Ribbon Communications Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone Q4 filing; selected fourth-quarter results are included below. Ribbon provides communications software, products and services to service providers and enterprises. Comparisons are affected by the October 2017 GENBAND merger: 2018 includes GENBAND for the full year, while 2017 includes it only from October 27. 2018 also includes Edgewater from its August 3 acquisition.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $577.9 million | $329.9 million |
| Gross profit / gross margin | $308.3 million / 53.4% | $201.5 million / 61.1% |
| Operating loss | $65.4 million | $55.2 million |
| Net loss | $76.8 million | $35.3 million |
| Diluted loss per share | $0.74 | $0.60 |
| Cash from operating activities | $(9.6) million | $8.1 million |
- Revenue rose 75.2% year over year, including product revenue of $279.0 million and service revenue of $298.9 million. Verizon contributed 17% of revenue in both years; the top five customers represented 38% in 2018 versus 41% in 2017.
- Gross margin fell 7.7 percentage points. Management attributed the decline largely to a full year of GENBAND costs and acquired-intangible amortization, product/customer mix, and higher project-related service costs.
- Operating expenses increased to $373.7 million from $256.7 million. FY2018 included $17.0 million of acquisition/integration expense and $17.0 million of restructuring expense.
- Q4 2018 revenue was $166.9 million, gross profit $95.7 million, operating income $1.2 million, and net loss $1.8 million. This followed an operating loss of $7.6 million and net loss of $10.2 million in Q3.
- At year-end, cash and cash equivalents were $43.7 million and marketable securities were $7.3 million; current assets were $278.4 million and current liabilities $289.7 million. Total assets were $957.2 million and stockholders’ equity $590.3 million.
- Debt comprised $55.0 million outstanding under a secured revolving facility and a $24.1 million related-party promissory note. The revolver carried a 5.96% weighted-average rate; the note accrues interest at 10% after its initial six months. The company reported compliance with credit-facility covenants at year-end.
Material changes, outlook and notable items
- Edgewater was acquired for cash, stock and deferred consideration. In February 2019, the parties reduced deferred consideration from $30.0 million to $21.9 million, payable March 8, 2019. Edgewater contributed $21.5 million of 2018 revenue and a $4.3 million net loss after acquisition.
- Management expected 2019 total revenue to increase, primarily from Edgewater; it also expected higher gross margin, increased R&D expense, approximately flat sales and marketing expense, and lower general and administrative expense. No numeric revenue or margin guidance was provided.
- Management stated available cash, marketable securities and borrowing capacity were expected to cover working capital and capital expenditure needs for at least 12 months, while cautioning that future financing might be needed. The credit facility has a December 2021 maturity, subject to an earlier springing maturity if the related-party note is not converted or extended by July 14, 2020.
- Revenue recognition standard ASC 606 was adopted January 1, 2018; the transition increased opening accumulated deficit by $12.2 million. Management said 2018 revenue would have been approximately $16 million lower under the prior standard.
- The company announced but did not complete a proposed $150 million convertible-note offering, citing market conditions; it incurred $1.0 million of related expense. It also paid a $1.9 million SEC civil penalty under a cease-and-desist order; the company neither admitted nor denied the findings.
- Material risk areas include ongoing Metaswitch patent, trade-secret and antitrust litigation; customer concentration; industry pricing pressure and declining legacy voice-infrastructure demand; merger integration and restructuring execution; supplier/manufacturer concentration; and debt maturity/covenant risks. Management did not expect the Metaswitch matters to materially affect results, but said outcomes could not be predicted.
- After year-end, Ribbon acquired Anova Data for 3.3 million shares; management did not expect a material effect on 2019 financial statements. The auditor issued unqualified opinions on the financial statements and internal controls; Edgewater was excluded from management’s internal-control assessment during its first year of integration.
Most important facts for investors to verify
- How much of reported revenue growth reflects acquired businesses versus organic performance, and how the business performs on a comparable basis.
- Whether gross margins improve as management expected, given lower 2018 margins and legacy-product pricing and demand pressures.
- Cash conversion and working-capital trends, particularly operating cash outflow and the sizable receivables balance.
- Funding and repayment plans for the $24.1 million related-party note, the revolving debt, and Edgewater deferred consideration, including the springing-maturity condition.
- Progress in realizing integration savings and controlling restructuring costs; management anticipated approximately $5 million of additional restructuring expense in 2019.
- Developments in Metaswitch litigation and the securities class action, as well as customer concentration and any changes in major customer spending.