Bruce McClelland, Ribbon Communication’s CEO, addressed shareholders on Feb. 14 to discuss fourth quarter 2023, reporting it as the company’s strongest quarter of the year and its most profitable quarter in nearly three years.
“Despite a challenging macro environment for telecom suppliers,” McClelland said, “we’re really starting to see the results of our strategy and the investment we have made over the last several years. For the first time, our IP optical business generated a profit on an adjusted EBITDA basis and was profitable for the entire second half of the year.”
Cross-selling pays off
McClelland reported that Ribbon’s effort to cross-sell its portfolio to existing companies was paying off in all of its regions: U.S. rural, Tier 1 carriers, Japan, India, Europe, and the Middle East. He also relayed the company’s earnings for the quarter: $43 million on an adjusted EBITDA basis, an increase of 48% year-over-year.
“Revenue in the quarter,” McLelland said, “was up 11% sequentially with growth from both segments and up 1% for the full year. This was below our original expectations but a very solid result given the lower spending from U.S. Tier 1 service providers across the entire industry. Excluding sales to our large U.S. Tier 1 customers, revenue from all other customers in 2023 grew 8% year-over-year.”
Optical rises
McClelland spoke more on Ribbon’s IP optical networks segment, marking it as a highlight of the quarter and crediting cloud and edge business for driving strong profitability.
Regarding the company’s success with its IP optical networks business, McClelland credited three factors: The relationships that Ribbon maintains with service providers, significant portfolio expansion investments, and a strategic focus on the middle mile market segment.
McClelland added, “The investments that we’ve made in the IP optical business have transformed Ribbon into a data networking company, complemented by a unique voice communications practice with significant differentiation and a high barrier to entry.”
Weathering carrier cutbacks
Mick Lopez, Ribbon’s chief financial officer, noted that Ribbon generated revenues of $226 million in the fourth quarter, a 3% decrease from the previous year.
“For the full year of 2023,” said Lopez, “revenues were $826 million, an increase of 1% versus the prior year. Fourth quarter non-GAAP gross margin was 56.8%, which is 440 basis points higher than the prior year due to a very positive product mix, mostly in the IP optical networks business unit. For the full year, both business units increased gross margins, but as a result of a higher mix of IP optical products, the gross margin remained at 53.1%, which is the same as the previous year. For the fourth quarter, non-GAAP operating expenses were $90 million, an improvement of $7 million or 8% year-over-year, driven by reductions in R&D and sales expenses.”
Quarterly non-GAAP net income was reported at $22 million, a $6 million increase from the previous year.
“In our cloud and edge business,” Lopez said, “fourth quarter revenue was $122 million, a decrease of 11% year-over-year, driven by capital expenditure cutbacks from our U.S. Tier 1 service providers. For the full year, revenue was $478 million, which reflects a $30 million or 6% decrease from 2023.”
Lopez also reported that Ribbon’s cash from operations was $20 million in the quarter, and its services business remained consistent at $293 million.
For the outlook of 2024, McClelland reported that, excluding maintenance, product, and service, revenues are expected to grow more than 10% year-over-year.
“With the higher sales and improved mix and lower product costs,” said McClelland, “we’re targeting gross margins in the high 30s for the year and the potential to be accretive to company adjusted EBITDA. In cloud and edge, we’re conservatively projecting revenue flat year-over-year with similar margins and EBITDA contribution. Visibility from U.S. service providers for the second half of the year spending is still developing, so there’s certainly an opportunity to do better than this as the year progresses.”
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