Ribbon Communications Inc. — Q1 2021 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2021; unaudited results. Ribbon supplies communications software, hardware and services to service providers and enterprises through its Cloud and Edge and IP Optical Networks segments. Comparisons are affected by the March 2020 ECI acquisition: Q1 2021 includes a full quarter of ECI, while Q1 2020 includes only the period after the March 3 acquisition. Q1 2021 excludes the Kandy business, sold in December 2020.
Financial results
Amounts are in USD millions, except per-share data. Comparisons are Q1 2021 versus Q1 2020.
| Metric | Q1 2021 | Q1 2020 | Change or context |
|---|---|---|---|
| Revenue | $192.8 | $158.0 | Up 22.0%; product revenue rose 29.0% and service revenue 15.6%. |
| Gross profit / margin | $110.5 / 57.3% | $90.5 / 57.3% | Cloud and Edge margin increased to 67.1% from 61.5%; IP Optical Networks margin was 39.2% in both periods. |
| Operating expenses | $123.2 | $119.3 | Included $6.0 restructuring expense in 2021 versus $2.1 in 2020; acquisition, disposal and integration costs fell to $1.2 from $12.4. |
| Operating loss | $(12.6) | $(28.7) | Improved despite higher operating expenses. |
| Net loss / diluted loss per share | $(44.7) / $(0.31) | $(33.2) / $(0.27) | Net loss widened, largely reflecting a $23.9 fair-value loss on AVCT securities received for the Kandy sale and higher net interest expense. |
| Adjusted EBITDA, non-GAAP | $19.7 | $9.5 | Segment measure reported by management; excludes specified items and is not a GAAP measure. |
| Cash from operations | $(6.2) | $39.9 | Shifted to an outflow, primarily due to net loss and cash payments reflected in accrued expenses and liabilities. |
| Cash and restricted cash | $108.9 | $110.1 | Cash and cash equivalents alone were $106.2 at March 31, 2021, down from $128.4 at year-end 2020. |
| Debt | $390.6 term-loan balance | — | Average rate 3.40%; balance-sheet debt, net of current portion, was $383.9 in total. Term loan matures March 2025. |
| Liquidity | $396.9 current assets; $296.5 current liabilities | — | Management believes cash and available borrowings are sufficient for at least 12 months. |
Segment revenue was $125.4 for Cloud and Edge (down from $128.0) and $67.4 for IP Optical Networks (up from $30.0). Much of the latter increase reflects a full quarter of ECI revenue in 2021 versus only one month in the 2020 comparison. Total revenue also reflects the absence of Kandy in 2021. Q1 2021 other expense, net, was $25.4, primarily due to the AVCT investment mark-to-market loss.
Material changes, outlook and management commentary
- Management expects 2021 revenue to increase versus 2020, citing customer spending and cross-selling opportunities. It expects total gross margin to decrease slightly, reflecting a higher mix of lower-margin IP Optical Networks sales.
- Management expects research and development expense to increase in 2021, primarily from additional IP Optical Networks investment; sales and marketing expense to increase modestly; and general and administrative expense to be broadly consistent with 2020.
- The March 2021 credit amendment used a $74.6 million incremental loan to buy and cancel the higher-rate Term B Loan, combining the debt into the 2020 Term Loan. The company reported compliance with credit-facility covenants at quarter-end. A $400 million interest-rate swap hedges variable-rate exposure through March 2025; $3.1 million may be reclassified as additional interest expense over the next 12 months.
- COVID-19 continues to pose risks to customer spending, supply chains, logistics and the ability of partners to deliver. Management also flags component availability, geopolitical disruption, customer purchasing timing, competition, cybersecurity and integration execution as risks. Further cost actions may be considered if disruption worsens.
- Restructuring expense was $6.0 million, including $3.4 million of accelerated lease-asset amortization. Management expects approximately $4 million of additional expense under the 2020 restructuring initiative and expects the 2019 facilities initiative to be completed in 2021.
- The Kandy sale consideration consists of AVCT debentures and warrants. The debentures were expected to convert to AVCT shares after a price-trigger condition was met, subject to regulatory filings; Ribbon had not exercised the warrants or redeemed debentures by March 31, 2021. The securities’ fair value declined from $115.2 million at year-end to $92.7 million at quarter-end.
- Other contingencies include up to $42.0 million of possible future royalties to Israel’s Innovation Authority, including $5.2 million accrued, and a securities class action seeking monetary damages. Management says routine legal matters are not expected to materially affect results, but litigation outcomes are inherently uncertain.
Key investor verification points
- Assess the sustainability of revenue growth after adjusting for ECI’s partial-period comparison and the Kandy divestiture; verify organic trends by segment and customer type.
- Track conversion and eventual realizable value of the AVCT debentures and warrants, including fair-value volatility and restrictions on selling underlying shares.
- Review operating cash conversion, working-capital movements, cash levels and the company’s ability to service and refinance its term debt, including the large maturity balance.
- Monitor margin effects from IP Optical Networks mix, supply-chain constraints, restructuring costs and planned R&D investment.
- Follow the IIA royalty exposure, securities litigation and potential additional facility-related costs. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.