big project on the services side that's getting billed the next quarter or some deferred revenue moving forward -- we have to recognize? What's -- explain the kind of the ups and downs in the legacy revenue business.

[Maurice L. Castonguay:]

With respect to service business, our service business -- or the professional services component of it can be up or down a few millions at any given quarter, tied to specific projects. But that's basically, if there's no really significant movement. We are expecting in our guidance of $66 million to $68 million increases in both product and service revenue.

[Unknown Analyst:]

On the legacy side?

[Maurice L. Castonguay:]

That's correct.

[Unknown Analyst:]

Also, on a different subject, I think it was last quarter you mentioned the win at Verizon for the SIP interconnect project, yet they don't show up as a 10% customer this quarter. I also noticed in the proxy you disclosed that, that was going to be SBC 9000 product. Is that going to -- at Verizon, does that turn out to be new software onto boxes that they had already acquired for a prior application or are there new shipments into -- that Verizon anticipated?.

[Maurice L. Castonguay:]

Yes, I'll go ahead and ask Todd to go and weigh in on pricing in general on your question here, Steve.

[Todd A. Abbott:]

Yes, so what we have previously disclosed is that the 9000 win at Verizon was a new chassis win, 100% dedicated to SBC for interconnect. So it did not relate to software upgrades to existing gateway products. So it was the 9000 competing on its own as a 100% full-fledged SBC. It is a multiyear project, it will be lumpy in different quarters, and we're well into the implementation of that infrastructure for Verizon.

[Unknown Analyst:]

I guess, as a follow-up to that, Todd, does that imply that the 9000 chassis has a longer life to it than I otherwise have thought or was there something special about the Verizon network that made it particularly appropriate for them and is less likely to be replicable at other carriers?

[Todd A. Abbott:]

For any net new carrier, it would be 5000-based. You have to kind of think about the sales cycle of a large infrastructure sale. And at that point in time, the 9000 was a much more natural migration for our legacy customers because of experience base and comfort with the GSX 9000. For any net new customer now, given where we are in the capabilities and the installed base and referenceability of the 5k base, that really becomes the lead with platform for any net new carriers. But the 9000 is going to have a long life. It's very strategic to a lot of our legacy customers and we continue to invest and innovate on that platform.

[Operator:]

[Operator Instructions] And it appears there are no further questions at this time. I'd like to turn the call back to the speakers for your closing remarks.

[Raymond P. Dolan:]

Well, thank you very much. This is Ray Dolan. We appreciate all the support from our shareholder community, as well as the financial analyst community in following the progress that we're making here at Sonus. And on behalf of over 1,000 people that are proud to be part of this journey, I just want to say, we look forward to sharing our results with you each quarter this year as we continue the transformation. So thanks, again. That's all we have for this evening. Have a good night.

[Maurice L. Castonguay:]

Thank you. Good night.

[Operator:]

Ladies and gentlemen, that does conclude the conference call for today. We thank you for participation and ask that you please disconnect your line.