Ribbon Communications Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Ribbon supplies communications software, hardware, network solutions and services. Its reportable segments are Cloud and Edge and IP Optical Networks. Comparisons are with Q1 2021 unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 / prior period |
|---|---|---|
| Revenue | $173.2 million | $192.8 million; down 10.2% |
| Gross profit / margin | $78.1 million / 45.1% | $100.5 million / 52.1% |
| Operating loss | $39.1 million | $12.6 million |
| Net loss / diluted loss per share | $70.0 million / $0.47 | $44.7 million / $0.31 |
| Operating cash flow | $15.0 million provided | $6.2 million used |
| Cash and restricted cash | $95.5 million at March 31 | $106.5 million at December 31, 2021 |
| Term debt | $355.5 million principal outstanding; $350.4 million net carrying amount | $375.5 million principal outstanding at December 31, 2021 |
Cash and cash equivalents alone were $92.8 million; restricted cash was $2.6 million. The quarter’s $11.0 million decrease in cash, cash equivalents and restricted cash reflected $22.4 million of financing outflows, partly offset by operating cash generation.
Product revenue fell 16.2% to $82.0 million; service revenue declined 3.9% to $91.2 million. Cloud and Edge revenue was $109.8 million, down from $125.4 million; IP Optical Networks revenue was $63.4 million, down from $67.4 million. Segment gross margins were 57.1% and 24.2%, respectively, versus 61.8% and 34.1%.
Interest expense, net, was $4.0 million, compared with $5.8 million. Other expense was $28.8 million, primarily a $27.0 million decline in the fair value of Ribbon’s AVCT investment, which was valued at $16.9 million at quarter-end versus $43.9 million at year-end. The income tax benefit was $1.9 million. The $14.8 million of other comprehensive income included gains on the interest-rate swap; it did not offset the reported net loss.
Material changes and management commentary
- Revenue and gross margin weakened. Management attributed the margin decline mainly to higher component, expedite, production and logistics costs, as well as product and customer mix. It said these factors reduced gross margin by about seven percentage points.
- Product revenue was affected by lower Cloud and Edge SBC and network transformation sales, and lower IP Optical Networks product sales. Professional services revenue declined, partly because of project scheduling delays; management expected delayed projects to complete later in 2022.
- Operating expenses rose to $117.1 million from $113.1 million. Research and development increased 11.1% to $52.7 million, while general and administrative expenses decreased 17.3% to $12.9 million.
- A February 2022 restructuring plan targets operational streamlining and investment in growth areas. The company recorded $4.2 million of severance costs for about 50 employees and anticipated approximately $16 million of additional severance and facility-consolidation expense.
Outlook, risks and contingencies
- Covenant and liquidity risk: Ribbon was compliant with its credit covenants at March 31, 2022, following a March credit-facility amendment that raised the leverage limit temporarily and required a $15 million debt prepayment. Management projected it might not comply in the quarters ending June 30 and September 30, 2022, citing supply disruptions, higher costs and geopolitical instability. A default could allow lenders to accelerate $355.5 million of principal; the company said it did not have sufficient cash or available liquidity to repay that amount if accelerated.
- Management said it was pursuing additional receivables factoring, potential sales of its derivative and equity investment (together valued at about $34 million), spending and vendor-payment adjustments, and a further lender amendment. Discussions with lenders were ongoing, no amendment was finalized, and completion was outside the company’s control. Management believed its plans were probable and expected liquidity to cover anticipated needs for at least 12 months, but also warned cash and borrowing availability might prove insufficient.
- Management outlook: Ribbon expected 2022 revenue to increase versus 2021, citing customer spending and cross-selling. It cautioned that gross margin could decline because of supply-chain costs and a higher expected mix of lower-margin IP Optical Networks sales. It expected modestly higher R&D, sales and marketing expense broadly consistent with 2021, and slightly lower G&A expense.
- COVID-19, component availability, geopolitical instability including the war in Ukraine, and higher production costs could affect demand, deliveries and margins. Management also cited unpredictable quarterly revenue and customer purchase timing.
- A new tax rule requires research and development costs to be amortized over five years beginning in 2022. If not changed, Ribbon said this could materially reduce 2022 operating cash flow.
- Potential future royalties to the Israeli Innovation Authority were estimated at a maximum $33.3 million, including $4.7 million accrued. A securities class action involving alleged 2015 statements remained unresolved; management said ordinary-course legal matters were not expected to have a material effect, while acknowledging litigation outcomes are uncertain.
Most important facts for investors to verify
- Whether Ribbon met its June and September 2022 credit covenants, and whether lenders approved any further amendment or waiver.
- Whether proposed liquidity measures—receivables factoring, asset sales, spending controls or extended vendor terms—were completed and generated sufficient cash.
- Whether revenue recovered as management expected, delayed projects were completed, and supply-chain costs and segment mix continued to pressure gross margins.
- The movement in AVCT’s share price and Ribbon’s investment value, and the resulting impact on reported earnings.
- The cash-flow effect of the R&D tax amortization requirement and the ultimate cost and timing of the 2022 restructuring plan.