Ribbon Communications Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. Ribbon supplies communications software, hardware, network solutions and services to service providers and enterprises through its Cloud and Edge and IP Optical Networks segments.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $210.6 million | $205.8 million | $396.8 million | $379.0 million |
| Gross profit / margin | $101.5 million / 48.2% | $104.6 million / 50.8% | $182.9 million / 46.1% | $182.6 million / 48.2% |
| Operating loss | $6.6 million | $7.2 million | $41.8 million | $46.3 million |
| Net loss | $21.5 million | $30.2 million | $59.8 million | $100.2 million |
| Loss per diluted share | $0.13 | $0.20 | $0.35 | $0.67 |
- Q2 product revenue rose 4.2% to $117.3 million; service revenue was nearly flat at $93.3 million. For the first half, product revenue increased 8.2% and service revenue 1.0%.
- Q2 revenue growth was driven by IP Optical Networks, up $16.6 million year over year, partly offset by lower Cloud and Edge product sales. First-half segment revenue was $239.7 million for Cloud and Edge, down from $246.9 million, and $157.0 million for IP Optical Networks, up from $132.1 million.
- Gross margin fell year over year in both periods, primarily due to sales mix shifting toward lower-margin IP Optical products and lower Cloud and Edge product volume and fixed-cost absorption. Q2 Cloud and Edge margin was 63.3%; IP Optical Networks margin was 25.9%.
- Operating expenses declined to $108.1 million in Q2 from $111.8 million, as lower R&D and sales and marketing costs more than offset increased G&A and restructuring expense. First-half restructuring and related costs rose to $11.2 million from $7.7 million.
Cash flow, debt and liquidity
- Cash and cash equivalents were $34.6 million at June 30, 2023, down from $67.3 million at year-end 2022. First-half operating cash flow was positive $8.6 million versus negative $24.4 million a year earlier; investing cash outflow was $4.1 million and financing cash outflow was $36.7 million.
- Term-loan principal was $245.4 million at June 30, 2023, compared with $330.4 million at December 31, 2022; the reported balance-sheet debt, net of current portion and issuance costs, was $241.4 million. The term loan’s average interest rate was 9.6%, versus 5.4% at year-end. Net interest expense increased 47% in Q2 to $6.8 million.
- In March, Ribbon amended its credit facility, prepaid $75 million of term debt, reduced revolving-credit capacity from $100 million to $75 million, and moved the reference rate from LIBOR to SOFR. It reported compliance with its covenants at June 30. The facility matures in March 2025.
- Management believes cash and available borrowing capacity will cover anticipated working capital and capital expenditure needs for at least 12 months, but notes that future cash needs could require refinancing or additional financing. Estimated 2023 purchase obligations were approximately $143 million; operating lease commitments totaled $68.1 million.
Material changes, outlook and risks
- Revenue grew 2.3% in Q2 and 4.7% in the first half. The company attributed IP Optical growth to broader regional sales and new customer wins. Enterprise product sales increased 65% in Q2 and 45% in the first half year over year; Verizon represented 11% of revenue in each 2023 period, down from 20% and 17%, respectively, in 2022.
- Management expects 2023 revenue to increase modestly from 2022, mainly on IP Optical growth. It anticipates IP Optical growth in India, Japan, Europe and North America, and Cloud and Edge growth in Enterprise, including U.S. Federal, partly offsetting lower U.S. service-provider spending. Management expects overall gross margin may decline in 2023 because of the expected product mix, while IP Optical margin is expected to improve in the remaining quarters.
- The company expects approximately $2 million of additional severance charges under its 2023 restructuring plan and approximately $5 million of future severance and facility-consolidation expense under its 2022 plan. Additional facility costs could arise if locations cannot be subleased.
- A March private placement generated approximately $53.4 million from 55,000 Series A preferred shares and about 4.9 million warrants, largely used to repay debt. The preferred stock is liability-classified, carries cumulative dividends rising from 9.25% to 12%, and has a September 2025 maturity. The warrants are exercisable at $3.77 per share and could dilute common shareholders; the filing said the common share price was below that exercise price at filing.
- Key risks include higher borrowing costs after the interest-rate swap sale, covenant and refinancing risk, inflation and supply-chain disruption, customer purchase delays, and the effects of the Ukraine conflict and related sanctions. Litigation includes a proposed settlement in principle of the Miller securities case, subject to court and shareholder approval, expected to be covered by D&O insurance, and ongoing Charter indemnification lawsuits; a Delaware trial date was set for January 2025. The company could not estimate potential losses for the pending litigation. Maximum possible future IIA royalty commitments, including accrued amounts, were $24.9 million.
- Management concluded disclosure controls were effective as of June 30, 2023, and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track cash generation, the $34.6 million cash balance, working-capital movements and the ability to meet debt, lease and purchase commitments.
- Review term-loan interest costs, upcoming amortization and maturity, covenant headroom, and the availability and terms of refinancing or other financing.
- Assess whether IP Optical growth and the expected margin improvement materialize, and whether Cloud and Edge sales stabilize amid the stated customer-spending and project-timing risks.
- Monitor preferred-stock dividend and redemption obligations, related-party participation, warrant exercise and potential common-share dilution.
- Follow restructuring cash costs and savings, the Miller settlement approval and insurance coverage, Charter litigation, and potential IIA royalty payments.