Business context and reporting period
Ribbon Communications Inc. filed this Form 10-K for the fiscal year ended December 31, 2021. It provides communications software, hardware, networking products and services to service providers and enterprises. Results are reported in two segments: Cloud and Edge, and IP Optical Networks. The filing also presents unaudited fourth-quarter results.
The ECI acquisition, completed in March 2020, expanded Ribbon into IP and optical networking. Management said operational integration was largely completed in 2021. Ribbon sold its Kandy Communications business in December 2020 and retained an investment in buyer AVCT.
Financial results and liquidity
Amounts below are in millions of dollars, except per-share data. Fiscal-year comparisons are 2021 versus 2020.
| Metric | 2021 | 2020 |
|---|---|---|
| Revenue | $845.0 | $843.8 |
| Gross profit / gross margin | $444.7 / 52.6% | $450.8 / 53.4% |
| Operating income (loss) | $(117.8) | $1.7 |
| Net income (loss) | $(177.2) | $88.6 |
| Diluted earnings (loss) per share | $(1.20) | $0.61 |
| Cash provided by operating activities | $19.2 | $101.6 |
| Cash and restricted cash at year-end | $106.5 | $135.7 |
Revenue was nearly flat. Product revenue declined 3.2% to $453.0 million, while service revenue increased 4.3% to $391.9 million. Cloud and Edge revenue fell to $556.7 million from $583.3 million; IP Optical Networks revenue rose to $288.3 million from $260.5 million, partly reflecting a full year of ECI results versus ten months in 2020. Verizon represented 16% of 2021 revenue; the top five customers represented 34%.
Gross margin declined by 0.8 percentage points. Higher component costs, expedited production and logistics, and product/customer mix reduced margin by approximately two percentage points; the absence of Kandy-related costs partially offset that impact. Management estimated that supply-chain costs reduced fourth-quarter gross margin by approximately 220 basis points. Fourth-quarter revenue was $230.6 million, operating loss was $120.1 million and net loss was $96.3 million; the quarter included the $116.0 million goodwill impairment.
Operating expenses were $562.5 million, including the $116.0 million IP Optical Networks goodwill impairment, $28.3 million of acquired-intangible amortization, $7.6 million of acquisition/disposal/integration expense and $11.7 million of restructuring expense. The impairment followed a determination that the IP Optical Networks reporting unit’s carrying value exceeded fair value; no impairment was recorded for Cloud and Edge. A $31.0 million income-tax benefit included a $28 million release of U.S. valuation allowance.
Investing activities used $14.2 million in 2021, including $17.1 million of capital expenditures. Financing activities used $33.7 million, including $92.2 million of term-debt principal payments. Year-end term debt was $375.5 million, with $103.9 million of cash and cash equivalents and $2.6 million of restricted cash. The $100 million revolving facility was undrawn, with $4.3 million of letters of credit outstanding. Operating cash flow included $118.5 million of non-recourse receivables factoring proceeds. Management said existing cash and borrowing availability were expected to cover anticipated needs for at least twelve months, while noting refinancing or additional financing might be needed if cash and borrowing capacity prove insufficient.
Material changes, outlook and risks
- Comparability: Revenue was essentially unchanged, but operating results swung to losses. 2020 included $112.7 million of other income, primarily the Kandy sale gain and an increase in the fair value of AVCT securities; 2021 included $74.8 million of AVCT-related fair-value losses. These items materially affected year-over-year net income.
- 2022 outlook: Management expected modest revenue growth, citing North American IP Optical opportunities and increased capital spending in India and Israel. It expected gross margin to decline, reflecting a higher IP Optical sales mix and continued supply-chain costs. R&D expense was expected to rise modestly, sales and marketing expense to remain broadly consistent, and general and administrative expense to decrease slightly.
- Restructuring: A February 2022 plan is expected to incur approximately $20 million of expense—about $6 million for severance and $14 million for facilities consolidation—and be substantially completed during 2022.
- Debt covenant update: After year-end, on March 10, 2022, Ribbon amended its credit agreement, temporarily increased maximum leverage covenant limits and made a $15 million prepayment. The filing notes that declining EBITDA could pressure future covenant compliance. The term loan matures in March 2025.
- Other principal risks: Global component and logistics disruption delayed an estimated $10 million of sales into 2022. The company cited customer spending uncertainty, competition, reliance on major customers and channel partners, COVID-19 effects, cybersecurity and intellectual-property risks, and geopolitical exposure. Approximately 6% of 2021 sales were to customers in Russia, Ukraine and surrounding countries; sanctions and conflict could further affect sales and collections. International customers generated 56% of revenue.
- Contingencies and unusual items: AVCT securities were valued at $43.9 million at year-end and remain exposed to share-price volatility; Ribbon also relies on AVCT for services to some shared customers. Potential future IIA royalties were estimated at a maximum of $34.2 million, including $4.3 million accrued. A securities class action remained unresolved, and management said its outcome could not be predicted. The auditor issued unqualified opinions on the financial statements and internal control; critical audit matters included revenue standalone-selling-price estimates and the IP Optical goodwill impairment.
Ribbon reclassified acquired-technology amortization from operating expenses to cost of revenue in comparative periods. This reduced reported gross margin by approximately five percentage points in 2020 and seven points in 2019, but did not change operating income, net income or EPS.
Important facts for investors to verify
- Whether the expected 2022 revenue growth materializes and whether supply constraints, delayed shipments and elevated component/logistics costs persist.
- IP Optical Networks’ performance, margin trajectory and the assumptions supporting its $116 million goodwill impairment; the audit identified this valuation as a critical audit matter.
- Debt covenant headroom, the effect of the March 2022 amendment and prepayment, and the company’s ability to generate cash while meeting debt, lease and purchase commitments.
- Operating cash conversion and reliance on receivables factoring, including its effect on reported operating cash flow and customer-credit exposure.
- AVCT’s financial condition and share price, the recoverability of Ribbon’s investment, and continuity of services AVCT provides to shared customers.
- Developments in the unresolved securities litigation and the amount and timing of any IIA royalty obligations.