Ribbon Communications Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited consolidated results. Ribbon provides communications software, hardware, networking solutions and services to service providers and enterprises, through its Cloud and Edge and IP Optical Networks segments.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $205.8m | $211.2m | $379.0m | $404.0m |
| Gross profit / margin | $104.6m / 50.8% | $118.7m / 56.2% | $182.6m / 48.2% | $219.2m / 54.3% |
| Operating income (loss) | $(7.2)m | $13.0m | $(46.3)m | $0.3m |
| Net income (loss) | $(30.2)m | $23.2m | $(100.2)m | $(21.4)m |
| Diluted EPS | $(0.20) | $0.15 | $(0.67) | $(0.15) |
| Operating cash flow | Not stated by quarter | Not stated by quarter | $(24.4)m | $8.0m |
- Q2 product revenue was $112.7m, down 0.4%; service revenue was $93.1m, down 5.0%. First-half product revenue fell 7.8% and service revenue fell 4.5%.
- Q2 Cloud and Edge revenue was $137.1m; IP Optical Networks revenue was $68.7m. IP Optical gross margin fell to 23.7% from 42.8%; Cloud and Edge gross margin was 64.4%, up from 62.8%.
- Q2 operating expenses were $111.8m, versus $105.8m. Q2 interest expense, net, was $4.6m; other expense, net, was $10.2m. The six-month other expense of $39.0m was largely driven by AVCT investment fair-value losses.
- At June 30, cash and cash equivalents were $36.2m, restricted cash $2.0m, and current assets $415.4m. Total liabilities were $779.3m and equity $451.3m.
- Term debt outstanding was $340.5m, at an average interest rate of 4.4%; the revolving facility was undrawn. The reported balance sheet shows $335.3m of current and long-term debt, net. Debt matures in March 2025.
Changes and management commentary
- Compared with Q2 2021, revenue decreased 2.6%, gross margin fell 5.4 percentage points, and results shifted from operating and net income to losses. First-half revenue declined 6.2% and gross margin fell 6.1 points.
- Management attributed lower first-half revenue mainly to reduced SBC product sales and fewer Service Provider VoIP Network Transformation projects completing. Margin pressure reflected product and customer mix, higher component costs, and freight and logistics expense; these factors reduced gross margin by about five points in Q2 and six points for the first half.
- First-half R&D expense rose 10.2% to $103.8m, primarily from investment in IP Optical Networks. The company expects R&D expense to increase modestly for full-year 2022; sales and marketing to be broadly consistent with 2021; and G&A to decrease slightly.
- Management expects 2022 revenue to increase versus 2021 and anticipates improved gross margin in the second half as supply-chain costs ease and sales and mix improve. It nevertheless cautions that full-year consolidated gross margin may decline versus 2021, including because of higher expected sales from the lower-margin IP Optical segment.
Liquidity, debt and material risks
- Ribbon reported compliance with its credit covenants at June 30, but said market conditions, supply-chain disruption, higher costs and geopolitical instability could result in noncompliance for the quarter ending September 30, 2022. A default could allow lenders to accelerate the $340.5m debt; the company stated it lacked sufficient cash and available liquidity to repay it if accelerated.
- June’s credit amendment relaxed near-term leverage and fixed-charge coverage tests, raised potential borrowing margins, and permitted at least $50m of junior debt subject to conditions; half of net proceeds must be used to repay senior debt. Management’s stated mitigation options include raising cash, selling its interest-rate derivative (fair value $21.3m), delaying capital spending and extending vendor payment terms. Management believes these plans are probable and expects liquidity to cover needs for at least 12 months, but refinancing or additional financing may be required and may not be available on favorable terms.
- Cash and restricted cash declined to $38.3m from $106.5m at year-end. First-half operating cash use was $24.4m, investing cash use $6.5m, and financing cash use $38.4m. Inventory increased to $64.6m current from $54.0m at year-end.
- The AVCT investment fair value fell to $4.5m from $43.9m at year-end; the company recorded fair-value losses of $12.4m in Q2 and $39.4m in the first half. This non-cash valuation movement was a major unusual item in reported results and operating cash-flow reconciliation.
- The 2022 restructuring plan incurred $7.1m of expense in the first half, including severance for approximately 60 employees. Management anticipates approximately $13m of additional severance and facility-consolidation expense.
- Other risks include ongoing component and logistics constraints, COVID-19 effects, the war in Ukraine and related sanctions, inflation, customer purchasing delays, and dependence on Verizon, which represented 20% of Q2 revenue and 17% of first-half revenue. A change in the U.S. tax treatment of R&D costs could materially reduce 2022 operating cash flow.
- Contingencies include a securities class action for which a motion to dismiss remained unresolved, and potential future royalties to Israel’s Innovation Authority; the maximum estimated future royalty commitment was $31.3m, including accrued amounts.
Important facts for investors to verify
- Whether Ribbon met the third-quarter 2022 credit covenants and secured sufficient cash or other financing to avoid acceleration of its debt.
- Actual second-half revenue and margin trends versus management’s outlook, particularly component and logistics costs and IP Optical product mix.
- The sources and timing of cash generation or funding, including receivables factoring, derivative-sale feasibility, capital spending and vendor-payment actions.
- Whether the AVCT investment, restructuring charges, and R&D tax amortization requirement result in further material earnings or cash-flow effects.
- The filing’s market-risk section says $8.0m of derivative-related accumulated gains may be reclassified as an “increase” to interest expense over the next 12 months, while the financial-statement note describes the amount as a “decrease”; verify the intended direction.