Ribbon Communications Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; unaudited. Ribbon provides communications software, hardware, solutions and services to service providers and enterprises through its Cloud and Edge and IP Optical Networks segments. Comparisons below are with the corresponding 2021 periods.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $207.1m | $210.4m | $586.1m | $614.4m |
| Gross profit / margin | $104.3m / 50.4% | $110.7m / 52.6% | $286.9m / 49.0% | $329.9m / 53.7% |
| Operating income (loss) | ($3.3m) | $2.0m | ($49.6m) | $2.3m |
| Net loss | ($18.4m) | ($59.4m) | ($118.6m) | ($80.9m) |
| Loss per diluted share | ($0.12) | ($0.40) | ($0.78) | ($0.55) |
- Revenue and segments: Q3 revenue declined 1.6%; nine-month revenue declined 4.6%. Q3 Cloud and Edge revenue fell to $124.7m from $142.4m, while IP Optical Networks rose to $82.4m from $68.0m. For nine months, Cloud and Edge revenue was $371.6m (down from $409.3m) and IP Optical Networks was $214.6m (up from $205.1m).
- Margins and costs: Gross margin contracted 2.2 percentage points in Q3 and 4.7 points for the nine months. Management cited product/customer mix, higher component and freight/logistics costs, and foreign exchange. Nine-month product cost of revenue increased 17.0%; R&D expense increased 6.9% to $153.2m, principally reflecting IP Optical Networks investment.
- Other income statement items: Operating expenses were $107.6m in Q3 and $336.5m for nine months. Net interest expense was $5.3m in Q3 and $13.9m for nine months. Other expense included AVCT investment fair-value losses of $1.9m in Q3 and $41.3m for nine months. Q3 income tax provision was $6.1m; the company also disclosed a $6.8m tax benefit from releasing a valuation allowance related to the AVCT capital loss.
- Cash flow: Operating activities used $42.5m in the first nine months, versus $7.9m provided in 2021. Investing used $13.0m; financing provided $6.2m. Cash, cash equivalents and restricted cash ended at $55.9m, down from $106.5m at year-end 2021.
- Debt and liquidity: Term-loan principal was $335.5m at a 5.4% average interest rate; balance-sheet debt, net of current portion, totaled $330.8m. The facility matures in March 2025, with approximately $275m due at maturity under the amended schedule. The revolving facility was undrawn; $3.3m of letters of credit was outstanding. The company reported compliance with covenants at September 30, after amendments that relaxed 2022 tests and increased pricing under specified leverage conditions.
- Capital and working capital: An August private placement of 17.1m shares at $3.05 generated $52.1m gross proceeds and approximately $50.4m net proceeds. Shares outstanding rose from 148.9m at year-end 2021 to 168.1m at September 30, 2022. Inventory increased to $70.3m from $54.0m; current deferred revenue fell to $90.1m from $109.1m.
Changes, outlook and material matters
- Management attributed weaker results to lower sales, supply-chain disruptions and higher costs, as well as lower SBC/network-transformation sales and fewer service projects completing. It expects 2022 revenue to decline slightly versus 2021.
- Management anticipated Q4 gross margins similar to Q3 for each segment, with the consolidated average potentially slightly lower depending on sales mix; it also expected 2022 consolidated gross margin to be lower than 2021. Management expected modestly higher full-year R&D, sales and marketing slightly below 2021, and G&A broadly similar to 2021.
- The 2022 restructuring plan included facility consolidation and workforce reduction. Approximately 60 employees were associated with nine-month severance charges; management anticipated about $9m of additional future severance and facility-consolidation expense.
- Management stated that available cash and borrowing capacity were expected to cover working capital and capital expenditures for at least 12 months, and projected covenant compliance for at least one year from issuance of the statements. These expectations are subject to operating performance, cash needs and credit-facility terms. The company had previously projected possible covenant noncompliance for Q3 before the equity raise and credit amendments.
- Risks highlighted include supply-chain and component availability, inflation and geopolitical conditions, COVID-19 impacts, customer spending and project timing, foreign exchange, interest rates, and the ability to meet credit covenants or refinance debt. The company noted that the 2022 tax requirement to amortize R&D costs over at least five years could materially reduce operating cash flow.
- Contingencies include a shareholder securities class action whose motion to dismiss was denied on October 20, 2022, and two Charter indemnification lawsuits filed in September 2022. The company said it could not reasonably estimate possible losses. Maximum potential future IIA royalties were estimated at $31.0m, including $4.6m accrued.
- The AVCT investment was settled and cancelled in August 2022; Ribbon paid $2.5m cash and received a perpetual software license recorded at $4.4m. The investment had been a substantial source of fair-value losses in the comparative periods.
Investor verification points
- Track cash burn, inventory and collections, and whether management’s stated 12-month liquidity expectation remains supportable.
- Review covenant headroom, leverage and interest costs under the amended credit agreement, including the large March 2025 maturity.
- Assess whether supply-chain costs and segment mix stabilize margins, particularly in IP Optical Networks, and whether revenue follows the stated outlook.
- Monitor execution and remaining costs of restructuring, R&D investment returns, and the potential cash-tax impact of R&D amortization rules.
- Follow developments and potential financial exposure in the Charter and Miller litigation; the filing provides no clear loss estimate.