Rustam Kanga

Rustam Kanga of Citizens inquired whether the provisional BEAD awards were already factored into Ribbon's financial outlook or if they remained on a wait-and-see basis. He also asked for insights into a historically large takeup in the direct versus indirect mix, and whether the new Acumen product innovation could lead to Ribbon eventually having three business segments instead of two.

Answer

CEO Bruce McClelland stated that he had largely discounted BEAD from a timing perspective, as Ribbon's middle-mile aggregation and transport portion typically comes later in such programs, making the first win a pleasant surprise. He hopes to learn more about the rollout in the coming months. Regarding the direct versus indirect mix, Mr. McClelland attributed the shift to the federal business, as those sales flow through a complex set of partners, appearing in the indirect number. For Acumen, Mr. McClelland noted it's too early to predict a third financial reporting segment, but highlighted significant customer interest and energy around the product, which spans both existing business units. He mentioned that standing up the solution could involve several million dollars, with potential for scaling.

Rustam Kanga inquired whether Ribbon is factoring any BEAD awards into its current outlook or if it remains a wait-and-see approach. He also asked about any interesting callouts regarding a historically large takeup in the direct versus indirect mix, as noted in the supplemental slides. Finally, he questioned if the new Acumen product and the potential emergence of a new category might lead Ribbon to eventually view its business as having three segments instead of two.

Answer

CEO Bruce McClelland stated that he has largely discounted BEAD from a timing perspective, as Ribbon's middle-mile aggregation and transport contribution typically comes later in the program, though the first win was sooner than expected. He hopes to learn more about the rollout over the coming months. Regarding the direct versus indirect mix, Mr. McClelland attributed it to the federal business, as those sales flow through complex partners and are categorized as indirect. On Acumen, he noted it's too early to predict a shift to three financial reporting segments, as the product spans both current business units. However, he highlighted significant customer interest and live demonstrations, with the potential for the solution to scale and generate 'several million dollars' to stand up.

Rustam Kanga from Citizens Capital Markets and Advisory sought to confirm that the FX headwind guidance is based on current rates holding steady. He also asked if the optimism around European defense opportunities was linked to increased NATO defense budgets.

Answer

EVP & CFO John Townsend and President, CEO & Director Bruce McClelland confirmed the FX headwind analysis assumes current exchange rates for the shekel, euro, and Canadian dollar persist. McClelland clarified that the current European defense opportunities are not yet driven by increased NATO spending, but rather by existing investment cycles. He noted the primary future opportunity lies in voice modernization programs similar to those in the U.S., which have not yet begun in earnest in Europe.

Rustam Kanga of Citizens inquired about the early customer reception for the newly launched NPT-2714 metro core router and its potential contribution. He also asked about the strategic impact of the network expansion with Converge ICT in the Philippines.

Answer

CEO Bruce McClelland described the NPT-2714 as a strategic, high-capacity router that allows Ribbon to offer end-to-end solutions and expand into the core of customer networks, noting a good pipeline of opportunities. Regarding the Converge project, he explained it's a new backbone built with Western providers to serve hyperscalers without Chinese equipment, serving as a key reference point for Ribbon in the APAC region.

Rustam Kanga, on for Trevor Walsh, asked for more detail on the drivers behind the successful cross-selling motion in the IP Optical segment, particularly with rural broadband providers.

Answer

Bruce McClelland, CEO, attributed the cross-selling success to two main factors. First, Ribbon leverages existing relationships with rural operators, where it already provides voice infrastructure, to introduce and sell its IP Optical portfolio. Second, the company is successfully using its IP routing platforms to replace legacy TDM and SONET infrastructure for a broader set of service provider customers who manage interconnect networks, offering them a cost-effective circuit emulation solution.

Rustam Kanga asked if Penguin Solutions was able to accelerate the time to services revenue recognition following the initial hardware deal, using the SK Telecom example, or if this was a one-off occurrence.

Answer

Mark Adams, President and CEO, clarified that the overall solution for SK Telecom, like others, contemplates hardware, software, and services, with revenue recognition timing differing for each. Hardware revenue is typically recognized upfront, while software and services revenue is ratified and recognized over the agreement's lifetime. He noted that while the SK Telecom deal saw both agreements secured within a close timeframe, it wasn't fundamentally different from other deployments where large hardware deals tend to have higher services attachment.

Rustam Kanga asked if Penguin Solutions was able to accelerate the time to services from an initial hardware implementation, specifically in the context of the SK Telecom deal, or if this was a one-off occurrence.

Answer

Mark Adams, President and CEO, clarified that the overall solution for deployments, including hardware, software, and services, is contemplated together, but revenue recognition differs. Hardware revenue is typically recognized upfront, while software and services revenue is recognized over the lifetime of the agreement. He explained that this instance was not significantly different from other deployments, but rather that both hardware and services agreements were secured within a close timeframe. Mark Adams added that large hardware deployments often lead to higher value propositions for services, resulting in good services attached, as was the case with SK Telecom.

Rustam Kanga asked how the recent suite of security feature announcements, such as Legal Hold, contributes to the company's strategic shift upmarket.

Answer

CEO Gleb Budman explained that new functionality for performance, security, and AI directly supports the upmarket momentum. He highlighted that features like Legal Hold and Bucket Access Logs were top requests from larger companies, making Backblaze a more strategic part of their infrastructure. These tools, combined with the go-to-market transformation, give the sales team the necessary products to close larger, more complex deals.

Rustam Kanga from Citizens JMP asked for comments on the Navy CCA program, sought to reconcile comments on a U.S. supply base with cost issues on target drones, and inquired about the impact of regional conflict on the Israeli microwave electronics business.

Answer

CEO Eric DeMarco declined to comment on any CCA programs. He explained the target drone cost issue stems from two specific sole-source suppliers who have significantly raised prices on fixed-price contracts. Regarding the Israeli business, he noted that conflict drives demand for air defense systems, and he sees no respite in demand.

Rustam Kanga asked about the Navy CCA program, the cost elevation in target drones, and the impact of conflict on the microwave electronics business.

Answer

CEO Eric DeMarco couldn't comment on CCA. He discussed the cost elevation due to sole-sourced suppliers and the positive impact of conflict on demand.

Rustam Kanga from Citizens JMP sought clarification on the tariff mitigation strategy, asking if the goal was to absorb costs internally and only pass on unmitigated impacts, making the 2-2.5% of COGS an upper bound for potential surcharges.

Answer

CFO Michael Connaway confirmed this interpretation was correct. He detailed the playbook: first, work with the supply base for offsets; second, optimize manufacturing; and only then pass on the remaining delta. He emphasized the goal is to be earnings-per-share neutral, even if it creates near-term gross margin pressure, viewing it as the right long-term strategy to treat suppliers and customers like partners.