Ribbon Communications - Earnings Call - Q4 2024

Executive Summary

• Record quarter: Revenue $251.4M (+11% YoY, +19.6% QoQ), GAAP operating income $33.2M, and non-GAAP Adjusted EBITDA $55.4M (22% margin), with non-GAAP gross margin 58.1% vs 56.8% last year and 55.3% in Q3.
• Strength driven by Cloud & Edge (Verizon voice core modernization, U.S. Federal/Enterprise) and favorable mix; book-to-bill was 1.1x, cash ended at $90M, and free cash flow was $54M in Q4.
• FY25 guide introduced: revenue $870–$890M, non-GAAP GM 54–55%, Adjusted EBITDA $130–$140M; Q1’25 revenue $185–$195M, non-GAAP GM 53.0–53.5%, EBITDA $12–$18M.
• Key catalysts: accelerating Verizon ramp (17% of Q4 revenue), broad network modernization, U.S. rural broadband/IP routing cross-sell, and federal wins; headwinds include suspended shipments to Eastern Europe and lower IP Optical margin/volume near term.

What Went Well and What Went Wrong

• What Went Well

  • Cloud & Edge outperformance: Q4 Cloud & Edge revenue $165M (+35% YoY), segment non-GAAP GM 67.6%, Adjusted EBITDA $60M (36% margin) driven by Verizon, federal, and enterprise demand.
  • Mix and execution: consolidated non-GAAP GM 58.1% (well above expectations) and record Adjusted EBITDA $55.4M (+30% YoY) on higher Cloud & Edge software and services mix and opex control.
  • Visibility and bookings: company book-to-bill 1.1x; Cloud & Edge and IP Optical both >1.0x; strong backlog supports 2025 growth.
  • Quote: “U.S. Tier 1 service provider Cloud & Edge sales doubled year-over-year... higher mix of Cloud & Edge sales... resulted in gross margins well above our expectations at 58%” — CEO Bruce McClelland.

• What Went Wrong

  • IP Optical softness YoY: Q4 revenue $87M (-17% YoY) with Adjusted EBITDA loss of $4M on lower volume; though GM at 40% was at the high end of target.
  • Geographic constraint: shipments to Eastern Europe remain suspended; management quantified a normalized $10–$15M per quarter opportunity if restrictions lift.
  • Elevated interest burden persists: Q4 interest expense $12M; FY’24 $34M despite refinancing, partially offsetting operating improvements.

Transcript

Operator (participant)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joni Roberts, Chief Marketing Officer. Thank you. You may begin.

Joni Roberts (CMO)

Good afternoon and welcome to Ribbon's fourth quarter 2024 financial results conference call. I'm Joni Roberts, Chief Marketing Officer at Ribbon Communications. Also on the call today, Bruce McClelland, Ribbon's Chief Executive Officer, and John Townsend, Ribbon's Chief Financial Officer. Today's call is being webcast live and will be archived on the Investor Relations section of our website at rbbn.com, where both our press release and supplemental slides are currently available. Certain matters we'll be discussing today, including the business outlook and financial projections for first quarter of 2025 and beyond, are forward-looking statements. Such statements are subject to the risks and uncertainties that could cause actual results to differ materially from those contained in these forward-looking statements. These risks and uncertainties are discussed in our documents filed with the SEC, including our most recent Form 10-K and Form 10-Q.

I refer you to our Safe Harbor statement included in the supplemental financial information posted on our website. In addition, we'll present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measure are included in the earnings press release we issued earlier today, as well as the supplemental financial information we prepared for this conference call. This again can be found both available on our Investor Relations section of our website. And now I'd like to turn it over to Bruce. Bruce?

Bruce McClelland (CEO)

Great. Thanks, Joni. Good afternoon, everyone, and thanks for joining us today to discuss our fourth quarter results. I'm very pleased to report strong performance across all key financial metrics, including the highest levels of revenue and earnings in the history of the company. This is clear validation of our strategy to expand our presence in markets such as enterprise and federal and defense, while also successfully positioning the company in areas where increased capital is being invested by our service provider customers. Business was robust across practically all regions and segments, but the primary driver behind the excellent performance in the quarter was sales of our Cloud & Edge portfolio. U.S. Tier 1 service provider Cloud & Edge sales doubled year over year, and sales to global enterprises, including U.S. federal agencies, increased more than 60%.

We also had a solid quarter in our IP Optical Networks segment with continued growth in Europe, India, and Asia-Pacific. The strong mix of IP routers and management software resulted in good margins for the segment as well. A higher mix of Cloud & Edge sales in the quarter resulted in gross margins well above our expectations at 58%. As a result, overall profitability in the fourth quarter increased by 30% year over year, and the full year we achieved Adjusted EBITDA of $119 million at the very high end of the original range we established at the beginning of the year. Our cash generation in the quarter was very good, with year-end cash of $90 million, and bookings were also very good at 1.1 times sales and above 1.0 times for both segments.

This creates a strong foundation for continued profitable growth in 2025, as the focus on network modernization and the investment in fiber networks drives an improving investment cycle. Just an excellent result, and a big thank you to the Ribbon team, our customers, and partners. Now, a few more highlights on each of our operating segments. This was obviously an excellent quarter for our Cloud & Edge business, with all aspects of the operation performing well. The business is solidly diversified, with approximately two-thirds of our sales to service providers and one-third sales to enterprise and federal and defense customers. Sales in the quarter grew 35% year over year, and adjusted EBITDA grew 75% year over year. For the full year, sales grew 6%, and EBITDA grew by 16%. Just a great year. The momentum and recovery we saw developing earlier in the year with our U.S.

Service provider customers translated into solid revenue growth in the second half, and we have a number of incremental projects in both the U.S. and Europe that we expect will maintain a solid growth trajectory in 2025. The Verizon Voice Network Modernization Project is a significant part of this major recovery. Sales to this key customer accounted for 17% of overall company revenue in the fourth quarter and grew 80% in the second half of the year. The initial phase of the program continues to ramp, and we're currently migrating approximately one voice switch every week and expect to scale further as the year progresses. In addition to the strong quarter with Verizon, network modernization sales to other U.S. service providers were up as well, growing 21% quarter over quarter.

This included a new IMS Mobile Core win, which is an exciting new area of growth for us, and we were awarded a significant cloud migration project with a European Tier 1 service provider that highlights the technology leadership we have in leveraging a cloud-native operational and software delivery model. We had an outstanding quarter in our enterprise segment, led by large financial services companies such as JPMorgan Chase, Bank of America, Citibank, and others. We continue to transition customers to a flexible enterprise license agreement framework that simplifies how they consume our software products and technical support services and provides better revenue predictability. We expect the fourth quarter will continue to be the strongest in the year as we renew these enterprise term license agreements and recognize a significant amount of revenue. As anticipated, we had a very strong quarter with several new U.S. defense agency awards.

In addition to expansion orders on a large voice network modernization project, we had a significant win with a new portable network-in-a-box communication platform that can be quickly deployed in a forward command and control environment. For the full year, our business with U.S. federal agencies increased almost 150% year over year. Finally, we're intensely focused on a pipeline of over 200 potential Metaswitch replacement opportunities and had several additional smaller wins in the fourth quarter. Microsoft's decision to sell that business to a small cloud platform provider does not give service providers much comfort that the future of their regulated on-premise lifeline voice platform is secure, and this is really our sweet spot.

In our IP optical segment, we had a solid quarter, although the year-over-year comparison is tough, given the strong finish in 2023 that included a surge of spending from the Israel Defense Forces at the beginning of the war in the region, as well as sales into Eastern Europe. Excluding those two regions, sales grew 9% year over year across other markets and regions. The highlight of the quarter was the continued improvement in India, with sales increasing 30% quarter over quarter and 10% year over year on the strength of continued business with Bharti and the renewed network investment by Vodafone Idea. Our sales in India increased by more than 40% in the second half as compared to the first half of the year, contributing to our strong growth later in the year.

We also had a strong quarter in the Asia-Pacific region, with sales growing 30% quarter over quarter and 60% year over year. In addition, we had several large bookings from this region right at the end of the year that helped drive overall IP optical book-to-bill above 1.1 times in the quarter. The project leverages our new 5-nanometer optical transponders that support up to 1.2 Gb per second wavelengths. These were hard-fought wins against both Western and Chinese suppliers. In the U.S., sales increased approximately 5% year over year, with continued momentum in the rural broadband fiber-to-the-home space. We're increasing our focus and investment in this area, adding additional resources to the sales organization and pre-sales specialists. It's also critical to establish strong relationships with the engineering firms that specialize in this area, and we've continued to expand our efforts here as well.

We have over 30 active projects currently in deployment, with more than 30 additional opportunities at different stages here in the first quarter. From a product mix perspective, we had our strongest quarter to date of sales of our Neptune IP routing platform, growing 29% year over year as we continue to expand the number of customers and use cases for this strategic product line. Overall margins came in a little better than we expected in the IP optical segment at 40%, benefiting from a sizable sale of our MUSE management software, which is a major differentiator for us. Overall, this resulted in a small loss in the quarter of $4 million of adjusted EBITDA.

For the full year, gross margin improved by 300 basis points and EBITDA improved by $9 million for the IP optical segment, progressing towards our goal of profitability despite the suspension of shipments to Eastern Europe. With that, I'll turn it over to John to provide additional financial details on our fourth quarter and full year results, and then come back on to discuss outlook for 2025 in the first quarter. John?

John Townsend (CFO)

Thanks, Bruce, and good afternoon, everyone. We were exceptionally pleased with our financial performance in the fourth quarter of 2024, with revenue toward the high end of guidance. Adjusted EBITDA was not only above guidance but also a new record high for the business, driven by the strong revenue performance and continued very healthy product margins. This helped to produce robust cash flow with a closing cash balance of $90 million. For the full year, our consolidated adjusted EBITDA was $119 million at the high end of the original guidance provided in the beginning of 2024. As a reminder, please refer to our Investor Relations page on the Ribbon website for supplemental financial information. Let's begin with financial results at the consolidated level. In the fourth quarter of 2024, Ribbon generated revenues of $251 million, an increase of 11% from the prior year quarter.

For the full year, revenues were $834 million, an increase of 1% or $8 million year to year. Fourth quarter non-GAAP gross margin was 58.1%, up 130 basis points from the prior year quarter. For the full year, non-GAAP gross margin was 55.9%, up 280 basis points from the prior year, driven by improvements in both business segments and segment mix. For the fourth quarter, non-GAAP operating expenses were $94 million, an increase of $4 million year over year, related to additional employee expenses partially due to the improved sales and earnings performance. For the year, operating expenses were $361 million, a net reduction of $2 million from the prior year. Quarterly non-GAAP net income was $28 million, a $7 million improvement year over year. This generated non-GAAP diluted earnings per share of $0.16, which was an increase of $0.04 versus the prior year.

Full year 2024 non-GAAP net income was $44 million, up 22% or $8 million from the prior year. Diluted earnings per share for 2024 was $0.25, up $0.04 from 2023. Our normalized non-GAAP tax rate for the quarter was 40%. However, we benefited from a one-time reassessment of tax reserves at year-end, resulting in net tax rates of 21% and 29% for the quarter and full year, respectively. Our interest expense for the quarter was $12 million and $34 million for the full year. The record-breaking fourth quarter adjusted EBITDA was $55 million, above the upper end of our guidance. This is an improvement of 30% or $13 million year over year. For the full year, adjusted EBITDA was $119 million, which was a $28 million increase over the prior year. This is the second straight year with an EBITDA improvement over 30%.

Our basic share count was 175 million shares, and our fully diluted share count was 179 million shares for the quarter. Now, let's look at the results for our two business segments. Our Cloud & Edge business produced exceptional results with fourth quarter revenues of $165 million, an increase of 35% year over year, driven by network transformation engagements with Verizon, as well as with defense and enterprise customers. Full year revenues were $505 million, which reflect a $28 million or 6% increase from 2023. Our services and support business increased 5% to $294 million or 58% of revenues. Fourth quarter non-GAAP gross margins remained strong at 67.6%, and for the full year, gross margin was 66.9%, up 100 basis points from the prior year.

Cloud and Edge continued its strong cash and profit contribution, with an all-time high adjusted EBITDA of $60 million or 36% of revenues in the fourth quarter. For the full year, adjusted EBITDA increased 16% versus the prior year, ending at $141 million or 28% of revenues. Now on to our IP Optical Networks business results. We recorded fourth quarter revenue of $87 million, a 17% decrease versus the prior year. Revenues for the full year were $329 million, down 6% from 2023 due to the impact of suspending shipments to Eastern Europe. Fourth quarter non-GAAP gross margin for IP Optical was 40%, which was at the high end of our target range, but was down 400 bps from the prior year, primarily due to lower volumes.

For the full year, gross margin was 39%, up 300 bps from the previous year, reflecting the actions we have taken to improve profitability. For full year 2025, we believe that we can continue to target gross margins in the high 30s or better. IP Optical Networks Adjusted EBITDA for the quarter was a loss of $4 million, $13 million less year over year. For the full year, we improved Adjusted EBITDA loss by $9 million to a loss of $22 million. Touching on the cash flows for the company, the strong business performance and collections in the fourth quarter drove free cash flow of $54 million and resulted in a closing cash balance of $90 million and a net debt leverage ratio of 2.2 times. Free cash flow for the full year was $28 million.

For my first full quarter in the CFO seat, it has been extremely encouraging to see the team at Ribbon execute on our strategy and be embraced by carrier, enterprise, and federal customers alike, especially our network transformation services. Our day-to-day execution focus is clearly paying off in the results that we post today. Now, I'll turn the call back to Bruce.

Bruce McClelland (CEO)

Great. Thanks, John. As we enter the new year, Ribbon is in the strongest position we've been in over the last five years. Our customer base has expanded and diversified. We have deepened our relationship with current customers, and we've improved visibility on the year ahead. We have strengthened our balance sheet and finished 2024 with strong momentum across almost all parts of our business, and we expect this to continue into 2025. We have several important elements to our strategy that leverage our broad portfolio and global presence. First, we remain very focused on cross-selling our solutions and leveraging the presence we have with so many customers. This is increasing our relevance and better aligning our future with the areas that are most important to our customers.

This includes an extra level of intensity to grow our business with the largest Tier 1 service providers who control the majority of industry CapEx. Second, we remain committed to improving and growing our IP routing and optical transport business in North America. We have a great IP routing solution that's very complementary to our voice infrastructure business in support of eliminating TDM and copper networks and have deployments with a growing number of service providers. In addition, the industry-wide investment being made to expand rural broadband across the U.S. is a perfect fit for our portfolio and a growing part of our business. Third, the continued exponential growth in mobile and fixed data traffic requires providers to constantly add more capacity to their network, and we continue to win new customers and grow share in the fiber transport market.

Advancements in AI are already driving massive new investments in data center connectivity and are expected to move closer to the edge as AI applications begin to advance, exactly the area we're focused on. Fourth, our decision several years ago to increase go-to-market investment in enterprise and government is clearly paying off and will remain a key part of our strategy. In particular, we have a very strong presence in mission-critical networks with a differentiated solution portfolio and expertise. Fifth, we continue to believe that the efficiency and scalability of cloud technologies, such as containers and Kubernetes, will become mainstream technologies for telecom network loads, including voice services, and we continue to invest in these areas to ensure we are industry leaders, not followers. This was a key element of the recent European tier-one win I mentioned earlier.

All of these strategic initiatives are supported by the focused effort to integrate key areas in order to simplify and streamline the operation of the company. Of course, it's crucial that we continue to innovate and differentiate, and we have a robust roadmap for 2025, including advances in IP routing, network automation, information security, and cloud automation. We will also invest more in our professional services capabilities and practices, where we have a unique employee talent pool that has knowledge across multiple generations of voice and data networking that's in very high demand and an important differentiator for us. Focusing specifically on our outlook for 2025, there are several key areas that we expect will drive profitable growth this year. The largest area of opportunity is clearly the investment being made by service providers, governments, and enterprises to modernize their communication infrastructure.

We've been successful in securing several longer-term contracts that provide improved visibility and a very solid foundation of business over the next two to three years, with high probability of further contract extensions. Increasingly, we're not just selling products but complete solutions, including extensive planning and deployment services that provide significant differentiation and a competitive advantage. This covers a broad set of use cases, from traditional fixed line voice services to unified cloud communications, from enterprise desktop through to contact center applications. Within the government sector, we built a strong base of customers in the U.S., Europe, and the Middle East, but there's significant room to expand into other countries and regions. We're leveraging our entire portfolio of voice and data products to address these mission-critical secure communication opportunities.

Overall, we estimate that the addressable market opportunity for the Cloud & Edge secure voice communication segment to be at least $7.4 billion over the next four years. The second most important area for our business this year is to capture a larger share of the investment in fiber networks. In addition to our traditional customer base supporting mobile data traffic growth and fiber broadband internet expansion, our new optical portfolio is a great fit for data center interconnect, and we're increasing our go-to-market investment in this area. AI is expected to drive billions of dollars of opportunity for telecom providers over the next five years, growing at a 40% plus CAGR, and we're targeting a larger presence here.

We're also applying AI to various aspects of our portfolio, such as our network planner to reduce cycle times and network implementation costs for our customers, and our service assurance analytics solution will be significantly enhanced to provide improved automation and trouble resolution. From a competitive perspective, I think we're going stronger and look to take advantage of weaknesses in the market, as well as competitors who are distracted by consolidation activities. There also continues to be a long tail of opportunity related to replacement of Chinese suppliers that we continue to pursue. From a macro perspective, there's more optimism across the industry as supply chain and inventory challenges abate, inflation slowly reverses, and interest rates normalize over time. There's also the promise of resolution of global conflicts in regions such as Israel and Ukraine that would be a significant tailwind for our business.

Finally, I'll note that we're in a substantially stronger position as a company with the ability to look more seriously at options to accelerate shareholder value through M&A. While we have a pretty tight criterion on what would make sense, it's certainly possible we'll find options that strengthen our portfolio and differentiation and add more scale to the business. Now on to guidance for 2025. For the full year, we're projecting revenue in a range of $870 million-$890 million. This implies a consolidated year-over-year growth rate of approximately 5% at the midpoint of guidance, but is actually significantly higher after excluding low-growth maintenance revenue and other regional adjustments. For the Cloud & Edge segment, we're projecting approximately 10% growth of product and professional services revenue, with maintenance revenue essentially flat year-over-year.

For the IP optical segment, the year-over-year comparison is impacted by the suspension of shipments to Eastern Europe partway through 2024. We're projecting a net year-over-year growth rate of approximately 5%, but this implies a growth rate of greater than 10% for IP optical after adjusting for Eastern Europe. We're currently projecting gross margin for the year to be approximately 100 basis points lower than full year 2024, primarily due to the increased revenue from professional services. While lower margin than high margin software, our services are a real strategic advantage and create strong brand loyalty and product pull-through. We're projecting OpEx essentially flat year-over-year as we continue to manage expenses carefully and absorb normal inflationary increases. As a result, adjusted EBITDA for the year is projected in a range of $130-$140 million, which would be approximately 13% higher than 2024 at the midpoint.

For the first quarter, we're projecting revenue in a range of $185 million-$195 million, a year-over-year increase of approximately 5% at the midpoint. Once again, the year-over-year comparison is affected by the substantial shipments to Eastern Europe we had in the first quarter of 2024. Excluding those sales, the implied year-over-year growth rate is greater than 15%, a pretty strong start for the year. EBITDA is projected in a range of $12 million-$18 million, a year-over-year increase of approximately 28% at the midpoint. We expect Cloud & Edge margin consistent with recent trends, but with lower IP optical gross margin due to mix and lower volume in the quarter. In conclusion, we have an exciting year ahead, and as our Q4 performance shows, our strategy is really working and we're gaining momentum. Operator, that concludes our prepared remarks, and we can now take a few questions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Our first question comes from Michael Genovese with Rosenblatt Securities. Please proceed with your question.

Michael Genovese (Managing Director)

Improving outlook for the company in general. So that's nice to see. I guess I just want to start on the quarterly guide. I heard what you just said about Eastern European comparison being harder in the first quarter. Is there anything else that we should take away from the guide about the seasonality that you expect in the first quarter? Is it more seasonal than normal, and then the year gets better as we move throughout the year, or is that reading too much into it?

Bruce McClelland (CEO)

Hey, Mike. No, I think the biggest delta is the Eastern European piece, and as I said, we're up double digits, kind of backing that out. So in general, I think we're kind of ahead of the trend. It's just a tough comparison in Q1, and that'll be the toughest comparison of the year, so it'll get easier as the quarters go forward here.

Michael Genovese (Managing Director)

Okay, great. And then on Eastern Europe, I mean, particularly if there were to be a breakthrough in Ukraine and hostilities there would be to get better, could you start that business back up? Is that something that you're thinking about? Are your assets in place to be able to do that quickly, or should we not be thinking about that possibility?

Bruce McClelland (CEO)

Yeah, it's definitely a possibility. Of course, we don't know how fast a resolution happens and how fast the restrictions get lifted, but the restrictions right now prevent us from shipping new hardware into the region, but we continue to work with customers and support them. So we're prepared to start that business up again if we're in a position where we're allowed to do that. And that could happen fairly quickly. So it's definitely a possibility as the year goes on.

Michael Genovese (Managing Director)

Okay, great. And then I guess I'll just finish with, if you could make a comment on both segments of the business. Starting with IP edge, sorry, Cloud & Edge. Starting with Cloud & Edge, is the most important thing going forward from here with all this momentum? Is it winning new contracts, or should we be looking for something else? And then just similarly on optical IP, what is the most important driver for the business for the next year? Thank you, and then I'll pass it on.

Bruce McClelland (CEO)

Yeah, thanks, Mike. Appreciate the question. So in the Cloud & Edge business, obviously the new contracts that we have in place, it puts us in a different position. We have a lot better visibility this year, stronger backlog entering the year. So there's a lot of focus on good execution. These are kind of large programs with a lot of resources. We're taking more of the services, more of the actual deployment work. And so there's a real focus on good execution as kind of the top priority. And we've got a pretty diversified business here now with both service providers as well as enterprise and federal customers, and it just gives us a really strong platform going into this year.

Not that we don't still need to win business. Clearly, we do quarter to quarter, but we're just in a much stronger position and good backlog for the year. In the IP optical business, I think there are kind of two or three threads here. One is obviously here in the U.S. and growing our business in North America. We've made good progress on that in the second half of the year of 2024. A lot of investment going into expanding broadband, and it really fits our portfolio really well around world broadband. So that's probably a big area to focus. We have a second, obviously important region in India where the business has continued to improve throughout 2024.

We expect to have another good year in that region where we're expanding our presence, and one of our larger customers, Vodafone Idea, is obviously investing in their network again pretty aggressively. So that's an important region for us, and then thirdly, Europe is really strategic. We've got a very good presence with critical infrastructure customers, and we want to grow into a larger presence in service providers. So I think those are the three kind of big themes around that portfolio. So, Mike, appreciate the questions.

Michael Genovese (Managing Director)

Thank you.

Operator (participant)

Our next question comes from Tim Savageaux with Northland Capital Markets. Please proceed with your question.

Tim Savageaux (Managing Director)

Okay, wrong button. Good afternoon and congrats on a great quarter and a really good outlook. I want to dig a little deeper and perhaps test my math skills here on the Eastern Europe front. Given what you said about Q1 guide, it looks like that was about $15 million last year, just in the quarter. I mean, should we see some positive developments in the relatively near term? Is that a quarterly run rate you can get back to? Is that something that was any one-timers in that, or things we should know, or what kind of addition to the business could we see in that scenario?

Bruce McClelland (CEO)

Yeah, hey, Tim. Well, your math is always good. So in Q1, it was actually a little north of the $15 million number, but you backed into the right number based on the percentages with a little bit more than that. And I know we've always talked about Eastern Europe as about 5% of overall sales for the company. It was probably a little bit more than that on the run rate going in last year. So on a normalized basis, we're looking at $10-$15 million a quarter, so $40-$50 million a year in that ballpark, and maybe more. So I think there's more opportunity there for us if we're able to restore the business.

Tim Savageaux (Managing Director)

Okay. I'm in real problems with these buttons. Okay, very good. Thank you. I want to follow up, Bruce, on a comment that you made in the script there, and I think it was about carriers eliminating TDM and/or copper networks in driving potential opportunities on the Cloud & Edge side of the business, and given that AT&T used almost those exact same words in their recent analyst day in terms of their plans to simplify, modernize, change their networks, I wonder if you see any opportunity. I know they're a current customer, probably not 10%, but if you did have any other 10% customers just in Q4, I'd be interested. But what kind of potential do you see there, I guess?

Bruce McClelland (CEO)

Yeah, yeah, good question, Tim. So we had one 10% customer Verizon in the fourth quarter. In general, we're seeing kind of two techniques to modernizing the traditional phone network. One is completely eliminating copper, and as you mentioned, AT&T mentioned that. It was kind of their primary focus, and there's a couple of different ways of doing that. You can substitute a voice line for a wireless line, or you can move a voice line onto a voice over IP line on broadband, or you can emulate the copper infrastructure over IP, and they talked about being able to do circuit emulation effectively. What that allows them to do is preserve the POTS interface, the phone interface on the enterprise that's typically used for enterprises. So you don't force the customer to churn. They can continue to operate their traditional infrastructure.

But you basically eliminate the copper or the SONET infrastructure by emulating it all over IP. And so that's a great technique. We've got a platform that's fantastic for that that's getting used by a variety of customers here now across the U.S. for doing circuit emulation and complete copper elimination, if you will. The other methodology we're seeing very popular is really keeping the copper in place, but modernizing the switching infrastructure to move to a much more software-centric architecture and reduce the amount of power consumption dramatically that the switches are taking up today. And that's really the approach Verizon's taking. In AT&T's conference they had back a few months ago, they talked about different regions and what their approach is in California in particular, a more challenging environment from a regulatory perspective and obviously the most expensive power cost in the U.S.

So there's a couple of different techniques there, and we've got a great portfolio to enable customers to do that.

Tim Savageaux (Managing Director)

Okay, great. And just one more from me. I was interested in your comments about investing more in data center interconnect. And I imagine that's focused on telecom service providers that are maybe working with big cloud players, or maybe you're going right for the cloud guys. But I'd love any more specifics on what investments you are making and what actions you are taking in that area.

Bruce McClelland (CEO)

Yeah. Generally speaking, it's more the former than the latter. We're working through our telecom customers, and in many cases, the products being deployed in the data center or at the data center edge. Some of the deals in Asia-Pacific I mentioned right at the very end of the year using our new Apollo platform, 1.2 terabit interconnect capabilities are exactly that. And so we're kind of getting at that data center application, but through telecom providers as opposed to selling directly to large cloud providers. It's not the biggest part of our revenue stream yet today, but the new products that we launched last year that support very high speed and very extensive aggregation of client-side interfaces, 400 gig client-side interfaces, is very efficient. And so we're seeing a lot of interest around that type of application. Thanks very much, Tim.

Tim Savageaux (Managing Director)

Sure.

Operator (participant)

Our next question comes from Christian Schwab with Craig-Hallam Capital Group. Please proceed with your question.

Christian Schwab (Senior Research Analyst)

Great. Just to follow up on the last line of questioning, AT&T is attempting to get rid of supporting all copper by the end of 2028. Regardless of which technology solution or mix of technology solutions they use to satisfy that, could you quantify how big of an opportunity that could be potentially for your company?

Bruce McClelland (CEO)

Yeah, I hesitate to give any more color at this point, Christian. I just don't want to get ahead of our customers on their messaging and their strategy, specifically with AT&T. As I mentioned, the rest of our service provider segment in the fourth quarter was up over 20% quarter over quarter. So we're seeing good traction across the customer base with the tier ones as well as with the next level of operators across the region. And hopefully, we'll have more specificity as the year goes on here, but that's about as detailed as I can get on their strategy at this point.

Christian Schwab (Senior Research Analyst)

Great. Could you give us an idea of the range of revenue you anticipate shipping to Verizon this year for their modernization program?

Bruce McClelland (CEO)

So I know it's kind of referencing back to the comments I had at the end of the year in our last earnings call. We're on a greater than $100 million per annum run rate with Verizon. Obviously, had a very strong fourth quarter, and we continue to ramp the program here with resources and good execution as the year's progressing. So we expect to grow from that level, and a fairly sizable amount of the growth we're projecting for the year is directly related to that program. So hopefully, that gives you at least directionally what we're thinking for the year there.

Christian Schwab (Senior Research Analyst)

Great. Thank you. And then my last question has to do with Metaswitch. If you did kind of a rip and replace on that, I assume the transaction size could be anywhere from high hundreds of thousands of dollars to a little bit north of a million, maybe approaching 2 million. So is that the right number? Meaning that if you have 200 different customers that you're talking to, if we just use round numbers and say a million, is that like the $200 million opportunity? Am I thinking about that math right?

John Townsend (CFO)

I think the range you just mentioned is exactly the way to think of it. Some of them are smaller. There's quite a broad breadth of smaller operators that are hundreds of thousands of dollars. Then there's certainly larger operators that are millions of dollars that take long to develop and would be not in maybe in one year, might be over a couple of different years. So I think maybe the total opportunity, not annualized necessarily, but total opportunity is in the ballpark that you estimated, Christian.

Christian Schwab (Senior Research Analyst)

Great. No other questions. Thanks, guys. Good quarter.

Bruce McClelland (CEO)

Thank you.

Operator (participant)

Our next question is from Ryan Koontz with Needham & Company. Please proceed with your question.

Ryan Koontz (Managing Director)

Yeah, thanks. I'm going to pile on on Cloud & Edge here. Sounds like a great opportunity, and obviously a real strong international quarter, it looked like in Q4 as well. Can we maybe expand on the opportunity internationally? A lot of focus in your discussion on big domestic SPs, but how should we think about the international opportunities there? Then is it a different set of competitors you'd face in the international domain for voice modernization? Thanks.

Bruce McClelland (CEO)

Yeah. Hey, Ryan. Thank you for the question. Yeah, traditionally, our business has been stronger in North America, and it goes back historically to how the telecom networks have evolved and some of our heritage and the position we have in the networks. But we are seeing good traction internationally. It's not as large today as what we see in North America. I mentioned one nice win with the European Tier 1. Their network architectures tend to be a little different, so we're selling a little different version of our products into those markets. The same challenges exist. Everybody wants to eliminate copper and save power. Everyone wants to move from bespoke hardware solutions that take up real estate and use a lot of power and move to a software architecture.

We are seeing maybe a little more interest or initiative to move to a much stronger cloud-centric implementation, meaning our software might be running on standard compute within a private data center or might be running actually in a public cloud-type environment, and so the investment that we've been making to modernize the products to be really cloud-native has been pretty strategic and allowed us to start to win more share there. I did discuss a fairly large customer last year, MTN in Africa, where we're doing a new voice interconnect hub, so there's a number of examples like that, including regions like Japan and India where we have a good presence as well around our voice products.

Ryan Koontz (Managing Director)

Got it. Great. And just one other one on IP Optical. You've talked about some tough comps, Eastern Europe and Q1. If you were to exclude Eastern Europe, what kind of growth rates would we have seen in 2024? And how do we think about that business in 2025, excluding your Eastern Europe compare there?

Bruce McClelland (CEO)

Yeah. I have to go back and run the math, which I can do offline, but the revenue in Eastern Europe in 2024 was still fairly sizable in the first part of the year. It was less than 5% of total sales, but it was still fairly significant. So you would have added that one way or the other, you back it out of the previous year or kind of continue it as a run rate. It probably would have been another 3%-4% of sales growth for us last year and kind of a similar impact going into this year.

Ryan Koontz (Managing Director)

Okay. Great. That's all I got. Thanks, Bruce.

Bruce McClelland (CEO)

All right. Thanks, Ryan.

Operator (participant)

Our next question comes from Dave King with B. Riley Securities. Please proceed with your question.

Dave King (Managing Director)

Thank you. Good afternoon. First question is regarding channel inventories. Just wondering what you see from the channel inventory situations with your customers.

Bruce McClelland (CEO)

Yeah. Hey, Dave. For the most part, we didn't see the same sort of inventory build challenge that others had seen, maybe a little bit around our enterprise edge platforms, but that's probably six to 12 months ago at this stage. And a lot of, of course, as you know, a lot of what we're selling, at least on the Cloud & Edge side, is software. So there's not really an inventory kind of concept there. So for the most part, we're not dealing with those types of challenges.

Dave King (Managing Director)

Got it, and then regarding Vodafone Idea, I mean, just wanted to clarify, have they started to ramp or are they about to ramp? Just more color on the timing.

Bruce McClelland (CEO)

Yeah. So we started to see some incremental business in the third quarter a little bit right after they completed their refinancing. And then a much stronger fourth quarter. As I think I mentioned, our revenue in the fourth quarter was up, I think, 10% year over year and 30% quarter over quarter in India as a whole. And Vodafone was certainly part of that. So it was great to see this customer. I mean, they've been a really important part of the business historically. So it's great to see them in a position they can reinvest in the network again. And we're providing both IP routing platforms as well as some optical transport with the customer.

Dave King (Managing Director)

Got it. And my last question is regarding gross margin. So you're starting around 53%-53.5% first quarter. And then for the year, you're guiding to 54%-55%. So clearly, in second half, we're talking 55% or maybe even higher just to finish the year at 54.5%, let's say. So what will be the catalyst to drive the margin expansion from first half to second half?

Bruce McClelland (CEO)

Yeah. So for the most part, it's simply mix. How much of in a particular quarter are we selling of high margin Cloud & Edge versus lower margin IP Optical? And it's amazing how much leverage you get in the model as the revenue line increases. There's not a big shift in the actual margin of each of the segments other than a little lower here in the first quarter, as I mentioned, just with the lower volume on IP Optical. So the one thing that's changing a little bit, and I think I said it in my guidance remarks, that we are seeing about 100 basis points lower margin year over year in aggregate for the year, primarily because of the higher mix of professional services, the larger portion of the work that we're taking on with our customers.

Obviously, professional service margin isn't quite at the same level as selling software, which is very, very high margin. So there's a bit of that shift that we've built into the model, but that's probably the biggest thing going on there.

Dave King (Managing Director)

Got it. Thank you.

Bruce McClelland (CEO)

Yeah. Thanks, Dave.

Operator (participant)

We've reached the end of our question and answer session, and I would now like to turn the floor back over to Bruce McClelland for closing comments.

Bruce McClelland (CEO)

Great. Thank you, Maria. Thanks again for everyone on the call and the interest in Ribbon. We look forward to speaking with many of you with our upcoming investor conferences. We also have our largest show of the year coming up in March in Barcelona, Mobile World Congress, and another significant show, OFC, big optical conference in San Francisco. So look forward to seeing you. We're off to a good start, and let's have a great 2025. Operator, thank you, and that concludes our call.