Ribbon Communications Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 2, 2019. Ribbon provides communications software and services to telecom, cable, wireless and enterprise customers. Results include Edgewater, acquired in August 2018, and Anova from February 28, 2019.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $118.9 million | $121.2 million |
| Product revenue | $47.5 million | $51.5 million |
| Service revenue | $71.4 million | $69.6 million |
| Gross profit / gross margin | $56.6 million / 47.6% | $55.3 million / 45.6% |
| Operating loss | $36.2 million | $42.4 million |
| Net loss / diluted loss per share | $30.8 million / $0.29 | $44.9 million / $0.44 |
| Operating cash flow | $19.6 million | $3.4 million |
- Product gross margin was 30.2% (35.9% in Q1 2018); service gross margin was 59.1% (52.8%). Lower third-party maintenance expense and cost reductions supported service margin.
- At March 31, cash and cash equivalents were $43.9 million and marketable securities were $2.0 million. Current assets were $220.1 million versus current liabilities of $269.9 million.
- Quarter-end borrowings included $57.0 million under the revolving facility and $24.7 million of related-party promissory-note debt. The company reported compliance with credit-facility covenants.
- Operating cash flow benefited from working-capital movements, notably collections and lower accounts receivable and inventory; net loss adjusted for noncash items consumed cash. Investing activities provided $1.5 million, while financing activities used $20.9 million, including $21.9 million paid for Edgewater deferred consideration.
Changes versus the prior-year quarter
- Revenue declined 1.9%, as product revenue fell 7.9%, partly offset by 2.6% growth in service revenue. Management attributed weaker product sales mainly to lower sales of software with attached appliances.
- Channel-partner sales rose to about 40% of product revenue from 16%; enterprise customers rose to about 31% from 14%. Service revenue growth included Edgewater maintenance and professional-services timing.
- Operating expenses decreased to $92.8 million from $97.7 million. R&D and sales and marketing costs fell, while general and administrative expense rose to $18.7 million from $15.6 million, primarily on higher professional fees.
- Net loss narrowed, but Q1 2019 included $7.8 million of other income, primarily the $8.1 million reduction negotiated on Edgewater deferred consideration. This was a material one-time benefit to reported results.
Outlook, significant events and risks
- Management expected 2019 product, service and total revenue to increase versus 2018, mainly from Edgewater and Anova contributions. It expected total gross margin to improve. These are directional expectations; the filing provides no specific revenue or earnings targets.
- Management expected R&D expense to rise, sales and marketing to be essentially flat, and G&A expense to decline in 2019; approximately $1 million of additional integration expense was anticipated during the remainder of 2019.
- On April 22, 2019, Ribbon and Metaswitch agreed to settle six lawsuits, with Metaswitch to pay $63.0 million in aggregate and the parties to cross-license patents. The filing’s descriptions conflict on installment payments: one states $25.5 million payable in three annual installments after $37.5 million in Q2 2019; another states $22.5 million. Final settlement documents were still to be completed.
- On April 29, Ribbon amended and restated its credit facility, adding a $50 million term loan funded in full and extending stated maturity to April 2024. It also repaid the related-party promissory note in full without an early-termination penalty. The company believed available cash and borrowing capacity would cover anticipated needs for at least 12 months, while noting that future funding needs could require refinancing or additional financing.
- In Q2 2019, the board authorized repurchases of up to $75 million of common stock through April 18, 2021; the program is discretionary and does not require purchases.
- Key risks include customer purchase timing and quarterly revenue variability, competition and industry pricing pressure, legacy-product decommissioning, customer concentration, acquisition integration and realization of synergies, component supply and product defects, litigation, and credit-facility covenant and liquidity risks. Verizon represented 15% of Q1 revenue and AT&T 10%.
- Adoption of lease accounting on January 1, 2019 added $43.9 million of lease assets and $47.8 million of lease liabilities; management reported no impact on earnings or cash flows from adoption. Disclosure controls were assessed as effective.
Investor verification priorities
- Confirm the final Metaswitch settlement terms, including the discrepancy between $25.5 million and $22.5 million of deferred installments, payment timing, and completion of the cross-license.
- Review the post-April 29 debt balance, interest costs, covenant headroom and liquidity after the $50 million term borrowing and promissory-note repayment.
- Track whether revenue growth and gross-margin expectations are achieved, distinguishing acquisition contributions from organic performance and recurring service trends.
- Assess the sustainability of operating cash flow, given the quarter’s working-capital contribution and continuing net losses.
- Monitor acquisition integration, Anova’s preliminary purchase-price allocation, restructuring costs, and the effect of the discretionary $75 million repurchase authorization on capital allocation.