Ribbon Communications Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; unaudited. Ribbon provides communications software, hardware, network solutions and services to service providers and enterprises through its Cloud and Edge and IP Optical Networks segments.
Financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $203.2 million | $207.1 million | $599.9 million | $586.1 million |
| Gross profit / margin | $103.5 million / 50.9% | $104.3 million / 50.4% | $286.4 million / 47.7% | $286.9 million / 49.0% |
| Operating income (loss) | $0.9 million | ($3.3 million) | ($41.0 million) | ($49.6 million) |
| Net loss | ($13.5 million) | ($18.4 million) | ($73.3 million) | ($118.6 million) |
| Loss per diluted share | ($0.08) | ($0.12) | ($0.43) | ($0.78) |
Q3 revenue fell 1.9% year over year, as lower Cloud and Edge sales outweighed IP Optical Networks growth. Nine-month revenue increased 2.4%, led by IP Optical Networks. Q3 operating results improved to a small profit, while the nine-month operating loss narrowed. Nine-month net loss also improved, helped by the absence of the prior-year $41.3 million AVCT investment fair-value loss.
Segments: Q3 Cloud and Edge revenue was $115.8 million, down from $124.7 million; IP Optical Networks revenue was $87.4 million, up from $82.4 million. Nine-month revenue was $355.5 million for Cloud and Edge (down from $371.6 million) and $244.4 million for IP Optical Networks (up from $214.6 million). Q3 gross margins were 64.6% and 32.9%, respectively; nine-month margins were 61.9% and 27.1%. Management attributed margin variation in part to sales mix, with IP Optical generally carrying lower margins.
Cash, debt and liquidity
- Cash and cash equivalents were $24.5 million at September 30, 2023, versus $67.3 million at December 31, 2022.
- For the first nine months, operating cash used was $3.1 million, compared with $42.5 million in 2022; investing cash used was $6.6 million, and financing cash used was $32.2 million. Cash decreased by $42.8 million.
- Debt face amount was $250.4 million, including $240.4 million term debt and $10.0 million drawn on the revolver. Average interest rates were 9.9% for both. The company reported $62.0 million of remaining revolving capacity and compliance with credit-facility covenants at quarter-end.
- Management said cash and available borrowings should cover anticipated needs for at least 12 months, but cautioned that future needs could require refinancing or additional financing that may not be available on favorable terms, or at all.
Material changes, outlook and risks
- On March 28, 2023, Ribbon raised approximately $53.4 million through a private placement of liability-classified preferred stock and warrants; proceeds were used for debt repayment. The preferred stock has cumulative dividends, with rates rising from 9.25% to 12.00% under its terms. Preferred stock and warrant liabilities totaled approximately $54.9 million at quarter-end.
- Interest expense increased to $7.1 million in Q3 from $5.3 million and to $20.3 million for nine months from $13.9 million, primarily reflecting higher borrowing costs and other debt-related costs. The company sold its remaining interest-rate swap in March 2023 and now has variable-rate debt.
- Management expected 2023 revenue to increase modestly versus 2022, supported by IP Optical growth and Enterprise demand, including U.S. Federal agencies, while anticipating lower spending by U.S. service providers. It expected overall 2023 gross margin could decline due to a greater share of lower-margin IP Optical sales, while IP Optical margins were expected to improve in the remainder of 2023.
- Restructuring expense was $13.9 million for the first nine months. Management anticipated approximately $1 million of additional severance expense under the 2023 plan and approximately $14 million of future facility-consolidation expense under the 2022 plan.
- Key risks include uncertain customer spending and project timing, supply-chain and inflation pressures, higher interest rates and covenant compliance, and the wars in Ukraine and Israel. Ribbon reported office closures in Israel and employee military call-ups following the October 2023 attacks; continued disruption could affect operations and project timing. Ukraine-related sanctions restrict certain sales and may affect collections.
- Contingencies include a proposed $4.5 million settlement of the Miller securities litigation, preliminarily approved and subject to final approval; the company expects insurance to cover it. Charter and WideOpenWest indemnification lawsuits remain ongoing, and Ribbon said it could not reasonably estimate potential losses. Maximum estimated future royalties payable to Israel’s IIA were $21.6 million, including accrued unpaid royalties.
Investor facts to verify
- Whether revenue trends and management’s modest full-year growth expectation materialize, particularly in IP Optical and Cloud and Edge.
- Cash generation, cash levels, borrowing availability, high variable interest costs and future credit-covenant compliance.
- Execution and cash costs of restructuring, including the projected facility-consolidation expense.
- Effects of Israel-related employee absences and regional conflict, supply constraints, and sanctions on sales and collections.
- Final approval and insurance coverage of the Miller settlement, and developments in the Charter and WOW litigation.