Dave Kang

Dave Kang asked for quantification of the impact of foreign exchange (FX) and tariffs on Ribbon's financials. He also sought clarification on whether the 'mid to high single digit' percentage for federal business referred to Cloud and Edge revenue or overall revenue. Additionally, he inquired about the specific components (IP or Optical) that contributed to the decline in North America IP Optical sales in Q3 and questioned the sustainability of the strong performance in India.

Answer

CEO Bruce McClelland and CFO John Townsend clarified that the FX impact on operating expenses was just under $3 million year-over-year, primarily due to the shekel. Tariffs represented a roughly $0.5 million per quarter headwind, mainly on items like cables and steel. Mr. McClelland confirmed that the 'mid to high single digit' percentage for federal business was based on Cloud and Edge revenue, specifically high single digits of Cloud and Edge revenue in 2024. For North America IP Optical, he explained that most sales are IP or IP over DWDM, and the business tends to be lumpy, with Q3 focusing on rural broadband after a Q2 critical infrastructure project. Regarding India, Mr. McClelland noted five consecutive quarters of sustained momentum, driven by customer diversification, a strong partnership with Bardi, and a more linear deployment of IP routing, suggesting sustainability.

Dave Kang from B. Riley asked for quantification of the impact of foreign exchange (FX) and tariffs on Ribbon's financials. He also sought clarification on whether the U.S. federal business contributed mid to high single-digit percentages to the Cloud and Edge segment or overall revenue. Additionally, Mr. Kang requested more details on the decline in North America IP Optical, specifically if it was due to IP, Optical, or both, and questioned the sustainability of the strong performance seen in India.

Answer

CEO Bruce McClelland and CFO John Townsend clarified that FX had an impact of just under $3 million year-over-year on OpEx in Q3, primarily due to the weakening shekel. Tariffs were estimated to be a headwind of approximately $0.5 million per quarter, mainly on cables and shelving equipment. Mr. McClelland confirmed that the mid to high single-digit contribution from U.S. federal business was specifically to the Cloud and Edge segment. For North America IP Optical, Mr. McClelland explained that the majority of sales are IP or IP over DWDM, and the business tends to be lumpy, with Q3 focusing more on rural broadband customers after a strong Q2 with critical infrastructure. He noted strong EMEA growth compensated for North America. Regarding India, Mr. McClelland highlighted five consecutive quarters of sustained momentum, driven by diversification to a broader customer base and a focus on access and aggregation IP routing, suggesting sustainable growth.

Dave Kang from B. Riley Financial questioned the impact of foreign exchange (FX) on the quarter, the drivers for the guided Q3 gross margin improvement, and whether there were any order pull-ins to Q2.

Answer

EVP & CFO John Townsend stated the Q2 FX headwind on OpEx was about $1 million, with a potential for $2 million per quarter going forward if rates hold. President, CEO & Director Bruce McClelland attributed the expected Q3 gross margin improvement to a better product mix in both segments, specifically less hardware and more software in the Cloud and Edge business. He also confirmed there were no significant order pull-ins during the quarter.

Dave Kang inquired about the potential impact of reciprocal tariffs on Ribbon's business, including customer and supplier reactions, and requested an update on AT&T's Neptune network ramp.

Answer

CEO Bruce McClelland stated that customers have not indicated changes to their plans and that much of Ribbon's business, such as software, services, and products manufactured in Mexico under the USMCA, is less affected. He noted they are working with manufacturing partners to mitigate costs. Regarding AT&T, McClelland could not comment on specific plans but affirmed Ribbon remains a strategic partner and expects IP Optical growth in North America driven by Rural Broadband and new products.

Dave Kang asked about the channel inventory situation, the ramp timing for customer Vodafone Idea, and the drivers for the expected gross margin expansion from the first half to the second half of 2025.

Answer

CEO Bruce McClelland confirmed that Ribbon did not face significant channel inventory issues, as much of its Cloud & Edge business is software. He noted that business from Vodafone Idea began ramping in Q3 2024 and strengthened in Q4. The projected gross margin improvement in 2025 is attributed to a favorable revenue mix, with higher volumes and a greater proportion of high-margin Cloud & Edge sales expected later in the year.

Dave Kang of B. Riley Financial, Inc. asked about the dynamics behind the significant increase in accounts receivable. He also inquired about the current and long-term target gross margin differences between the transceiver and CATV businesses, and what steps remain in the qualification process after a customer has approved a manufacturing facility.

Answer

CFO and CSO Dr. Stefan Murry explained that receivables rose due to a combination of doubling revenue year-over-year and offering extended payment terms to facilitate the staging of CATV products in the U.S. He stated that current CATV margins are in the low-to-mid 30s while transceivers are below 30%, with long-term targets of over 40% for CATV and mid-to-upper 30s for transceivers. Regarding qualification, Dr. Murry clarified that the final step for 800G is for AOI to have meaningful production capacity ready, at which point the customer provides final approval.

Dave Kang asked about the 400G inventory digestion situation, the margin differential between CATV and data center products, the current status and typical length of 800G qualifications, and the expected margin difference for transceivers produced in Texas versus Taiwan.

Answer

CFO and CSO Dr. Stefan Murray confirmed the inventory digestion was in 400G and is expected to resolve in Q2. He noted CATV margins are currently 300-600 basis points higher than data center margins, with both expected to expand. Regarding 800G, both Dr. Murray and CEO Dr. Thompson Lin described a multi-stage qualification process, stating they are in the final phase with several customers. They also projected that margins for Texas-made products could be higher, as customers are willing to pay a premium for U.S. manufacturing to ensure supply and avoid potential tariffs.

Dave Kang asked for details on the large CATV customer, why AOI's CATV business is thriving while DAA deployments are slowing, the end-customers for the distributor, and the expected lead times for 800G products.

Answer

CFO & CSO Dr. Stefan Murry confirmed the large CATV customer is a stocking distributor selling to major North American MSOs. He explained that AOI's amplifier upgrades are independent of the Remote PHY module issues that are slowing DAA deployments, allowing MSOs to proceed with amplifier upgrades first. He also confirmed that 800G lead times are expected to be in the typical 8-10 week range for datacenter products.

Dave Kang from B. Riley inquired about the assumptions driving the implied sequential revenue increase for Q4 and asked for an update on business activity from North American Tier 1s and in Africa.

Answer

CFO Michael Connaway clarified that guidance points to the full-year consensus, implying a Q4 revenue of $116M-$120M, a more modest sequential increase than the analyst calculated. CEO Pete Smith stated that North America Tier 1 activity is at a normal level for a period between projects and that Africa remains a currency-constrained environment, with significant improvement unlikely until interest rates moderate.

Dave Kang of B. Riley Financial, Inc. asked for clarification on the muted North America Tier 1 service provider market, questioning if it was due to excess inventory or timing. He also requested an update on weakness in Africa and the company's expectations for Europe.

Answer

CEO Pete Smith clarified that the U.S. Tier 1 softness is a timing issue as they are 'between projects,' not an inventory problem, and that a recovery is factored into guidance but could materialize in Q1 FY26. He stated that weakness in Africa is expected to persist for the foreseeable future due to currency and interest rate challenges. Conversely, Smith sees Europe as a potential growth driver, citing legislation around Chinese vendors and a growing recognition of Aviat's value proposition.

Dave Kang sought clarification on the tariff impact on Q4 gross margin, asked if contract manufacturers have U.S. facilities, and requested an update on the U.S. federal government vertical.

Answer

CFO Kevin Rhodes confirmed the $1.5 million tariff impact is included in the Q4 outlook. President and CEO Ed Meyercord stated that their ODM partners do not have plans for U.S. manufacturing. He described the U.S. federal business as currently immaterial but a growth opportunity, as the company has invested in new certifications to qualify for federal projects.

Dave Kang inquired about opportunities with large service providers like Verizon and asked for details on the data center business, including its size, customer type, and growth drivers.

Answer

CEO Ed Meyercord highlighted a new private subscription model aimed at large service providers, leveraging Extreme's MSP platform to improve profitability for them, with recent wins expected to contribute to revenue in late FY25 and FY26. Regarding data centers, he clarified that Extreme's focus is on specific use cases with partners like Ericsson and Verizon's back office, rather than the competitive hyperscale market. He also mentioned they are monitoring opportunities for on-prem AI workloads.

Dave Kang asked for an update on Extreme's AI strategy in light of competitors' claims and inquired about the health of the company's major verticals like government and education.

Answer

CEO Ed Meyercord detailed Extreme's current 'first-generation' AI capabilities through its CoPilot AIOps product, which provides network insights and remediation suggestions. He also hinted at future announcements regarding generative AI platforms developed with partners AWS and Microsoft, which will enhance the user experience. CFO Kevin Rhodes stated that the vertical mix is very similar to previous quarters and will likely be updated annually going forward.

Dave Kang from B. Riley Financial asked about the company's strategic plan for its germanium substrate business, inquiring if they plan to continue running it or potentially monetize it. He also requested more detail on the indium phosphide business, asking for a rough mix between photodetector and silicon photonics applications.

Answer

CEO Dr. Morris Young explained that while demand for germanium is strong, high raw material prices have made it unprofitable, so the company is managing the business until costs decline. Executive Tim Bettles estimated the datacenter indium phosphide mix is roughly a 65/35 split in favor of lasers (for EML and silicon photonics) over photodetectors, though Dr. Young added that tracking the final application for all substrates sold can be difficult.