Ribbon Communications is positioned for a strong second half despite Q2 shortfalls

  Ribbon Communications is expecting a strong second half of the year, bolstered in part by fiber network buildouts using the company’s optical transport and IP routing solutions.

  “We are well positioned to benefit from the growing investment in fiber networks to meet the exponential increase in consumption,” said Bruce McClelland, Ribbon president and CEO, during the company’s second-quarter earnings call.

  Revenue for Ribbon’s IP Optical segment was $82 million in the second quarter, down $3 million year-over-year; Non-GAAP adjusted EBITDA was negative $4 million.

  With Eastern Europe excluded, revenue in the segment from all other customers was up 4% year-over-year. The EMEA region, McClelland reported, was the strongest market for IP Optical solutions in the quarter, increasing 30% year-over-year due in part to significant deals with the Israeli Defense Forces, the Swiss Armed Forces, and other defense agencies.

  Excluding sales to India, which were down approximately 20% year-over-year in the first half of 2024, IP Optical sales in the Asia-Pacific region increased 32% year-over-year.

  “We expect the business in India to grow approximately 30% in the second half versus the first half of the year on the strength of stronger fiber network deployments and long-awaited increased network spending by Vodafone Idea,” said McClelland. “The return of this strategic customer is a major opportunity given the shift away from Chinese manufacturers in this large region.”

  IP Optical sales in the U.S. were also down in the quarter, but Ribbon expects sales to increase in the last half of the year.

  “We have a very strong pipeline of U.S. rural broadband opportunities in the second half,” he said. “In fact, the backlog is currently higher than the entire amount we shipped in the first half of the year.”

  Cloud & Edge

  McClelland reported that, in addition to lower shipments to Eastern Europe, the largest shortfall Ribbon saw in the quarter was the delay of a significant Cloud & Edge deal with a U.S. Federal agency.

  “That deal alone would have put us in the revenue guidance range for the quarter and well above the top end of guidance on earnings,” explained McClelland.

  McClelland said it has been challenging to predict the timing of U.S. Federal defense projects, but Ribbon expects the deal to close by the end of the year.

  Miguel Lopez, executive vice president and CFO, reported Cloud & Edge revenues of $111 million in the second quarter, a 12% year-over-year decrease, which he attributed to lower enterprise product sales. Software sales made up 64% of total product revenues in Cloud & Edge, and the segment had an adjusted EBITDA of $26 million.

  “Sales to service providers, including U.S. Tier 1 carriers, stabilized and were down only slightly year-over-year,” said McClelland. “We expect strong growth from service providers in the second half of the year.”

  Financials

  Overall, revenue for the second quarter was $193 million, an 8.5% decrease year-over-year. Adjusted EBITDA was $22 million in the quarter, down $1 million from the prior year. Non-GAAP operating expenses were $86 million, an improvement of $4 million year-over-year, and non-GAAP net income was $9 million, a $1 million improvement from the previous year.

  Cash flow from operations for the quarter was negative $10 million, which Lopez reported includes a one-time $7 million preferred equity dividend that is classified as interest.

  “On a normalized basis, cash flow from operations was a negative $3 million for the quarter and a positive $7 million for the first half of the year,” said Lopez.

  Banking on the second half

  In addition to strength with broadband buildouts, McClelland reported several tailwinds that give Ribbon confidence there will be growth in the second half of the year, predicting that revenue will increase approximately 25% compared to the first half of the year.

  He reported that the Verizon voice modernization program has had a good start, and Ribbon is scaling deployment teams and increasing production of hardware components and installation material.

  Ribbon also expects a strong second half with enterprise and U.S. Federal and defense agencies, predicting revenue growth of more than 50% compared to the first half of the year.

  Additionally, sales in the EMEA region (with the exclusion of Eastern Europe) are expected to increase approximately 30% in the second half.

  “The combination of all these trends provides us good visibility and strong growth in the second half of the year,” said McClelland. “Of course, we’ll have some headwind from the suspension of shipments to Russia; we estimate this at approximately $20 million to $25 million of revenue in the second half. However, we are implementing several expense reduction actions to mitigate a significant portion of the profit shortfall, and the additional tailwinds I outlined support the growth we’re projecting in the second half.”

  Revenue for the third quarter is projected to be in the range of $205 million to $220 million and non-GAAP adjusted EBITDA in the range of $25 million to $30 million.