Ribbon Communications Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited quarterly results, including the fourth quarter. Ribbon provides communications software, products and services to service providers and enterprises; it operates as one reporting segment. Figures below are in U.S. dollars.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $563.1 million | $577.9 million |
| Gross profit / margin | $317.1 million / 56.3% | $308.3 million / 53.4% |
| Operating loss | $189.5 million | $65.4 million |
| Net loss | $130.1 million | $76.8 million |
| Operating cash flow | $55.7 million | $(9.6) million |
| Cash and cash equivalents at year-end | $44.6 million | $43.7 million |
| Debt outstanding at year-end | $56.8 million | $55.0 million |
| Working capital | $72.6 million | $(11.2) million |
Fourth-quarter 2019 revenue was $161.1 million, operating loss was $148.8 million and net loss was $150.4 million. The quarter included the annual goodwill impairment charge.
Changes versus the prior year
- Revenue declined 2.6%. Product revenue fell 6.1% to $262.0 million, primarily from lower sales of software bundled with appliances; software license and subscription sales partly offset the decline. Service revenue rose 0.7% to $301.1 million.
- Gross margin increased to 56.3% from 53.4%, reflecting improved service margins and a higher software mix.
- Operating expenses rose to $506.5 million, including a $164.3 million goodwill impairment charge. Without that charge, the reported operating loss would have been substantially lower; the filing does not present an adjusted operating result as a GAAP measure.
- Net loss widened despite $70.4 million of other income, net, primarily including a $63.0 million Metaswitch settlement gain and an $8.1 million reduction in Edgewater deferred purchase consideration.
- Operating cash flow improved by $65.3 million to $55.7 million. Investing activities used $3.5 million; financing activities used $51.3 million.
Liquidity, debt and capital allocation
- At year-end, debt comprised approximately $48.8 million of term-loan principal and $8.0 million drawn on the revolving facility; the combined average interest rate was 3.30%. Ribbon reported compliance with its credit-facility covenants.
- The $100 million revolving line was not fully drawn; $5.4 million of letters of credit were outstanding. The facility was secured by first-priority liens on substantially all assets and matures in 2024.
- Ribbon reported $192.5 million of contractual obligations, including operating leases, purchase obligations, debt principal and interest, and pension obligations. Management said cash and available borrowing capacity were expected to cover anticipated needs for at least 12 months, including the pending ECI transaction.
- The company spent $4.5 million to repurchase about 1.0 million shares in 2019, leaving $70.5 million authorized under its repurchase program.
Outlook, management commentary and notable items
- Management expected 2020 revenue to increase slightly from 2019 and total gross margin to improve, citing greater software content and restructuring and integration savings. It expected R&D expense to benefit from cost reductions, partly offset by increased software investment; sales and marketing expense to rise modestly; and general and administrative expense to decline.
- The 2019 restructuring plan includes workforce reductions, facility consolidation and a shift from appliance-based development toward software virtualization. Ribbon recorded $16.4 million of restructuring and related expense in 2019 and expected facility actions to be substantially completed by the end of 2020.
- The proposed ECI merger was expected to close in the first quarter of 2020, subject to remaining approvals and customary conditions. Consideration included $324 million in cash, 32.5 million Ribbon shares, less ECI indebtedness; the planned $500 million credit facility comprised a $400 million term loan and a $100 million revolver. The filing warned of financing, integration, dilution and transaction-completion risks.
- Customer concentration remains significant: Verizon represented 17% and AT&T 12% of 2019 revenue; the top five customers represented about 40%. International customers accounted for 39% of revenue.
- Other risks include volatile customer purchasing and quarterly results, intense competition, technology-transition and execution risks, reliance on contract manufacturers and limited-source components, foreign exchange and regulatory exposure, cybersecurity and data privacy risks, and possible future goodwill or intangible-asset impairment.
- A securities class action concerning 2015 Sonus guidance was pending; the company said the outcome could not be predicted. Separately, a 2018 SEC order required a $1.9 million civil penalty, which Ribbon agreed to pay without admitting or denying the findings.
- The independent auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective at year-end.
Important facts for investors to verify
- Whether the modest revenue growth and gross-margin improvement outlook was achieved, and how software and subscription revenue developed relative to appliance sales.
- The assumptions and valuation inputs behind the $164.3 million goodwill impairment and whether further impairment indicators arise.
- ECI merger completion, final debt funding and leverage, dilution from the 32.5 million shares, integration costs and realized synergies.
- Cash generation and working-capital movements, including collection of the $25.5 million remaining Metaswitch settlement receivable.
- Continued customer concentration and the effect of major-customer spending changes, as well as progress on restructuring and facility consolidation.
- The outcome and potential financial exposure of the securities litigation and any other material contingencies.