Earnings call transcript: Ribbon Communications Q2 2025 sees revenue beat

Ribbon Communications Inc. (RBBN) reported its second-quarter 2025 earnings, meeting EPS expectations and surpassing revenue forecasts. The company posted an EPS of $0.05, aligning with analyst predictions, while revenue reached $221 million, exceeding expectations by 3.57%. This positive revenue surprise contributed to a 5.46% increase in the stock price during after-hours trading, reaching $4.25. According to InvestingPro analysis, RBBN currently appears fairly valued, with a beta of 1.36 indicating moderate market sensitivity. The company’s overall financial health score stands at 2.14, rated as "FAIR" by InvestingPro’s comprehensive evaluation system.

Key Takeaways

• Revenue outperformed forecasts by 3.57%, reaching $221 million.
• Cloud and Edge business revenue grew by 24% year-over-year.
• Stock price rose by 5.46% in after-hours trading following the earnings release.
• Strong performance in North American and Asia Pacific markets.

Company Performance

Ribbon Communications demonstrated solid performance in the second quarter of 2025, with a 15% year-over-year increase in revenue. The company’s strategic focus on cloud-native voice and edge routing solutions contributed significantly to this growth, particularly in its Cloud and Edge business segment, which saw a 24% rise in revenue. Additionally, the IP Optical Networks segment recorded a 2% increase, highlighting ongoing market demand. InvestingPro data reveals the company maintains a healthy current ratio of 1.39 and has achieved a 5-year revenue CAGR of 8%, demonstrating sustained growth momentum.

Financial Highlights

• Revenue: $221 million, up 15% YoY
• Earnings per share: $0.05, meeting forecast
• Non-GAAP Gross Margin: 52.1%
• Adjusted EBITDA: $32 million, up 47% YoY
• Non-GAAP Net Income: $10 million

Earnings vs. Forecast

Ribbon Communications met its EPS forecast of $0.05, while revenue surpassed expectations, coming in at $221 million compared to the $213.39 million forecast. The 3.57% revenue surprise reflects strong sales performance and effective execution of the company’s strategy.

Market Reaction

Following the earnings announcement, Ribbon Communications’ stock experienced a 5.46% increase in after-hours trading, reaching $4.25. This positive movement suggests investor confidence in the company’s financial health and growth prospects. The stock’s performance is nearing its 52-week high, indicating robust market sentiment. InvestingPro analysts maintain a strong buy consensus with a price target range of $5.50 to $6.50, suggesting potential upside. InvestingPro subscribers can access 6 additional exclusive ProTips and a comprehensive Pro Research Report, offering deeper insights into RBBN’s market position and growth potential.

Outlook & Guidance

Looking ahead, Ribbon Communications projects full-year revenue between $870 million and $890 million, with Q3 revenue expected to range from $213 million to $227 million. The company anticipates a seasonally stronger second half of the year, although it acknowledges potential currency headwinds of approximately $5 million. InvestingPro analysis indicates that net income is expected to grow this year, with 4 analysts recently revising their earnings estimates upward for the upcoming period. The company is projected to achieve profitability this year, despite not being profitable over the last twelve months.

Executive Commentary

"We’re in a multi-year investment period to modernize communication networks across service providers and enterprise verticals," stated Bruce McLuhan, CEO. He emphasized the strong demand in the North American market and the company’s progress towards achieving profitability in its IP Optical segment.

Risks and Challenges

• Potential currency fluctuations could impact financial results.
• Intense competition in the telecommunications sector.
• Dependence on major clients like Verizon for significant revenue.
• Ongoing need for investment in network modernization.

Q&A

During the earnings call, analysts focused on the Verizon multi-year transformation program, opportunities in defense and critical infrastructure, and the impact of currency fluctuations on financial projections. The management addressed these concerns, highlighting the company’s strategic initiatives and financial resilience.

Full transcript - Ribbon Communications Inc (RBBN) Q2 2025:

Conference Operator: Greetings, and welcome to the Ribbon Communications Second Quarter twenty twenty five Financial Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Najam, Senior Vice President, Investor Relations.

Please go ahead.

Fahad Najam, SVP, Corporate Strategy and Investor Relations, Ribbon Communications: Good afternoon, and welcome to Ribbon’s Second Quarter twenty twenty five Financial Results Conference Call. I am Fahad Najam, SVP, Corporate Strategy and Investor Relations at Ribbon Communications. Also on the call today are Bruce McLuhan, Ribbon’s CEO and John Townsend, Ribbon’s CFO. Today’s call is being webcast live and will be archived on the Investor Relations section of our website at rbbn.com, where both our press release and supplemental slides are currently available. Certain matters we will be discussing today, including the business outlook and financial projections for the 2025 and beyond, are forward looking statements.

Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in these forward looking statements. These risks and uncertainties are discussed in our documents filed with the SEC, including our most recent Form 10 ks. I refer you to our Safe Harbor statement included in the supplemental financial information posted on our website. In addition, we will also present non GAAP financial information on this call. Reconciliations to applicable GAAP measures are included in the earnings press release we issued earlier today as well as in the supplemental financial information we prepared for this call, which again are both available on the Investor Relations section of our website.

And now I’d like to turn the call over to Bruce. Bruce?

Bruce McLuhan, CEO, Ribbon Communications: Great. Thanks, Fahad, and welcome to the Ribbon team. Good afternoon, everyone, and thanks for joining us today to discuss our Q2 results and outlook for the rest of the year. I’m very pleased with our strong financial performance in the second quarter, with revenue reaching a new all time high for the quarter. We’re tracking well in the first half of the year against the growth objectives we set, with revenue year to date increasing 8% year over year and adjusted EBITDA growth year to date of 13% year over year.

Demand in the North American market is very strong across both service provider and enterprise market verticals, including US federal agencies, as we continue to win some of the largest and most challenging voice transformation opportunities in the industry, resulting in significant growth year over year in our cloud and edge business. Our portfolio is the broadest in the market and supports an extensive number of use cases, with a particular focus on elimination of legacy copper networks with modern cloud centric unified communication systems that can be deployed either on premise or in the cloud. Ribbon’s innovation in cloud native voice and edge routing solutions is winning customers and gaining momentum. Building on the first quarter activity, we continue to see strong investment in next generation fiber broadband networks, resulting in very good growth in Asia Pac and North American markets. Excluding sales to Eastern Europe, our IP optical business grew by 25% year over year in the first quarter, and we continued that momentum with sales increasing another 14% sequentially in the second quarter.

In particular, Tier one operators in India, such as Bardi Airtel, continue to invest in transforming their IP services network with new advanced routing platforms and adding fiber capacity to support their growing mobile networks. And in North America, we continue to expand our IP networking footprint with expanded deployments with regional service providers and critical infrastructure networks such as AEP. So the demand picture remains strong, and we continue to expect good growth this year. In the second quarter, we delivered revenue and earnings at the high end of our expectations. Revenue was up 15% year over year and 22% sequentially, above the high end of our guidance.

Sales to service providers increased 18% year over year and 17% sequentially, driven by a record quarter with Verizon and strong sales to Bardi in India, as well as a new logo win with a Tier one telecommunications operator in Southeast Asia. Enterprise revenue also increased 7% year over year and 34% sequentially as a result of strong sales to U. S. Federal agencies and new critical infrastructure wins, including several deals that were delayed from the first quarter. Adjusted EBITDA increased 47% year over year, an increase of $26,000,000 sequentially, right at the high end of our guidance.

These results align with the plan we laid out at the beginning of the year. Our visibility into the second half of the year is solid, with book to bill in the second quarter above one point zero times, similar to the last several quarters. As we anticipated, gross margin improved substantially in the quarter with a stronger mix of software and better regional profile. This was modestly below our guidance range with additional hardware shipments and professional services in the quarter. Now a little more detail on each of our operating segments.

We had a great quarter in our cloud and edge business with sales growing 24 year over year and 27% sequentially. Excluding maintenance revenue, product and service sales increased 48% year over year. The strong growth in sales resulted in a 43% increase in adjusted EBITDA. The increased revenue in the quarter was primarily a result of higher sales to global service providers, increasing 28% year over year, highlighting the broad base of interest that we have in network modernization and improving efficiency. This includes our multi year voice transformation program with Verizon, which continues to progress very well and is focused on replacing hundreds of legacy central office switches.

In addition, we’re working with Verizon to virtualize their existing wireline voice soft switch cores. Our solution includes our virtual C20 call controller and our Neptune router for IP traffic aggregation, resulting in significant cost savings as compared to traditional architectures. Cloud and Edge sales to enterprise customers also increased in the second quarter by 13% year over year and 32% sequentially, driven by strong sales to several US federal agencies, including a deal that was delayed from the first quarter. As expected, Cloud and Edge gross margins declined year over year and were down 60 basis points sequentially due to the higher mix of professional services and hardware shipments. This included a significant number of media gateways to support the replacement of legacy TDM switches and a higher demand for enterprise edge gateways.

We expect an improvement in gross margin in the second half to the more typical mid-60s for the segment with a higher mix of software and continued improved service margins. In our IP Optical segment, we had a number of notable wins in the second quarter, which drove sales up 13% sequentially and up 2% year over year. Excluding Eastern Europe, IP Optical sales to all of the customers increased 5% year over year. Our footprint and presence in India continues to grow with sales up more than 40% year over year in this region in the second quarter. In addition to expanding the footprint of our IP routing solutions at Bardi, Tata and Vodafone Idea, we have a new win supporting the deployment of broadband internet access in rural India.

Sales in Southeast Asia were also strong with multiple new projects across the region, including a new win with a Tier one service provider that validates the competitiveness of our optical portfolio. We continue to see new opportunities across the region, partially due to vendor consolidation, as well as the need to build networks that have no Chinese OEM equipment. IP optical sales in North America were also a standout this quarter, growing over 45% year over year. We’re supporting a number of market segments and use cases, including regional and rural broadband Internet expansion, critical infrastructure private secure networks for utility companies such as AEP, and TDM voice network modernization and IP traffic aggregation with telecom service providers. Sales in the EMEA region were solid, up 42% sequentially and essentially flat year over year, mostly offsetting the loss of sales from Eastern Europe.

As expected, gross margins for the IP Optical segment improved significantly in the second quarter, increasing over 700 basis points sequentially. The improvement was tied to several factors, including higher North American sales, improved product mix and margins in Asia Pac and better fixed cost absorption related to higher volume. With that, I’ll turn it over to John to provide additional financial details on our second quarter results and then come back on to discuss outlook for the second half of the year. John?

John Townsend, CFO, Ribbon Communications: Thanks, Bruce, and good afternoon, everyone. Let’s begin with Q2 financial results at the consolidated level. We had an exceptional quarter generating revenues of $221,000,000 an increase of 15% from the prior year and above the top end of the guidance we gave during our Q1 earnings call. Our financials clearly reflecting the operational momentum that we’ve built within the business. Second quarter non GAAP gross margin was 52.1%, marginally lower than we guided due to the mix of services and higher hardware in cloud and edge and the very strong performance once again from our India team, where margins are usually a little lower.

Non GAAP operating expenses were $87,000,000 in the quarter, reflecting the seasonality in expenses such as sales commissions and variable employee compensation, which we expect to increase in the second half. Second quarter adjusted EBITDA was $32,000,000 again at the top end of our guidance and an increase of $10,000,000 or 47% year over year. Our non GAAP tax rate for the quarter was 34% and our interest expense was $11,000,000 including amortization of debt insurance costs. Both of these were in line with our expectations. Quarterly non GAAP net income was $10,000,000 compared to $9,000,000 in the prior year.

This generated a non GAAP diluted earnings per share of $05 which was the same as the prior year. Our basic share count was 177,000,000 shares, and our fully diluted share count was 180,000,000 shares for the quarter. Now let’s look at the results of our two business segments. Our Cloud and Edge business continued to deliver impressive growth in the second quarter as we executed strongly with our service provider and US federal agency customers, maintaining the network transformation momentum that we’ve created. We generated revenues of $137,000,000 an increase of 24% year over year and up $29,000,000 from Q1.

Non GAAP gross profit of $85,000,000 was up 16% year over year, although the higher proportion of both hardware and professional services resulted in non GAAP gross margin of 61.9, which is down from the prior year. Adjusted EBITDA for the segment was $37,000,000 or 27% of revenue in the quarter, a 43% improvement year over year. Now on to our IP Optical Networks results. We recorded second quarter revenue of $84,000,000 a 2% increase versus the prior year. Second quarter non GAAP gross margin for IP Optical was within our normal range of 35.9%, up seven sixty basis points sequentially, but down approximately 300 basis points from the prior year, reflecting the hardware and geographical mix between those quarters.

Notably, we had another excellent quarter in both India and North America. IP Optical Networks adjusted EBITDA was a loss of $5,000,000 versus a $4,000,000 loss in the prior year. Moving on to cash and capital expenditure. Cash from operations was a usage of $1,000,000 in the quarter, with a closing cash balance of $62,000,000 down $12,000,000 from the first quarter. This was principally driven by higher working capital resulting from a sequential increase in sales and the capital expenditure and share repurchases, which I will cover momentarily.

We closed the quarter with a net debt leverage ratio of 2.3 times. Whilst we still need to complete our evaluation, we expect a near term cash benefit from recent tax bill passed by Congress. The bill enables companies to return to expense in US r and d tax costs as they are incurred rather than depreciating them over time, and it also permits catch up on deferred deductions from prior periods. This will result in an estimated cash tax saving of approximately 15,000,000 to $20,000,000 for twenty twenty five compared to our projections coming into the year. Total CapEx in the quarter was $6,000,000 including a final $2,000,000 expenditure in relation to the new R and D facility in Israel that we mentioned last quarter.

We expect normal capital expenditure for the year to be approximately 12,000,000 to $15,000,000 in addition to the $8,000,000 relating to our new Israel facility. In the second quarter, we announced a new stock repurchase program to use a portion of the company’s free cash flow over the next several years to repurchase up to $50,000,000 of the company’s common stock. During the quarter, we repurchased 573,000 shares under the program for a total consideration of $2,300,000 The underlying trends in our business continuing to improve, and we continue to look at ways to accelerate shareholder value creation. With that, I’ll turn the call back to Bruce.

Bruce McLuhan, CEO, Ribbon Communications: Great. Thanks, John. As we look forward to the second half of the year, the demand picture remains robust. We anticipate a seasonally stronger second half with revenue increasing 15% to 20% as compared to our first half results, similar to FY ’twenty four. We continue to project revenue in line with our full year guidance of $870,000,000 to $890,000,000 Visibility to this target remains good following a first half year to date revenue growth of 8% and higher backlog for the rest of the year as compared to the same point last year.

Similar to last year, we expect the fourth quarter to be the strongest quarter of the year given the timing of enterprise deals and service provider projects. Longer term, we’re in an up cycle and gaining momentum. We’re in a multi year investment period to modernize communication networks across service providers and enterprise verticals, and are in a great position to win a large share of this opportunity as we continue to innovate to leverage our entire voice and IP networking portfolio to differentiate our offering against larger entrenched competitors. And as our first half performance highlights, we continue to secure new wins with our IP optical portfolio as customers invest aggressively to keep up with the growth in traffic, driven by mobile broadband, fiber network expansion and explosive data center growth. From a profitability perspective, the higher year over year sales support continued growth in the bottom line, although there is some potential pressure on OpEx and gross margin in the second half of the year due to the weakening U.

S. Dollar. On a full year basis, both gross margin and EBITDA are trending towards the lower end of our guidance range. Focusing specifically on the third quarter, we’re projecting the business to look very similar to our exceptionally strong second quarter. In our Cloud and Edge segment, we’re projecting revenue consistent with last year and in a similar range to the second quarter of this year.

We expect higher sales to a variety of enterprise and U. S. Federal customers, offsetting lower shipments this quarter to US Tier one service providers. Verizon deployments are expected to continue at a very strong pace with strong professional service revenue, but lower equipment and software revenue this quarter. We’re still early in the initial phase of this multi year program with significant opportunity for multiple years beyond this, as well as a large potential opportunity as Verizon completes their acquisition of Frontier.

In the IP Optical segment, we’re projecting 5% to 10 year over year growth in the third quarter. The key trends in this business include the following areas. In North America, we’re continuing to build momentum with both critical infrastructure and regional service providers tied to the growth in fiber networks. We’re also effectively leveraging our IP routing portfolio to further differentiate our voice core platform, creating opportunities to land and expand inside major service provider networks. The latest product in our innovation pipeline is our new modular Neptune 2,714 router that was recently introduced.

We expect to achieve general availability this quarter and have a healthy sales funnel and trials underway and have secured our first win. We expect continued momentum in Asia Pac with strong sales in India and Southeast Asia, similar to the last several quarters. Barty, Vodafone Idea, Tata and others continue to expand network capacity, and we see additional opportunities related to expansion of rural internet access and data center interconnect in India. And we have a lot of activity in Europe and The Middle East with both critical infrastructure and defense agency projects, expanding secure command and control networks, which should contribute higher gross margins. We continue to make solid progress towards our goal of achieving a profitable contribution from our IP Optical segment, overcoming the loss of revenue from Eastern Europe, and we remain committed to achieving profitability in the near term.

Overall for the company, we expect continued improvement in gross margin in the third quarter. While there remains a lot of uncertainty over where U. S. Tariffs will settle and any reciprocal trade barriers that may be implemented, at the current time, we’re not projecting a material impact on our business. So based on the foregoing, for the third quarter, we’re projecting revenue range of two thirteen million to $227,000,000 and non GAAP adjusted EBITDA in a range of 28,000,000 to $34,000,000 As I mentioned earlier, the overall demand picture remains robust and similar to last year, we expect the fourth quarter to be the strongest quarter of the year, given the timing of enterprise deals and service provider projects.

We are well positioned to benefit from the growing investment in fiber networks to meet the exponential increase in data consumption. And we expect the growth in our voice communications business to continue with investment across a wide range of service provider and enterprise customers. Operator, that concludes our prepared remarks, and we can now take a few questions.

Conference Operator: Thank you. We’ll now be conducting a question and answer session. You. Our first question today is coming from Michael Genovese from Rosenblatt Securities. Your line is now live.

Michael Genovese, Analyst, Rosenblatt Securities: Great. Thanks very much. Good afternoon, guys. I guess, I really liked everything I heard on the conference call that you just said. So I just need a couple of things explained to me, which are, first of all, the gross margins being a little bit expectations for the second quarter.

What happened there?

Bruce McLuhan, CEO, Ribbon Communications: Yeah. Hey, Mike. So that was primarily just a shift towards a little more hardware in the cloud and edge segment, the shipments there. It was part of the reason we ended up at the higher end of the guidance range or above the guidance range. And so that just obviously just has a bit of an effect on the overall gross margin.

That was the primary reason. Second, we had a little more professional services in the quarter as well, associated with some of the modernization programs. So both of those have a little less, overall gross margin relative to selling software, obviously.

Michael Genovese, Analyst, Rosenblatt Securities: Okay. That makes sense. And similarly, I mean, understanding you beat the second quarter on revenues and the third quarter guided a little bit below consensus, but the year basically doesn’t change. But just I mean, I know you went through all this, but there was so much information. The idea that revenues could be sequentially down in the third quarter, what before cut, obviously coming back strongly in the fourth.

What’s going on in the third quarter?

Bruce McLuhan, CEO, Ribbon Communications: Yes, so if I just kind of compare it year over year first. So second quarter is up 15% versus second quarter last year. And then I think if you look at the midpoint of our guidance for third quarter, we’d be up about 5% relative to third quarter last year. So if you look at our full year guidance up about 5.5% versus 2024, we’re kind of off to a good start. First half of the year is up 8%.

We got Q3 guided up about 5%. And then if we have obviously a solid Q4 like we did last year, I think we’re in really good shape. So that sequential kind of flatness Q2 to Q3, primarily because Q3 ended up ahead of the curve really.

Michael Genovese, Analyst, Rosenblatt Securities: Got it. And then finally, I’ll just ask, obviously, the cloud and edge business outlook has gotten much better the last several quarters than it was previously. And it also seems like optical is doing pretty well. But I just want to kind of take your temperature on the idea that Ribbon has these two kind of separate businesses and how you’re feeling about that or if you would prefer to focus more on one business, if you could get rid of the other one, any comments on that would be helpful.

Bruce McLuhan, CEO, Ribbon Communications: Yeah, thanks, Mike. Well, I obviously think we’re feeling pretty good about the different elements and I know we covered a lot of material but, you know, we mentioned that at Verizon, the voice core upgrades that we’re doing the modernization, they’re moving to a virtual platform now includes our IP router to do the IP traffic aggregation as part of that upgrade. So it’s a perfect example how we’re able to leverage the technologies between the two different businesses and really differentiate us. I don’t think anybody else is doing that today. So, you know, yeah, I think, all things, move in the right direction there.

Michael Genovese, Analyst, Rosenblatt Securities: Okay, perfect. I’ll pass it on.

Bruce McLuhan, CEO, Ribbon Communications: Thanks, Mike.

Conference Operator: Thank you. Our next question today is coming from Ryan Kunz from Needham and Company. Your line is now live.

Ryan Kunz, Analyst, Needham and Company: Great. Thanks for the question. Bruce, can you give us any more color on this classified replacement opportunity as it applies to other large wins in the pipeline? Do you think there’s international opportunities? And then what do you correlate kind of these opportunities with?

Is it do you directly correlate it with fiber deployments and they’re looking to kind of just radically reduce OpEx in particular region? That’d be helpful. Thank you.

Bruce McLuhan, CEO, Ribbon Communications: Yes. Thanks, Ryan. Yes, there’s definitely a correlation between the fiber upgrade and the class five upgrade. Not so much because the technologies plug into each other. But typically, what we’ll see is a telco continuing to push fiber deeper and deeper, moving traditional copper lines to a voice over IP, voice over fiber capability.

And then for the long tail, if you will, of remaining lines, it makes a lot of sense to modernize that class five switch. They don’t have to wait until the entire fiber penetration is at 100%. They’re able to capture some pretty significant cost savings by basically doing the switch modernization in parallel with the fiber deployment. And as you mentioned, that kind of approach applies really to any wireline operator, particularly in North America, where there’s a traditional class four, class five switch architecture, that’s been put in place thirty five years ago. As you go to Europe, the network architectures look a little bit different.

You see more convergence between mobile and fixed lines through an IMS architecture. And we participate in some of those, programs as well, more focused on a cloud native implementation, of our voice core, our SBC, our policy server, etcetera. So similar idea, just probably a little different architecture and implementation.

Ryan Kunz, Analyst, Needham and Company: Helpful. Thanks. And what’s the general tone on CapEx these days, Bruce? I mean, we’ve been hearing some relatively positive commentary around accelerated depreciation, maybe starts to open up a little more CapEx in the coming quarters. Any commentary there you’ve heard from customers in The U.

Bruce McLuhan, CEO, Ribbon Communications: S? Yes. It’s so fresh right now, a few weeks old, and I’m not sure how many people have read the thousand pages of the bill yet. But clearly, that’s a tailwind for the industry. As John mentioned, it benefits us being able to normally expense the R and D investments that we’re making and other capital investments.

But even more significantly for our customers where they’re able to, fully expense the capital investments that they’re making in The US. That’s a huge deal. I think across the industry billions of dollars of additional cash flow. But again, as I say, it’s early, I’m not sure I’ve heard a lot of direct dialogue on it other than, obviously, Stankey was pretty vocal on that on his call today.

Ryan Kunz, Analyst, Needham and Company: Yes, exactly. Great. And then on the maybe last question, and I’ll pass it on. But commentary on private networks, I know you guys are pretty strong in Europe and some U. S.

Government projects. Any kind of broad commentary on what’s the spending environment like around voice and even optical and routing in the enterprise?

Bruce McLuhan, CEO, Ribbon Communications: Yeah. Yeah. Great question. So we, you know, in in North America kinda have two different initiatives. One focused on voice modernization with many of the the large DOD agencies and have a, you know, really, great pipeline and series of programs going there.

And, we are fairly early, but now starting to see, you know, a number of key wins in The US for critical infrastructure, energy companies, transportation, those sorts of areas. And we think that’s a big opportunity for us because we haven’t done a lot in that space, historically. By

Ryan Kunz, Analyst, Needham and Company: channel, Bruce? Sorry to interrupt.

Bruce McLuhan, CEO, Ribbon Communications: Yeah, no, good question. Certainly the, any of the government related, programs are through channels. Typically, you’re going through, a series of large system integrators and kind of specialty providers. There has been, kind of obviously a renewed focus in that space around making sure every dollar that’s spent is being very efficiently used and trying to reduce the amount of overhead in getting technology into the hands of the agencies and kind of streamlining that whole sales process. In the short term, that kind of, I think, delays decisions a little bit.

But in the longer term, I think it really pays to the strength of the technology OEMs and makes our products more cost effective and achieves the goals that the government is trying to focus on here. I think in Europe, obviously there’s a large step up in spending around defense spending across Europe today, countries like Germany and several others are going to spend and invest a lot more around defense than they have in the past. We’ve got a series of customers in that region that are, really strong, businesses for us in Israel and Switzerland and Finland, and we’re really looking to expand our presence there in both data transport as well as in, voice modernization. So, you know, I think we’ll we’ll invest more there and, try and replicate some of the success we’ve had here in The US.

Ryan Kunz, Analyst, Needham and Company: That’s great. Thanks so much. That’s all I’ve got.

Bruce McLuhan, CEO, Ribbon Communications: Great. Thanks, Ryan.

Conference Operator: You. Next question is coming from Dave Kang from B. Riley Securities. Your line is now live.

Dave Kang, Analyst, B. Riley Securities: Thank you. Good afternoon. First question is, did you guys have any FX impact?

Bruce McLuhan, CEO, Ribbon Communications: Yes. Hey, Dave. John can probably comment a little more. Definitely see the weakening U. S.

Dollar as a headwind from an OpEx perspective. And John, what was the impact in second quarter?

John Townsend, CFO, Ribbon Communications: So in second quarter, David, it wasn’t huge. Most of the sort of weakening of the dollar occurred during the second quarter. So probably on OpEx, it was about $1,000,000 in the second quarter. But clearly, you look forward for the rest of the year, then if everything stays as it is, and all this is relative to our expectations at the start of the year and the guidance set there, we do see headwinds roughly around $2,000,000 a quarter. And that’s really depends if the current exchange rates hold.

The currency we’re seeing the pressure from are the shekel, the euro and the Canadian dollar particular. So obviously, the one thing I can say is the exchange rates won’t stay where they are, but it’s just but if they do, then that’s the likely impact.

Dave Kang, Analyst, B. Riley Securities: Got it. And then regarding gross margins, sounds like you’re guiding third quarter gross margin to increase 150 bps to maybe 200 bps sequentially. Just if you can go over the dynamics behind that?

Bruce McLuhan, CEO, Ribbon Communications: Yeah, that’s about right. I think, it’s really across both of the businesses, the mix that we’re seeing in the third quarter and our IP optical business should result in quarter over quarter improvement in that segment. And then in cloud and edge, as I commented, we expect less hardware shipments in the quarter, and less media gateways and more of a software mix in the third quarter, which kind of moves us back to more maybe more a traditional, gross margin mixes for the business. As you know, when we were awarded the Verizon contract last year, we did expect that the overall gross margin would come down as a result, obviously super accretive, you know, on the bottom line, but the additional services and hardware just carry a lower gross margin than software.

Dave Kang, Analyst, B. Riley Securities: Got it. And my last question is, I’m just wondering if you had any order pull ins during the quarter?

Bruce McLuhan, CEO, Ribbon Communications: No, I think it was a pretty middle of the road, I guess, I would say quarter for second quarter. As we look into the second half of the year, we’ve got obviously a strong funnel and projecting really strong growth versus the first half. Getting the exact timing between Q3 and Q4 is always tricky, but we’re pretty optimistic about the second half here, obviously.

Dave Kang, Analyst, B. Riley Securities: All right. Thank you.

Tim Savageaux, Analyst, Northland Capital Markets: Thanks, Dave.

Conference Operator: Thank you. Next question today is coming from Tim Savageaux from Northland Capital Markets. Your line is now live.

Tim Savageaux, Analyst, Northland Capital Markets: Hey, good afternoon. I wonder, I think you mentioned a record quarter at Verizon. Wonder if you can be a bit more specific on that. It looks like that might take them up around 20% of revenue. Just wondered if you could talk to us in more detail on where Verizon ended up and also what the dynamics were across the rest of the service provider space, which is to say if they grew as much as it appears they did, it looks like you might have seen some growth in the rest of the service provider world.

But anyway, I’ll follow-up from there. Thanks.

Bruce McLuhan, CEO, Ribbon Communications: Yeah, thanks, Tim. Yeah, so your number is almost bang on and you see it in the queue as we publish our 10% plus customers. So Verizon was, I think a little over 20% of total sales in the second quarter. The last time we had a quarter that strong was not that long ago. Our fourth quarter was obviously very strong with them as well.

But this was a little bit above that level. If you go back to kind of my commentary last quarter, We projected that we knew we would you know, we had a lot of activity a lot of a lot of work to do in the second quarter with Verizon and You know, I’d say now we’re extremely pleased and I think they’re very pleased with how the upgrade in the modernization programs are progressing and the velocity at which we’re getting after capturing the cost savings for them across their networks. Going very well. As I think you’ve already backed into the math accurately, the other parts of our service provider business also increased in the quarter. I don’t have the exact number, obviously not as large as Verizon, but, you know, all of the other service providers increased as well, in the quarter year over year.

The one I did comment on was obviously India, with a very strong quarter in India with the Tier one service providers there as well.

Tim Savageaux, Analyst, Northland Capital Markets: Great. And if I could maybe extend that commentary into Q3. I mean, it sounds like high level, a little bit of the flattish guide might be a little stronger Verizon in Q2 and a little weaker in Q3. Is that a reasonable way to look at it? Is that kind of pullback material for Verizon?

And then I would anticipate, given your expectations for the year, that you would expect kind of a new record with them in Q4, maybe not percentage wise, but maybe absolute dollar wise? Just interested in your thoughts on that.

Bruce McLuhan, CEO, Ribbon Communications: Yes, I think the Q3 commentary is accurate. I mean, we have a ton of projects obviously going with them. And so we’ll have a strong Q3, but we’re not anticipating shipping the same amount of product that we did as we did in the second quarter. We’re spending time now getting it all deployed, obviously. But we do see the diversification we have in the business, the strong enterprise set of customers, whether it’s financial institutions, transportation or defense, all of those we expect more growth in the third quarter.

So we see part of the business increasing, of it coming down. The net net is a fairly consistent Q3 to what we just did in Q2, but up obviously year over year from last year.

Tim Savageaux, Analyst, Northland Capital Markets: Great. And I think you mentioned you’ve got a router in there in that deployment. I think you’ve released talking about the same kind of situation at AT and T last year or maybe even prior to that sort of inserting your routing solution into the overall IP voice solution. I mean, I guess, can you give us an update there? Is that indeed the case?

And I think it brings to mind the question, can you extend that into the other elements of the routing product line or the transport product line I mean, the optical side proper as you think about those two big US carriers?

Bruce McLuhan, CEO, Ribbon Communications: Yes, we have, I’d say two primary use cases where we’re using, the routing platform, as part of our voice modernization. One is that router becomes an aggregation router basically to aggregate all of the, voice core traffic and, you know, that’s a key part of of of that system upgrade and, you know, the reliability, the performance and everything are really crucial to make sure that nine eleven carrier grade traffic continues to flow properly. That’s the first use case. The second use case is using it as an edge aggregation device in particular around doing circuit emulation for traditional TDM networks to TDM links. And, we’re seeing really a broad set of telecom customers looking at that use case or using our platform basically to help them eliminate TDM infrastructure across their metro network, move everything to an IP backbone, if you will, and where they have to continue to provide TDM interfaces, do it at the edge.

So we see really good interest or uptake around that. And as I kind of said in the commentary, think of that as a land and expand strategy. And once we’re deployed in a couple of different use cases, we really want to get deployed much more broadly into a broader set of edge aggregation use cases. And it’s just kind of part of the longer term strategy here to expand our market share in that space.

Tim Savageaux, Analyst, Northland Capital Markets: Okay. Thanks very much.

Conference Operator: Thanks, Tim. Thank you. Our next question today is coming from Christian Schwab from Craig Hallum Capital Group. Your line is now live.

Christian Schwab, Analyst, Craig Hallum Capital Group: Thanks for taking my question. Bruce, this is meeting of clarity. We talked about currency headwinds on OpEx, but I thought I heard in your prepared comments that you expected to be at the lower end of your gross margin and EBITDA range for calendar twenty twenty five due to currency. Did I hear that correct?

Bruce McLuhan, CEO, Ribbon Communications: Yes, yes, exactly. Christian, so we know John said there’s things kind of continue that the level they’re at today, and of course, they’ll change. We just don’t know which way, but if they continue where they are today, it’s about a $5,000,000, headwind on, overall earnings relative to the original guidance that we set at the beginning of the year. That’s in I’ll call it in OpEx. Obviously, we have some fixed cost, also in the COGS line that goes into gross margin.

So it’s put some pressure on the gross margin line. That’s not as significant as the OpEx impact, but definitely contributes a little bit. So overall, as we look at the rest of the year and try and project where we end, I think on earnings we’re thinking we’re lower in that range than where we would normally be without that headwind.

Christian Schwab, Analyst, Craig Hallum Capital Group: Great. And then as it relates to Verizon strength this year, I mean, can you elaborate on your visibility or bookings or backlog outlook, however you’d like to do that with that customer for calendar twenty twenty six? Or is that too early?

Bruce McLuhan, CEO, Ribbon Communications: Yeah, no, we think next year looks like a strong year. As we had indicated last year, the initial phase of this program is a three year program. So we’re kind of one year into implementation. And I know we got a ton of work to do just on what was part of the original defined program. That only does a partial portion of their network and assuming everything’s going well and no other kind of macro changes, we would certainly expect to see that continue well beyond that.

You then layer in, the opportunity around Frontier as that business gets integrated into the Verizon processes. We would expect very likely that they would wanna implement something similar there, to go after the cost infrastructure in that business. So, you know, we feel, yeah, really good about the outlook going into next year, with Verizon.

Christian Schwab, Analyst, Craig Hallum Capital Group: Great. Fantastic. No other questions. Thank you.

Dave Kang, Analyst, B. Riley Securities: Thanks, Christian.

Conference Operator: Thank you. Our next question today is coming from Greg Mesniew from Kingswood Capital Partners. Your line is now live.

Greg Mesniew, Analyst, Kingswood Capital Partners: Thank you. Can you hear me?

Bruce McLuhan, CEO, Ribbon Communications: We got you, Greg.

Greg Mesniew, Analyst, Kingswood Capital Partners: Good. Hey, Bruce, you mentioned when you talked about book to bill in the second quarter, you kind of gave us a general statement of greater than one. When you look at your deferred revenues, it’s a pretty interesting bump up from at

John Townsend, CFO, Ribbon Communications: the

Greg Mesniew, Analyst, Kingswood Capital Partners: end of Q1 to the end of this current quarter. You went from basically $23,500,000 at the end of Q1 to 31,700,000.0 at the end of this quarter, which is a much bigger pickup than from Q4 of last year, year end of last year, 900,000.0 up to 23,500,000.0 at the end of the first quarter. So obviously, revenue is starting to accelerate, guess, you could say. Is that really kind of the setup for the fourth quarter? Or some of that beyond?

Can you just kind of give us some color on that trend? Thanks.

Bruce McLuhan, CEO, Ribbon Communications: Yes. Hi, thanks, Greg. I think it’s kind of two key aspects to our deferred revenue pipeline, if you want to think of it that way. The largest portion is associated with our maintenance and support contracts. And a large portion of those bookings tend to happen in q four.

So you see a big buildup and then that kind of bleeds off as the year progresses. But that can change depending on the timing of when we, you know, when those, kind of contracts get renewed or implemented. The other part is associated with product and services, deferred revenue. And, particularly in the cloud and edge business, we can have larger programs that, that are implemented over multiple quarters, and that can definitely influence our deferred revenue number. And, yeah, it’s definitely an indicator of obviously kind of future revenue.

So, an important element to look at. And as you commented on book to bill again, of above one times again in the quarter, guess the third or fourth quarter in a row we’ve had that. And it’s particularly good to have that when we have a quarter where we beat the revenue number. So both the numerator and the denominator increased in that case.

Greg Mesniew, Analyst, Kingswood Capital Partners: Thank you. And just a quick follow-up. You had guided to a fairly conservative gross margin trend for the third quarter, all things considered. But you also did say that the percentage of hardware sales in the second quarter was up significantly. Shouldn’t we assume that at some point you get the whole razor blade effect versus the razor, and that should give us kind of a delayed pickup in margins?

Bruce McLuhan, CEO, Ribbon Communications: Yes, we certainly saw a little bit of that in Q2 in the IP Optical business, where our gross margins were up, almost 800 basis points sequentially in Q2, you know, with a much improved mix, particularly in Asia Pac and part of it’s the razor razorblade, you know, analogy that you’ve used. So, if I think about the third quarter and your comment on that, there’s two comparisons to think about. One is the sequential gross margin, and we expect that to improve Q2 to Q3, kind of continued improvement in gross margin given the higher mix of software and, less hardware. But if you compare it year over year, we’re still lower from a gross margin perspective year over year, primarily due to the increased professional services that we’re doing in the business with some of modernization programs. So a couple of different factors to think about there.

Greg Mesniew, Analyst, Kingswood Capital Partners: It. Thank you for that. Nice job on the quarter. Thanks, Frank.

Conference Operator: Thank you. Next question today is coming from Rustam Congo from Citizens. Your line is now live.

Fahad Najam, SVP, Corporate Strategy and Investor Relations, Ribbon Communications0: Good afternoon, Bruce and John. Thanks for taking my questions. One point of clarification on the comment regarding the FX headwinds in relation to the EBITDA and gross margins. The assumption there is that those rates would hold and that’s the reason for the call out. Is that fair?

John Townsend, CFO, Ribbon Communications: Yes, that’s right. Clearly, we’ve seen is, as I referenced, the exchange rates moved fairly substantially during the second quarter. So just trying to predict the rest of the year is clearly quite challenging, but they do hold those at the rates.

Bruce McLuhan, CEO, Ribbon Communications: Yeah. Ruston, we have kind of three or four, you know, foreign currencies where we have, OpEx exposure that John mentioned, you know, India is probably the largest, Israel, India, you know, those types of Canada. So, you know, and the euro so as we look today, you know what that current exchange rate is relative to when we set guidance earlier the year, there’s been a fairly material shift. It could all shift back. We just don’t know.

Fahad Najam, SVP, Corporate Strategy and Investor Relations, Ribbon Communications0: Very clear. I appreciate it. And then secondarily, in regards to the call out or the optimism around European defense opportunity, to what extent is that largely driven by the, you know, recently increased NATO defense budget?

Bruce McLuhan, CEO, Ribbon Communications: Today, I would say almost none. We’re exposed to other investments that are being made there that really haven’t been affected by the increased NATO investment. The area that I think I’m most interested in trying to capture is really around their voice modernization, you know, the similar programs that we’re doing here with the different, defense agencies. There’s a similar need for those types of upgrades in in Europe, and don’t think they’ve really started with earnest yet. I don’t know what the timing is yet, but we’ve certainly increased our focus there.

Tim Savageaux, Analyst, Northland Capital Markets: Thank you.

Conference Operator: Thank you. We’ve reached the end of our question and answer session. I’d to turn the floor back over to Bruce for any further closing comments.

Bruce McLuhan, CEO, Ribbon Communications: Yes. Well, thanks, operator, and thanks again for being on the call and your interest in Ribbon. We really look forward to speaking with many of you at the upcoming investor conferences that we’re at and updating you on our progress. So with that, operator, thanks, and that concludes our call.

Conference Operator: Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.

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