Ribbon Communications Inc. Stock

Greetings and welcome to the Ribbon Communications Second Quarter, 2026 Financial Results Conference [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Fahad Najam, head of investor relations. Thank you. You may begin.

Good afternoon and welcome to Ribbon's second quarter 2026 financial results conference call. I'm Fahad Mujam, SVP Corporate Strategy and Investor Relations at Ribbon Communications. Also on the call today are Bruce McLuhan, Ribbon's Chief Executive Officer, and Rick Marmorek, Ribbon's Chief Financial Officer. Today's call is being webcast live and will be archived on the investor relations section of our website at rbbn.com. 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 third quarter of 2026 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 the documents filed with the SEC, including our most recent Form 10-K. I refer you to our Safe Harbor Statement included in the Supplement of Financial Information posted on our website. In addition, we will present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measures are included in the earnings press release we issued earlier today. as well as the supplemental financial information we prepared for this conference call, which again are both available on the investor relations section of our website.

And now I would like to turn the call over to Bruce. Great. Thanks, Fahad. Good afternoon, everyone, and thanks for joining us today to discuss our second quarter results and outlook for the second half of the year. We had a solid second quarter with key financial metrics above the midpoint of our guidance. Revenue grew 18% sequentially to $192 million and earnings improved by $20 million to 12 million with improvement in both of our operating segments. Including maintenance, product and services revenue increased 28% sequentially. Following a similar pattern to the first quarter, bookings in our IP optical segment were very strong. In fact, product and service bookings were an all-time high in the quarter, with a book-to-bill of 1.6 times revenue. overall IP optical backlog has increased more than 60% so far this year.

This includes several new data center interconnect projects and one of our strongest quarters ever in the U.S. market, supporting mission-critical networks and broadband services. The U.S. enterprise market segment was also a real highlight in the quarter. We expanded several strategic customer relationships, including voice and data projects with multiple Fortune 100 companies, including one of the nation's largest financial institutions. and another project with one of the nation's largest energy producers. During the quarter, we announced a very significant and material partnership with Salesforce to accelerate time to market of its new agentic AI contact center offering, AgentForce Contact Center, which integrates Ribbon's secure carrier grade voice capabilities. We believe this validates a new market segment, enabling enterprise customers to securely deploy AI-powered applications while leveraging the resiliency and reliability of carrier-grade communications infrastructure. Thank you. I'll expand on this very important partnership in more detail shortly. When comparing year over year, as we expected, sales in our Cloud and Edge segment in the second quarter were down 19% year over year. primarily as a result of lower sales to Verizon.

It's important to remember that the prior year included record shipments and deployment activity associated with Verizon's voice network transformation program, creating a particularly difficult year-over-year comparison. IP optical results in the second quarter were very consistent with the previous year, growing modestly after accounting for the completion of a long-term support and maintenance contract. So in summary, solid performance in the second quarter with progress against several of our strategic growth objectives and meaningful improvement versus the first quarter. Looking into the balance of the year, we continue to expect sequential revenue growth and improved earnings in Q3 and Q4, supported by the strong IP optical bookings momentum in the first half and a strong pipeline of new projects. There are a number of larger opportunities within our IP optical business that could drive additional growth. Therefore, we have a wider range of potential outcomes for the second half of the year, which I'll comment on more later. Voice network modernization deployments with US Tier 1 service providers have improved, but more slowly than we expected, moderating our second half growth rate while increasing the backlog and opportunity in 2027.

Looking at the broader market environment, we continue to see healthy investment across communications infrastructure, especially tied to building and expanding mission-critical networks, data center interconnectivity, and adoption of cloud-native technology to be able to innovate more quickly, improve cybersecurity, and support agentic AI voice deployments. From an end market perspective, as expected, sales to both service providers and enterprises in the second quarter were up significantly versus the first quarter. Total enterprise sales, which includes large enterprise, critical infrastructure, and government and defense agencies, increased 42% sequentially. Year over year, sales were essentially flat, with growth in large enterprise offsetting lower sales to federal and defense in the quarter. Total service provider revenue increased 9% sequentially in the second quarter, with both Verizon and Vardy remaining 10% plus customers. Consolidated gross margin in the quarter was in line with our expectations, with IP optical revenue and margins a little stronger than expected. Growth in the U.S. market contributed to the significant sequential improvement in IP optical margins in the second quarter.

Cloud and edge margins also improved sequentially, reflecting the higher product revenue offset by continued lower professional service revenue. Adjusted EBITDA for the quarter was $12 million, a $20 million improvement versus the first quarter and above the midpoint of our guidance. Now a few more highlights in each of our operating segments. Starting with our IP optical networks business, as I mentioned, we had our strongest bookings quarter ever since the acquisition of ECI in 2020. Demand was broad-based across multiple customer segments and geographies, giving us increasing confidence as we moved through the second half of the year. Product and services revenue increased 36% sequentially in the quarter, with the largest increase coming from our optical networking Apollo solutions, which increased over 70% sequentially. Geographically, the strongest growth in the quarter was here in the U.S. with a combination of regional service provider, data center, and critical infrastructure projects.

One of the most encouraging growth opportunities continues to be data center interconnect. During the quarter, we doubled the number of new projects as compared to the first quarter. These projects span multiple regions and customer types, including a new major award in Africa, where we will be helping our customer build an optical fiber backbone, spanning several regions. several countries, connecting data centers and other services. Mission-critical infrastructure also continues to be a key area of strength and differentiation for our IP optical solutions. Utilities, transportation providers, and government agencies continue to invest in highly secure private communications networks, where reliability and resiliency remain paramount. During the quarter, we had a significant number of projects in the U.S. and EMEA regions, including the major expansion project I mentioned with one of the largest energy providers in the U.S. continue to expand our portfolio to address this key market segment. Our solutions are a great fit with significant differentiation.

And we have a strong position with multiple defense agencies across Europe and the Middle East where it's imperative that they continue to modernize and expand their secure command and control networks. Okay. Fence-related revenue increased nearly 60% sequentially and year-over-year, reflecting the growing importance of secure optical transport and IP networking in these environments. To continue addressing the significant opportunities within the defense market, we recently announced the commercial availability of our Network in a Box product offering, targeting critical network infrastructure requirements in highly challenging and rugged environments. And in the Asia-Pacific region, our business in India remains strong with good visibility into the second half and significant additional growth opportunities in 2027, including a very substantial optical networking expansion project. We also closed additional opportunities across Southeast Asia in countries such as the Philippines, Vietnam, and Japan, and expect further growth in the second half. Overall, demand across our IP Opticals business remains healthy and increasingly diversified. The mix of opportunities includes higher value applications, including data center interconnect, mission critical infrastructure, and secure communication networks, which we believe represent attractive long-term growth opportunities.

Turning to our cloud and edge business, product and services revenue increased 19% sequentially, with sales to both enterprises and service providers increasing quarter over quarter. majority of the sequential increase resulted from a number of new projects with large enterprise customers. In the quarter, we closed two significant voice communication infrastructure deals with major Fortune 50 companies. As I mentioned earlier, the first is a global Microsoft Teams deployment with one of the nation's largest financial institutions. It leverages our entire portfolio of SBC, policy routing, analytics, and management products. deployed on premise across multiple data centers around the world. With the increased awareness and focus on cybersecurity, our ability to constantly monitor threats and proactively address vulnerabilities via a new SecOps offering was a key factor in our selection. This will be one of our largest Microsoft Teams deployments to date. The second is a new customer win and competitive replacement with one of the largest US car manufacturers.

They're initiating a global voice communications upgrade and selected ribbon to replace the legacy platform. The other major announcement we had in the second quarter was the partnership with Salesforce, who are leveraging our cloud-native portfolio to bring voice capabilities to its agent-force platform. This win is highly strategic, as we believe there is a new market forming with the integration of AI applications and voice communication. Thank you. With Salesforce, we'll benefit from the growing traction agent force is enjoying in revolutionizing the contact center market across the entire spectrum of small, medium, and large businesses. As AI agents augment or even replace human agents and tasks, we expect a dramatic increase in total voice call sessions, as contact center capacity will no longer be limited by human agent capacity and instead will be driven by available GPU compute capacity. should drive strong demand for our cloud native SBCs, serving as voice firewalls for each AI agent. In fact, another important and long-term customer bandwidth also called out the favorable tailwinds they expect from serving voice agents globally on their platform, which also leverages ribbon technology. The cloud-native ribbon session border controller and SIP routing engine is integrated into the AgentForce contact center application and deployed across multiple AWS instances to support rapid deployment and scalability.

Public cloud is increasingly becoming the infrastructure of choice for these types of applications, and we added five additional customer wins in the second quarter where AWS is the chosen deployment platform. So overall, we continue to advance our strategy of broadening the base of solutions within our cloud and edge segment beyond traditional voice modernization into a broader secure communications portfolio supporting cloud native networking, AI enabled communications, and mission critical enterprise infrastructure. With that, I'll turn it over to Rick to provide additional financial details on our results and come back on to discuss outlook for the third quarter. Rick.

Thanks, Bruce. Good afternoon, everyone. Let's begin with our consolidated financial results. In the second quarter of 2026, ribbon generated revenue of $192 million, up 18% sequentially and down 13% year over year. Consolidated non-GAAP gross margin was 49.3%, increasing 350 basis points sequentially and down 280 basis points year over year, primarily due to lower margins in our cloud and edge segment and approximately $1 million of higher component and logistics costs, as As we indicated on our last earnings call, we continue to expect a stronger second half, which would drive additional margin improvement. Non-GAAP operating expenses were $88 million, up one million year over year, While we continued to face FX hen wins from the stronger Israeli shekel, we were able to offset most of that impact through targeted cost savings. Adjusted EBITDA was $12 million, up $20 million sequentially, and down $20 million from the prior year. Net interest expense was $11 million in the quarter. Non-GAAP net loss was $5 million, a $15 million decline year over year.

This resulted in a non-GAAP diluted loss per share of $0.03 down $0.08 compared to the prior year. Now let's turn to the results of our two business segments. In our IP Optical Network segment, second quarter revenue was $82 million, increasing 30% sequentially with significant growth in North America. Year-over-year sales were down 2%, primarily due to lower sales in Europe, reflecting the end of a legacy maintenance contract in the fourth quarter of 2025, partially offset by higher sales in the America region and our European defense vertical. We delivered another strong bookings quarter with a book-to-bill ratio of 1.6 times, positioning the segment for continued growth in the second half. Second quarter non-GAAP gross margin was 35.2% of 680 basis points sequentially and down 70 basis points year over year. Sequential improvement was driven by a combination of product and geographic mix, as well as improved fixed cost absorption from higher revenue.

IP optical networks adjusted EBITDA was a loss of $6 million, improving $11 million sequentially and down $1 million versus the prior year due to slightly lower revenue. Now turning to our Cloud and Edge business. Second quarter revenue was $111 million, up 11% sequentially and down 19% year over year. Non-GAAP cloud and edge gross margin was 59.8%, improving 300 basis points sequentially and down 210 basis points from the prior year. As we noted on our first earnings call, we had retained key resources to support anticipated higher service deployments, which we have now adjusted and expect improved services margin in the second half. Adjusted EBITDA for the segment was $18 million, or 16% of revenue, improving $10 million sequentially and down $19 million year-over-year. Cash flow from operations was a use of $12 million in the quarter, driven by lower billings and lower second quarter adjusted EBITDA.

We ended the quarter with $45 million in cash, and our net debt leverage ratio was 4.0 times. As revenue and earnings grow sequentially in the second half, we expect our cash balance to improve. Capital expenditures totaled $5 million in the quarter. In conclusion, as expected, our second quarter results improved substantially from the first quarter. We remain focused on growing both revenue and adjusted EBIT in the second half while maintaining cost discipline, including the ability to flex our services cost structure up or down based on the timing of deployments. With that, I'll turn the call back to Bruce.

Great. Thanks, Rick. As evidenced by the stronger IP optical sales and bookings trend, we're incrementally positive on the outlook for the business for the balance of the year and beyond, which I'll discuss more in a minute. Thank you. As I mentioned earlier, we're also having very good success growing our market share in secure voice communication for enterprises. across multiple use cases, including unified communications, contact center, desktop, and agentic AI applications, a solid backlog and pipeline of projects for the second half of the year. We continue to work closely with Verizon to re-accelerate voice switch upgrades within their network and have good alignment and engagement, although there is still more work to do to achieve the higher velocity that we're mutually targeting for the rest of the year and even higher deployment rates in 2027. There is a sense of urgency to go faster and capture the significant cost savings associated with the investment. also exploring additional catch products with several of our customers that enable even further cost savings by moving the TDM to IP conversion right out to the subscriber edge, completely eliminating the legacy copper infrastructure. The large voice modernization projects we have underway with several U.S. defense agencies are also progressing, and we are still confident in reaching full commercial deployment this year, opening the opportunity for additional expansion business in the new government fiscal year. There's a very good pipeline of additional projects across civilian and military organizations where ribbon is highly differentiated and we expect new wins later this year. Given the latest view on these key voice modernization projects, we have moderated our expected revenue increase for the second half of the year, but expect a good setup for 2027.

To be clear, there's still a large market opportunity over the next several years to replace legacy voice communication infrastructure with modern cloud-based technology and retired TDM voice networks. And we're positioned to capture a significant portion of the capital and operational spend. provides a great platform to expand our base of solutions beyond traditional infrastructure into a broader secure communications portfolio supporting cloud-native networking, AI-enabled communications, and mission-critical enterprise infrastructure. As mentioned on our last earnings call, we're seeing solid momentum in the other areas of our business, which are becoming increasingly meaningful contributors and key growth pillars as our customer base broadens and communication networks continue to evolve. The first key focus area of growth for Ribbon is in the critical infrastructure and government market sectors, where we're uniquely positioned with our voice and data portfolio. We continue to add new logos and improve our win rate across this segment both internationally and in the U.S. with numerous energy companies and transportation providers. Sales to government and defense customers in the second quarter represented 10% of overall revenue, and we're working closely with a number of large system integrators and specialized channel partners to address this large and growing market, and we believe our product and service offerings maintain meaningful differentiation. The secure communications market has very unique requirements and is in the early stages of a multi-year investment cycle, replacing legacy voice and data communication infrastructure with modern software and IP networking technology.

Our second major focus area this year is targeting the exponential growth in data traffic and the massive investment in fiber and wireless network infrastructure. Here in the U.S., we've been very focused on regional service providers who are investing in fiber-to-the-home services, which contributed to our strong bookings in the second quarter. Thank you. In many cases, these providers are now designing their metro transport networks to also support data center and enterprise traffic as construction moves to areas of the country where there's lower permitting risks, plentiful power availability, and lower cost of cooling infrastructure. While BEEF funding has been slow to materialize, this additional funding will only accelerate investment in this area. Similarly, many of our international IP optical deployments are multipurpose fiber transport networks, supporting fiber internet access, mobile backhaul, enterprise services, and data center interconnect. Finally, we believe there's a new category emerging as the adoption of AI increases within the enterprise, similar in nature to the widespread use of unified communications platforms such as Microsoft Teams and Zoom. As customers begin integrating AI into customer engagement, collaboration, and business workflow applications, secure carrier-grade voice communications are becoming an increasingly important part of the overall architecture.

While it's still early, we're seeing growing customer interest in cloud-native communication platforms that can securely connect people, applications, and AI services. This is an area where we believe Riven is well positioned. Our cloud native communications portfolio, together with our strategic partnership with AWS, provides a strong foundation to support these next generation deployments. We have a solid pipeline of innovation related to AI voice with a focus on enhancing the security feature set of our platforms to ensure our customers can deploy AI capabilities with confidence. While still early, customer engagement around these opportunities continues to increase and reinforces our confidence in the long-term direction of the business. Taken together, these growth drivers represent an important evolution of ribbon. While voice network modernization remains a large revenue opportunity, our business is becoming increasingly diversified across enterprise, digital infrastructure, mission-critical networks, and AI communications.

We believe this diversification expands both our customer base and our addressable market while creating a more balanced growth profile over time. In summary, we're operating in a dynamic market with fresh tailwinds and momentum in the strategic growth areas of our business, offsetting timing delays in other areas. We remain confident in meaningful sequential improvement for the rest of the year and a stronger 2027. With that backdrop, for the third quarter of 2026, we expect revenue in a range of $215 to $230 million and adjusted EBITDA in a range of $26 million to $31 million. And for the full year, we're updating our outlook and now expect revenue in a range of $810 to $840 million and adjusted EBITDA in a range of $78 million to $88 million. Our guidance assumes approximately $2 million per quarter in increased product cost associated with higher components and logistics expenses with the potential to partially offset through targeted price increases. And consistent with the broader industry trend, we do anticipate supply limitations in the second half of the year, given the increasing demand environment for key technologies.

Operator, that concludes our prepared remarks and we can now take a few questions.

[Operator Instructions] Our first question comes from the line of Ryan Kuntz with Needham & Company.

Please proceed with your question.

Thanks for the question. If you could expand a bit on the supply chain you referenced there at the end, about $2 million a quarter in cost impacting you. you're probably contemplating you know some surcharges and such maybe for customers but can maybe peel that back a little bit in terms of where you see the most sensitivity around supply whether it's you know optics or memory or high end silicon I'm sure it's any number of whack-a-mole areas thanks.

Yes, hey Ryan, thank you for the question. Yes, to your point, it's a number of areas. It does depend on the product to some extent. So if I kind of give three different examples, in our Cloud and Edge business, we're many times running our software on commercial off the shelf hardware, Dell servers, HP servers. certainly seen an inflation around those types of products. You know, in that case, it's really a complete pass through where we're reselling those platforms integrated with our software. And so we're, you know, minimizing any impact around that and reducing, you know, price guarantee timelines and things like that. to make sure we protect ourselves and our customers at the end of the day. You know, a second example around our IP routing platforms, the core silicon in that case, you know, dominates a lot of the product costs and, you know, we've certainly seen inflation around core silicon expenses as the core manufacturing costs have gone up and so, you know, having kind of a long-term agreement with those suppliers and managing that care. is really important.

Memory obviously plays into that as well as there's considerable amount of memory in those products. And then And then finally, as you mentioned, in our optical products, it's really around the core optical transceiver technology and managing those costs. So we're taking a fairly, I'll call it surgical approach around how to manage those inflationary costs and working with customers to pass on some of those expenses. You know, it's not a kind of one size fits all. We've got to be careful in how we manage it out into the market.

Really helpful. Thank you, Bruce. And maybe follow up, you mentioned a new initiative around subscriber edge, IP voice. You know, I wonder how you're thinking about that relative to this kind of fiber or wireless offerings. I assume you don't want to be in the CP hardware business. So how would you, how would you, you know, add value at that level? Was it some kind of embedded software, or how do you think about that?.

Yes, so it's mostly focused around enterprise edge as opposed to subscriber or residential edge. That's in general not a space we're in, but we're definitely in the enterprise edge and have a portfolio already there today that we sell to our customers. either a sell-to or a sell-through model. So we've expanded that portfolio and have a number of new products where, and even a larger enterprise now can preserve the legacy TDM services and move that DMARC point right to the edge at the enterprise so that the legacy copper or sonnet infrastructure can be completely removed. And, you know, we're providing a set of interfaces facing the enterprise to preserve that. So that's a business we're already in today. Now we're expanding that with some new enhanced products. And, you know, the early indications are they should be pretty popular in the market and enable kind of the, you know, the full. elimination of copper at that point.

That's great. Thanks so much. Thanks, Ryan.

Thank you. Our next question comes from the line of Christian Schwab with Craig Hallam Capital Group. Please proceed with your question.

Great. As it relates to Verizon, were they a 10% customer in Q2? Yes, they were. They and Barty were both 10% plus customers again in the quarter. Okay, great. And then as we look to the second half of the year and the increased growth with the moderating expectation of Verizon, will Verizon still remain a 10% customer in the second half of the year?.

Yes, we believe so. You know, the first half has obviously been a slower deployment rate, as we've talked about multiple times below the 2025 levels. We expect Q3 to be stronger and Q4 to be stronger. So we expect those to continue to increase. And, you know, we expect them to increase at a rate similar to the growth in the overall business such that they would remain a percent plus. We'll see how it plays out, but that's the visibility we have today.

Great. And then as far as non-GAAP gross margins in the back half of the year in the IP optical business, would you assume that that remains kind of at the levels that we saw in Q2 or one of the pluses and minuses there? Yes, that's exactly right. So I think we're modeling it very, very consistently.

consistent with Q2. Maybe it's down a hair just depending on the mix, you know, what the regional mix is. Obviously, we're absorbing some of these additional component costs and passing some of them along as well. But, you know, the overall blend we expect is pretty consistent with the second quarter.

And then moving to the cloud and edge and the non-GAAP gross margins and then, you know, the improvement there, would we expect that to improve in the second half of the year from that level again or remain consistent?.

Yes, so we do expect some improvement in the second half of the year on cloud and edge. Obviously, there was a big step up Q1 to Q2, but we're still below the, you know, kind of lower to mid 60s that we were last year. And we expect continued improvement in Q3 and Q4. You know, one of the key drivers there is just incremental professional service revenue. We've talked about that, you know, it'd come down as the deployment rate had slowed down. And we expect that to help recover margins in the second half.

Great. And then it sounded like, you know, last quarter you talked about, you know, 30 customers, you know, with existing ribbon IP optical deployments have been awarded bead grants, but then I thought I heard you say it's kind of been slow to happen or slow to be bookings and orders. Did I hear that right? or maybe just give us a quick update of what you're seeing in Bede for the second half of 26.

Yes, no, you heard correctly on both cases. So, you know, we have over 30 customers that we know -- you know, have programs lined up that they'll do with us once they secure BID funding. And it's been, I don't know what others have seen, but what we've seen is it's been a very slow adoption rate, even though approvals have gone through NTIA and through NIST, there seems to be, you know, friction in the environment or the process to get money out into the hands and spent. And whether that's... something on the funding side or resistance on the operator's side to leverage that funding given the restrictions or the conditions that come with it, it's a little unclear. we have not seen a lot of bead funding, you know, flow into the market so far and are not really expecting much in the second half of the year.

Okay. Thank you for that clarity. And then my last question has to do with, initial guidance at the beginning of the year at the midpoint to your current midpoint of guidance despite optical or maybe you assumed optical was going to be as strong as it's turning out to be with a the book to bill, et cetera. But if we just go midpoint to midpoint, is that shortfall almost entirely Verizon? Yes.

The majority is certainly our U.S. Tier 1. I think the IP optical, all things being equal, is playing out stronger in the second half than we'd initially projected. And if you just look at Verizon's numbers in the first half, and We report that in our queue. They're probably down about $25 million in the first half of the year. So that accounts for a pretty significant amount of the reduction in the full year guidance that we're giving at this point.

Perfect. Thank you for that clarity, Ruth. No other questions. Thank you. Thanks, Christian.

Thank you. Our next question comes from the line of Tim Savojo with Northland Capital Markets. Please proceed with your question.

Hey, good afternoon, and congrats on the optical bookings in particular, and that's kind of where I want to focus here. And maybe these two questions are combined. I guess, do you expect optical, IP optical backlog to continue to grow through the second half of the year? And then you mentioned, I think, a couple of big opportunities, right? in IP optical, I think in the context of widening the guidance range, but I imagine the answer to that first question is somewhat reliant on on some of these big deals coming through or maybe not, but I would just like a little.

more color on both fronts. Yes, good question, Tim. Thank you. So, you know, our objective, obviously, is to be able to ramp supply to kind of keep up with what we see as demand. And, you know, you don't always get that right. We've got to be able to guess six to 12 months in advance on what the demand is going to be. Yes. And clearly we could have shipped more in the first half if we'd been able to supply more given the growth in the backlog, but, but it's good. It gives us good predictability on mix and those sorts of things. And, You know, I think third quarter, you know, our objective here is to obviously, you know, get more out the door.

So I'm not sure we expect backlog to grow, certainly at the same rate in the third quarter. But these larger deals I referenced, you know, assuming they materialize in the fourth quarter timeframe, I think that, you know, is another good thing. catalyst for backlog growth. So, you know, I think that's kind of the way we see it. You know, we've had a nice step up. We're now very focused on delivering and want to be ready for more.

Okay, and maybe we can drill down on sort of the nature of some of those larger opportunities. I don't know whether that's... how big a factor data center interconnect is in there or whether those opportunities lie in other verticals. And along those lines, I think you mentioned the number of DCI projects doubling in the quarter. I just want to make sure I understand that. I think you talked about you called out three, I think, major DCI wins recently. Does that mean three more or six more? And any color on those incremental wins would be appreciated as well.

Yes, thank you. So, yes, we talked about three projects awarded in Q1, and now we had an additional, you know, six projects in Q2. And just to provide a little more color, in many cases, it's not a dedicated DCI interconnect network. In almost all cases, except for maybe one, we're building out a flexible high speed metro long haul, in some cases, subsea. optical and IP network. And they're being used for multiple purposes, particularly international, you know, a network will, will handle mobile backhaul. It'll do internet broadband aggregation. In some cases, even satellite, like the Starlink example I gave. And then in almost all cases, they're now picking up data center, regional data center traffic. And, you know, they look at that as a, as our business case, they want multiple sources of revenue to, to justify the investment.

So we're, we're helping build these flexible networks. You know, I referenced one in Africa, which is exactly that example. You know, it's kind of a carrier of carrier example where, you know, they're providing either, you know, with fiber, you know, uh fiber services uh ip layer services it just depends on what the customer demand is so um And, you know, I think if we added up the projects that we had in the second quarter that included data center interconnect, it would be more than 10% of our revenue in the quarter. So, you know, it's starting to kind of show on the radar at this point. Okay.

Okay, great, thanks. And I guess last question, was that 10% of IP optical revenue or total, I guess? I'm sorry. Yes, I'm sorry. 10% of IP optical revenue, Tim. Okay, that's right, though. As you look at the larger opportunities that you referenced, any way to quantify the size of that pipeline in the aggregate in terms of the type of opportunities that you're shooting for here?.

Yes, so I think, you know, the potential for us, and again, it's over a somewhat of a period of time, maybe a 12 or 18 month period is over $50 million of incremental business with customers we're not working with today. So that just kind of sizes it for you. Sure does. Thanks very much. Okay. Appreciate it, Tim.

Thank you. Our next question comes from the line of Mike Genovese with Rosenblatt Securities. Please proceed with your question.

Hi, this is Amol Nolwool stepping in for Mike Genovese. I just have a quick question on the full year gross margins. In Q1, you guided to 52.5% to 53.5%, and now you brought it down to 51% to 52%. Is this just due to a mix between optical and edge, or is there anything else?.

in there? Yes, so kind of two factors there. It is mixed more IP optical revenue, which obviously carries real or gross margin. and less cloud and edge. And then within the cloud and edge business, given the lower professional service revenue in the first half, higher costs there, you know, that certainly impacted the profitability and gross margin. I guess the third thing I'd ask is, or I'd add is that the component cost expense. You know, when we started the year, we probably estimated a few million dollars in the year. You know, it's probably closer to five million dollars of cost inflation on components. Now, we'll recover some of that, I think, through pricing action.

But, you know, all those things kind of contributed to the now 51 to 52 percent gross margin estimate for the year. Got it.

Our next question comes from the line of Dave King with B Reilly Securities. Please proceed with your question.

Thank you. Good afternoon. Just wondering regarding ECI, whether there were any disruptions because of the geopolitical situation?.

No, team's been, hey Dave, team's been doing great executing and there's disruptions everywhere in the world these days it seems. You know, the teams continue to stay focused and no disruptions to speak of at all at this stage.

Got it. And then just more questions on the supply situation. So how much was left on the table? How much did you leave on the table? as far as first half is concerned and will they be made up in second half? From a component cost perspective, Dave? Or component shortages. Sounds like you were supply-constrained.

Yes, I guess, you know, the way I look at it is, yes, there's always something you could do more at the end of the quarter. You're always carrying backlog into the next quarter, obviously. And in many cases, customers are fairly flexible. They'll take deliveries as soon as you can get it to them. I've kind of stopped trying to quantify that per se. I pointed out in this case, just because the backlog is growing as I mentioned, 60% since the beginning of the year. But I would hesitate to put a number on it in the first half, you know, how much cord we've done if we had unlimited supply.

I'm not sure what that exact number is. Got it. And lastly, regarding IP Optical, it's still running... negative as far as EBITDA is concerned. Can you just go over your plans, how you're going to turn that profitable?.

Yes, so it's going to be another mission for us going into next year. As you can see, the gross margins are 200 or 300 basis points below where we had been running before. you know, the last couple of years at the same revenue level. We are focused on, you know, continuing to get more efficient and pull more cost out, both within the kind of the above the gross margin COG structure, as well as in the operational expenses to continue to reduce, reduce the amount of revenue we need to have to get break even and positive. The geographical mix makes a huge difference. You know, some of the growth we've had over the last 12 months has come out of the Asia Pac region, which typically is just carrying a little less margin than what we get out of Europe and North America. we can continue on this rate to grow in, in these two, you know, North American Europe region, it helps a lot. And, uh, you know, it's, uh, it's a continued focus and mission here to get to, uh, to get to a positive contribution.

And based on your bookings, it actually sounds like since you said North America is stronger compared to other regions, it sounds like that could happen sooner rather than later?.

Yes, I think the U.S. environment was, Rick, I think about 15% of IP optical sales in the second quarter. So, you know, that's a good start. We need to keep that momentum up. You know, that was a combination of both energy companies, which are obviously investing a lot in the infrastructure in the U.S. environment. as well as with regional service providers. So it was a good, you know, a pretty good blend. That was up, you know, a lot from the first quarter and, you know, a reasonable amount year over year. So we just need to keep that trend going.

Thank you. Great. Thanks, Dave. Thank you.

We have reached the end of the question and answer session, and therefore I'd like to turn the floor back to Bruce McClellan for closing remarks.

Great. Well, thanks again for everyone being on the call and your interest in Ribbon. We look forward to speaking with many of you at our upcoming investor conference. Operator, thank you as well. And that concludes our call.

Thank you, and this concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.

This live transcript is auto-generated without human intervention or review.

Greetings, and welcome to the Ribbon Communications First Quarter 2026 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce Fahad Najam, Senior Vice President of Investor Relations. Please go ahead.

Good afternoon, and welcome to Ribbon's First Quarter 2026 Financial Results Conference Call. I'm Fahad Najam, SVP, Corporate Strategy and Investor Relations at Ribbon Community cases. Also on the call today are Bruce McClelland, Ribbon's Chief Executive Officer; and John Townsend, Ribbon's Chief Financial Officer. 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 second quarter of 2026 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-K. I refer you to our safe harbor statement included in the supplemental financial information posted on our website. In addition, we will present non-GAAP financial information on this call. Reconciliations to the 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 conference call, which again, are both available on the Investor Relations section of our website.

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

Great. Thanks, Fahad. Good afternoon, everyone, and thanks for joining us today to discuss our first quarter results and outlook for the rest of 2026. As highlighted on our last earnings call, we ended 2025 with a broadening customer base and increasing backlog, and we continue to expect a much stronger second half with meaningful improvements starting this quarter.

Our first quarter revenue was in line with our expectations and consistent with the industry dynamics we outlined back in February, causing us slower than normal start to the year. Visibility into our customers' plans for the rest of the year and confidence in second half growth has improved since the beginning of the year, particularly around the specific areas we highlighted where we were being cautious.

Sales in the first quarter were near the midpoint of our guidance but with stronger-than-expected demand in India, particularly with Bardi Airtel, who was a 10%-plus customer in the quarter. This was offset by lower sales than we anticipated the U.S. Tier 1 service providers, which I'll comment on more in a minute.

This shift in mix resulted in lower gross margins and earnings for the quarter. When comparing year-over-year, as we expected, sales were lower in both of our segments with Cloud and edge down 8% and IP Optical Networks down 14% in the first quarter.

From an end market perspective, the majority of the year-over-year decline was due to lower sales to service providers in multiple regions. Within the Cloud & Edge segment, sales to service providers declined approximately 5% year-over-year, primarily in the U.S. region across a number of smaller customers.

Horizon remained a 10%-plus customer in the first quarter. And while voice network transformation activity was lower than we had expected, impacting our first quarter results. Deployment rates are increasing, and we anticipate a much stronger second half in 2027.

Expansion into the Frontier footprint remains a significant incremental opportunity. Within the IP Optical segment, sales to service providers in the Asia Pac region were down year-over-year following a strong performance from the region last year.

Demand in India was stronger than we initially expected, and we are increasingly confident in our outlook in that region for the year ahead. IP optical sales in Europe in the first quarter were lower year-over-year primarily due to the completion of a long-term support and maintenance contract with a Tier 1 service provider customer, reducing our IP optical maintenance revenue, partially offset by maintenance increases with our growing installed base.

Importantly, IP optical bookings in the quarter were strong at 1.5x, indicating a much improved quarter ahead. Within the enterprise market vertical, aggregate sales to enterprise defense and critical infrastructure customers declined approximately 6% in the first quarter versus last year, with lower cloud and edge sales to U.S. government agencies partially offset by increased IP optical business with international defense agencies.

Voice network modernization projects with several U.S. federal agencies continue to progress towards full deployment in the coming months. and we expect further capacity expansion and new projects in the second half of the year. These modernization projects are mission-critical to our Department of War agencies as these legacy infrastructures are becoming increasingly expensive to maintain.

Consolidated gross margin in the quarter was approximately 300 basis points below our expectations, primarily due to the lower network transformation professional services revenue with elevated service expenses. We believe voice modernization initiatives remain a strategic priority for service providers such as Verizon, and we expect activity to accelerate in the second half of the year.

In order to support the increased work, we are deliberately retaining key resources and expertise, even though revenue is lower in the first half. While this decision impacts gross margins and near-term profitability, we believe it positions us well to execute efficiently as volumes increase later in the year. This is a deliberate investment in execution readiness.

Adjusted EBITDA for the quarter was negative $8 million, below our guidance range to lower gross profit dollars. Overall book-to-bill in the quarter was 1.1x with IP optical at 1.5x and supporting the increased expectations in Q2 and second half of the year.

Now a few more highlights in each of our operating segments. In our IP Optical Networks business, we had a number of key wins in several strategic areas, including in the rapidly growing data center interconnect space, we had 3 new wins across multiple geographies, including Europe, the U.S. and Asia. Two of the projects involve a regional service provider expanding their network to support data center connectivity in their regions. And 1 of the projects is a major biotech company, connecting all of their major data center locations with a new high-capacity optical network. It's great to see our momentum picking up in this crucial high-growth area.

Similarly, we had 5 new project awards in the quarter from major energy producers and distributors in countries such as Germany, Vietnam Singapore and Colombia. They are all focused on building of secure, private, command and control networks to keep pace with the critical nature of their business. In fact, 2 of the new 400-gig networks are leveraging Quantum Key Distribution encryption for enhanced security using our Apollo optical transport platform. In Africa, we have received an award for a major fiber network expansion across 3 countries, which we expect will exceed over $10 million with first revenue in the second quarter. And here in the U.S., we now have more than 30 customers who have already deployed our IP and optical products that have been awarded bead grants, where we expect incremental new business once funds are finally distributed.

Similarly, in our Cloud Edge segment, we had a lot of activity in the first quarter around several strategic areas. One of the key areas of focus for any enterprise and service provider customers is the adoption of cloud native technologies to lower costs and reduce complexity, whether in their own private data centers or in public cloud. We reached full commercial deployment of our cloud-native SBC solution with a leading service provider in Japan in the first quarter and have a very extensive program underway with a Tier 1 provider in Europe. This is a fundamental shift in how networks are designed and how software is managed and deployed to achieve higher degrees of automation, elasticity and reliability.

Public cloud is the ultimate destination for many customers, which is why we've established a new partnership with Amazon Web Services that we recently announced at MWC in February. Our first 2 customers are now live and providing commercial service with our cloud-native SBC running in AWS. This is an important strategic milestone and reinforces our leadership position in cloud native secure voice infrastructure.

Over time, we see opportunities to help enable emerging Agentic AI platforms to seamlessly support voice within their application environment.

In the enterprise market, the financial services vertical is a key focus area for us, where we are widely deployed across many of the leading banks and insurance companies. Within the quarter, we were excited to further expand our presence and in a new top 20 bank to our customer base in the U.S. as mentioned on our last earnings call, we had significant voice network transformation orders in the fourth quarter, and we are executing against these new contracts. These programs typically convert to revenue over 6 to 12 months or longer on large deployments, which positions us for a strong second half.

Finally, we continue to make good progress preparing to launch our new AI Ops and automation platform, acumen with lead customer, Optimum, which we expect to go live later this quarter. We have a growing pipeline of customers spanning a number of different use cases, including mobile and fixed wireless services, emergency E911 services, fiber to the home Internet service assurance and several others.

With that, I'll turn the call over to John to provide additional financial details on our results and then come back on to discuss outlook for the second quarter. John?

Thanks, Bruce, and good afternoon, everyone. Let's begin with financial results on a consolidated level. In the first quarter of 2026, Ribbon generated revenues of $163 million, a decrease of 10% from the prior year. driven by the factors Bruce outlined and which I will touch on shortly in the segmental discussion.

Consolidated non-GAAP gross margin was abnormally low in the quarter at 45.8%. And down 280 basis points year-on-year, primarily due to lower professional services revenue with continued higher costs to support the anticipated ramp in the second half.

Non-GAAP operating expenses were $87 million, an increase of $1 million year-over-year, driven by FX headwinds of approximately $4 million, offset by expense savings. This resulted in marginally higher R&D costs. Most of the FX impact was a result of the strong rate shekel. Adjusted EBITDA was a loss of $8 million, a $14 million decrease from the prior year, driven principally by the low revenues and gross margins.

Net interest expense in the quarter was $10 million.

Quarterly non-GAAP net loss was $8 million, $4 million worse year-over-year, this generated a non-GAAP diluted loss per share of $0.05, which was a decrease of $0.02 versus the prior year.

Now let's look at the results of our 2 business segments. In our IP Optical Networks results we recorded first quarter revenues of $63 million, a 14% decrease versus the prior year, which was driven principally by lower sales in Asia Pacific and lower maintenance revenue. Encouragingly, we had stronger IP optical bookings in the quarter with a book-to-bill ratio of 1.5x, underpinning our expectations for improving top line performance as we proceed through the year.

First quarter non-GAAP gross margin for IP Optical was 28.4%, similar to last year, but lower than our target level due to the higher mix of India revenues and also fixed cost absorption. We expect this to improve materially in the second quarter and for the rest of the year.

IP Optical Networks adjusted EBITDA for the quarter was a loss of $16 million, a $1.7 million higher loss than the prior year driven by the lower revenues.

Now on to our Cloud and Edge business. We generated first quarter revenue of $100 million, down 8% year-over-year. Non-GAAP gross margins were 56.8% and down 575 basis points from the prior year, primarily due to lower professional services revenues while carrying higher service costs in readiness for the anticipated second half ramp in voice network transformation deployments. As a result, adjusted EBITDA for the segment was $8 million or 8% of revenue and down $12 million year-on-year on the lower revenues on gross margins.

Cash flow from operations was a usage of $22 million in the quarter, resulting from the lower billings and typical seasonal employee-related expenses. Closing cash was $70 million, and our net debt leverage ratio was 2.9x.

Total CapEx spend in the quarter was $3 million, and this is in line with our normal run rate.

In conclusion, we remain focused on operational execution and cost management and are confident that we will see meaningful growth in the second half of the year, improving both revenue and margins in both segments, which we expect to drive stronger profitability.

And with that, I'll turn the call back to Bruce.

Great. Thanks, John. As we move forward through the balance of the year, our confidence in the broader setup for the business continues to improve. While first half results remain influenced by customer timing dynamics, the demand environment across our core markets is strengthening, and our pipeline continues to expand. We are making targeted investments in execution readiness that we can capitalize on the opportunities already in front of us.

Importantly, we ended the year with solid momentum reflected in the strong bookings over the last 6 months and a healthy pipeline across service provider, enterprise, EMEA and Asia Pac markets.

Looking ahead to the second quarter, we expect meaningful revenue acceleration from enterprise and EMEA customers, continued sequential improvement at our major Tier 1 service providers and ongoing strength in India.

In the second half, we anticipate growth across practically all regions and broad-based improvement across most of our markets, including a return to higher deployment levels at Verizon. Beyond that, we remain well positioned to capture incremental growth opportunity from increasing traction in key growth pillars of our business.

The largest market opportunity continues to be the replacement of legacy voice communication infrastructure within service provider networks with modern cloud-based technology. In addition to the large Verizon project, in the fourth quarter, we had more than $50 million of bookings from more than a dozen service provider customers, where we were replacing legacy voice switch infrastructure with modern software-based systems. These projects will continue for most of the year, and we anticipate a reacceleration of our Verizon program in the second half of the year.

In a growing number of cases, customers are choosing to move to a cloud-native technology stack, either deployed in their own private data centers or in a public cloud environment. Ribbon is certainly the technology leader in this area. The second key focus area of growth for Ribbon this year is in the enterprise and government market sectors where we are uniquely positioned with our voice and data portfolio. We expect this to be a very strong segment for us this quarter with a number of large enterprise projects across both our IP Optical and Secure Voice portfolio.

Within the U.S. government sector, we have several large voice modernization projects underway where we are heads down the first half of the year, migrating end users onto a new cloud-based platform and anticipate new opportunities and further capacity growth in the second half of the year.

Our third major focus area this year is the exponential growth in data traffic and the massive investment in broadband infrastructure. We have a significant number of projects already underway in the second quarter as highlighted by the strong book-to-bill in Q1. This includes several major network upgrade projects in Europe and Africa, further growth in India, large projects in the Asia Pac region and continued strength with defense agencies in Europe.

Finally, our Acumen AI Ops initiatives continue to generate strong customer interest with several proof-of-concept discussions progressing well across multiple target use cases and integration of secure carrier-grade voice capability with emerging AI and a genic AI platform is gaining traction. This is an area where Ribbon is uniquely differentiated. Our recently announced partnership with Amazon Web Services is an important strategic milestone and reinforces our leadership position in cloud native secure voice infrastructure. This partnership is already generating increased customer engagement and pipeline activity.

Overall, we remain confident in the broader setup for the year and continue to expect stronger performance starting this quarter.

Based on the foregoing, for the second quarter, we expect revenue in a range of $185 million to $195 million and adjusted EBITDA in the range of $9 million to $14 million.

In summary, the market dynamics we discussed 90 days ago were unfolding as anticipated, and we remain confident in our outlook for accelerating performance in the second half of 2026.

Before we open up for questions, I just wanted to take a moment to highlight. We have also made an announcement this afternoon that John will be leaving the company for another opportunity back in the Telecom Services segment.

While I'm sorry to see John leave and fully understand his decision, I'm very excited to announce the promotion of Rick Marmurek to the role of Ribbon Chief Financial Officer. Rick has been an important leader in the company for more than 15 years, playing a key role in building our global finance organization. He is absolutely the right person for the job and will help drive the next phase of execution for the company.

John, we wish you well on your next endeavor.

Thanks, Bruce. And I'd really like to say I've enjoyed my time here at Ribbon. I remain confident that the company has a bright future. And Rick, I know you'll do a great job. Congratulations.

Thanks, John and Bruce. I'm very excited about this new opportunity and look forward to continuing to work closely with the teams across the business to drive sustainable growth and operational excellence.

Great. Well, thanks, Rick. And operator, why don't we now open up for a few questions?

[Operator Instructions] Our first question is from Michael Genovese with Rosenblatt Securities.

First, let me just say, John, congratulations on the new opportunity. And it was a nice working with you at Ribbon, and just look forward to staying in touch. I guess, Bruce, the question that I'll start with is you seem to have a lot of confidence of improvement in the second quarter. But then the Verizon cloud and edge sounds like it doesn't really get meaningfully better until the second half of the year. Can you just talk more about the timing of Verizon's being stronger in the second half of the year than the first half of the year and just more detail on that?

Yes. Mike, and I know what -- John says thank you, by the way, he's with me. So I think you read it correctly. We don't expect a significant increase in revenue here in the second quarter with our top customer although I think the improvement in deployment rates will progressively improve throughout the quarter. The growth in the second quarter is focused in a number of different areas. In particular, we expect a very strong quarter from enterprise customers in North America. We've got a great set of programs there that are both in the cloud edge piece of the business as well as in our IP Optical business, around some of the critical infrastructure deployments we have going here in the North America market. So that's a big part of the growth. And then the EMEA region, both kind of Continental Europe as well as Africa. We're looking forward to a pretty strong quarter. So I think that's where the step-up is coming from here in the second quarter. And then as we get into third and fourth quarter, in addition to growth around Verizon growth relative to the first half of the year, obviously, we've got a variety of different increases expected from U.S. federal market and additional capacity expansions there. Growth in the Asia Pac region and again, even a stronger second half in Europe. So it's pretty broad-based and a nice funnel ahead of us this year.

Great. Okay. Great. I noticed on your presentation, there is a slide about the number of data centers and rural areas, which I find interesting. But I'm wondering about the correlation between that and it seems like what would be more compelling is not the location of the data centers, but how many are being built by sort of regional service providers versus hyperscalers. So I'm just curious is there a relationship there between the location being rural and the regional service provider. I mean, are we supposed to draw -- like can you just help me drive these conclusions?

Yes. I think the correlation isn't so much the regional service providers building the data center it's leveraging the network infrastructure they're putting in place for their fiber-to-the-home and capacity expansions to then pick up additional traffic and interconnect into more regional data centers as they build out into those areas. As you know, I think that's kind of our sweet spot is with the regional operators. And I even mentioned the growing opportunity around bed where funding is available to be able to build out middle mile capacity. And then it's a matter of how do you put as much traffic on that as you can. And so we see that in the North American market. And then we see it in a variety of international markets as well, where the fiber connectivity is coming from an operator or a service provider, not necessarily just dedicated dark fiber circuits.

Great. And then finally for me before I pass it on. Could you just flesh out more for me the Agentic opportunity and how you guys support that and play into Agentic AI? I'm -- it's a little bit of a newer part of the story. So I'd like to be brought up to speed there.

Yes, I think -- I'd like to think of it in kind of 2 different aspects. So 1 is certainly this new platform we're launching called Acumen where we're basically working with our current customers to add an genic AI-driven operations center, if you will, to help them manage their network, create their own agents to be able to automate what today is done in a more human way into a much more automated way. And we're building on top of a couple of different platforms we already have deployed in particular, our analytics platform, which is pretty widely deployed, collecting vast amounts of information off the network and then feeding that into an Agentic layer into a large language model and basically learning different characteristics of the network and being able to take advantage of that. So that's 1 aspect of it. And as I mentioned, we're launching late this quarter kind of commercially with our lead customer Optimum here in the U.S.

The second part of how we see an opportunity for us is as the use of Agentic AI becomes more prevalent in enterprises. We think the connection between the user and the Agentic applications will be voice driven. And so there's a need to basically protect that boundary and be able to facilitate the voice traffic similar to what you would do in a Microsoft Teams or Zoom or Webex type application. And so we are able to repurpose our voice platforms into that type of use case and the first launch customers on the AWS deployment that I talked about are effectively using our session border controller in that way to interconnect into their Agentic AI applications. And so we think there's a real opportunity there as new types of Agentic AI platforms are deployed for us to have a play there, again, very similar to how UCaaS platforms are working.

[Operator Instructions] Our next question is from Tim Savageaux with Northland Capital Markets.

Sorry about that. You talked about, hey, a couple of the product drivers for the Q2, the sequential growth in Q2, but I don't know if you talked about that from a segment standpoint, whether you expect a meaningful difference in growth rate by segments you've had book-to-bills in each of them in the last quarter or 2. But any color there and then I can follow-up.

Yes. No, good question, Tim. So we expect growth in both segments here in the second quarter versus the first quarter. And as you just pointed out, the bookings over the last 6 months combined have been very solid for us. So we're expecting both segments to be growing. I do believe that IP Optical segment will grow more than the Cloud and Edge segment in the second quarter. As I mentioned, in North America, we've got a number of great opportunities for growth here in various different markets I mentioned. So I highlighted a number of kind of interesting wins in the first quarter that helped build the backlog some around data center interconnect as we start to deploy our new 948 transport, optical transport platform into that market and then a number of critical infrastructure again, kind of a broad range of different customers, Columbia, Vietnam, Europe, Germany. So all of those are kind of contributing to the growth here in the second quarter. I think Cloud and Edge would obviously be growing faster as the Verizon deployments kind of picked back up again, and that will be a key part of the growth into the second half of the year.

Okay. Just as an aside, I just want to check in, those sound like absolute dollar comments, I ought to go smaller. So I want to check on that versus percentages. But the main follow-up question was, if we look at Q1 results, is it fair to look at the year-on-year declines in Cloud Edge. Is that mostly Verizon or not at all? I know they stayed on the 10% list, but I assume they are done pretty good. And then maybe a little more in depth on the IP Optical decline year-over-year in terms -- I guess India was up. So what was the real weakness there?

Yes. So 3 good questions. So the first 1 around dollars versus percentages for second quarter, I think from a dollars perspective, the IP Optical business will be up more from a dollars or revenue perspective. And I think that translates probably into a larger percentage increase at the same time. So for -- yes, we don't guide each individual segment, but I think that's the trend we're expecting to see in the second quarter.

The question on kind of year-over-year, what was down in the first quarter? Was it Verizon versus other things. Actually, Verizon was perhaps the smallest piece year-over-year from Q1 last year to Q1 this year. It was really actually not 1 specific thing. It was a number of kind of smaller projects that we had with different service providers. I think we were down 5%, 6% in the first quarter on Cloud and Edge. So it wasn't a big drop, and it wasn't 1 individual customer, kind of a series of smaller things. I think in the last question, which was similar around the IP Optical decline. The Asia Pac region in the first quarter, including India was fairly consistent, maybe off $1 million or $2 or something like that, so very consistent year-over-year, with India being the strongest piece of that market for us. So the weaker parts was really around the European market and a little bit in North America as well, but I think Europe was the kind of the largest contributor to the decline in the first quarter. And our business in Europe, in particular, is concentrated with a whole variety of different types of critical infrastructure customers, railways, oil and gas, big in defense. And those projects tend to be project based. You win something, you complete it and then you go find the next program. So it can be a little bit lumpy. As you see now, with the bookings metric, clearly, that was a real positive and sets us up for stronger growth here in the second, third quarter.

And that was my last question actually, talking about that IP Optical, book-to-bill, and you guys highlighted what's happening, data center interconnect-wise, pretty significantly here in the report. Say you gave us an order of magnitude, I think, on this contribution from your big Africa deal. I wonder to what extent do you see either what you've booked order wise or the opportunity pipeline or however you want to term it in terms of additional color, how you would look at this DCI opportunity in terms of materiality relative to either book-to-bill or the overall IP Optical business?

Yes. So the data center interconnect space was not a big focus area for us, say, 3 or 4 years ago. We really, as you know, have been very focused on. We can't do everything. So we're focused in on critical infrastructure segment where highly secure, robust capabilities are really crucial. So that was a real sweet spot. And then building out our capabilities around middle mile IP MPLS in the access and aggregation layers of the network, which is 1 of the big strengths in our India deployments. So the third leg in the stool really for us is around data center interconnect, and we kind of started in full earnest last year with the launch of 2 new platforms, our 2700 series which is a very dense aggregation platform for aggregating 400-gig IP clients and the other optical transport platform, which was built for the data center, basically built for enterprise, different form factor, a compact modular flood design that allows us to leverage pluggable optics and -- so those were the 2 new products that we launched last year focused around data center. And so that's allowed us to start to generate wins and kind of grow into that market. Relative to the first 2 markets, it's small for us today, but we've improved our go-to-market to match the new products that have come out, and we do think it's a stronger growth path for us. It's a little hard for us to forecast revenue yet at this point because we're kind of building wins as we go. But I think you'll hear a lot more about it from us in the future. Obviously, there's a ton of spend going into data centers, and we want to be able to go after that market, both through our service provider customers as well as direct into different types of data centers.

There are no further questions at this time. I would like to turn the floor back over to Bruce McClelland for any closing remarks.

Okay. Great. Thanks, Paul for -- maybe Russ has squeezed in on the question line, Paul, if you can check with them.

Our next question is from Rustam Kanga with Citizens.

Is it fair to say, Bruce, that visibility into the sustainability on the India CapEx side, has improved since last quarter, and that's largely intact now?

Yes. On the last call, I talked about really 3 different areas that we were being cautious on around the growth in India around plans with Verizon and others around network transformation. And we feel like we've got better improved visibility. Clearly, the India market is remaining very strong. In fact, it was a it was a catalyst for us to do well in the revenue line for Q1. So I think we're feeling better. I think the enterprise market, both critical infrastructure on our IP optical side, and then large enterprise around our secure voice looks really robust for the rest of the year. And then the final area that I've been just cautious on is around the U.S. federal space. I mentioned we have a couple of large programs that need to get into full deployment, so we can start adding capacity to that. So those were the areas that I think we were more cautious on and feel better about all of those as we sit here kind of 90 days later.

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Bruce McClelland for any closing remarks.

Well, great. Thanks for everyone joining us today. Just to reiterate, I guess, the key messages here. We -- as we just summarize, I think we feel like we have good visibility going into the rest of the year, starting with improvements here in the second quarter and look forward to keeping everyone updated. We have a whole slate of investor conferences over the next couple of months and look forward to keeping you updated with our progress. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you again for your participation.

Greetings, and welcome to the Ribbon Communications Fourth Quarter and Full Year 2025 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. [Operator Instructions]

It's now my pleasure to introduce your host, Fahad Najam, Senior Vice President, Investor Relations and Corporate Strategy. Fahad, please go ahead.

Good afternoon, and welcome to Ribbon's Fourth Quarter and Full Year 2025 Financial Results Conference Call. I am Fahad Najam, SVP, Corporate Strategy and Investor Relations at Ribbon Communications. Also on the call today are Bruce McClelland, Ribbon's Chief Executive Officer; and John Townsend, Ribbon's Chief Financial Officer.

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 first quarter of 2026 and beyond are forward-looking statements. Such statements are subject to the 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-K. I refer you to our safe harbor statement included in the supplemental financial information posted on our website. In addition, we will present non-GAAP financial information on this call. Reconciliations to the 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 would like to turn the call over to Bruce. Bruce?

Great. Thanks, Fahad. Good afternoon, everyone, and thanks for joining us today to discuss our Q4 results and outlook for 2026.

When we spoke with you back in October, we entered Q4 with a sense of optimism, but also recognized we are operating in a very dynamic macro environment, including budget uncertainty related to the recent U.S. government shutdown. We remain optimistic as we start the year. We successfully closed multiple significant deals in the quarter and achieved record product and professional service bookings. A significant portion of these new orders is associated with new voice modernization projects, where we expect revenues starting in the second half of 2026. We've expanded the customer base and reinforced our industry leadership in cloud-centric voice modernization where our portfolio and technical teams really sets us apart from the competition. We also see a significant opportunity to integrate voice technologies with the expanding set of conversational AI and Agentic AI platforms. And our Acumen AIOps platform continues to garner strong interest.

However, relative to our guidance for Q4, revenue was below our expectations and was impacted by several customer and project delays. The delayed programs are not lost business and are primarily tied to two key reasons. Half of the shortfall was associated with projects already in backlog where implementation delays pushed out project completion milestones or product shipments, delaying revenue recognition to future quarters. This included one of our primary U.S. customers where deployments slowed during their recent restructuring.

The remaining gap in the fourth quarter was with several customers impacted by budget availability at the end of the year. This included an IP optical project where the end customer is still waiting for BEAD funding to be distributed. When comparing year-over-year, as expected, the largest contributor to the lower sales in Q4 was the reduction in new sales to U.S. federal agencies, which were approximately $10 million lower than the fourth quarter of 2024.

The other primary contributor to the year-over-year reduction in Q4 is the challenging comparison to the record quarter we had with Verizon in the fourth quarter of '24 when we shipped significant amounts of equipment to begin to ramp the voice modernization project across multiple sites. For the full year, our business with Verizon was very strong with sales increasing 27% year-over-year. And now with the closure of the Frontier acquisition, there is a significant opportunity to expand the scope of our program across the Frontier footprint over the next several years.

For the full year, sales to global service providers increased 5% and were 70% of overall sales for the company. Sales to enterprise customers increased 2% year-over-year, while sales to government and defense declined 23% and were 9% of overall sales. So we made good progress growing our position in telecom and enterprise markets, while government and defense were below expectations. On a regional basis, 2025 sales in the Americas were essentially flat year-over-year given the reduction in U.S. federal, offset by the increased business with service providers. EMEA sales were down year-over-year as a result of the reduced sales to Russia starting in the second quarter of 2024. Excluding Russia, sales in EMEA were flat year-over-year. And sales in the Asia Pacific region grew 19% year-over-year on the significant increase of business in India.

Consolidated gross margin in the quarter was in line with our expectations with very strong Cloud and Edge margins benefiting from a stronger mix of software revenue this quarter, offset by lower IP Optical Networks gross margin from the increased sales in India and lower sales in North America and EMEA regions.

Adjusted EBITDA for the quarter was $40 million, $2 million below our guidance range due to the lower sales, offset by lower operational expenses, primarily related to reduced employee variable compensation. Despite the lower-than-expected Q4 results, we ended 2025 in a solid financial position. And as expected, Q4 was the strongest quarter of the year, increasing 6% versus the third quarter. For the full year, revenue increased 1% to $845 million, but excluding sales to Russia in 2024, sales to all other customers increased 4% in 2025. Also note that you'll see a significant increase to our net income and EPS this quarter related to a new tax benefit that John will describe shortly.

Now a little more detail on our operating segments. In our IP Optical Networks business, revenue was down $2 million year-over-year in the quarter, which was below our target of mid-single-digit growth. As mentioned earlier, we saw several projects in North America push out into 2026, including a significant new deployment awaiting the release of BEAD funding. And sales were lower in the EMEA region, primarily due to a year-end budget freeze with the government defense agency. This was offset by continued growth in India with sales in the fourth quarter increasing 28% year-over-year on the strength of deployments with Bharti as well as first shipments for a new rural broadband deployment. For the full year, sales in India grew more than 40% and exceeded $100 million. In other regions, we won several optical transport expansion projects in Southeast Asia with Converge CICT and Moratel. And in the critical infrastructure market segment, we won significant projects with two major European railways, Danish Railway Banedanmark and pan-European operator, Deutsche Bahn.

We also had a first win with one of the largest electric power generation and distribution cooperatives in the U.S., which provides service across nine states.

IP Optical product and services bookings to revenue was 1.1x in the quarter and bookings were the highest level of the year. For the full year, revenue grew approximately 1%, but when excluding sales to Russia in '24, revenue across all other regions increased 9% year-over-year.

In our Cloud and Edge segment, revenue in the fourth quarter was down $23 million year-over-year and below our expectations, as I previously mentioned. Despite the lower revenue in the quarter, Cloud and Edge bookings set a new record high with product and professional services book to revenue of 1.5x.

As I mentioned on our last earnings call, we're seeing an increasing number of service providers investing in modernizing their traditional voice networks. In addition to Verizon, we booked over $50 million of voice network transformation orders in the quarter across more than a dozen different customers. Revenue for these projects is normally spread out over time, typically 6 to 12 months or perhaps longer for larger projects. It's a very good start, and there are several additional significant opportunities that we are pursuing.

In addition to legacy Class-5 switch replacement, another key voice modernization priority for both service providers and enterprises is to migrate from purpose-built hardware to fully virtual cloud-native implementations. We now have several major projects underway with Tier 1 service providers in Europe and Asia Pac, along with a significant new win with a U.S. Tier 1 customer this quarter to migrate SBC and routing workloads to cloud-native implementations running in both private and public cloud. For the full year, Cloud Edge sales increased 1% with service provider sales growing 8% and enterprise and government sales decreasing 16%.

With that, I'll turn it over to John to provide additional financial details on our results and then come back on to discuss outlook for 2026. John?

Thanks, Bruce. Let's begin with financial results at the consolidated level. In the fourth quarter of 2025, Ribbon generated revenues of $227 million, a decrease of 10% from the prior year. For the full year, revenues were $845 million, an increase of 1% or $11 million year-over-year. Fourth quarter non-GAAP gross margin was 55.4%, down 270 basis points due to lower software revenue and higher professional services revenue. It was also impacted by geographic mix with a very strong performance from our team in India.

For the full year, non-GAAP gross margin was 52.3%, down 355 basis points from the prior year, driven by the higher sales in India and higher services revenues. Fourth quarter non-GAAP operating expenses were $90 million, a decrease of $4 million year-over-year, reflecting our continued focus on efficiency and cost management. For the full year, operating expenses were $352 million, a reduction of $9 million from the prior year. The reductions were driven by employee and related costs more than offsetting $4 million and $6 million of FX pressures in the quarter and year, respectively.

Fourth quarter adjusted EBITDA was $40 million, a $15 million decrease from the prior year, driven principally by lower revenues. For the full year, adjusted EBITDA was $107 million, a decrease of $12 million from the prior year, driven by the lower gross margin.

During the quarter, we recognized a deferred tax benefit of approximately $90 million related to our investment in ECI. This had a favorable $0.50 benefit to non-GAAP EPS. The tax asset will be utilized over the next several years, resulting in cash tax savings of between $15 million to $20 million per annum. Net interest expense in the quarter is $11 million and $44 million for the full year. Quarterly non-GAAP net income was $106 million, a $78 million improvement year-over-year, driven by the tax benefit in the quarter. This generated non-GAAP diluted earnings per share of $0.59, which was an increase of $0.43 versus the prior year. Full year 2025 non-GAAP net income was $118 million, up $74 million from the prior year. Diluted earnings per share for 2025 was $0.66, up $0.41 from 2024.

Now let's look at the results of our 2 business segments. In our IP Optical Networks results, we recorded fourth quarter revenues of $85 million, a 2% decrease versus the prior year. Revenues for the full year were $333 million, up 1% from 2024. Fourth quarter non-GAAP gross margin for IP Optical was 34%, down 600 basis points from the prior year due principally to the higher revenues generated in India. For the full year, gross margin was 35% IP Optical Networks adjusted EBITDA for the quarter was a loss of $8 million. For the full year, adjusted EBITDA was a loss of $27 million.

Now on to our Cloud and Edge business. We generated fourth quarter revenue of $142 million, up 14% sequentially, but a decrease of 14% year-over-year against a record fourth quarter in 2024. Full year revenues were $511 million, a $6 million increase from 2024. Fourth quarter non-GAAP gross margins were strong at 68%, up 65 basis points from the prior year, supported by core session border controller sales increasing by 10%, benefiting the overall mix. Full year gross margin was 64%, down 300 basis points from the prior year due to the higher level of professional service revenues related to voice network transformation programs. Adjusted EBITDA for the segment was $48 million or 34% of revenue. For the full year, adjusted EBITDA was $134 million or 26% of revenues.

Cash flow was very strong in the quarter. Good collections performance drove cash from operations of $29 million, resulting in a closing cash balance of $98 million and a net debt leverage ratio of 2.3x. Cash from operations for the full year was $51 million. Total CapEx spend in the quarter was $2 million, bringing the full year expenditure to $15 million, plus an additional $10 million relating to our new Israeli facility.

During the fourth quarter, we repurchased approximately 972,000 shares of our common stock under our buyback authorization for a total cost of approximately $3.3 million, bringing the total for 2025 to 2.5 million shares and a total cost of approximately $9 million.

In conclusion, we continue to improve our cost efficiency and working capital levels to better drive cash conversion in the business. We also expect our annual capital expenditure levels to return to approximately $15 million. These efforts plus lower cash taxes are expected to improve cash generation in the coming years.

And with that, I'll turn the call back to Bruce.

Great. Thanks, John. Over the past four years, we've maintained steady top line revenue performance and navigated a significant number of challenges while delivering improved profitability with EBITDA growing at a 19% CAGR. As we enter the new year, we're not satisfied and are anxious to drive faster growth. We ended 2025 with increasing backlog and a broadening customer base for our secure voice and IP optical solutions. We continue to strengthen our balance sheet while also investing in innovation across our portfolio to drive long-term value. Our momentum remains intact, and I'm confident we'll deliver improving results as the year progresses.

We have several important elements to our strategy this year to drive improved profitable growth and unlock value. The largest area of opportunity continues to be the investment being made by service providers, governments and enterprises to lower the cost of operating their communication infrastructure and replacing outdated equipment.

With our marquee customer, Verizon, we ramped up activity in 2025 and are progressing well on the first phase of their modernization program. We believe this remains a high priority for them and believe there is opportunity to expand as Verizon integrates the Frontier operation in the coming months.

Beyond Verizon, we now have similar initiatives with a broadening number of customers, highlighted by the strong bookings in the fourth quarter. These projects are complex and can take 6 months or more to implement and include a significant amount of professional services that Ribbon is uniquely positioned to provide. In many ways, the upfront investment can essentially be self-funded by the savings generated, and we're exploring creative ways to further unlock and accelerate voice modernization across the industry.

In addition to telecom service providers, we have a growing presence in the enterprise segment where companies are building and managing their own complex secure communication infrastructure. We have several specific market verticals that we are addressing across the Fortune 1000 landscape, including financials, health care, transportation, energy and defense. The technology stack within large global multinationals is transitioning from private data centers to public cloud, adopting technologies such as containers and Kubernetes, and we believe we are considerably in front of our competition in supporting these new capabilities. Within the government sector, although it may take some time, we expect improved visibility now that the U.S. federal fiscal '26 funding has been approved. We have several large voice modernization programs already underway and a funnel of new opportunities that we expect will provide growth in the second half of the year. A key goal is to also secure similar programs outside the U.S. this year.

Our third major focus area is the sustained global investment in high-speed broadband infrastructure, driven by exponential growth in data traffic and the need to extend connectivity to underserved regions. In the U.S., we're actively supporting regional service providers as they expand fiber-to-the-home networks using very cost-effective IP over DWDM architectures, and we expect these deployments to accelerate meaningfully in 2026 with the support of federal funding dollars. We're seeing similar momentum internationally, particularly in India, where national broadband initiatives have already translated into early commercial success for us. These networks also provide a foundation for data center interconnect services, and we see additional upside in critical infrastructure customers across rail, energy and defense with a strong focus on expanding further in North America.

Finally, our new Acumen AIOps platform is an important growth initiative for us, enabling end-to-end observability and automation across multi-vendor networks with tools that allow customers to build AI agents using multiple large language model integrations. Optimum remains our lead customer with additional POCs planned in the first half and modest revenue expected in the second half. Beyond AIOps, as the adoption of Agentic AI platforms continue to grow, we see a great convergence opportunity with our cloud-centric secure voice portfolio to seamlessly integrate AI with the human interface.

Partnerships are critical to success in this ecosystem, and we recently signed a multiyear collaboration agreement with AWS to simplify the transition of critical network services to public cloud. In addition to our core strategy, our recent tax planning has created an opportunity to generate more cash over the next several years that can be used to strengthen our balance sheet as well as to potentially accelerate innovation and expansion into new immediately adjacent markets with select investments in new private technology companies rapidly innovating in these explosive growth markets.

Now on to guidance for 2026. As I've just outlined, the underlying industry fundamentals are solid, and there are multiple positive long-term drivers supporting the business, and it's imperative for our customers to continue to invest. However, we're taking a more cautious approach at this point in the year given several near-term factors that are out of our control. As a result, our 2026 outlook reflects a more conservative set of assumptions, particularly around timing of business here in the first quarter.

Key factors affecting our near-term outlook include shifts in investment priorities at major U.S. service providers amidst elevated M&A activity, sustainability of Indian service provider CapEx intensity that has resulted in 60% revenue growth for Ribbon over the last three years and timing in U.S. federal spending and subsidy programs in the current political environment. Reflecting these macro uncertainties, we recently completed a restructuring that eliminated approximately 85 positions, lowering our annual expenses by more than $10 million.

With that context, for the full year, we're projecting revenue in a range of $840 million to $875 million. This implies a consolidated year-over-year growth rate of approximately 1.5% at the midpoint of guidance, but is actually quite a bit higher after excluding low growth maintenance revenue. For the Cloud & Edge segment, we're projecting approximately 6% growth in product and professional services revenue, offset by slightly lower maintenance revenue. And for the IP Optical segment, we're projecting approximately 5% growth of product and professional services revenue. Maintenance revenue is expected to be lower by approximately $10 million related to the completion of a maintenance contract with a European customer associated with legacy access equipment.

On a consolidated basis, we're currently projecting gross margin to increase 50 to 100 basis points year-over-year. And we're projecting OpEx for the year to increase approximately 2% year-over-year due to normal inflationary increases, offset by the restructuring savings I mentioned earlier. As a result, adjusted EBITDA for the year is projected in a range of $105 million to $120 million, which would be approximately 6% higher than 2025 at the midpoint. For the first quarter, we expect a slower than typical start given lower sales in India and lower maintenance revenue and are projecting revenue in a range of $160 million to $170 million and adjusted EBITDA in a range of minus $3 million to plus $1 million.

In conclusion, we're taking a cautious approach given several factors I've outlined that can affect the timing of the business this year and expect improvement as the year progresses.

Operator, that concludes our prepared remarks, and we can now take a few questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today is coming from Michael Genovese from Rosenblatt Securities.

Bruce, I'd like to hear more about these new Cloud & Edge bookings, just more detail on the size of those bookings. And then also, are those all coming from new customers? Or does that also include new programs with existing customers like Verizon in that number?

Yes. Mike, thanks for the question. So the $50 million of new bookings that I mentioned were non-Verizon, first of all. These are other customers on top of the business we have with Verizon. And I think I mentioned there are about a dozen different customers. So it's kind of spread across a growing base of customers kind of focused on similar modernization.

There was a couple of reasonably large ones and then a longer list of more single-digit million sort of thing that contributed to the $50 million in bookings. And the revenue associated with that, a portion of that, we shipped some of that in Q4, probably around 25%. And then the rest of that revenue associated with those bookings kind of plays out over the next, say, 15 months, something like that.

Great. And I mean, do any of those dozen or so customers, I mean, are any of them of the size where they could be eventually like a Verizon or even like a Brightspeed? Or is there anybody large on that list?

Yes, yes.

I guess we'll leave it at that. I guess -- my other question is I just want to get more follow-up on some of these delays that you're seeing because it sounds like it's cutting across government in the U.S., government in Europe plus some U.S. service provider. So that's like multiple vectors of delay and budget issue. So just more color on what's going on in all of these places and how long this could last would be helpful.

Yes. No, I definitely understand the question. I wish I could point to one specific thing. There was kind of two groupings. One -- I think the one I was probably most frustrated with was business we already had in backlog that we were expecting to score revenue in the quarter that moved out of the quarter. And these are basically professional service programs where we're deploying product. I mentioned as one example, a large U.S. customer that was going through restructuring. And these programs were basically joined at the hip with the customer, doing the planning, out in the field, basically installing the equipment, doing the migrations, et cetera. And we recognize revenue as these migrations complete and all the lines are cut over to the new platforms. And so we saw some delays in those deployments, and that kind of immediately moves out revenue for us. And those types of kind of major restructurings obviously have an impact on those types of programs. So that was the first big bucket.

And then the other was what I'd describe as year-end budget issues. The one that was kind of the best example was the project that I talked about last quarter that's associated with BEAD funding. And of course, if you follow that closely, there's a lot of frustration over when that -- when those funds start to really get released to the individual states. Most of the NTIA approvals are now completed, but now everyone is waiting for NIST approval, which is really the final government contract to release the funds. And so that's an example of something moved out of the quarter. And there's a couple of other kind of smaller examples like that. So...

Okay. Maybe I'll ask one last question, if you don't mind. I guess given where we're starting the first quarter and the guide for the full year, it looks like we need some pretty significant sequential growth, I'd say, throughout the year, right, throughout the remaining quarters. Is that the right way to think about it? Because I know typically, the third quarter can be down sequentially. But in this kind of -- when you're starting the first quarter this low and you have this kind of guide, I'm just thinking ahead to the third quarter. I know it's early to think about the third quarter, but should we think about sequential growth every quarter this year unless seasonality after we get by the first quarter?

That's the way we're profiling it at this point. And yes, we're slow here in Q1, obviously, as I mentioned, we expect revenue in India to be lower than the peak levels that we've had last year.

I think there's a couple of reasons why you're seeing us be more conservative. Obviously, starting slower in Q1 is one of them. But there's a number of kind of macro things going on here. The large changes going on at Verizon, our key customer here. We feel like we're well positioned because we're ultimately helping them reduce the cost of operating the networks. And as they integrate the Frontier footprint, we think there's just a great opportunity for us in the midterm here to expand the programs we have going. And I think they're delighted with the progress and everything we've made. But when they go through a major restructuring like they are, it definitely has some near-term impact just on the velocity of getting the work done. So that's one of the key reasons we're being more conservative until we really understand exactly how that.

The second is still tied to the U.S. federal government spending, not that -- obviously, things are back in business there and budgets are now kind of established for all the agencies, et cetera, but it takes a bit of time for that all to start to ramp back up again. We have, in particular, two major programs going on there today where we're in the deployment phase and kind of similar to the Verizon program, we're out helping deploy and operationalize the infrastructure that we've already sold them. So we think that ramps significantly again back in the second half. And that's why we think it's kind of back-end loaded as the year progresses.

The third item I flagged, Mike, in the commentary was around India. We've had a great run there, increased 40% in 2025. We think there's a possibility it continues at that rate, but we're not sure yet until all the budgets are finished. They're on a fiscal year ending March. So we're trying to be just a little more thoughtful around the targets that we set. And hopefully, we can improve that as the year progresses here.

Next question is coming from Tim Savageaux from Northland Capital Markets.

I guess the first question, and I think you said you might have some -- I don't know if you specified big U.S. Tier 1 carriers in that $50 million of orders. But is there a way to relate those initial orders to the total opportunity at those customers? Is that sort of -- those are pretty big deployments, but I guess, how much of the -- your estimate of the total opportunity at those customers for voice upgrades does that $50 million represent?

Yes. Tim, it's absolutely a fair question. I've hesitated to put a specific number on the total addressable market for modernization. Part of my reluctance is not everybody is adopting the same approach. Obviously, the tactics at Verizon look different than what, let's say, Lumen is doing today or what AT&T is doing today. The additional backlog that we built here in the fourth quarter is obviously meaningful and covers deployments over the next, say, 12 months, as I mentioned. And there are some larger names in that, that are maybe not committing to a larger multiyear program. Maybe it's more targeted on different regions where the cost of operating those networks are higher or it's more challenging to just switch off the offices and turn off the copper loop. So depending on just how big and broad these programs go, this is a sizable large market. The last number I saw the number of pot lines in the U.S. is something like $20 million. I don't know if anybody has an exact number on that, but it's a large addressable market.

As I mentioned in my commentary, if you look at the numbers as far as the cost savings that you generate from doing the modernization, depending on your time horizon, this becomes a self-funding program. And if you're not modernizing, eventually, your costs start to be higher than your revenue. And so I think there's -- we're looking at some creative ways to really unlock and move more quickly.

Just a final comment. If you look at Verizon, we've obviously in the first phase of that program with them. I think it addresses about 1/3 of their network. And so there's a significant opportunity still with them as we progress over the next several years. And then I think it's a key part of how they're thinking about reducing cost operating the Frontier network as well. So, yes, there's lots of activity, lots of opportunity here for us.

Yes. I mean that's kind of the color I'm looking for. You're obviously a pretty big deal with Verizon. I think you mentioned up 26%. I don't know if that's getting close to $140 million or something like that.

But just to try to relate -- and they've sort of committed to that three-year rollout. I guess what I'm trying to get to is it doesn't sound like within that $50 million of bookings, there are commitments for three-year rollouts from big carriers, but maybe there are, right? So to the extent you're relating what you've done with Verizon is 1/3 of the network, it seems like this range of commitments from current customers should represent a lot less than that in terms of proportion of their networks they're upgrading. That's directionally kind of what I'm looking for.

Right. I think those are all the right observations. None of the bookings in Q4 were for like a 3-year horizon. This is all kind of 12-month -- 12- to 15-month horizon programs. And just on Verizon, again, the contract we have in place for first three years, kind of 1/3 of their footprint. We're now kind of halfway through that from a timing perspective. We're about 1.5 years since we initiated the program. And we estimate we're 35% or so through that effort.

So there's a lot of work left to go on the first contract. We think there's likely a second phase and then Frontier on top of that. So, yes, there's quite a runway here for us, lots of work ahead.

Right. Exactly. I guess it's closer to $150 million for Verizon now that I look at it. Now obviously, they've kind of announced a draconian cut in their combined CapEx with Frontier and looking to maintain, I guess, at least the current level, if not accelerate fiber build. And you mentioned a restructuring, but would you say you're -- I guess you got a bunch of factors going on, but maybe just uncertainty around where that cut is coming from, perhaps given this merger just happened is likely what's impacting you as well as just a lower bogey envelope for capital spending overall. Is that kind of fair to say?

Yes. I guess what I would say is we're being cautious here until plans are finalized. They're only kind of weeks into running the Frontier network. And again, I think there's obviously, opportunity for expansion associated with that. But until we and they have had a chance to kind of nail all that down, I just want to be cautious in how we think about how the year is going to play out. And I'm convinced there's tons of business and growth here with them. But until they get through their planning, I want to be more cautious. And as you said, they've made some big macro changes. So until that kind of rolls out to everybody, I think it's the right way to manage it.

Fair enough. And last one for me. I mean I'd say most of -- understanding the fine points to process, but certainly, most of what we've been hearing in recent quarters around BEAD has been pretty positive with the approvals and a lot of the access guys getting a lot more visibility on network planning, design, rollout, what have you. So it would seem like that should be a good news story in calendar '26, at least in the second half at the very least. But how are you looking at right now at a higher level versus the push you described in Q4?

Yes. No, I resonate with all those comments. We think it's a great opportunity for us. We think that segment of our business grows reasonably significantly this year for us. I'm a little frustrated because we expected to get started in Q4. I think everybody did. So we're a little delayed from that. But I think we've got a really nice funnel of opportunities in that space for us. And hopefully, we're weeks and kind of months away from all of this being settled and moving out, but we're not quite there yet.

Next question is coming from Ryan Koontz from Needham & Company.

I appreciate all the color, Bruce, on the voice modernization. You covered most of the kind of the bigger Tier 1 opportunities. Do you have any updated thoughts on down market opportunities there in terms of the rurals? Are they -- any idea what kind of approach they're going to be taking as they start to maybe retire copper and deploy more fiber here and what they're going to do with their existing infrastructure, their classifieds?

Yes, that's a great question. What we're seeing most of the activity is in the, I'll call it, the Tier 2 operator space where they are committed to that as a service offering. They want to lower the cost of operating the network, and we're a great solution to help them do that.

When you get into the much smaller operators, I think you see different things there. I think voice looks like a nice lead service, but it's not necessarily a good revenue generator or profit generator for them. We see different things happening. Some look at that as an entry point to sell more fiber. So not only do they want to maintain the relationship with subscribers on the copper network, they maybe even want to grow that because it's an entry point for them to differentiate. Once you've got a relationship with the consumer, it's easier to maintain it.

Others, we see just wanting to kind of manage it in place. They don't want to invest anything incremental. We have a decent service and support revenue stream from that segment of the market. And we see it kind of similarly where it's a great entry point for us to come in, introduce our IP optical products and grow our business within that space. And we've built in some capabilities that help them migrate off of legacy TDM networks on the IP networks. So it's a great entry point for us there. But we don't think of it as a great revenue generator for voice modernization necessarily. I'm not sure they're investing. That's not a top priority investment for them.

Yes. Makes sense. And on your legacy maintenance business, what kind of decline is that typically saying like 10% a year, kind of double-digit declines typically?

No, no, it's much steadier than that. And we've -- in select places, we've been in a position where we are raising prices. I think we see a few million dollars a year erosion kind of in the base from our voice business.

In our IP and Optical business, it's actually been growing as we increase the base. We have one customer where we completed a long-term maintenance contract supporting their access business that we exited or completed in Q4. So that's a step down going into this year. I kind of mentioned that on the call. But for the rest of the market, that part of the business is actually growing for us.

Got it. And then following up on the packet optical side, are your main kind of use cases you're most excited about here in the next 18 months or so? Is it still the broadband aggregation and backhaul? Or are you seeing alternate type use cases for your platforms?

Yes, that's really the focus. And I've mentioned a couple of times that I think our area for best differentiation is around integration of IP networks with optical networks or IP over DWDM and where that's the most cost-effective way to build a new network. You're integrating the transponder technology into a pluggable that goes into the router. We've invested a lot in a broader set of platforms for IP routing. And most of the growth here in North America has been IP with optics integrated into the routers and maybe an OLS that we include for the transport network. And similarly, in the high-growth area we've had in India with the portfolio, the majority of that growth has been around our IP portfolio, our IP/MPLS portfolio and the growth there. So that's really the focus.

Sounds great. And any commentary on kind of the enterprise SBC market? I assume that's also somewhat a legacy product, you're not investing a whole lot. Is it a profitable business line for you still?

Yes. No, it's a great business for us. And most of the investment, the innovation there has been taking the traditional kind of bespoke products and turning them into cloud platforms. And anybody that's been through that knows it's not a lift and shift. In many cases, you're reengineering the implementation into a cloud-native elastic fault-tolerant implementation. And I think we're out in front of the competition in that space. I mentioned in the call, we have now kind of Tier 1 carriers in all regions migrating their traditional SBC infrastructure into a true cloud-native implementation. with a complete DevOps software delivery model, which is a big shift for that market.

We see the same thing in the enterprise market where customers want to move to much more of a public cloud implementation. I mentioned that we have a new partnership with AWS, where we integrate our SBC and routing platforms and management systems into the AWS cloud to really simplify the onboarding of new customers. And we had two fairly significant wins last quarter based on that integration into AWS.

So there's -- yes, there's a lot of activity. In fact, I think John mentioned our SBC sales in Q4 were up pretty considerably. It was one of the big growth areas and the contributor from a margin perspective in the quarter.

[Operator Instructions] Our next question is coming from Dave Kang from B. Riley Securities.

Just on the federal segment, I think you said the amount as far as how much it was down. Can you repeat that? I missed that one.

Yes. So, the U.S. federal business, which was one of the drivers for our great Q4 a year ago 2024, was a little over $20 million. And in the fourth quarter of 2025, it was $10 million down from that, so call it, $10 million in the quarter.

Got it. And then regarding all these delays, were they mainly in optical or C&E or both?

It was almost evenly split. And I would say the -- again, the ones I mentioned that I'm probably most frustrated with the deployment delays is the stuff that was already in backlog. A large portion of that was Cloud and Edge, obviously, with all the services that go with that. And the ones that were more, I'll call it, budget oriented like the BEAD delay was more IP Optical.

But based on your outlook for first quarter, it doesn't sound like they're being pushed into first quarter. Can you just provide more color as far as when you expect to capture all these delayed projects?

Yes. If you kind of did the arithmetic on the $27 million we did in Q4 relative to guidance, it's about $13 million below the midpoint. And I think we pick up about $6 million of that in Q1, and then the rest is kind of linearly into other quarters.

The deployment-related delays probably just all kind of move out. So you don't catch up on that. I mean, eventually, we'll catch up if we can accelerate the deployments, but we need the customer to go faster with us to kind of catch that back up. So, again, we're trying to be more conservative here in how we put together the outlook. And I think that's the right profile for the first quarter.

And then you mentioned about certain customers with budget issues. So, as far as timing is concerned, I mean, have they given you some kind of a timing as far as when that budget will be available? Or is there still uncertainty going forward?

Yes. I think it varies a little bit. Our larger customers, we get good visibility. Generally speaking, we get good visibility, particularly around the hardware products where we have to drive supply chain. And if we're not forecasting and they're not forecasting, it's difficult to supply. So there's a lot of cases where we have good visibility. And then there's a portion of our business, which is still book and ship inside the quarter and particularly with software where it's really easy to fulfill, there's not as much pressure to forecast that as accurately. So maybe we have more variability around that part of the business.

Next question today is coming from Rustam Kanga from Citizens.

Just curious to sort of peek into the growing POC opportunities in regards to the Acumen platform. Are customers still evaluating the solution there just relative to their own DIY approaches? And then additionally, any update on sort of initial reactions to pricing perhaps on OpEx-based savings?

Yes. Thanks, Rusty. Good question. So we're in the heavy lifting, getting into deployment with our lead customer, Optimum on integrating Acumen into their operation. And then we probably got about a dozen other POCs lined up for the next few months. And I think similar -- actually, we have the same experience as we're integrating AI platforms into our back office. We really want to see them in operation in the network and see the savings from them before you make a larger longer-term commitment. And we're seeing kind of the similar phenomenon as we position Acumen.

The kind of the easiest introduction is with customers that already have our analytics platform deployed. They're already -- they already have a large data collection infrastructure that we're able to tap into and feed all of that up into the acumen layer and into the large language model, et cetera. But I think customers really want to see it in action. They want to see the translation into OpEx savings. So, I think, the next six months, I think, is really focused on these POCs so that we can start to turn that into real revenue in the second half of the year.

We reached the end of our question-and-answer session. I'd like to turn the floor back over to Bruce for any further or closing comments.

Great. Thank you. Thanks for everyone being on our call and your interest in Ribbon. We look forward to speaking with many of you at the upcoming investor conferences as well as some of the major trade shows, Mobile World Congress coming up in Barcelona and then the large OFC optical conference in Los Angeles in March as well. So, thanks very much. That concludes our call.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. Thank you for your participation today.

Greetings, and welcome to the Ribbon Communications Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] As a reminder,this conference being recorded.

And it is now my pleasure to introduce to you, Fahad Najam with Investor Relations. Thank you, sir. You may begin.

Good afternoon, and welcome to Ribbon's Third Quarter 2025 Financial Results Conference Call. I am Fahad Najam, SVP, Corporate Strategy and Investor Relations at Ribbon Communications. Also on the call today are Bruce McClelland, Ribbon's Chief Executive Officer; and John Townsend, Ribbon's Chief Financial Officer.

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 fourth quarter of 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-K. I refer you to our safe harbor statements included in the supplemental financial information posted on our website. In addition, we will present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measures are included in the earnings press release we issued earlier today as well as in the supplemental financial information be prepared for this conference call, which again, are both available on the Investor Relations section of our website.

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

Great. Thanks, Fahad. Good afternoon, everyone, and thanks for joining us today to discuss our Q3 results and the outlook for the fourth quarter and full year. I'd like to start by highlighting our recent new product announcement that's getting considerable interest from customers. Acumen is our new powerful AI Ops automation platform. Designed to help service providers and enterprises navigate the complexity of today's challenging operational environment and accelerate their transition to autonomous networks. Our recent announcement included the endorsement from [ LTE ] sound Optimum who are integrating the platform into their operation to enhance network reliability and performance.

The Acumen platform is built to reduce deployment time lines and deliver customizable automation across the entire network life cycle. It ingests data from all layers of network, providing end-to-end network observability across multi-vendor and multiple networks. Moreover, it combines out-of-the-box applications built on our analytics and use products with a powerful agent builder capability. that enables our customers to develop their own AI agents with various LLM integrations. Our deep protocol and networking experience uniquely positions us to help our customers build fully autonomous AI-driven networks. Beyond AI Ops, our Cloud & Edge portfolio is becoming increasingly strategic to our customers' agenetic AI platforms and road map. We had several very important awards in the third quarter, where we've been selected by leading technology providers, including one of the largest SaaS companies in the world, which is leveraging our cloud-native SBCs and WebRTC APIs deployed in AWS to enhance their customer service agenetic AI operations.

Another notable win in the quarter was with IBM, which is embedding our virtual SBC solutions within its Watson AI platform. to enable support for multiple different formats, including voice to interact with users. These are just some of the examples of the new innovations our team is working on with more to come. And I'm extremely excited about the convergence of AI and voice technologies and the significant opportunity ahead for Ribbon.

Okay. Now on to our quarterly results. I'm pleased to report a solid third quarter with sales increasing 2% year-over-year even as we navigate short-term disruption related to the U.S. federal government shutdown. Year-to-date, revenue has increased 6% this year and EBITDA has increased 5% versus the same period in 2024. Excluding the impact of sales to Eastern Europe, revenue has increased more than 10% so far this year. Sales to service providers in the quarter increased 5% year-over-year with growth across multiple accounts, including Verizon, [ Bharti ] and several other operators in North America. Sales to enterprise customers in the quarter were down approximately 3% year-over-year and were impacted by lower sales to U.S. government agencies. Excluding this segment, enterprise sales to all other customers were up almost 7% year-over-year. While the U.S. government shutdown officially started October 1, it became a growing distraction in the last few weeks of the third quarter. And delayed the procurement process on several projects that would have easily put us above the midpoint of our guidance for the quarter.

The ongoing shutdown is obviously affecting many government activities with significant noncritical staff furlough. This has become an important segment for us, contributing mid- to high single-digit percentages of our Cloud & Edge revenue in 2024. In any event, these projects remain a high priority for U.S. federal agencies and purchases are simply delayed, not lost. But given the uncertainty over when a resolution will be reached, we have removed the majority of U.S. government-related sales from our projection for the fourth quarter. And now assume these purchases will occur in 2026. To be clear, no business has been lost, deployments and services are continuing, and we're supporting our customers' mission-critical needs. Notwithstanding this near-term impact, the fundamentals across our Cloud & Edge and IP Optical businesses remain strong. Continuing on the momentum built over the last several quarters, we're benefiting from very good demand across both service provider and enterprise customers. As they continue to invest in modernizing their voice and data networks, and we're tracking well against our growth objectives.

From a regional perspective, sales to Europe, Middle East and Africa were very strong this quarter. Growing 26% year-over-year. Sales to Asia Pacific countries were also strong, growing 13% with India really leading the way. Sales in North America were impacted by the lower U.S. federal sales and declined approximately 10% year-over-year in the quarter. From a consolidated bookings perspective, product and professional services bookings in the quarter were below 1x for the first time in almost 2 years. To some extent, this reflects the impact from the U.S. government shutdown. Bookings momentum so far in the fourth quarter has been good with more than $30 million of new enterprise and service provider orders received over the last few weeks.

Now a little more detail on each of our operating segments. Sales in our IP Optical Networks business continued to grow, increasing 11% year-over-year, one of our strongest quarters in the last 5 years. And compensating for lost sales to Eastern Europe. The higher sales, favorable regional and customer mix and expense management resulted in a positive earnings contribution on an EBITDA basis, an important milestone for the business. Business in Europe and the Middle East increased almost 50% year-over-year with a variety of critical infrastructure and defense agency projects.

This included several notable new data center interconnect projects in Central Europe. The first was in support of a large regional insurance provider to provide secure high-speed connectivity between its data centers. With a key focus on low latency and traffic encryption. The second was with a regional telecom operator building a new 400-gig Internet peering network connecting over 200 cities. I'm pleased with the growing pipeline of DCI opportunities that have opened up with our expanded portfolio of IP over DWDM solutions. We also had a very nice optical transport award with a new customer in the Ukraine and are seeing several additional opportunities as this region continues to rebuild and modernize their infrastructure.

In the Asia Pacific region, we saw IP Optical growth across multiple areas, including Japan, India and Southeast Asia. Sales to India continued to grow, increasing 31% year-over-year this quarter, and are up 50% year-to-date. We had several new projects in Japan, including a new 400-gig long-haul transport win with a regional electric power company that provides Internet, mobile and data center services throughout the region. While IP Optical sales in North America were lower this quarter, we were pleased to see our first Rural Broadband project award tied to a provisional beat award expected to be ratified shortly.

With growing clarity around the new BEAD rules and process, I expect momentum to quickly increase over the next several months. To further underscore the progress we've made over the last several quarters in diversifying our IP Optical revenue, I'm pleased to highlight that revenue from IP routing solutions has grown by more than 20% year-to-date. And represents approximately 50% of new product sales for this segment so far this year. Optical sales are down year-to-date, but entirely due to the suspension of shipments to Russia mid-last year.

In our Cloud & Edge segment, despite the lower sales this quarter due to reduced U.S. federal sales. We've generated solid revenue growth year-to-date with revenue up almost 9% year-over-year, primarily on the strength of voice network modernization projects. Excluding low-growth maintenance revenue, Cloud & Edge product and professional service revenue has grown almost 18% so far this year as compared to last year. We had another strong quarter with service provider customers, growing 5% year-over-year. In addition to another strong quarter with Verizon, where revenue grew approximately 20% year-over-year. We're seeing an increasing number of service providers beginning to invest in voice network modernization with 8 new projects initiated this last quarter. Cloud & Edge channels to enterprise customers, excluding U.S. government agencies, were up slightly from the second quarter, but down approximately 10% year-over-year.

As we've moved more customers towards annual enterprise software license agreements, we see a larger concentration of revenue in the fourth quarter when we renew these recurring license agreements. As a result, the amount of our Cloud & Edge revenue, which is reoccurring in nature, including high-margin support and maintenance contracts, continues to increase. As mentioned earlier, Cloud & Edge sales to U.S. federal customers in the quarter were impacted by the impending government shutdown. And were down approximately 60% year-over-year from our first half '25 run rate. However, in the third quarter, we did receive a significant first order from a new U.S. Federal DoD agency, that started a major voice modernization project. And we continue to see the scope of opportunity growing within our U.S. federal customer segment. As I highlighted earlier, we're uncovering multiple new opportunities tied to our customers' Gentek and generative AI road map, which is very exciting. I already mentioned 2 very notable wins in the quarter and our pipeline of opportunities related to [ Adgentic ] and generative AI platforms is growing.

With that, I'll turn it over to John to provide additional financial details on our third quarter results and then come back on to discuss outlook for the fourth quarter. John?

Thanks, Bruce, and good afternoon, everyone. Let's begin with Q3 financial results at the consolidated level. We generated revenues of $215 million in the quarter, an increase of 2% from the prior year within the guidance range we discussed during our Q2 earnings. Third quarter non-GAAP gross margin was 52.6%, lower than we guided due to lower software sales to U.S. government customers, offset by stronger margins in our IP Optical segment. Overall, gross margin was up sequentially by 50 basis points, driven by higher margins in both segments. Non-GAAP operating expenses were $89 million in the quarter, up $1 million sequentially, principally due to increased employee expenses, but down marginally year-over-year, reflecting our continued focus on driving efficiencies within the business.

This reduction was achieved despite the weaker U.S. dollar and foreign exchange headwinds of approximately $3 million year-over-year. 4Q expenses are expected to trend upwards marginally based on seasonally higher employee compensation costs. Third quarter adjusted EBITDA was $29 million, again, within our guidance, right, a $1 million decrease from the prior year, driven principally by the lower gross margin I just noted. The non-GAAP tax rate for the quarter was 40%, higher than the 35% we had projected because of changes included in the one big beautiful bill. From a cash tax perspective, as expected, indicated during our 2Q earnings call, we did not pay U.S. federal income tax in Q3 and expect no further payments for the rest of the year due to the ability to accelerate the deduction of R&D expenses.

Interest expense in the quarter was $12 million, including amortization of debt issuance costs. Quarterly non-GAAP net income was $7 million compared to $8 million in the prior year. This generated a non-GAAP diluted earnings per share of $0.04, down from $0.01 in the prior year. Our basic share count was 177 million shares and our fully diluted share count was 181 million shares in the quarter. Now let's look at the results of our 2 business segments. In our IP Optical Networks results, we recorded third quarter revenue of $91 million, an 11% increase versus the prior year and up $7 million sequentially. This was driven by strong sales to India and EMEA. Third quarter non-GAAP gross margin for IP Optical was 39.4%, up 350 basis points sequentially. And up 330 basis points from the prior year, reflecting better product and geographical mix as well as fixed cost absorption on higher revenues.

The combination of higher sales and margin resulted in a positive EBITDA contribution of $1 million in the quarter, which was particularly pleasing. Year-to-date, IP Optical revenues have grown 2% and but excluding Russia, revenues are up 13%. We now move on to our Cloud & Edge business. We generated third quarter revenue of $124 million, a decrease of 3% year-over-year, down 9% sequentially. Non-GAAP gross profit was $77 million, producing a non-GAAP gross margin of 62.2%, an improvement of 27 basis points from the prior quarter. This improvement was achieved by tight commercial discipline and despite some higher-margin software-based deals pushing out from the quarter and noted by Bruce.

Margins were approximately 500 basis points lower year-over-year due to the mix of the revenues in the prior year as the Verizon network transformation commenced with larger product shipments versus higher service revenues in the quarter just closed. Adjusted EBITDA for the segment was $28 million or 22% of revenue in the quarter, down $10 million year-over-year, driven by the margin dynamics just discussed. Moving on to cash and capital expenditure. We remain disciplined and focused on managing our operating expenses and working capital and generated cash from operations $26 million in the quarter. With a closing cash balance of $77 million, up $40 million from the end of the second quarter.

We closed the quarter with a net debt leverage ratio of 2.2x. Total CapEx spend in the quarter was $5.5 million, including final payments associated with our new facility in Israel. During the third quarter, we repurchased approximately 900,000 shares under our previously announced stock buyback program for a total cost of $3.5 million.

In summary, we produced a robust set of results in the quarter and continue to strengthen the company's balance sheet. With that, I'll turn the call back to Bruce.

Great. Thanks, John. Looking at the final quarter of the year, we have solid momentum across the majority of our business other than the timing uncertainty related to the U.S. government shutdown. Despite this, we continue to expect Q4 to be the strongest quarter of the year with both our enterprise and service provider customers. In our Cloud & Edge segment, out of an abundance of caution, we're assuming the U.S. government shutdown will impact new purchases associated with our ongoing voice modernization projects this quarter. This may prove to be a conservative approach, but it will take time for the government to fully restart once the new spending bill is passed by Congress. The outlook for the rest of our Cloud & Edge business remains consistent with our previous guidance.

In North America, we expect continued excellent execution with our Verizon projects and similar revenue to the recently completed third quarter. We're still early in the initial phase of this multiyear program with significant opportunity for multiple years beyond this as well as a large potential opportunity as Verizon completes their acquisition of Frontier. As I mentioned earlier, across the rest of North American service providers, we have an increased number of voice modernization projects that will begin to contribute in the fourth quarter. And we expect a seasonally strong quarter with enterprise customers as we renew several annual enterprise license agreements with multiple additional projects across financial, health care and industrial verticals. We expect the increased mix of software and services to contribute to significantly higher Cloud & Edge gross margins in the high 60s in Q4, similar to the previous year.

In the IP Optical segment, the solid third quarter results demonstrate that we're on the right path. In the fourth quarter, we're projecting sales to be at similar levels to the third quarter and increasing mid-single digit year-over-year. We expect India to remain one of our strongest markets. with sales increasing yet again both quarter-over-quarter and year-over-year. In addition to continued momentum with key customers such as Bharti and Tata Teleservices, we expect first revenue associated with the new Rural India broadband project. In North America and Europe, we expect sales to be fairly consistent with last quarter and with fourth quarter 2024. And starting this quarter, we expect our IP Optical maintenance revenue to be lower due to the completion of a maintenance contract with a European service provider associated with legacy access equipment.

As a result of all these mix changes, we anticipate IP Optical margins to be in the mid-30s in the fourth quarter. So based on these expectations for the fourth quarter, we're projecting revenue in a range of $230 million to $250 million and non-GAAP adjusted EBITDA in a range of $42 million to $48 million. As I mentioned earlier, while the U.S. government shutdown creates near-term timing uncertainty this quarter, the fundamentals have not changed. We are well positioned to benefit from the growing investment in data centers critical infrastructure and fiber networks to meet the exponential increase in data consumption. We expect the growth in our voice communications business to continue with investment across a wide range of service providers, enterprise customers and government agencies. And we've identified several new growth vectors for the company with the real-world adoption and application of AI technology to help our customers achieve autonomous network operation and the convergence of voice and the genetic AI within the enterprise.

Operator, that concludes our prepared remarks, and we can now take a few questions.

[Operator Instructions] And the first question comes from the line of Michael Genovese with Rosenblatt Securities.

Bruce, I'll start the call, you were talking about software and AI. So my question is, is this -- do we think about this as a driver of cloud edge growth rate in the future? Or do we think -- are we going to have automation and AI software as a category we talk about that will become significant? And if so, when?

Yes. Great question, Mike. We're actually thinking of it as a new category in a lot of ways. And there's really 2 elements kind of as I described in the comments. One is around AI Ops basically an AI engine that allows our customers to build their own smart agents to help them manage and operate the network. It builds on top of some of the other platforms we already have invested in and developed around large analytic engines and management systems, et cetera. So that's part of it, but it really spans both product categories. So you could really think of it as a new category on its own. The other part that we're really seeing some more momentum around -- and I've mentioned this a couple of times on earnings calls is as the convergence between voice and AI starts to increase in the enterprise, our products kind of sit in the middle here, and they provide a bridge between the traditional voice network and these new AI environments.

And there's a lot of different use cases there. So we -- for now, we're reporting that revenue within the Cloud & Edge segment, but in some ways, I'm thinking of it really as a new category.

Okay. Great. And then can you touch upon both for the quarter as well as the guide, just sort of characterize the Verizon Cloud and Edge business and the U.S. IP Optical business? Like just kind of summarize the third and fourth quarters, how those were in each of those 2 areas?

So in the case of Verizon, they're a 10%-plus customers. So we break out their information in our [ Q ] when you see that come out. If I recall correctly, Verizon grew about 20% year-over-year in the third quarter and was down from the second quarter. As I mentioned, second quarter is the best quarter we ever had with them. So we knew this quarter was going to be more around services and products. So again, just a really healthy quarter with Verizon and up year-over-year. If you recall, last year, in the third quarter, we were just really kind of getting started with our modernization program. And as John had mentioned, we shipped quite a bit of the infrastructure, the products and then started the service deployment. This quarter is a little bit different. It's more around services than products.

So hopefully, that helps a little bit on Verizon. On the U.S. IP Optical business, it does tend to be a little lumpy as we do different types of programs. As you know, a lot of the business there is with Tier 2 or Tier 3 were regional operators or around some critical infrastructure customers. And so we do see the revenue kind of go up and down quarter-to-quarter. What we're looking at is really the longer-term trend and the growth rate there. One of the things I mentioned was the -- obviously, the BEAD funding that you can kind of start to see come into the market -- many of the states now have provisional awards, and there's a review process to ratify that, and it was good to see the first project we don't clearly identify that's directly attached to the BEAD funding coming in. So that was nice to see.

Great. Great. And I'll just sneak one more in. Obviously, the reported numbers are reported numbers, we see them and they're affected by the shutdown. So I have to take your word on this next question. But would you describe sort of ex shutdown? Do you think that you would have been in line? Or do you think you would have beat nicely, like how much -- what would have happened if there was not a shutdown?

Yes. No, I think -- in fact, I think I mentioned it in the call that we would have been comfortably in the midpoint or above the midpoint with the opportunities. And really, it was in the last week -- and as you know, we transact and closed a fair amount of business in the last month of each quarter. And it was just clearly a distraction on anything going on. I spent several days in Washington that last week, and it was just obvious that things were getting impacted. Prior to that, I think everybody thought it wasn't going to happen. So it really started to scramble things in the last 10 days or so over the quarter.

I think you know, right, the amount of business that we're doing with these federal agencies now it's pretty significant for us. In 2024, I think it was high single digits of our Cloud & Edge business is all voice infrastructure. So it's a pretty substantial amount of business. And Q4 last year was a really good quarter for us in that space. And -- so I just feel like given the situation with the government still shut down at this point, the prudent thing to do is to take that out of our view for the rest of the year. Hopefully, that's a conservative view, but, I think that's the right thing to do at this stage.

And the next question comes from the line of Dave Kang with B. Riley.

First of all, just wondering if you can quantify the impact of FX and tariffs. I think I missed that?

Yes. So in the case of FX, John, I think in the quarter, we're about $3 million, I think, on OpEx. Is that right?

Yes. It's just under $3 million year-on-year from an FX impact there, Dave. The biggest component of that is the shekel. So we've seen pretty stable shackle through the -- over the last couple of years and then sort of with what happened in April, we said at the end of Q2 that we've seen a weakening of the U.S. dollar. And through the quarter, we've seen some stability on that. And then with the war in Iran, we saw another weakening as well. So the [ shareholder ] has been the major factor behind our FX issues at headwinds.

And right now, nothing changes. I think it's kind of similar. And really, we're trying to compare year-over-year to give you a comparison here on if we had stable FX relative to a year ago, what's the impact? That's what we're trying to quantify here. So on the tariff question, yes, yes. Yes. So it's still relatively small at this stage. We benefit from the U.S. MCA free trade agreement with anything we're manufacturing in Mexico, and there's some other provisions that we have for products that we're bringing in internationally. There is some additional costs associated more with cables and shelving equipment and things like that, steel, et cetera, that have tariffs attached to them. It's probably a $0.5 million a quarter headwind, something in that ballpark, Dave, at this point.

Okay. And then I just wanted to clarify, I think you said regarding federal mid- to high single digits. I thought you said the mid-single MST to high single-digit C&E.Is that correct? Or is it overall revenue?

Yes. I would -- given what we're selling there today in the U.S., it's all C&E. So I'm just trying to base it off the C&E numbers. So last year, we did $504 million, $505 million of revenue in C&E high single digits portion of that has now diversified into U.S. federal. So it's a very good business diversifies us from traditional enterprise as well as service provider. So it's an important element of the work we're doing.

Got it. And then lastly, on North America IP Optical, it was down -- just wondering if you can provide more color. Was it IP? Or was it Optical that was down, or were both down?

Yes. So the majority of what we're selling is either IP or IP over DWDM who are bundling basically routers with pluggables with line systems, et cetera. So most of the projects look like that today. And as I mentioned earlier, it does tend to be a little lumpy. As an example, last quarter, we had a nice big project with a critical infrastructure provider here in the U.S. this quarter was more focused around rural broadband customers. We expect this quarter looks pretty good with the pipeline and the backlog we already have there. And as I mentioned, the BEAD program. We think with that customer, we'll start to ship into that deployment. So it just moves around a little bit quarter-to-quarter. I did highlight, obviously, how strong EMEA was in the third quarter.

It was up, I think, 50% year-over-year. And so that was really nice to see, and it really helps with the margins, which tend to be better than what we see in the Asia Pacific region.

And lastly, on India, it was fairly strong. How long -- I mean is that sustainable since India can get a little lumpy at times?

It's been, I don't know, I think, 5 quarters in a row now where we've seen nice sustained momentum in India, and we have been diversifying to a little broader set of customers -- I always love talking about India. We have such a great partnership with Bharti in the region, the service and deployment team that we have that partners with them closely out in the market, helping deploy the products is so strategic. Unlike what you see with the investment around mobile infrastructure, which tends to be some big ebbs and flows, ups and downs as they activate new spectrum and then consume capacity. Most of what we're deploying there today is access and aggregation IP routing and if they're continuing to add more capacity to keep up with the growth in data. So it tends to be a more linear deployment -- it's a little early to nail down next year yet, but it feels like we've got some good sustainable momentum there.

And the next question comes from the line of Tim Savageaux with Northland Capital Markets.

Just a couple of questions. I'll start with a focus on IP optical. I think you had kind of a surprise positive EBITDA results. And given your guidance, it sounds like maybe you don't expect that to necessarily maintain in Q4, maybe a modest negative. But given the double-digit growth rate, which I think is finally apples-to-apples, and it looks like you're guiding to something mid-singles next quarter. As you look forward for IP Optical, I mean, can that business be a positive contributor or breakeven in '26? And what type of growth rate do you think you can see here and what appears to be a pretty strong end market environment?

Yes. Thanks, Tim. Well, so first of all, obviously, it was John said -- as John said, very pleasing to see a positive EBITDA contribution in the third quarter. I think the mix was a large portion of that with the European market being very strong in the quarter. We know we can be positive on EBITDA at the right level of revenue and margin, like, obviously, that's a no-brainer, but we got to get there. So at a $90 million plus with margins in that 40% range were there, but as I mentioned in the mix in the next quarter, we're not seeing quite the same favorable mix. We have more India, less Europe. And so that just drives the equation.

Look, our objective is clearly that this business is a positive contributor for the company. Otherwise, we wouldn't be investing in it. So that's absolutely the objective the growth this year now at the end of the third quarter is higher than the revenue level we had last year, even though we don't have the revenue going into Eastern Europe. So we've kind of replace that now with new growth, and that's what we needed to do. It's taken us a year or so to get there, but it's great to see getting to that milestone. The next one is sustainable positive contribution for the business.

Okay. Great. And before we leave that, I'd like to get an update on what you're seeing in terms of impact from mergers among your competitors or any other trends that are standing out? It sounds like a little more going on in the data center interconnect side in Europe. If you got anything additional to call out in terms of what's happening fundamentally across that segment?

Yes, it was a relatively quiet quarter from big shifts because of changes in the competitive environment and things like that. So I didn't have a lot of kind of notable examples to point to this last quarter. As you know, we brought to market a couple of new products focused on the data center market -- not focused on selling pluggable optics into hyperscale data centers, not that type of focus really around systems selling transport systems and IP aggregation into data center. So I pointed out a couple of good examples in Europe that we had -- we had nice 400-gig Optical transport win in Japan, which included picking up data center traffic.

And so where we're really focused is working often through our telco partners to attack the data center and aggregate traffic out of the growing investment in data center. Clearly, as these data centers get more sophisticated, more diversified spread into other regions, there's a need for more and more fiber transport going into the data centers. And so I think the timing on some of the new systems products that we brought to market is good, and we're seeing some good wins here and starting to build momentum. And in many cases, it looks a lot like our specialty around critical infrastructure where low latency really matters the ability to encrypt individual data streams really matters, and that's where we've really specialized.

Great. Just maybe a couple of more quick ones. We saw a very strong outlook plans for Q4 capital spending from AT&T this morning. And I know they're not reading the 10% list, but maybe not too far away. Whether it's just run rate business or new projects, which you did refer to starting up in Q4, any comments on expectations there with -- and could they join Verizon on the 10% list sometime next year?

Yes. So I know and I listening to their call this morning, John was pretty vocal and passionate around their plans to reduce operating costs and really drive efficiency across the network. Talked about their copper network plans multiple times. As you point out, they're a very important customer for us, one of our largest customers. And I think, again, where we're focused is helping reduce operating costs across the network. So -- it was good to see healthy returns for them and how they're operating. And hopefully, that translates into more growth for us as well.

Okay. Great. And finally, we're trying -- this is pretty complicated, but I want to try and take a quick swing at the shutdown impact, both in Q3 and Q4 from what you said, that looks like kind of a mid-teens -- million type situation than you would probably would be around your original guidance range without that. So in Q3, I want to understand a little bit more, it looks like U.S. revenues were down something on the order of $20 million sequentially. Verizon a little but hung in there pretty well. Are we seeing some of the Q3 impact of the shutdown there in that number? Are there other dynamics driving that? And overall, in terms of the effect in Q3 and Q4, am I in the in the -- ballpark if you kind of $10 million one quarter, $15 million in next year or something like that?

Yes. So you're in the ballpark, and I do want to make sure, I'm as clear as I can on it. So there was there was an impact in the third quarter, again, in the last -- essentially, the last week or so. If not for that, we would have been comfortably midpoint plus in Q3. So I think you can drive kind of a pretty good estimate from that. We're not projecting that revenue to catch up in Q4. At this point, we've effectively removed essentially the majority of new business, new orders that we might receive in the quarter from any of the U.S. federal agencies.

Again, that may prove conservative. But at this stage, really nothing is getting through the process. There's a lot of the civilian employees for load and that just slows everything down or freezes everything. As I mentioned last year, the business U.S. DoD was a significant part of our business. The first half of this year was on a similar run rate. So it definitely has an impact in the fourth quarter and as the majority, say, the vast majority of why the numbers are lower. But as I mentioned, the rest of our projections are basically in line with what we expected in the last earnings call.

And the next question comes from the line of Christian Schwab with Craig-Hallum Capital Group.

Great. Most of my questions have been answered, but just a follow-up on the government business -- eventually the government will reopen, we'll have that catch up next calendar year. What -- given -- excluding that catch-up, when do you expect your government program business growth rates to be in calendar '26 versus '25?

Yes. It's obviously the right question, and it's a little early to be able to clearly answer that, particularly when the government doesn't even have a budget at this point. Trying to answer it in a slightly different way. I mentioned that we did have a new win on a brand-new project basically with another top 3 U.S. government agency in the third quarter that is starting their own voice modernization program that's additive to the business that we've been having so far. So what we're obviously doing is expanding the deployments with current customers that are modernizing and then hunting for new ones, right, that we'll do similar programs. And that's what I think drives the growth next year. If we can bring on even one more new major agency, it moves the needle pretty well for us. So my obviously, my aspiration here for next year as this business grows at a really a solid rate going into next year as we build on the programs that we already have.

Great. And then just a follow-up on that. What is the typical -- can you help us with the typical yearly run rate that a new win for voice modernization of the government agency means [indiscernible] a broad range?

Yes, yes, sure. So there tends to be a combination of hardware systems -- in a lot of cases, if you're going into an existing base, let's say, they're looking for survivability so they want capabilities both on-premise as well as running in their cloud data centers. And so there's elements of hardware we'll deploy. There's clearly a lot of software systems that will run inside their data centers. And then there's quite a bit of service support that goes into standing these up and deploying them. So those 3 elements. And of course, we'll recognize revenue on hardware shipment, we'll recognize some software, some ratably, some upfront, but some ratably and then the service is all ratably over the program.

So kind of getting to the answer to your question, a project will be multiple years in the making and on the larger ones, we're talking tens of millions of dollars over that period of time to go and modernize the infrastructure.

And the next question comes from the line of Rustam Kanga with Citizens.

Great to see the provisional BEAD awards. And Bruce, you kind of mentioned expecting to see momentum in the coming months. Just wondering -- are you factoring any of that into your outlook? Or is that still a little bit too presumptuous and more on a wait-and-see basis?

Rustam, yes, good question. So I've talked a few times, I've really, in some ways, discounted bed from a timing perspective, at least anyway for us. A lot of the investment initially goes into construction into optics into driving fiber, et cetera. And the portion that we do kind of the middle mile aggregation and transport tends to be later in the program. So it was great to see kind of the first win and opportunity kind of come through here probably a little sooner than I expected.

As you review all of the awards to each of the states now, there's a lot of money that's been provisionally granted and it will be interesting to see just how this process unfolds over the next few months on approving the [ NC ] programs go into execution. At this stage, I haven't figured out how to size this for us next year. I probably wouldn't have put much on it initially, but maybe I've been too conservative in my thinking there. So I have to learn a lot more over the next few months. In fact, we have a customer event coming up next month called Insights and one of the panels we're focused on bringing in some experts that focus all their time around bed and bed funding programs. So it will be interesting to get their perspective on how they see it rolling out.

Great. Appreciate that. Just wanted to also just saw in the supplemental slides that there was a historically large tick up in the direct versus indirect mix there. Anything interesting to call out there? Or is that more just a function of maybe some of the shutdown dynamics?

Yes, I'll have to go look just to double check, but I'm certain it's tied to the federal business. All of those sales flow through a fairly complex set of partners to get to the end customer. So they'll be all in our indirect number.

Makes total sense. Last one for me, just talking about the new product with Acumen and the potential emergence of a new category, I understand it's currently falling into C&E, but is that an area that you -- you continue to expect to announce new product innovation and -- is it overly presumptuous to think that you might be telegraphing that down the road you would view Ribbon as having sort of 3 segments to the business rather than 2?

Yes, it's probably much too early for me to predict that yet from an actual financial reporting perspective. But it is interesting, this product really spans both business units, if you will. It doesn't necessarily fit neatly into one or the other. And so we'll just have to think about how do we manage that -- it's been really interesting since we announced this project -- this product and announced the project with Optimum is our first lead customer. We've gotten just a ton of interest and I've been to a few industry events and actually been able to do live demonstrations of this product that, again, allows our customers to literally build their own genetic agents. And take their information that's being collected off the network and feed it into an LLM of their choice, basically. It's pretty -- it's really a pretty phenomenal capability that's put in the hands of people that can build their own things here. So we'll see just how transformational is, but it's been pretty -- a lot of energy around it the first couple of months. And these from an economics perspective, just to kind of stand up the solution and the network, get it running we're talking several million dollars to there's the ability here for this to really scale as we can get it out to more customers. .

And the next question comes from the line of Ryan Koontz with Needham & Company.

Just a couple of clarifications, if I could, Bruce. On the bead win, I assume that's for middle mile optical and aggregation. So you're selling into kind of the backhaul from these remote nodes? .

Yes, exactly, Ryan. So I'll call it middle mile right IP over DWDM type infrastructure or network design.

Is that typically handled by the local incumbent telco or some kind -- a third party that's maybe a consortium or as such?

Yes. In this case, it's not a consortium, but it is a number of -- operators kind of working together on the infrastructure, so [indiscernible] .

Yes, cool. And then on Verizon going forward, how should we think about that kind of mix of product and service going forward? Is it going to always be kind of seasonal? Or how should we frame that up over the next 18 months into next year? .

Yes. We'll try and give as good a visibility as we can. In addition to the modernization program with them, we obviously have a number of other pieces of business and a lot of what we're transacting or selling these days is very software-oriented. So they will move the needle, an extra $5 million here or there or less makes -- does make an impact on the overall numbers. So I think the way to think of it is -- we have this background set of activity focused on modernization and then you'll see a few additional things kind of come in and out a few times a year. And so it will create a little bit of variability that way.

More lumpy.

yes.

All right. Great. And then lastly, just kind of a big question. You talked about genetic AI. And I assume you're still mostly session border controllers into these genic AI applications? And how do you think about -- how do you think about that TAM right now?

Obviously, very early in the market development. Yes. So with some -- certainly, I think the core of the solution is going to be a session border controller what we're seeing the most interested in is the cloud-native versions of the products. So these are kind of SaaS environments being stood up in the cloud -- the first couple that we've done have been AWS-based. So we've -- I think we're out in front on the cloud native implementation of not just the SBC, but then all the things that goes around it, the policy routing, the analytics, the management system and then pair that with a kind of a WebRTC set of APIs that allow basically programmatic access to the network functions, the telecom network functions.

So it's a pretty sophisticated set of solutions that then made up into the customer's ant Gentic AI platform that they're developing. And of course, that's all the buzz right, is how do you leverage Gentic AI to really transform all these different types of services, whether it's contact center or SaaS applications, those sorts of things. So I think the interface into those more and more will be voice. So I think that really puts us in a good spot.

And the bulk of that, Bruce, that technology stack was built for enterprise virtually, just traditional enterprise was?

It's really -- the great thing about the technology is that we can deploy it inside a telecom network or inside an enterprise, how we position and sell it and package it is different, but the core technology is very similar.

And there are no further questions at this time. I would like to turn the floor back over to Bruce McClelland for any closing remarks.

Great. Thank you. Well, thanks again for being on the call and your interest in Ribbon. We look forward to speaking with many of you at upcoming investor conferences and updating you on our progress. Operator, thank you, and that concludes our call.

Thank you, sir. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.