Ribbon Communications Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed March 31, 2023. Ribbon supplies communications software, hardware and services to service providers and enterprises through its Cloud and Edge and IP Optical Networks segments.
Financial results
| Metric | FY 2022 | FY 2021 | Change |
|---|---|---|---|
| Revenue | $819.8 million | $845.0 million | Down 3.0% |
| Gross profit / margin | $400.9 million / 48.9% | $444.7 million / 52.6% | Down $43.7 million; margin down 3.7 percentage points |
| Operating loss | $48.3 million | $117.8 million | Improved $69.5 million |
| Net loss | $98.1 million | $177.2 million | Improved $79.1 million |
| Net loss per diluted share | $0.63 | $1.20 | Loss narrowed |
| Cash from operations | $(26.4) million | $19.2 million | Declined $45.5 million |
- Cloud and Edge revenue was $508.1 million, down 8.7%; IP Optical Networks revenue was $311.6 million, up 8.1%. Cloud and Edge gross margin was 61.1% versus 61.7%; IP Optical Networks gross margin was 29.1% versus 35.1%.
- Product revenue fell 2.3% and service revenue fell 3.8%. Lower North American service-provider spending and lower Cloud and Edge product sales weighed on results; IP Optical product sales increased.
- Cash and restricted cash totaled $67.3 million at year-end, down from $106.5 million. Current assets were $478.0 million and current liabilities $330.5 million.
- Term debt was $330.4 million, compared with $375.5 million a year earlier; the average interest rate rose to 5.4% from 3.4%. The term loan matures in March 2025, with a final payment of approximately $275 million due at maturity. Ribbon reported covenant compliance at year-end.
- Operating expenses were $449.3 million, down from $562.5 million, largely because 2021 included a $116.0 million goodwill impairment. FY 2022 included $10.8 million of restructuring costs and $29.6 million of acquired-intangible amortization.
Material changes and unusual items
- FY 2022 included a $41.3 million loss from changes in the fair value of the AVCT investment, recorded in other expense. In August 2022, Ribbon settled with AVCT, canceled the investment and warrants, paid $2.5 million, and received a perpetual technology license.
- The FY 2021 comparison included a $116.0 million IP Optical goodwill impairment and a $74.8 million AVCT fair-value loss. The smaller 2022 net loss therefore reflects, in part, these prior-year charges; Ribbon still reported a full-year operating and net loss.
- Ribbon raised $52.1 million gross in an August 2022 private equity offering, issuing 17.1 million common shares at $3.05 per share. Year-end common shares outstanding were 168.3 million, versus 148.9 million a year earlier.
- FY 2022 quarterly revenue rose from $173.2 million in Q1 to $233.6 million in Q4. Q4 operating income was $1.3 million and net income was $20.5 million, following losses in each of the first three quarters.
Outlook, management commentary and risks
- Management expected 2023 revenue to increase modestly, led by IP Optical market-share gains and continued growth in IP Routing. It expected gross margin to improve slightly, citing higher IP Optical volume and favorable mix and lower supply-chain costs; R&D and sales and marketing expenses were expected to decline.
- Ribbon cited ongoing component shortages, higher input and freight costs, inflation, rising interest rates, customer spending delays, and the Russia-Ukraine conflict and related sanctions. Supply-chain pressures had moderated but continued to affect delivery execution and profitability.
- The 2022 restructuring plan was expected to incur approximately $8 million of additional costs and finish by year-end 2023. A separate plan approved in February 2023 was expected to add approximately $10 million of restructuring expense, mostly severance.
- Liquidity depends on cash generation and continued access to the secured credit facility. The facility is secured by substantially all assets; leverage limits tighten after 2022, creating covenant-compliance and refinancing risks. Management said available cash and borrowing capacity were expected to cover anticipated needs for at least 12 months.
- Subsequent to year-end, Ribbon issued preferred stock and warrants for approximately $53.4 million of proceeds, sold its remaining interest-rate swap position, and made a $75 million debt prepayment in conjunction with a credit-facility amendment. The amendment revised covenant limits and reduced the revolver commitment from $100 million to $75 million.
- Verizon contributed 15% of FY 2022 revenue; the top five customers contributed approximately 34%. International revenue was 57% of total, and approximately 7% of sales were to Eastern European countries, including Ukraine, Russia and surrounding countries.
- Material legal matters include a securities class action in which the court denied defendants’ motion to dismiss in October 2022, with discovery and class certification ongoing, and Charter indemnification lawsuits seeking monetary damages. The filing does not provide a clear quantified exposure for these matters.
Most important facts for investors to verify
- Whether modest 2023 revenue growth and slight gross-margin improvement materialize, particularly in IP Optical Networks, and whether supply costs and delivery constraints improve.
- Quarterly cash use, working-capital movements and liquidity after the 2023 financing and $75 million debt prepayment; confirm covenant headroom under the amended facility.
- The timing and funding plan for the approximately $275 million final term-loan payment due in March 2025, as well as interest expense and refinancing options.
- Customer concentration and the sustainability of Verizon-related revenue; monitor service-provider demand, recurring maintenance revenue and customer collection trends.
- Actual restructuring costs and savings, and progress in integrating and cross-selling the Cloud and Edge and IP Optical portfolios.
- Developments in the Miller and Charter litigation, and any changes in the estimated financial exposure.
- Potential share dilution from the 2022 common-stock issuance and the March 2023 preferred-stock and warrant transaction.