Ribbon (RBBN) Q2 2025 Earnings Call Transcript

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DATE

• Wednesday, July 23, 2025, at 4:30 p.m. EDT

CALL PARTICIPANTS

• President & Chief Executive Officer — Bruce McClelland
• Chief Financial Officer — John Townsend

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RISKS

• Currency headwinds, particularly from the weakening U.S. dollar, are expected to create approximately $5 million of annual earnings pressure for calendar year 2025, primarily impacting operating expenses and, to a lesser extent, gross margin. Future outcomes will depend on exchange rates remaining stable.
• Gross margin and adjusted EBITDA (non-GAAP) for the full year 2025 are currently tracking toward the lower end of management's guidance range, due to currency pressures and a higher mix of hardware and professional services sales.

TAKEAWAYS

• Revenue: $221 million in revenue in Q2 2025, up 15% year over year and 22% sequentially, topping the high end of guidance.
• Adjusted EBITDA: Adjusted EBITDA was $32 million in Q2 2025, increasing 47% year over year and rising $26 million sequentially, at the high end of guidance.
• Cloud and Edge Segment Sales: $137 million in revenue for the Cloud and Edge segment in Q2 2025, reflecting a 24% year-over-year increase and 27% sequential growth; Product and service sales, excluding maintenance, rose 48% year over year.
• Cloud and Edge Segment Gross Margin: 61.9% non-GAAP gross margin in Q2 2025, down 60 basis points sequentially (non-GAAP) due to a higher mix of hardware and professional services.
• Cloud and Edge Segment Adjusted EBITDA: Adjusted EBITDA for the Cloud and Edge segment was $37 million in Q2 2025, up 43% year over year and representing 27% of segment revenue.
• IP Optical Networks Segment Sales: $84 million in revenue for Q2 2025, a 2% increase year over year and 14% sequentially; Excluding Eastern Europe, year-over-year growth was 5%.
• IP Optical Networks Gross Margin: 35.9% non-GAAP gross margin for the IP Optical segment in Q2 2025, which was within the target range for the second quarter, up 760 basis points sequentially (non-GAAP) but down approximately 300 basis points from the prior year on a non-GAAP basis due to hardware and geographic mix.
• IP Optical Networks Adjusted EBITDA: $(5) million loss in Q2 2025 compared to a $(4) million loss in Q2 2024.
• Service Provider Revenue: Grew 18% year over year and 17% sequentially, including a record quarter with Verizon, which accounted for just over 20% of total company sales.
• Enterprise Revenue: Increased 7% year over year and 34% sequentially, benefiting from delayed federal agency deals and critical infrastructure wins.
• Geographic Performance: Sales in India rose over 40% year over year; IP optical sales in North America grew over 45% year over year; EMEA sales were up 42% sequentially and flat year over year, offsetting Eastern Europe declines.
• Book-to-Bill Ratio: Remained above 1.0 times, consistent with prior quarters.
• Cash and Capital Expenditure: Operations used $1 million in cash; closing cash balance was $62 million in Q2 2025, down $12 million sequentially; Capital expenditures were $6 million in Q2 2025.
• Stock Repurchase: Repurchased 573,000 shares for $2.3 million under a newly announced $50 million buyback program in Q2 2025.
• Q3 2025 Guidance: Revenue projected at $213 million–$227 million for Q3 2025; non-GAAP adjusted EBITDA expected in a $28 million–$34 million range for Q3 2025.
• Gross Margin Outlook: Expected non-GAAP gross margin to improve 150–200 basis points sequentially in Q3 due to a greater software mix and fewer hardware shipments.
• Full-Year Revenue Guidance: Management reaffirmed full-year revenue guidance at $870 million for FY2025, implying 15%–20% revenue growth in the second half compared to the first half of FY2025.
• Deferred Revenue: Rose from $23.5 million at Q1 2025-end to $31.7 million at Q2 2025-end, driven mainly by multi-quarter product and services programs as well as renewal timing of maintenance contracts.
• Legislative Impact on Taxes: Recent changes allow for immediate expensing of U.S. R&D costs, expected to deliver approximately $15 million–$20 million in 2025 cash tax savings.

SUMMARY

Ribbon Communications (NASDAQ:RBBN) delivered record quarterly revenue of $221 million in Q2 2025, driven primarily by strong uptake in both its Cloud and Edge and IP Optical Networks segments, particularly among tier one service providers like Verizon and leading operators in India. Management highlighted that the company’s revenue and adjusted EBITDA reached the high end of guidance on a non-GAAP basis, with a book-to-bill ratio remaining above 1.0 and deferred revenue building quarter over quarter. Executives cited new business wins in North America, Asia Pacific, and EMEA, with particular emphasis on critical infrastructure and federal agency contracts as drivers of enterprise growth. The company announced a stock repurchase program and expects to benefit from U.S. legislative changes affecting R&D tax treatment, projecting notable cash tax savings of approximately $15 million to $20 million in 2025.

• President & CEO McClelland said, “The initial phase of the [Verizon] program is a three-year program. We would certainly expect to see that continue, you know, well beyond that.”
• Chief Financial Officer Townsend stated, We do see headwinds roughly around $2 million a quarter. referring to expected ongoing currency effects if exchange rates persist at current levels.
• McClelland described new wins with “[a] tier one telecommunications operator in Southeast Asia” and expansion in European defense and critical infrastructure sectors as key market differentiators for future growth.
• The company’s backlog and booking trends may indicate continued strong performance into Q4, supported by increased deferred revenue (from $23.5 million at the end of Q1 to $31.7 million at the end of Q2) and a multi-year investment cycle across key geographies.

INDUSTRY GLOSSARY

• Class 5 Switch: A local telephone exchange switch used to connect subscribers to the public switched telephone network, often subject to modernization in fiber and VoIP migration projects.
• Book-to-Bill Ratio: The ratio of orders received to units shipped and billed within a given period, used as an indicator of demand versus supply.
• Media Gateway: A device that converts voice signals from one digital format to another or between digital and analog signals, facilitating migration away from legacy TDM systems.
• Neptune Router: Ribbon’s proprietary IP aggregation platform, highlighted as integral to major modernization and network transformation deployments.

Full Conference Call Transcript

Bruce McClelland: Great. Thanks, Fahad, and welcome to the Ribbon team. Afternoon everyone and thanks for joining us today to discuss our Q2 results and outlook for the rest of the year. I'm very pleased with our strong financial performance in the second quarter with revenue reaching a new all-time high for the quarter. We're tracking well in the first half of the year against the growth objectives we set, with revenue year to date increasing 8% year over year and adjusted EBITDA growth year to date of 13% year over year. Demand in the North American market is very strong across both service provider and enterprise market verticals, including US federal agencies.

As we continue to win some of the largest and most challenging voice transformation opportunities in the industry, resulting in significant growth year over year in our cloud and edge business. Our portfolio is the broadest in the market and supports networks with modern cloud-centric unified communication systems. It can be deployed either on-premise or in the cloud. Ribbon's innovation in cloud-native voice and edge routing solutions is winning customers and gaining momentum. Building on the first quarter activity, we continue to see strong investment in next-generation fiber broadband networks, resulting in very good growth in Asia Pac and North American markets.

Excluding sales to Eastern Europe, our IP optical business grew by 25% year over year in the first quarter, and we continued that momentum with sales increasing another 14% sequentially in the second quarter. In particular, tier one operators in India such as Bharti Airtel continue to invest in transforming their IP services network with new advanced routing platforms, and adding fiber capacity to support their growing mobile networks. In North America, we continue to expand our IP networking footprint with expanded deployments with regional service providers, and critical infrastructure networks such as AEP. So the demand picture remains strong and we continue to expect good growth this year.

In the second quarter, we delivered revenue and earnings at the high end of our guidance. Revenue was up 15% year over year and 22% sequentially, above the high end of our guidance. Sales to service providers increased 18% year over year, and 17% sequentially, driven by a record quarter with Verizon and strong sales to Bharti in India as well as a new logo win with a tier one telecommunications operator in Southeast Asia. Enterprise revenue also increased 7% year over year and 34% sequentially, as a result of strong sales to US federal agencies, and new critical infrastructure wins, including several deals that were delayed from the first quarter.

Adjusted EBITDA increased 47% year over year, an increase of $26 million sequentially, right at the high end of our guidance. These results align with the plan we laid out at the beginning of the year. Our visibility into the second half of the year is solid, with book to bill in the second quarter above 1.0 times similar to the last several quarters. As we anticipated, gross margin improved substantially in the quarter with a stronger mix of software and better regional profile. This was modestly below our guidance range with additional hardware shipments and professional services in the quarter. Now a little more detail on each of our operating segments.

We had a great quarter in our cloud and edge business with sales growing 24% year over year and 27% sequentially. Excluding maintenance revenue, product and service sales increased 48% year over year. The strong growth in sales resulted in a 43% increase in adjusted EBITDA. The increased revenue in the quarter was primarily a result of higher sales to global service providers increasing 28% year over year highlighting the broad base of interest that we have in network modernization and improving efficiency. This includes our multi-year voice transformation program with Verizon, which continues to progress very well and is focused on a replace. In addition, we're working with Verizon to virtualize their existing wireline voice soft switch cores.

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

We expect an improvement in gross margin in the second half to the more typical mid-sixties for the segment with a higher mix of software and continued improved service margins. In our IP optical segment, we had a number of notable wins in the second quarter which drove sales up 13% sequentially and up 2% year over year. Excluding Eastern Europe, IP optical sales to all of the customers increased 5% year over year. Our footprint and presence in India continues to grow. With sales up more than 40% year over year in this region in the second quarter.

In addition to expanding the footprint of our IP routing solutions at Bharti, Tata, and Vodafone Idea, we have a new win supporting the deployment of broadband Internet access in rural India. Sales in Southeast Asia were also strong with multiple new projects across the region, including a new win with a tier one service provider that validates the competitiveness of our optical portfolio. We continue to see new opportunities across the region, partially due to vendor consolidation, as well as the need to build networks that have no Chinese OEM equipment. IP optical sales in North America were also a standout this quarter growing over 45% year over year.

We're supporting a number of market segments and use cases including regional and rural broadband Internet expansion, critical infrastructure, private secure network for utility companies such as AEP, and TDM voice network modernization and IP traffic aggregation with telecoms. Service providers. Sales in the EMEA region were solid. Up 42% sequentially and essentially flat year over year mostly offsetting the loss of sales from Eastern Europe. As expected, gross margins for the IP Optical segment improved significantly in the second quarter increasing over 700 basis points sequentially. The improvement was tied to several factors, including higher North American sales, improved product mix, and margins in Asia Pac, and better fixed cost absorption related to higher volume.

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

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

Non-GAAP operating expenses were $87 million, reflecting the seasonality in expenses such as sales commissions, variable employee compensation, which we expect to increase in the second half. Second quarter adjusted EBITDA was $32 million again at the top end of our guidance. And an increase of $10 million or 47% year over year. Our non-GAAP tax rate for the quarter was 34% and our interest expense was $11 million including amortization of debt insurance costs. Both of these were in line with our expectations. Quarterly non-GAAP net income was $10 million compared to $9 million in the prior year. This generated a non-GAAP diluted earnings per share of $0.05 which was the same as the prior year.

Our basic share count was 177 million shares and our fully diluted share count was 180 million shares for the quarter. Now let's look at the results for our two business segments. Our cloud and edge business continued to deliver impressive growth in the second quarter, US federal agency customers, maintaining the network transformation momentum that we've created. We generated revenues of $137 million, an increase of 24% year over year. And up $29 million from Q1. Non-GAAP gross profit of $85 million was up 16% year over year although the higher proportion of both hardware and professional services resulted in non-GAAP gross margin of 61.9% which is down from the prior year.

Adjusted EBITDA for the segment was $37 million or 27% of revenue in the quarter. A 43% improvement year over year. Now on to our IP Optical Networks results. We recorded second quarter revenue of $84 million a 2% increase versus the prior year. Second quarter non-GAAP gross margin for IP optical was within our normal range of 35.9%. Up 760 basis points sequentially. But down approximately 300 basis points from the prior year. Reflecting the hardware and geographical mix between those quarters. Notably, we had another excellent quarter in both India and North America. IP Optical's Networks adjusted EBITDA was a loss of $5 million versus a $4 million loss in the prior year.

Moving on to cash and capital expenditure. Cash from operations was a usage of $1 million in the quarter, with a closing cash balance of $62 million down $12 million from the first quarter. This was principally driven by high working capital, resulting from a sequential increase in sales and the capital expenditure and share repurchases which I will cover momentarily. We closed the quarter with a net debt leverage ratio of 2.3 times. Whilst we still need to complete our evaluation, we expect a near-term cash benefit from the recent tax bill passed by Congress. The bill enables companies to return to expense in U.S. R&D task costs as they are incurred.

Rather than depreciating them over time and it also permits catch up on deferred deductions from prior periods. This will result in an estimated cash tax saving of approximately $15 million to $20 million for 2025 compared to our projections coming into the year. Total CapEx in the quarter was $6 million including a final $2 million expenditure in relation to the new R&D facility in Israel that we mentioned last quarter. We expect normal capital expenditure for the year to be approximately $12 million in addition to the $8 million relating to our new Israel facility.

In the second quarter, we announced a new stock repurchase program to use a portion of the company's free cash flow over the next several years to repurchase up to $50 million of the company's common stock. During the quarter, we repurchased 573,000 shares under the program for a total consideration of $2.3 million. The underlying trends in app is just continuing to prove. And we continue to look at ways to accelerate shareholder value creation. With that, I'll turn the call back to Bruce.

Bruce McClelland: Great. Thanks, John. As we look forward to the second half of the year, the demand picture remains robust. We anticipate a seasonally stronger second half with revenue increasing 15% to 20% as compared to our first half results. Similar to FY2024. We continue to project revenue in line with our full year guidance of $870 million. Visibility to this target remains good following a first half year to date revenue growth of 8%. And higher backlog for the rest of the year as compared to the same point last year. Similar to last year, we expect the fourth quarter to be the strongest quarter of the year given the timing of enterprise deals, and service provider projects.

Longer term, we're in an up cycle and gaining momentum. In a multiyear investment period to modernize communication networks across service providers and enterprise verticals. And are in a great position to win a large share of this opportunity as we continue to innovate to leverage our entire voice and IP networking portfolio to differentiate our offering against larger entrenched competitors. And as our first half performance highlights, we continue to secure new wins with our IP optical portfolio as customers invest aggressively to keep up with the growth in traffic driven by mobile broadband, fiber network expansion, and explosive data center growth. From a profitability perspective, the higher year over year sales support continued growth in the bottom line.

Although there is some potential pressure on OpEx and gross margin in the second half of the year. Due to the weakening US dollar. On a full year basis, both gross margin and EBITDA are trending towards the lower end of our guidance range. Focusing specifically on the third quarter, we're projecting the business to look very similar to our exceptionally strong second quarter. In our Cloud and Edge segment, we're projecting revenue consistent with last year and in a similar range to the second quarter of this year. We expect higher sales to a variety of enterprise and US federal customers, offsetting lower shipments this quarter to US tier one service providers.

Verizon deployments are expected to continue at a very strong pace strong professional service revenue, but lower equipment and software revenue this 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. In the IP optical segment, we're projecting 5% to 10% year over year growth in the third quarter. The key trends in this business include the following areas. In North America, we're continuing to build momentum with both critical infrastructure and regional service providers, tied to the growth in fiber networks.

We're also effectively leveraging our IP routing portfolio to further differentiate our voice core platform, creating opportunities to land and expand inside major service provider networks. The latest product in our innovation pipeline is our new modular Neptune 2714 router that was recently introduced. We expect to achieve general availability this quarter and have a healthy sales funnel and trials underway. And have secured our first win. We expect continued momentum in Asia Pac with strong sales in India, and Southeast Asia similar to the last several quarters. Bharti, Vodafone IDEA, Tata, and others continue to expand network capacity and we see additional opportunities related to expansion of rural Internet access. And data center interconnect in India.

And we have a lot of activity in Europe and the Middle East. With both critical infrastructure and defense agency projects expanding secure command and control networks, which should contribute higher gross margins. We continue to make solid progress towards our overcoming the loss of revenue from Eastern Europe, and we remain committed to achieving profitability in the near term. Overall, for the company, we expect continued improvement in gross margin in the third quarter. While there remains a lot of uncertainty over where US tariffs will settle, and any reciprocal trade barriers that may be implemented, at the current time, we're not projecting a material impact on our business.

So based on the foregoing, for the third quarter, we're projecting revenue in a range of $213 million to $227 million and non-GAAP adjusted EBITDA in a range of $28 million to $34 million. As I mentioned earlier, the overall demand picture remains robust and similar to last year, we expect the fourth quarter to be the strongest quarter of the year given the timing of enterprise deals and service provider projects. We are well positioned to benefit from the growing investment in fiber networks, meet the exponential increase in data consumption. And we expect the growth in our voice communications business to continue with investment across a wide range of service provider and enterprise customers.

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

Operator: Thank you. We'll now be conducting a question and answer session. Before pressing star one. One moment please while we poll for questions. Our first question today is coming from Michael Genovese from Rosenblatt Securities. Your line is now live.

Michael Genovese: Great. Thanks very much. Good afternoon, guys. I guess, I knew, like, everything I heard on the conference call that you just said, so I just need a couple things explained to me which are, first of all, the gross margins being a little bit lower expectations for the second quarter. What happened there?

Bruce McClelland: Yeah. Hey, Mike. So that was, you know, primarily just a shift towards a little more hardware in the cloud niche segment, the shipments there. It was part of the reason we ended up at the higher end of the guidance range or above the guidance range. And so that just obviously, just has a bit of an effect on the overall gross margin. That was the primary reason. Second, we had a little more professional services in the quarter as well. Associated with some of the modernization programs. So both of those have a little less overall gross margin relative to selling software, obviously.

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

Bruce McClelland: Yeah. So if I just kinda compare it year over year first, so second quarter is up 15% versus second quarter last year. And then I think if you look at the midpoint of our guidance for third quarter, we'd be up about 5% relative to third quarter last year. So if you look at our full year guidance up about 5.5% versus 2024, we're kinda off to a good start. First, you know, first half of the year is up 8%. Got Q3 guided up about 5%. And then, you know, if we have a, obviously, a solid Q4 like we did last year, I think we're in really good shape.

That sequential, you know, kind of flatness Q2 to Q3, primarily because Q3 ended up ahead of the curve, really.

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

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

Michael Genovese: Okay. Perfect. I'll pass it on.

Bruce McClelland: Thanks, Mike.

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

Ryan Koontz: Great. Thanks for the question. Bruce, can you give us any more color on the Class five replacement opportunity as it applies to other large wins in the pipeline? Do you think there's international opportunities? And then what do you correlate kind of these opportunities with? Is it do you directly correlate it with fiber deployments and they're looking to kinda just radically reduce OpEx in a particular region, helpful. Thank you.

Bruce McClelland: Yeah. Thanks, Ryan. Yeah. There's definitely a correlation between the fiber upgrade and the class five upgrade. Not so much because the technologies plug into each other, but typically what we'll see is a telco continuing to push fiber deeper and deeper moving traditional copper lines to a voice over IP, voice over fiber capability. And then for the long tail, if you will, of remaining lines, it makes a lot of sense to modernize that class five switch. So they don't have to wait until the entire fiber penetration is at 100% were able to capture some pretty significant cost savings by basically doing the switch modernization in parallel with the fiber deployment.

And as you mentioned, right, that kind of approach applies really to any wireline operator particularly in North America. Where there's a traditional class four, class five switch architecture that's been put in place, you know, 35 years ago. You go to Europe, the network architectures look a little bit different. You see more convergence between mobile and fixed lines through an IMS architecture. And we participate in some of those programs as well. More focused on a cloud-native implementation of our voice core, our SD our policy server, etcetera. So similar idea, just probably a little different architecture and implementation.

Ryan Koontz: Helpful. Thanks. And what's the general tone on CapEx these days, Bruce? I mean, we've been hearing some relatively positive commentary around accelerated depreciation. Maybe starts to open up a little more CapEx in the coming quarters. Any commentary there you've heard from customers?

Bruce McClelland: Yeah. You know, it's so fresh right now. A few weeks old, and I'm not sure how many people have read the thousand pages of the bill yet. But, clearly, that's a tailwind for the industry. You know, as John mentioned, it benefits us being able to normally expense the R&D investments that we're making and other capital investments. But even more significantly for our customers where they're able to fully expense the capital investments that they're making in the US. That's a huge deal. You know, I think across the industry billions of dollars of additional cash flow again, as I say, it's early.

I'm not sure I've heard a lot of direct dialogue on it other than, obviously, you know, Mr. Stankey was pretty vocal on that on his call today.

Ryan Koontz: Yeah. Exactly. Great. And then on the maybe last question, and I'll pass it on. But commentary on private networks, I know you guys are pretty strong in Europe and some US government projects. Any kind of broad commentary on what's the spending environment like around voice and even optical and routing in the enterprise?

Bruce McClelland: Yeah. Great question. So we, you know, in North America kinda two different initiatives. One focused on voice modernization with many of the large DOD agencies and have a really great pipeline and series of programs going there. And we've are fairly early, but now starting to see, you know, a number of key wins in the US for critical infrastructure, energy companies, transportation, those sorts of areas. And we think that's a big opportunity for us because we haven't done a lot in that space historically. I think those are by channel, Bruce?

Ryan Koontz: Sorry to interrupt.

Bruce McClelland: Yeah. No. Good question. Certainly, any of the government-related programs are through channels. Typically, you're going through a series of large system integrators and kinda specialty providers. There has been, you know, kinda obviously a renewed focus in that space around making sure every dollar that's spent is being very efficiently used and trying to reduce the amount of overhead in getting technology into the hands of the agencies and kinda streamlining that whole sales process.

In the short term, that kinda, I think, delays decisions a little bit, but in the longer term, I think it really pays you know, plays to the strength of the technology OEMs and, you know, makes our products more cost-effective and, you know, achieve the goals that the government's trying to focus on here. So I think in Europe, obviously, there's a large step up in spending around defense spending across Europe today. You know, countries like Germany and several others are gonna spend and invest a lot more around defense than they have in the past. We've got a series of customers in that region that are really strong businesses for us in Israel and Switzerland and Finland.

And we're really looking to expand our presence there both data transport as well as in voice modernization. So you know, I think we'll invest more there and try and replicate some of the success we've had here in the US.

Ryan Koontz: Great. Thanks so much. That's all I've got.

Bruce McClelland: Great. Thanks, Ryan.

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

Dave Kang: Thank you. Good afternoon. First question is did you guys have any FX impact?

Bruce McClelland: Yeah. Hey, Dave. John can probably comment a little more. We yeah. We definitely see, you know, the weakening US dollar as a headwind from an OpEx perspective. And, John, what was the impact in the second quarter?

John Townsend: In the second quarter, David, it wasn't huge. Most of the sort of weakening of the dollar occurred during the second quarter. So probably on OpEx, it's about a million dollars in the second quarter. But clearly, as you look forward for the rest of the year, then if everything stays as this and all this is relative to, you know, our expectations at the start of the year and the guidance set there. We do see headwinds roughly around $2 million a quarter. And that's, you know, really depends if the current exchange rates hold. And, you know, the currency we're seeing, the pressure from are the shekel, the euro, and the Canadian dollar in particular.

So, obviously, you know, the one thing I can say is the exchange rates won't stay where they are. But it's just you know? But if they do, then that's the likely impact.

Dave Kang: Got it. And then regarding gross margins, sounds like you're guiding third quarter gross margins to increase 150 to maybe 200 bps sequentially just if you can go over the dynamics behind that.

Bruce McClelland: Yeah. That's about right. I think, you know, it's really across both of the businesses. The mix that we're seeing in the third quarter in our IP optical business should result in quarter over quarter improvement in that segment. And then in cloud and edge, as I commented, we expect less hardware shipments in the quarter, and less media gateways and more of a software mix in the third quarter, which kind of moves us back to more maybe more traditional gross margin mixes for the business. As you know, when we were awarded the Verizon contract last year, we did expect that the overall gross margin would come down as a result.

Obviously, super accretive, you know, on the bottom line, but the additional services and hardware just carry a lower gross margin than the software.

Dave Kang: Got it. And my last question is, I'm just wondering if you had any order pull-ins during the quarter?

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

Dave Kang: Alright. Thank you.

Bruce McClelland: Thanks, Dave.

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

Tim Savageaux: Hey. Good afternoon. I wonder I think you mentioned a record quarter at Verizon. I wonder if you can be a bit more specific on that looks like that might take them up around 20% of revenue. I just wondered if you could talk to us in more detail. On where Verizon ended up and also what the dynamics were across the rest of the service provider space, which is to say if they grew as much as it appears they did like you might have seen some growth in the rest of the service provider world and but anyway, and I'll follow-up from there. Thanks.

Bruce McClelland: Yeah. Thanks, Tim. Yeah. So your number is almost bang on, and you'll see it in the queue as we publish our, you know, 10% plus customers. So Verizon was, I think, a little over 20% of total sales in the second quarter. You know, the last time we had a quarter that strong was not that long ago. Our fourth quarter was so above that level. If you go back to kind of my commentary last quarter, we projected that. We knew we would, you know, we had a lot of activity, a lot of work to do in the second quarter with Verizon.

And know, I'd say, you know, we're extremely pleased, and I think they're very pleased with how the upgrade and the modernization programs are progressing and the velocity at which we're, you know, getting after capturing the cost savings for them across their networks. So going very well. As I think, you know, you've already backed into the math accurately. The other parts of our service provider business also in obviously, not as large as Verizon, but, you know, all of the other service providers increased as well in the quarter year over year. One I did comment on was obviously India, you know, with a very strong quarter in India with the tier one service providers there as well.

Tim Savageaux: Great. And if I could maybe extend that commentary into Q3, mean, it sounds like high level a little bit of the flattish guide might be, you know, a little stronger Verizon Q2 and a little weaker in Q3 is that a reasonable way to look at it? Is that kind of pullback material for Verizon. And then I would anticipate given your expectations for the year, that you would expect kind of a new record with them in Q4, maybe not percentage wise, but maybe absolute dollar wise. Just interested in your thoughts in them.

Bruce McClelland: Yeah. So I think the Q3 commentary is accurate. I mean, we have a ton of projects obviously going with them, and so we'll have a strong Q3, but we're not anticipating shipping the same amount of product that we did as we did in the second quarter. You know, we're spending time now getting it all deployed, obviously. But we do see it, you know, the diversification we have in the business that strong enterprise set of customers, whether it's financial institutions, transportation, or defense, all of those we expect more growth in the third quarter. So we know, we see part of the business increasing, part of it coming down.

The net is you know, a fairly consistent Q3 to what we just did in Q2, but up obviously, year over year from last year.

Tim Savageaux: Great. And I think you've mentioned you've got a router in there in that deployment. I think you've at least talking about the same kind of situation at&T. Last year or maybe even prior to that, sort of you know, inserting your routing solution into the overall IP voice solution, when you I mean, I guess, can you give us an update there? And is that indeed the case? And you know, I think it brings to mind the question you know, can you extend that into the, you know, other elements of the routing product line or the transport product line I mean, on the optical side proper as you think about those two big US carriers.

Bruce McClelland: Yeah. So we have, you know, kind of say two primary use cases where we're using the routing platform as part of our voice modernization. One is that router becomes an aggregation router based aggregate all of the voice core traffic and, you know, that's a key part of that system upgrade and, you know, the reliability, the performance, and that, you know, 911, you know, carrier-grade traffic continues to flow properly. That's the first use case. The second use case is using it as an edge aggregation device in particular, around doing circuit emulation for traditional TDM networks. To TDM links.

And we've seen really a broad set of telecom customers you know, looking at that use case or using our platform basically to help them eliminate TDM infrastructure across their metro network. Move everything to an IP backbone, if you will, and where they have to continue to provide TDM interfaces, just do it at the edge. So, you know, we see, you know, really good interest or uptake around that. And as I kinda said in the commentary, I think of that as a land and expand strategy. And once we're deployed in a couple of different use cases, we really wanna get deployed, you know, much more broadly into a broader set of edge aggregation use cases.

And, you know, it's just kind of part of the longer-term strategy here to expand our market share in that space.

Tim Savageaux: K. Thanks very much.

Bruce McClelland: Thanks, Tim.

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

Christian Schwab: Thanks for taking my question. Bruce's is a meeting the clarity. We talked about currency headwinds on OpEx, but I thought I heard in your prepared comments that you expected to be at the lower end of your gross margin and EBITDA range for calendar 2025 due to currency. Did I hear that correct?

Bruce McClelland: Yes. Yes. Exactly, Christian. So we as John said, there's if things kinda continue that the level they're at today, and, of course, they'll change, we just don't know which way. But if they continue where they are today, it's about a $5 million headwind on overall earnings. Relative to the original guidance that we set at the beginning of the year. That's in I'll call it in OpEx. Obviously, we have some fixed cost also in the COGS line that goes into gross margin. So it's put some pressure on the gross margin line. That's not as significant as the OpEx impact, but you know, definitely contributes a little bit.

So, you know, overall, as we look at the rest of the year and try and project where we end, you know, I think on earnings, we're thinking we're lower you know, lower in that range than where we would normally be. Without that headwind.

Christian Schwab: Great. And then as it relates to Verizon, strength this year, I mean, you're can you elaborate on your visibility or bookings or backlog out however you'd like to do that with that customer for calendar 2026, or is that too early?

Bruce McClelland: Yeah. No. We think next year looks like a strong year. As we had indicated last year, the original the initial phase of this program is a three-year program. So we're kind of you know, one year into implementation. And I know we got a ton of work to do just on what was part of the original the original defined program. That only does a partial portion of their network and assuming everything's going well and no other kind of macro changes, we would certainly expect to see that continue, you know, well beyond that. You then layer in, the opportunity around Frontier as that business gets integrated into the Verizon processes.

You know, we would expect you know, very likely that they would wanna implement something similar there to go after the cost infrastructure in that business. So know, we feel, yeah, really good about the outlook going into next year with Verizon.

Christian Schwab: Great. Fantastic. No other questions. Thank you.

Bruce McClelland: Thanks, Christian.

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

Greg Mesneath: Yes. Thank you. Can you hear me?

Bruce McClelland: We got you, Greg.

Greg Mesneath: Good. Hey, Bruce. You mentioned, when you talked about the book to bill in the second quarter, you kinda gave us a general statement of greater than one. When you look at your deferred revenues, it's a pretty interesting two at the end of Q1 to Q2, this end of this current quarter, you went from basically $23.5 million at the end of Q1 to $31.7 million. At the end of this quarter, which is a much bigger pickup than from Q4 of last year, year-end of last year, $20.9 million up to $23.5 million. At the end of the first quarter. So, obviously, deferred revenue is starting to accelerate, I guess, you could say.

Is that really kind of the setup for the fourth quarter? Or some of that beyond? Can you just kind of give us some color on that trend? Thanks.

Bruce McClelland: Yeah. Hi. Thanks, Greg. I think it's you know, kinda two key aspects to our deferred revenue pipeline, if you wanna think of it that way. The largest portion is associated with our maintenance and support contracts. And a large portion of those bookings tend to happen in Q4, so you see a big buildup and then that kinda bleeds off as the year progresses. But that can change depending on the timing of when we you know, when those kind of contracts get renewed or implemented. Other part is associated with product and services, deferred revenue.

And, particularly in the cloud and edge business, we can have larger programs that are implemented over multiple quarters and that can definitely influence our deferred revenue number and yeah, it's definitely an indicator of it, obviously, kind of future revenue. So an important element to look at. And as you commented on book to bill, again, kind of above one times again in the quarter. I think that's the third or fourth quarter in a row we've had that. And it's particularly good to have that when we have a quarter where we beat the revenue number. So, you know, both the numerator and the denominator increased in that case.

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

Bruce McClelland: Yep. We certainly saw a little bit of that in Q2 in the IP optical business where you know, our gross margins were up almost 800 basis points sequentially in Q2, you know, with a much-improved mix particularly in Asia Pac and part of it's the razor blade analogy that you've used. So know, if I think about the third quarter and your comment on that, there's two comparisons to think about. One is the sequential gross margin and we expect that to improve Q2 to Q3 kinda continued improvement in gross margin given the higher mix of software and less hardware.

If you compared it year over year, know, we're still lower from a gross margin perspective year over year. Primarily due to the increased professional services that we're doing in the business. With some of these modernization programs. So a couple different factors to think about there.

Greg Mesneath: Got it. Thank you for that. Nice job on the quarter.

Bruce McClelland: Thanks, Greg.

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

Rustam Kanga: Good afternoon, Bruce and John. Thanks for taking my questions. One point of clarification on the comment regarding the FX headwinds in relation to the EBITDA and gross margins. The assumption there is that those rates would hold and that's the reason for the callout. Is that fair?

John Townsend: Yeah. That's right. You know, clearly, what we've seen is, as I referenced, the exchange rates moved fairly substantially during the second quarter. But the so it's just trying to predict the rest of the is quip. Clearly quite challenging, but they do hold those at the rates.

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

Rustam Kanga: Very clear. I appreciate it. And then secondarily, in regards to the call out or the optimism around the European defense opportunity, to what extent is that largely driven by the, you know, recently increased NATO defense budget?

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

Rustam Kanga: Thank you.

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

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

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

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