Ribbon Communications Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. Amounts are in U.S. dollars; financial statements are unaudited. Ribbon provides network communications products and services. The October 2017 GENBAND merger materially changed the company: 2018 results include GENBAND, while reported 2017 results generally do not, limiting year-over-year comparability.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $137.4M | $55.7M | $258.5M | $109.1M |
| Gross profit / margin | $75.1M / 54.7% | $36.4M / 65.3% | $130.4M / 50.4% | $70.2M / 64.3% |
| Operating expenses | $91.7M | $49.1M | $189.4M | $93.6M |
| Operating loss | $(16.6)M | $(12.7)M | $(59.0)M | $(23.5)M |
| Net loss | $(19.9)M | $(12.3)M | $(64.8)M | $(23.0)M |
| Basic and diluted loss per share | $(0.20) | $(0.25) | $(0.64) | $(0.47) |
| Operating cash flow | Not presented separately | Not presented separately | $(22.7)M | $2.8M |
- Reported revenue growth primarily reflects GENBAND’s inclusion, not solely organic growth. On a pro forma combined basis, 2017 revenue was $143.4M for Q2 and $272.1M for the first half, compared with 2018 reported revenue of $137.4M and $258.5M, respectively.
- Q2 product revenue was $63.1M and service revenue $74.2M. Gross margin fell year over year, with management citing acquired-intangible amortization, GENBAND costs, and product/customer mix.
- At June 30, cash and cash equivalents were $33.4M and marketable securities $21.9M; together, $55.3M. These balances were down from $74.3M at year-end 2017. Current assets were $232.8M and current liabilities $203.1M.
- Debt included $20.0M drawn on the revolving facility and a $22.9M related-party promissory note on the balance sheet. The note’s $22.5M principal is due in October 2020 and bears 10% annual interest after its initial six months. The company reported compliance with credit-facility covenants.
- Six-month investing cash flow was $0.8M provided; financing cash flow was $1.6M used. Cash declined $23.7M during the half-year.
Material changes and unusual items
- GENBAND contributed approximately $32M of Q2 and $60M of first-half product revenue; it also contributed substantial maintenance and professional-services revenue. Acquired-intangible amortization was $24.3M in the first half.
- Merger-related restructuring expense was part of total restructuring expense of $6.1M in Q2 and $12.8M in the first half. Ribbon expected approximately $5M of additional merger restructuring expense. Acquisition and integration costs were $4.3M in Q2 and $8.7M in the first half.
- Ribbon adopted ASC 606 on January 1, 2018 using the modified retrospective method, recording an approximately $12M adjustment to beginning accumulated deficit. Management said adoption increased recognized revenue by about $0.7M in Q2 and $1M in the first half versus the prior revenue standard.
- Accounts receivable were $136.4M on the balance sheet, including $16.3M of unbilled receivables. Two customers represented approximately 37% of receivables at quarter-end. Verizon accounted for 21% of Q2 revenue and 17% of first-half revenue.
Outlook, risks and contingencies
- Management expected 2018 revenue to be significantly higher than 2017 reported revenue because of a full year of GENBAND, but lower than combined 2017 Sonus and GENBAND revenue. It expected lower 2018 gross margin, mainly due to acquired-intangible amortization, and noted continuing service-sector pricing pressure, competition, and legacy-product decommissioning.
- Management estimated an additional $7M–$8M in acquisition and integration costs for the remainder of 2018. It stated that cash, investments, and available revolver capacity should cover anticipated needs for at least 12 months, including the pending Edgewater acquisition.
- The Edgewater acquisition was expected to close in Q3 2018, subject to closing conditions and regulatory approvals. Consideration comprised $50M cash funded through the credit facility, $30M deferred cash funded from operating cash flow, and $30M in stock, subject to a 5.2M-share cap. The credit agreement was amended to permit the transaction.
- The $100M secured revolving facility matures in December 2021, but has a springing maturity condition tied to the related-party note if it is not converted or extended by July 2020. The facility is secured by substantially all relevant assets and includes financial and other covenants.
- Ribbon had reached an agreement in principle with SEC staff to resolve an inquiry concerning Sonus’s 2015 guidance, including a proposed $1.9M civil penalty; final settlement terms were still being negotiated. Ribbon had previously accrued the amount.
- Ribbon disclosed five lawsuits involving Metaswitch, including patent and trade-secret claims and counterclaims. A prior judgment awarded GENBAND $8.9M in royalties plus interest and costs; Metaswitch appealed. Ribbon said outcomes were not predictable and did not expect the matters to have a material adverse effect. No material risk-factor changes were reported from the 2017 Form 10-K.
Important facts for investors to verify
- Separate merger-driven revenue growth from underlying organic performance, and compare results with the disclosed combined-company pro forma figures.
- Track gross-margin recovery, acquired-intangible amortization, restructuring charges, and integration savings as the GENBAND integration progresses.
- Monitor operating cash burn, cash and securities, working-capital movements, and funding needs for the Edgewater consideration.
- Review the Edgewater closing, purchase financing, deferred-payment terms, and potential share issuance.
- Confirm the final SEC settlement terms and developments in the Metaswitch litigation, including the appeal and scheduled trade-secret trial.
- Assess refinancing or extension plans for the related-party note and the resulting springing-maturity provision in the revolving facility.