Ribbon Communications Inc. — Q1 2023 Form 10-Q
Business and period: Ribbon provides communications software, hardware, network solutions and services to service providers and enterprises. This unaudited report covers the three months ended March 31, 2023, compared with Q1 2022. Its reportable segments are Cloud and Edge and IP Optical Networks.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $186.2 million | $173.2 million | Up 7.5% |
| Gross profit / margin | $81.4 million / 43.7% | $78.1 million / 45.1% | Profit up 4.3%; margin down 1.4 percentage points |
| Operating loss | $35.2 million | $39.1 million | Loss narrowed |
| Interest expense, net | $6.4 million | $4.0 million | Expense increased $2.4 million |
| Net loss / diluted loss per share | $38.3 million / $0.23 | $70.0 million / $0.47 | Loss narrowed |
| Cash from operating activities | $11.1 million | $15.0 million | Down $3.9 million |
| Cash and restricted cash | $46.0 million | $67.3 million at Dec. 31, 2022 | Down $21.2 million |
Product revenue rose 13.8% to $93.3 million; service revenue increased 1.8% to $92.8 million. Cloud and Edge revenue was $114.5 million, up from $109.8 million; IP Optical Networks revenue was $71.7 million, up from $63.4 million. Segment gross margins were 57.7% for Cloud and Edge and 21.4% for IP Optical Networks; the latter fell from 24.2%, primarily due to new-product ramp-up, customer mix and supply-chain costs.
At March 31, total current assets were $429.6 million and current liabilities were $342.8 million. Term debt was $250.4 million, including $20.1 million current and $225.8 million long-term, net of debt issuance costs. The company reported $11.1 million of operating cash flow and $2.4 million of capital expenditures. Financing activities used $30.1 million, including $80.0 million of debt principal payments, partly offset by $53.4 million of preferred-stock and warrant proceeds.
Material changes and unusual items
- Revenue growth reflected higher product sales, particularly in IP Optical Networks and Cloud and Edge. Channel-partner product sales increased to $35.9 million from $23.5 million.
- Net loss improved substantially, but comparisons include unusual items: Q1 2022 had a $27.0 million loss from the decline in the AVCT investment’s fair value. Q1 2023 included $7.3 million of income from the interest-rate-swap sale and $3.5 million of private-placement costs in other income (expense), net.
- On March 28, Ribbon issued 55,000 Series A preferred shares and approximately 4.9 million warrants, raising about $53.4 million. The instruments are classified as liabilities and remeasured at fair value. Preferred dividends accrue at 9.25% in year one, 9.75% in year two, and 12% thereafter, subject to the stated payment terms; the shares mature September 30, 2025.
- The March credit-facility amendment was accompanied by a $75 million prepayment, largely funded by placement proceeds and the swap sale. The amendment raised near-term leverage covenant limits, reduced the revolving commitment from $100 million to $75 million, and moved the alternative floating rate from LIBOR to SOFR with a 4.5% margin. Ribbon said it was covenant-compliant at quarter-end.
- Ribbon sold the remaining interest-rate swap in March. Its term loan had an average interest rate of 5.7% at quarter-end; without the swap, debt is exposed to floating-rate movements. A $12.0 million accumulated swap gain is expected to reduce interest expense over the remaining loan term.
Outlook, risks and contingencies
- Management expects 2023 revenue to increase modestly versus 2022, with growth principally from IP Optical market-share gains and new IP Routing products. It expects IP Optical gross margin to improve over the remainder of 2023, while overall 2023 gross margin may decline because of a larger mix of lower-margin IP Optical sales.
- Management expects lower R&D and sales-and-marketing expense, slightly higher general and administrative expense, approximately $4 million of additional severance expense under the 2023 restructuring plan, and about $7 million of future severance and facility-consolidation expense under the 2022 plan.
- Management believes cash and available credit will meet anticipated working-capital and capital-expenditure needs for at least 12 months. It cautions that future liquidity needs could exceed available resources and that refinancing or additional financing may not be available on favorable terms. Estimated 2023 purchase obligations are approximately $143 million; lease obligations total $69.7 million.
- Risks highlighted include customer purchase delays and revenue timing, supply-chain and component availability, inflation and higher interest rates, geopolitical developments and Russia-related sanctions, competition, cybersecurity and privacy risks, and credit-facility covenant compliance.
- Pending matters include a securities class action and Charter indemnification litigation. The company says outcomes are uncertain and it cannot reasonably estimate possible losses or ranges of losses. Potential future royalties to Israel’s Innovation Authority were estimated at a maximum of $28.6 million, including $5.6 million accrued.
Important facts for investors to verify
- Whether revenue growth and expected IP Optical product momentum continue, and whether segment and consolidated margins recover as management anticipates.
- Cash conversion, working-capital movements, customer collections, and the impact of purchase obligations and restructuring costs on liquidity.
- Floating-rate borrowing costs after the swap sale, future debt amortization and maturity requirements, covenant headroom, and the availability of revolving credit.
- Fair-value changes, dividend obligations and redemption terms of the liability-classified preferred stock and warrants, including potential dilution from warrant exercise.
- Updates on the Miller and Charter litigation, IIA royalty exposure, and any additional restructuring or facility charges.