Ribbon Communications Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. The filing also provides unaudited fourth-quarter results. Ribbon supplies communications software, hardware, network solutions, and services through its Cloud and Edge and IP Optical Networks segments.
Financial performance and liquidity
| Metric | FY 2023 | FY 2022 |
|---|---|---|
| Revenue | $826.3 million | $819.8 million |
| Gross profit / gross margin | $408.1 million / 49.4% | $400.9 million / 48.9% |
| Operating loss | $24.3 million | $48.3 million |
| Net loss | $66.2 million | $98.1 million |
| Diluted loss per share | $0.39 | $0.63 |
| Cash from operating activities | $17.1 million | Cash used: $26.4 million |
| Cash and cash equivalents at year-end | $26.6 million | $67.3 million |
Revenue increased 0.8%. Cloud and Edge revenue declined to $477.6 million from $508.1 million, while IP Optical Networks revenue rose to $348.7 million from $311.6 million. Segment gross margins were 62.8% for Cloud and Edge and 31.0% for IP Optical Networks. The consolidated margin improved 0.5 percentage point year over year.
Fourth-quarter 2023 revenue was $226.4 million, versus $233.6 million a year earlier. The company reported $16.7 million of operating income and $7.1 million of net income, compared with operating income of $1.3 million and net income of $20.5 million in fourth-quarter 2022.
At year-end, term debt had a $235.4 million face amount ($232.6 million net of unamortized issuance costs), including $35.1 million classified as current; scheduled principal maturities are $35.1 million in 2024 and $200.3 million in 2025. The average term-loan rate was 10.0%, up from 5.4% in 2022. Remaining revolver borrowing capacity was $72.3 million, with $2.7 million of letters of credit outstanding. Ribbon was in compliance with its credit covenants at year-end, but expects to refinance the facility in 2024; the facility matures in March 2025.
Current assets were $418.7 million and current liabilities were $341.1 million. The filing states that cash, operating cash generation, and available credit are expected to cover anticipated needs for at least twelve months from issuance of the financial statements, while cautioning that future liquidity needs and refinancing terms remain uncertain.
Changes versus the prior year
- IP Optical product sales increased approximately $33 million, while Cloud and Edge product sales declined approximately $31 million. Management cited stronger IP Optical sales in the U.S. and India and lower Cloud and Edge sales to U.S. Tier One service providers.
- Enterprise customers accounted for 32% of product revenue, up from 28%; channel partners accounted for 35%, up from 30%.
- Operating expenses declined to $432.4 million from $449.3 million, including lower R&D and sales and marketing costs. Restructuring expense increased to $16.2 million from $10.8 million.
- Interest expense, net increased to $27.3 million from $19.8 million, reflecting higher borrowing costs and the sale of the interest-rate swap in March 2023.
- Other expense, net fell to $3.8 million from $44.5 million. The 2022 amount principally reflected $41.3 million of losses on the AVCT investment; the 2023 amount included preferred-stock and warrant fair-value effects, placement costs, and a gain related to the swap sale.
- Cash from operations improved by $43.5 million, to $17.1 million. Cash declined by $40.6 million during 2023, including $47.9 million of net cash used in financing activities.
Outlook, risks, and unusual items
- Management expects 2024 revenue to increase, led by IP Optical growth. It anticipates IP Optical growth across North America, EMEA, and Central and Latin America; enterprise and U.S. Federal growth in Cloud and Edge is expected to offset lower U.S. service-provider spending.
- Management expects IP Optical gross margin to improve, but consolidated gross margin may decrease as the lower-margin IP Optical segment becomes a larger share of sales. R&D and sales and marketing expense are expected to decline modestly; G&A is expected to increase slightly. Approximately $5 million of additional restructuring expense is expected in 2024.
- The March 2023 private placement raised approximately $53.4 million through 55,000 shares of Series A Preferred Stock and warrants for approximately 4.9 million common shares at a $3.77 exercise price. The preferred stock is liability-classified, carries cumulative dividends that rise to 12% after the second anniversary, and has a September 2025 maturity. Its stated liquidation preference was $56.65 million at year-end. These terms and potential warrant dilution may affect liquidity, financing flexibility, and common-stock value.
- Major risks include covenant compliance and refinancing, customer concentration and unpredictable purchasing cycles, competition, supply-chain and component availability, inflation and interest rates, and geopolitical disruption. Israel-related risks include office closures and employee military call-ups; sanctions and the war in Ukraine may constrain regional sales and collections.
- Verizon represented 11% of 2023 revenue; the top five customers represented approximately 34%. International customers generated 58% of revenue.
- Legal matters include a proposed $4.5 million settlement in the Miller securities litigation, funded into escrow by the D&O insurer and awaiting final court approval, plus Charter and WOW indemnification disputes. Management says it cannot currently estimate possible losses for the latter matters.
- The company reported no known cybersecurity threat that had materially affected or was reasonably likely to materially affect it as of the filing date. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Track refinancing progress, interest costs, covenant headroom, required debt amortization, and the March 2025 maturity.
- Assess whether IP Optical growth can offset lower Cloud and Edge demand without materially diluting consolidated margins.
- Monitor operating cash generation, cash levels, receivables, inventory, and the timing of customer collections.
- Review the preferred-stock dividend and redemption obligations, related restrictions, and potential dilution from warrants and equity awards.
- Follow customer concentration, restructuring savings and execution, and developments in the Miller, Charter, and WOW matters.