Ribbon Communications Inc. Q2 FY2025 earnings call

• Second quarter revenue reached a new all-time high, with revenue up 15% year-over-year and 22% sequentially, above the high end of guidance. Adjusted EBITDA increased 47% year-over-year. - Cloud & Edge business saw sales grow 24% year-over-year and 27% sequentially, with strong growth in sales to global service providers and U.S. federal agency customers. Gross margins declined due to higher mix of professional services and hardware shipments but expected to improve in second half. - IP Optical segment had notable wins, with sales up 13% sequentially and 2% year-over-year, including strong sales in India, Southeast Asia, and North America. Gross margins improved significantly in the second quarter.

Cloud & Edge business: Generated revenues of $137 million in the second quarter, an increase of 24% year-over-year and up $29 million from Q1. Non-GAAP gross profit of $85 million was up 16% year-over-year, but non-GAAP gross margin was 61.9% due to higher proportion of hardware and professional services. Adjusted EBITDA for the segment was $37 million, a 43% improvement year-over-year. IP Optical segment: Recorded second quarter revenue of $84 million, a 2% increase versus the prior year. Excluding Eastern Europe, IP Optical sales to all other customers increased 5% year-over-year. IP Optical Networks adjusted EBITDA was a loss of $5 million versus a $4 million loss in the prior year.

• Anticipates a seasonally stronger second half with revenue increasing 15% to 20% compared to first half results, continuing to project revenue in line with full year guidance of $870 million to $890 million. - Third quarter projected to look similar to the strong second quarter, with Cloud & Edge segment projecting revenue consistent with last year and IP Optical segment projecting 5% to 10% year-over-year growth. - Full year, both gross margin and EBITDA trending towards lower end of guidance range due to weakening U.S. dollar.

• Potential pressure on OpEx and gross margin in the second half of the year due to weakening U.S. dollar. - Uncertainty over where U.S. tariffs will settle and any reciprocal trade barriers that may be implemented.

Q: What happened to cause gross margins to be a little bit below expectations for the second quarter?

A: Primarily a shift towards more hardware in the Cloud & Edge segment shipments and a little more professional services associated with some modernization programs, which have a lower overall gross margin relative to selling software.

Q: What's going on in the third quarter that might cause sequential down in revenues?

A: Second quarter is up 15% versus second quarter last year, and third quarter midpoint guidance is up about 5% relative to third quarter last year, with sequential flatness mainly because third quarter ended up ahead of the curve.

Q: Can you give more color on the Class 5 replacement opportunity and international opportunities?

A: There's a correlation between fiber upgrade and Class 5 upgrade, with telcos pushing fiber deeper and modernizing Class 5 switches in parallel. In Europe, more focused on cloud-native implementation of voice core, SBC, etc.

Q: What's the tone on CapEx?

A: The recent tax bill is a tailwind, but it's early and not much direct dialogue on it yet.

Q: Any comment on private networks?

A: In North America, strong pipeline with defense agencies and critical infrastructure; in Europe, step-up in defense spending with opportunities in voice modernization and data transport.

Q: Did you have any FX impact?

A: Weakening U.S. dollar is a headwind on OpEx, with about $1 million impact in second quarter and expected $2 million per quarter headwind if rates hold.

Q: Dynamics behind third quarter gross margin increase?

A: IP Optical business mix improvement and Cloud & Edge business expected less hardware shipments and more software mix, moving back to traditional gross margin mix.

Q: Any order pull-ins during the quarter?

A: Second quarter was middle of the road, with strong funnel for second half.

Q: Specifics on Verizon's record quarter and rest of service provider space?

A: Verizon was over 20% of total sales in second quarter, other service providers also increased. Q3 will have strong projects but less product shipping than Q2, with growth expected in enterprise customers.

Q: Thoughts on Verizon's outlook for 2026?

A: Next year looks strong as it's 1 year into a 3-year program, with opportunity around Frontier integration.

Q: Color on deferred revenues and book-to-bill?

A: Deferred revenue has two parts, maintenance contracts and product/services deferred revenue. Book-to-bill was greater than 1x in second quarter, indicating future revenue.

Q: Clarification on FX headwinds and European defense opportunity?

A: FX headwinds assume current rates hold. European defense opportunity not largely driven by increased NATO budget, but around voice modernization.