Ribbon Communications Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts below are in millions of dollars except per-share data and percentages. Ribbon provides communications software, hardware and services through its Cloud and Edge and IP Optical Networks segments.
Financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $211.2 | $210.5 | $404.0 | $368.5 |
| Gross profit / margin | $128.4 / 60.8% | $123.3 / 58.6% | $239.0 / 59.2% | $213.8 / 58.0% |
| Operating income (loss) | $13.0 | $1.6 | $0.3 | $(27.1) |
| Net income (loss) | $23.2 | $(8.3) | $(21.4) | $(41.4) |
| Diluted EPS | $0.15 | $(0.06) | $(0.15) | $(0.31) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $8.0 | $36.7 |
Q2 revenue was nearly flat year over year: service revenue rose 9.4% to $98.1 million, offsetting a 6.4% decline in product revenue to $113.1 million. For the first half, revenue grew 9.6%; management attributes much of the product and IP Optical Networks growth versus 2020 to having a full six months of ECI results in 2021 versus four months in the prior-year period.
Q2 segment revenue was $141.4 million for Cloud and Edge, down from $146.9 million, and $69.8 million for IP Optical Networks, up from $63.6 million. Six-month segment revenue was $266.8 million and $137.1 million, respectively. Verizon represented 17% of Q2 revenue and 16% of first-half revenue.
Q2 net income included $17.2 million of other income, principally reflecting a $12.1 million fair-value gain on AVCT securities received in the Kandy sale. The same securities generated an $11.8 million fair-value loss for the first half; first-half other expense was $8.3 million. Accordingly, reported net income and loss were affected by valuation changes, not solely operating performance.
Liquidity, debt and cash flow
At June 30, 2021, cash and cash equivalents were $112.2 million and restricted cash was $2.6 million, compared with $128.4 million and $7.3 million, respectively, at year-end. Current assets were $413.0 million and current liabilities were $287.2 million. The balance sheet reported $379.4 million of term debt, including current portion; the company disclosed an outstanding term-loan balance of $385.5 million at an average rate of 3.40%. The loan matures in March 2025, and the revolving facility was undrawn. Ribbon said it was in compliance with all credit-facility covenants.
First-half operating cash flow was $8.0 million, down from $36.7 million. Management cited cash payments for bonuses, facilities, professional fees and royalties, among other working-capital movements. Investing activities used $7.6 million, including $10.6 million of capital expenditures, partly offset by sale proceeds. Financing activities used $20.9 million, including debt principal payments and $12.1 million of employee tax withholding on net-share settlements. Cash, cash equivalents and restricted cash totaled $114.8 million at period end.
A $400 million notional interest-rate swap effectively fixes the loan’s LIBOR component at 0.904%, plus the applicable leverage-based margin, through March 2025. Ribbon estimated $3.2 million could be reclassified from accumulated other comprehensive loss to interest expense over the following 12 months.
Outlook, risks and unusual items
- Management expected 2021 revenue to increase versus 2020, citing customer spending and cross-selling opportunities; it expected total gross margin to decrease slightly as IP Optical Networks, a lower-margin business, grew.
- Management expected R&D expense to increase, primarily from investment in IP Optical Networks; sales and marketing expense to rise modestly; and G&A expense to remain consistent with 2020 levels. The company expected approximately $2 million of additional 2020 restructuring expense and nominal, if any, further expense under the 2019 initiative.
- Management believed cash and available borrowing capacity would cover working capital and capital expenditures for at least 12 months, while cautioning that prolonged disruption could require refinancing or additional financing that may not be available on favorable terms.
- COVID-19, component availability, logistics and supply-chain disruption may affect customer demand, revenue, margins and delivery performance. The filing also identifies competition, cybersecurity, customer purchasing timing, international exposure and integration of ECI as risks.
- The Kandy sale consideration consists of AVCT debentures and warrants. Their aggregate fair value was $106.0 million at June 30, 2021 and is subject to market-price changes. The debentures were expected to convert after AVCT completed customary regulatory filings; Ribbon had not exercised the warrants by quarter-end.
- Potential future royalties to Israel’s Innovation Authority were estimated at a maximum $36.8 million, including $3.9 million accrued. A securities class action and other routine legal matters remain; outcomes are uncertain. Management did not expect routine matters to materially affect results.
- Ribbon maintained a full valuation allowance on deferred tax assets but said a significant U.S. allowance release could become possible within 12 months if sufficient evidence of profitability emerged. Timing and amount are uncertain.
Important facts for investors to verify
- How much of Q2 earnings improvement reflects recurring operating performance versus the AVCT fair-value gain, and how AVCT securities are valued going forward.
- Whether Cloud and Edge product demand stabilizes and IP Optical Networks growth and margin improvement continue, considering ECI-period comparability.
- Working-capital and accrued-liability movements behind the decline in first-half operating cash flow, and cash conversion in subsequent quarters.
- Debt balance and scheduled amortization, covenant headroom, refinancing needs, and the impact of interest-rate and reference-rate changes despite the swap.
- Whether supply constraints, COVID-19 effects, restructuring costs, royalty obligations or litigation create material changes to the company’s stated outlook or liquidity.