Ribbon projects Q4 revenue of $230M-$250M as AI platform gains traction amid U.S. government sales delays

Earnings Call Insights: Ribbon Communications Inc. (RBBN) Q3 2025

MANAGEMENT VIEW

* Bruce McClelland, President, CEO & Director, highlighted the launch of Acumen, a new AIOps automation platform, stating it is "designed to help service providers and enterprises navigate the complexity of today's challenging operational environment and accelerate their transition to autonomous networks." He further noted endorsement from Optimum and significant wins with major SaaS and technology providers, including IBM integrating Ribbon’s virtual SBC solutions within its Watson AI platform.
* McClelland emphasized 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." He reported that excluding Eastern Europe, revenue increased over 10% year-to-date, with service provider sales up 5% and enterprise sales down approximately 3% due to lower U.S. government agency sales. He clarified, "these projects remain a high priority for U.S. federal agencies and purchases are simply delayed, not lost."
* McClelland also called out strong regional performance: "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."
* John Townsend, Executive VP & CFO, stated, "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." He noted, "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."

OUTLOOK

* McClelland stated, "we continue to expect Q4 to be the strongest quarter of the year with both our enterprise and service provider customers." He projected revenue for Q4 in the range of $230 million to $250 million and non-GAAP adjusted EBITDA in a range of $42 million to $48 million.
* He specified that guidance removes most U.S. government-related sales for Q4, assuming these purchases will occur in 2026. "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."
* For the IP Optical segment, McClelland said, "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."

FINANCIAL RESULTS

* Townsend reported Q3 revenues of $215 million, with non-GAAP gross margin at 52.6%. Non-GAAP operating expenses were $89 million, with adjusted EBITDA at $29 million. Quarterly non-GAAP net income was $7 million and non-GAAP diluted earnings per share of $0.04.
* IP Optical Networks revenue was $91 million, up 11% year-over-year and $7 million sequentially. Non-GAAP gross margin for IP Optical was 39.4%. The segment delivered a positive EBITDA contribution of $1 million.
* Cloud & Edge revenue was $124 million, down 3% year-over-year and down 9% sequentially. Non-GAAP gross margin improved to 62.2% from the prior quarter.
* Cash from operations was $26 million, closing cash balance $77 million. CapEx spend was $5.5 million. Approximately 900,000 shares repurchased for $3.5 million.

Q&A

* Michael Genovese, Rosenblatt Securities: Asked if software and AI would become a new category for Cloud & Edge growth. McClelland responded, "We're actually thinking of it as a new category in a lot of ways. ... So you could really think of it as a new category on its own."
* Genovese asked about Verizon and U.S. IP Optical business. McClelland explained, "Verizon grew about 20% year-over-year in the third quarter and was down from the second quarter. ... On the U.S. IP Optical business, it does tend to be a little lumpy as we do different types of programs."
* Genovese sought clarification on the shutdown impact. McClelland replied, "we would have been comfortably in the midpoint or above the midpoint with the opportunities."
* Dave Kang, B. Riley Securities, queried FX and tariff headwinds. Townsend answered, "It's just under $3 million year-on-year from an FX impact there, Dave. ... It's probably a $0.5 million a quarter headwind, something in that ballpark, Dave, at this point."
* Kang asked for clarity on U.S. federal revenue mix. McClelland replied, "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."
* Timothy Savageaux, Northland Capital Markets, asked about positive EBITDA in IP Optical and sustainability. McClelland said, "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."
* Christian Schwab, Craig-Hallum Capital Group, asked about government program growth rates in 2026. McClelland replied, "It's obviously the right question, and it's a little early to be able to clearly answer that. ... If we can bring on even one more new major agency, it moves the needle pretty well for us."
* Rustam Kanga, Citizens JMP Securities, inquired about BEAD awards. McClelland said, "I've really, in some ways, discounted BEAD from a timing perspective, at least anyway for us. ... 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."

SENTIMENT ANALYSIS

* Analysts expressed concerns about the impact of the U.S. government shutdown, sustainability of growth in India, and the timing of BEAD-related revenue, with a slightly negative to neutral tone. Questions repeatedly focused on government sales delays and future category segmentation.
* Management maintained a confident and measured tone in prepared remarks, emphasizing product innovation and growth regions, but adopted a slightly defensive stance during Q&A when discussing the government shutdown and segment outlook. Examples include: "To be clear, no business has been lost, deployments and services are continuing..."
* Compared to the previous quarter, the tone has shifted from strongly positive and growth-focused to more cautious and pragmatic, especially regarding government-related revenue timing.

QUARTER-OVER-QUARTER COMPARISON

* Q3 revenue was $215 million, down from $221 million in Q2. Non-GAAP gross margin improved slightly quarter-over-quarter, but Cloud & Edge segment revenue declined sequentially and year-over-year.
* Bookings in Q3 fell below 1x for the first time in two years, attributed to U.S. government shutdown impacts, while prior quarter bookings were above 1x.
* U.S. government shutdown was not a factor in Q2 but significantly impacted Q3, leading to removed government sales from Q4 guidance.
* Regional growth in EMEA and Asia Pacific remained strong in both quarters, with India continuing as a growth driver.
* Management confidence in new AI and automation offerings increased, but overall sentiment became more measured due to external macro uncertainties.

RISKS AND CONCERNS

* Management cited the U.S. government shutdown as a key risk, noting delays but not loss of business. "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."
* Exposure to foreign exchange headwinds ($3 million year-over-year) and tariffs ($0.5 million per quarter) was identified.
* Bookings softness in Q3 and continued lumpiness in IP Optical North America were mentioned.
* Analysts raised concerns about timing and magnitude of BEAD program revenue, government program delays, and sustainability of growth in key regions.

FINAL TAKEAWAY

Management reported robust momentum in product innovation and strategic wins, particularly in AI-driven network automation, but acknowledged near-term revenue headwinds from the U.S. government shutdown and macroeconomic factors. Guidance for Q4 is built on a cautious approach, excluding most government-related revenue until 2026, while the company maintains confidence in its growth trajectory with strong performance in EMEA, Asia Pacific, and the expanding Cloud & Edge portfolio.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/rbbn/earnings/transcripts]

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