Ribbon Communications Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Ribbon provides network communications products and services to telecommunications, cable, wireless and enterprise customers. The October 2017 GENBAND merger makes Q1 2018 results not directly comparable with Q1 2017, which included no GENBAND results.
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $121.2 million | $53.4 million |
| Gross profit / gross margin | $55.3 million / 45.6% | $33.7 million / 63.2% |
| Operating expenses | $97.7 million | $44.5 million |
| Operating loss | $42.4 million | $10.8 million |
| Net loss / diluted loss per share | $44.9 million / $0.44 | $10.6 million / $0.22 |
| Operating cash flow | $3.4 million | $3.6 million |
Product revenue was $51.5 million and service revenue was $69.6 million. Revenue rose 127%, principally from including GENBAND; management attributed approximately $28 million of product revenue and $41 million of service revenue to GENBAND. International customers generated approximately 53% of revenue, versus 33% a year earlier. Verizon represented 12% of revenue.
Lower gross margin reflected GENBAND’s cost structure and acquired-intangible amortization. Operating expenses included $4.4 million of acquisition and integration costs and $6.7 million of restructuring expense. Higher amortization also weighed on earnings.
Balance sheet, debt and liquidity
At March 31, 2018, cash and cash equivalents were $58.6 million, marketable securities $23.7 million, and investments $2.2 million—about $84.5 million in total. Current assets were $251.4 million and current liabilities $223.0 million. Accounts receivable was $125.5 million; deferred revenue totaled $117.4 million.
Debt comprised $20.0 million drawn under a $100 million secured revolving credit facility and a $22.5 million related-party promissory note. The revolver also supported $3.3 million of letters of credit. The note bears 10% annual interest after its initial six months and is due in October 2020, subject to its terms. The company reported compliance with credit-facility covenants. Management said available cash, investments and borrowing capacity should cover anticipated needs for at least 12 months.
Operating cash flow was positive despite the net loss, primarily due to lower receivables, increased deferred revenue and noncash expenses. Investing activities used $1.6 million and financing activities used $0.5 million. Management said the net loss, adjusted for noncash operating items, used approximately $27 million of cash.
Changes, outlook and significant items
- Outlook: Management expected 2018 revenue to be significantly higher than Ribbon’s 2017 revenue because GENBAND would be included for a full year, but lower than the combined companies’ 2017 revenue. It expected lower gross margin, higher R&D, sales and marketing, and G&A expenses, and continued industry pricing pressure and legacy-product decommissioning. No specific full-year revenue or earnings guidance was provided.
- Restructuring and integration: The merger restructuring plan incurred $6.5 million in Q1; management expected about $15 million of additional restructuring charges and $5–6 million of further merger-related acquisition and integration expense in the remainder of 2018. Expected restructuring payments were to be completed by early 2019.
- Revenue accounting: ASC 606 adoption increased opening accumulated deficit by approximately $12 million. Under the new standard, Q1 revenue was about $0.8 million lower than it would have been under the prior standard. Merger purchase accounting reduced assumed GENBAND deferred revenue by approximately $50 million; management estimated this reduced Q1 revenue by about $11 million and expected a similar reduction in the remainder of 2018, with effects continuing through 2020.
- Goodwill: Management reported market capitalization below book value at March 31 and said a sustained decline could indicate a goodwill impairment trigger. It considered the decline temporary, citing merger integration and unrealized synergies. Goodwill was $335.7 million.
- Legal matters: The company was negotiating an SEC settlement in principle involving a $1.9 million civil penalty, already accrued. A court entered an $8.9 million judgment plus $0.4 million in costs for GENBAND in a Metaswitch patent case; Metaswitch appealed, and the company had not recorded the award. Separately, an April 2018 Taqua litigation settlement required release of escrow funds and an additional $1.4 million payment. The company said it did not expect Metaswitch litigation to have a material adverse effect, though outcomes remained uncertain.
- Controls: Management concluded disclosure controls were effective as of March 31, 2018, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported growth reflects GENBAND consolidation versus underlying organic performance, and whether integration synergies materialize.
- Whether gross margins stabilize as acquired-intangible amortization, product mix and integration costs evolve.
- Cash conversion and working-capital trends, including whether positive operating cash flow persists despite ongoing losses.
- Progress against restructuring plans and actual remaining integration and restructuring costs.
- Credit-facility availability, covenant compliance, and the related-party note’s repayment or extension status given its link to the revolver’s springing maturity.
- Potential goodwill impairment, final GENBAND purchase accounting, and outcomes of the SEC and litigation matters.