Ribbon Communications Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results. Ribbon provides communications software, hardware and services to service providers, enterprises and critical-infrastructure customers.
Financial performance
- Revenue: $843.8 million, up 49.8% from $563.1 million in 2019. Product revenue was $467.9 million (+78.6%) and service revenue was $375.9 million (+24.8%). The comparison is substantially affected by the March 2020 ECI acquisition; ECI contributed $260.5 million of revenue after acquisition.
- Segments: Cloud and Edge revenue was $583.3 million, with a 65.9% gross margin. IP Optical Networks, primarily the acquired ECI business, contributed $260.5 million, with a 41.7% gross margin. The segments were newly reported in 2020, so IP Optical Networks has no comparable 2019 segment results.
- Gross profit and margins: Gross profit was $493.1 million versus $354.7 million. Total gross margin fell to 58.4% from 63.0%, mainly because IP Optical Networks has a higher hardware mix and lower margins.
- Operating results: Operating income was $1.7 million, compared with an operating loss of $189.5 million in 2019. 2019 included a $164.3 million goodwill impairment. Net income was $88.6 million versus a net loss of $130.1 million; diluted EPS was $0.61 versus a loss of $1.19 per share.
- Non-operating and unusual items: Other income, net, was $112.7 million, primarily including an $83.6 million gain on the Kandy sale and a $30.3 million mark-to-market gain on AVCT securities received as consideration. These gains substantially contributed to reported net income and are not equivalent to recurring operating earnings.
- Fourth quarter: Revenue was $244.2 million, operating income $16.9 million and net income $123.8 million. The quarter’s net income was substantially affected by the Kandy-related gains and securities revaluation.
- Cash flow: Operating activities provided $101.6 million, compared with $55.7 million in 2019. Investing activities used $330.1 million, mainly reflecting the ECI acquisition; financing activities provided $319.3 million, principally reflecting debt financing.
- Liquidity and debt: Cash and cash equivalents were $128.4 million, with an additional $7.3 million restricted cash. Working capital was $120.0 million. Debt outstanding was $393.1 million: $318.5 million Term A and $74.6 million Term B; the $100 million revolver was undrawn, with $5.6 million of letters of credit outstanding. The company reported compliance with credit-facility covenants at year-end.
Material changes and business developments
- Ribbon completed the ECI acquisition on March 3, 2020, broadening the business from communications and voice technologies into IP networking and optical transport. Consideration included $322.5 million cash and 32.5 million Ribbon shares.
- Ribbon sold its Kandy Communications business on December 1, 2020. Consideration consisted of AVCT convertible debentures and warrants, valued at $115.2 million at year-end; their fair-value movements affect GAAP earnings. The securities were subject to a lock-up through June 1, 2021, subject to exceptions.
- Revenue from outside the United States represented 55% of 2020 revenue, up from 39% in 2019. Verizon represented 15% of 2020 revenue; the top five customers represented approximately 34%.
- Restructuring expense was $16.2 million in 2020. The company expected approximately $8 million of additional expense under its 2020 restructuring initiative, primarily for severance and facility consolidation.
Outlook, risks and contingencies
- Management expected 2021 revenue to increase, citing North American IP Optical growth and a recovery in Indian capital spending. It expected total gross margin to decline slightly as IP Optical sales grew, R&D expense to increase, sales and marketing expense to rise modestly, and G&A to remain near 2020 levels.
- Management said available cash and borrowing capacity were expected to cover anticipated needs for at least 12 months, while noting uncertainty from COVID-19 and the possibility that additional financing could be required. The company had reduced discretionary spending and described further cost reductions as a contingency.
- Key risks include customer concentration and unpredictable order timing; COVID-19-related demand, supply-chain and delivery disruption; intense competition; execution and integration of ECI; component sourcing and contract-manufacturer dependence; international, currency and geopolitical exposure, including Israel; and the company’s substantial secured debt and covenant restrictions.
- Ribbon disclosed unauthorized access to part of its network in the first quarter of 2021; it said it detected and remediated the intrusion and did not believe material internal or customer data was obtained or systems disrupted.
- Contingencies include a securities class action whose outcome was uncertain and potential royalties to Israel’s Innovation Authority. The maximum possible future royalty commitment was estimated at $44.0 million, including accrued unpaid royalties. The auditor issued unqualified opinions on the financial statements and internal controls; the controls assessment excluded ECI during its first year after acquisition.
Most important facts for investors to verify
- How much of 2020’s revenue growth and 2021 outlook reflects ECI acquisition effects versus organic growth, and whether integration and cross-selling targets are being met.
- Whether recurring operating performance and operating cash flow support the reported profit, excluding the Kandy sale gain and AVCT mark-to-market gains.
- AVCT securities’ conversion, liquidity, valuation sensitivity and the timing and conditions under which Ribbon can sell the underlying shares.
- Debt repayment capacity, interest costs, covenant headroom and refinancing exposure, especially the large Term A maturity payment due in March 2025.
- Customer concentration, international receivables and collection performance, supply-chain resilience, and progress integrating ECI’s controls and operations.