Business context and reporting period
Ribbon Communications Inc. provides software, products and services for communications networks, serving telecommunications, cable and wireless providers and enterprises. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $137.7 million | $152.5 million | $402.0 million | $411.0 million |
| Gross profit | $78.9 million | $82.2 million | $216.1 million | $212.6 million |
| Gross margin | 57.3% | 53.9% | 53.8% | 51.7% |
| Operating income (loss) | $2.7 million | $(7.6) million | $(40.6) million | $(66.6) million |
| Net income (loss) | $1.7 million | $(10.2) million | $20.3 million | $(75.0) million |
| Operating cash flow | Not provided separately | Not provided separately | $22.6 million | $(23.5) million |
Q3 product revenue was $61.2 million, down 20.9%; service revenue was $76.5 million, up 1.8%. For the nine-month period, product revenue declined 5.9% to $180.7 million, while service revenue increased 1.0% to $221.3 million. Nine-month results included $63.0 million of gain from the Metaswitch settlement and an $8.1 million gain from reducing deferred Edgewater acquisition consideration; these materially boosted reported income. Excluding these unusual gains, the filing does not provide a single adjusted earnings figure.
At September 30, 2019, cash was $40.4 million, with no marketable securities. Current assets were $247.3 million and current liabilities $205.3 million. Debt borrowings were approximately $83 million: a $49.4 million term loan and $34.0 million revolving balance. The term loan’s carrying value was approximately $49.1 million, including current and long-term portions. The company reported compliance with credit-facility covenants. It also had $47.3 million of operating lease liabilities following adoption of the new lease standard.
Material changes versus prior period
- Q3 revenue fell 9.7%, principally because of lower product sales, particularly software sold with appliances. Service revenue was broadly stable.
- Despite lower revenue, gross margin improved in both comparison periods, supported by improved service margins and cost reductions; nine-month product margin declined on product and customer mix.
- Operating expenses declined to $76.2 million in Q3 from $89.8 million, and to $256.8 million for nine months from $279.2 million. Lower acquisition and integration costs and lower selling, general and administrative expenses contributed.
- Operating cash flow improved to $22.6 million from a use of $23.5 million. Cash nevertheless declined $3.3 million during the first nine months, to $40.4 million.
- In April 2019, Ribbon refinanced its prior facility with a $50 million term loan and a $100 million revolver, and repaid a related-party promissory note of $24.7 million.
Outlook, management commentary and risks
- Management expected 2019 revenue to decrease slightly from 2018 and total gross margin to increase. It expected future component purchases to decline as software content grows.
- The 2019 restructuring program includes workforce reductions, facility consolidation and a shift toward software virtualization. Management estimated approximately $25 million in annualized cost-footprint savings once complete and approximately $10 million of savings in 2019, with savings intended for reinvestment in software development. Facilities actions were expected to finish by the end of 2020.
- Management said current cash and available borrowing capacity should meet anticipated working-capital and capital-expenditure needs for at least 12 months, while cautioning that future liquidity needs or financing conditions could require refinancing or additional capital.
- Metaswitch agreed to pay $63.0 million to settle six lawsuits and cross-license existing patent portfolios. Ribbon received $37.5 million in 2019; the remaining $25.5 million is payable in three annual installments beginning June 2020, with 4% interest.
- A securities class action relating to statements made by former Sonus officers remained pending; defendants had moved to dismiss. The filing also identifies risks from customer and industry concentration, competition, acquisition integration, restructuring execution, credit-facility terms, foreign currency and potential tariffs or trade restrictions.
- Two customers, AT&T and Verizon, each represented at least 10% of revenue in the reported periods. Three customers together represented approximately 42% of accounts receivable at September 30, 2019.
Important facts for investors to verify
- How much of nine-month earnings and operating cash flow reflects the Metaswitch settlement and Edgewater consideration adjustment, and when the remaining settlement installments will be collected.
- Whether product revenue stabilizes and management’s expected 2019 slight revenue decline and gross-margin improvement are achieved.
- Progress toward the restructuring savings targets, related implementation costs and the timing of cash payments; the filing gives differing payment timing in its discussion and notes.
- Available revolver capacity, debt balances, interest costs and continued compliance with credit covenants.
- Developments in the securities litigation, customer concentration and potential tariff or supply-chain effects.