@Mark Kenna Thanks for your time on our offline sync. After doing several testing internally, we found that the Identity issuer turns to Phone when we enable the Password less authentication feature to enable user sign in process via SMS which is termed as SMS based sign-in.
We also learned that this has nothing to do with the guest/external users.
If the user is enabled for this, the Identity authority expects the sign in via SMS codes and not via passwords. Due to this reason AAD does not let any admin to reset the password of the user considering the password are not used anyway as user has been onboarded for Password Less Authentication.
Thus the behavior you see is expected. We really encourage customers to move away from passwords and these methods certainly help you achieve the same.
Feel free to reach out to us for any queries and we will do our best to help you.
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