Ribbon Communications Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial statement figures are in millions unless noted. Ribbon provides communications software, hardware and services through its Cloud and Edge and IP Optical Networks segments.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $210.4 | $231.1 | $614.4 | $599.6 |
| Gross profit / margin | $120.3 / 57.2% | $135.0 / 58.4% | $359.3 / 58.5% | $348.7 / 58.2% |
| Operating income (loss) | $2.0 | $11.9 | $2.3 | $(15.2) |
| Net income (loss) | $(59.4) | $6.3 | $(80.9) | $(35.2) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $7.9 | $65.2 |
Q3 product revenue fell 13.3% to $111.7 million and service revenue fell 3.4% to $98.7 million. For the nine-month period, product revenue declined 0.9%, while service revenue rose 6.5%. Nine-month growth included a full nine months of IP Optical Networks results, compared with seven months in 2020 following the ECI acquisition.
Q3 Cloud and Edge revenue was $142.4 million, down from $153.5 million; IP Optical Networks revenue was $68.0 million, down from $77.6 million. For nine months, Cloud and Edge revenue was $409.3 million versus $428.5 million, while IP Optical Networks revenue increased to $205.1 million from $171.1 million. Consolidated segment adjusted EBITDA was $31.7 million in Q3 versus $43.4 million, and $94.4 million for nine months versus $82.5 million.
The quarterly net loss was principally driven by a $56.5 million fair-value loss on Ribbon’s AVCT investment, included in other expense. The nine-month fair-value loss was $68.3 million. Other expense, net, totaled $57.7 million for Q3 and $66.0 million for nine months. These investment remeasurement losses substantially affected GAAP earnings and are distinct from operating performance.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $101.2 million and restricted cash was $2.5 million, compared with $128.4 million and $7.3 million, respectively, at December 31, 2020. Current assets were $418.7 million and current liabilities $284.7 million.
- Term-loan principal outstanding was $380.5 million, with a reported average interest rate of 2.90%; the balance sheet reports $20.1 million current and $354.8 million long-term debt, net. The $100 million revolving facility was undrawn; $5.9 million of letters of credit were outstanding. The company reported compliance with all credit-facility covenants.
- Nine-month operating cash flow was $7.9 million, down from $65.2 million. Investing activities used $11.3 million, including $14.3 million of capital expenditures; financing activities used $28.0 million. Cash and restricted cash decreased by $31.9 million during the period.
- Management said cash and available credit were expected to cover working capital and capital expenditure needs for at least 12 months, while cautioning that future needs are uncertain and refinancing or additional financing might be required.
Material changes, outlook and risks
- Q3 revenue and gross margin declined year over year, while nine-month revenue increased modestly. Management attributed product weakness in part to lower Cloud and Edge SBC and IP Optical Networks sales, the Kandy business sale, and supply-chain constraints. Service revenue grew year to date.
- Management expected 2021 revenue to increase versus 2020, subject to supply-chain challenges; it expected total gross margin to decrease slightly, citing a greater IP Optical Networks revenue mix and higher near-term supply costs. Management also expected R&D and sales and marketing expenses to increase modestly, while G&A was expected to be broadly consistent with 2020.
- Ribbon converted AVCT debentures into 13.7 million AVCT shares in September and held an approximately 25% equity interest, plus warrants for 4.38 million shares. Its investment was valued at $50.4 million at quarter-end, down from $115.2 million at December 2020. The AVCT share price is volatile, so mark-to-market changes may materially affect reported earnings. Ribbon also disclosed AVCT’s June 2021 current liabilities exceeded current assets by approximately $16 million and noted uncertainty around AVCT’s liquidity initiatives.
- COVID-19, component availability, logistics and broader supply disruption could affect demand, delivery and margins. Verizon accounted for 18% of Q3 revenue and 17% of nine-month revenue; one customer represented approximately 16% of accounts receivable at September 30.
- The company disclosed a maximum possible future royalty commitment to the Israeli Innovation Authority of $35.9 million, including $4.3 million accrued. A securities class action remained pending; management said routine legal matters were not expected to have a material effect, but adverse litigation outcomes could be material.
- Ribbon maintained a full valuation allowance on deferred tax assets but said a significant portion of the U.S. allowance might potentially be released within 12 months if sufficient evidence of sustained profitability emerges. Timing and amount were uncertain. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether AVCT’s financial condition, share price and liquidity developments change the value or realizability of Ribbon’s AVCT shares and warrants.
- Whether component availability, logistics and product/customer mix continue to pressure IP Optical Networks revenue and gross margin.
- Operating cash generation, debt amortization, covenant compliance and the availability of undrawn revolving capacity.
- Progress against management’s 2021 revenue and margin expectations, taking account of the differing ECI and Kandy comparison periods.
- Developments in the securities litigation, IIA royalty exposure and any potential release of the tax valuation allowance.