Ribbon Communications Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise. Results include ECI only from its March 3, 2020 acquisition date, limiting direct year-over-year comparability.
Business context and key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $210.5 | $145.4 | $368.5 | $264.3 |
| Gross profit / margin | $112.3 / 53.4% | $80.7 / 55.5% | $193.9 / 52.6% | $137.3 / 51.9% |
| Operating income (loss) | $1.6 | $(7.1) | $(27.1) | $(43.3) |
| Net income (loss) | $(8.3) | $49.5 | $(41.4) | $18.6 |
| Diluted EPS | $(0.06) | $0.45 | $(0.31) | $0.17 |
| Operating cash flow | Not presented separately for quarter | Not presented separately for quarter | $36.7 | $29.1 |
- Q2 revenue comprised $120.9 million product and $89.6 million service revenue. Six-month revenue comprised $196.8 million product and $171.7 million service revenue.
- At June 30, cash and cash equivalents were $81.0 million, plus $13.1 million restricted cash. Current assets were $408.8 million and current liabilities $342.6 million.
- Reported term debt was $392.2 million on the balance sheet, including current and long-term portions. The 2020 Term Loan had $397.5 million outstanding before balance-sheet presentation adjustments; the $100 million revolver was undrawn, with $5.2 million of letters of credit outstanding. The Company reported covenant compliance.
- Cash flow for the first half included $318.2 million net investing outflow, principally $346.9 million net cash consideration for ECI and $14.9 million in capital expenditures, partly offset by $43.5 million proceeds from land sales. Financing provided $331.1 million, primarily from new term debt.
Material changes versus prior comparable periods
- Revenue rose 44.7% in Q2 and 39.4% in the first half, primarily because ECI contributed $63.6 million of Q2 revenue and $93.6 million since acquisition. Organic Ribbon product sales also improved in the first half, while attached-appliance sales declined.
- Q2 gross margin declined to 53.4% from 55.5%; first-half margin increased to 52.6% from 51.9%. Management cited ECI’s higher hardware content and lower margins, COVID-related order delays and higher acquired-intangible amortization as pressures. Organic Ribbon margins improved, aided by software sales and cost reductions.
- Operating loss narrowed year over year in the first half, but interest expense increased to $8.8 million from $2.6 million, reflecting higher borrowings and related costs.
- Net results are not directly comparable: Q2 2019 included $62.9 million of other income, and first-half 2019 included $70.6 million, substantially affecting prior-period reported earnings.
Outlook, commentary, risks and unusual items
- Management expected 2020 revenue to increase from 2019, mainly due to ECI, but to be below the combined standalone Ribbon and ECI 2019 revenue. It expected full-year gross margin to decline from 2019, primarily due to ECI product mix, and R&D, sales and marketing, and G&A expenses to increase with ECI’s inclusion. No specific full-year revenue or earnings guidance was provided.
- COVID-19 created uncertainty around demand, customer purchase delays, supply chains, logistics and delivery. ECI experienced delayed customer orders and maintenance renewals. The Company implemented temporary 10%–50% salary reductions for most employees, restricted hiring and contracting, curtailed travel and discretionary spending, and said further cost actions may be considered.
- The $400 million term loan is variable-rate debt, partially hedged by a $400 million interest-rate swap that fixes the LIBOR component at 0.904% plus the applicable margin through March 2025. The swap had a $13.5 million fair-value liability at June 30; $3.1 million was estimated to be reclassified as higher interest expense over the next 12 months.
- The ECI purchase price allocation remained preliminary, with valuation expected to be finalized by Q1 2021. Integration execution, anticipated cost savings, COVID-19 effects, debt covenants and refinancing, LIBOR transition, customer concentration, international operations and adoption of 5G/cloud products are highlighted risks.
- Restructuring expense was $5.4 million in Q2 and $7.4 million in the first half. The 2020 plan covered approximately 75 employees and included planned facility consolidation; management expected about $5 million of additional expense. The filing gives differing expected payment timing for these severance costs in separate sections; verify the current estimate.
- Potential future IIA royalties, including $9.3 million accrued, were estimated at up to $56.2 million based on projected product sales and other assumptions. A shareholder securities class action remained pending; management did not expect routine proceedings to materially affect results.
- Subsequent to quarter-end, the Company agreed to sell its Kandy cloud-based enterprise services business for 13 million shares of AVCTechnologies, subject to adjustments and closing conditions. Closing was expected in the second half of 2020.
Important facts for investors to verify
- How much revenue and margin growth is organic versus attributable to ECI, and whether ECI integration and cost savings meet expectations.
- Cash generation and liquidity after acquisition spending, restricted cash, debt service and working-capital movements.
- Debt covenant headroom, interest-rate exposure, and the implications of the LIBOR transition and secured-credit restrictions.
- COVID-19 effects on customer demand, supply continuity, ECI renewals, margins and the timing of projects.
- Final ECI purchase accounting, restructuring costs and timing, and the status and terms of the Kandy divestiture.
- Customer concentration: Verizon represented 15% of Q2 revenue; two customers together accounted for approximately 26% of receivables at June 30.