Ribbon Communications Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 8, 2020. Unaudited results. Comparisons are with Q1 2019 unless otherwise stated. Q1 2020 includes ECI results only from its March 3 acquisition date.
Business context
Ribbon provides communications software and networking products and services to service providers and enterprises. The ECI acquisition expanded its portfolio into optical and packet networking. ECI contributed $30.0 million of revenue and $3.3 million of net loss after closing during the quarter. CEO Bruce McClelland began employment March 1, 2020.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $158.0 million | $118.9 million |
| Gross profit / gross margin | $81.6 million / 51.6% | $56.6 million / 47.6% |
| Operating expenses | $110.3 million | $92.8 million |
| Operating loss | $28.7 million | $36.2 million |
| Net loss | $33.2 million | $30.8 million |
| Basic and diluted loss per share | $0.27 | $0.29 |
| Cash from operating activities | $39.9 million | $19.6 million |
Product revenue rose 59.9% to $75.9 million; service revenue rose 14.9% to $82.1 million. Product, service, and total gross margins were 40.8%, 61.6%, and 51.6%, respectively. The operating loss narrowed, but net loss increased, reflecting higher interest expense and the absence of Q1 2019’s $7.8 million of other income. Q1 2020 included $12.4 million of acquisition and integration expense and $2.1 million of restructuring expense.
Cash, cash equivalents and restricted cash totaled $110.1 million at quarter-end, including $96.8 million of cash and cash equivalents and $13.2 million of restricted cash. Operating cash flow benefited in part from working-capital movements, including collections of receivables. Investing activities used $309.4 million, primarily for ECI, partly offset by $43.5 million of proceeds from a real-estate sale.
Ribbon reported a $400 million term loan outstanding at an average interest rate of 3.9%, plus $3.5 million of short-term export loans. The $100 million revolving facility was undrawn, with $5.6 million of letters of credit outstanding. The term loan is due under a credit facility maturing in March 2025; the company had complied with its covenants at March 31. A $400 million interest-rate swap fixes the loan’s LIBOR component at 0.904%, plus the applicable leverage-based margin. The swap had a $9.5 million liability at quarter-end.
Material changes and outlook
- Revenue increased 32.8%, primarily reflecting ECI’s contribution and higher sales of Ribbon software licenses and subscriptions. ECI’s one-month contribution limits comparability with the prior-year quarter.
- The ECI merger closed March 3. Consideration included $322.5 million in cash and 32.5 million Ribbon shares valued at $108.6 million. Purchase-price allocation remained preliminary; management was assessing COVID-19 effects and expected to finalize valuation by Q1 2021.
- Management expected 2020 revenue to increase versus Ribbon’s 2019 results, mainly due to ECI, but said COVID-19 could make 2020 revenue lower than the combined companies’ respective 2019 revenue. It expected total gross margin to decline in 2020, primarily because of ECI’s higher hardware content, and R&D, sales and marketing, and G&A expenses to rise primarily due to ECI. No numerical earnings or revenue guidance was provided.
- Management believed cash and available borrowing capacity would cover anticipated needs for at least 12 months, while noting that a prolonged or worsening pandemic could require further cost reductions or additional financing.
- The company limited hiring, travel and discretionary spending in response to COVID-19. It cited risks to customer demand, component supply, logistics, manufacturing, contract performance, collections, markets and access to capital.
Risks, contingencies and unusual items
- Integration costs, disruption, employee or customer attrition, and failure to realize ECI’s expected benefits or savings could adversely affect results.
- Other disclosed risks include dependence on the uncertain timing of 5G and cloud adoption; credit-facility covenants and refinancing risk; LIBOR transition; international and Israel-related operating risks; and potential reductions in Israeli innovation grants.
- A securities class action concerning alleged statements about 2015 performance remained pending; a motion to dismiss had been argued in February 2020. Management did not expect routine legal matters to materially affect the company.
- The filing describes uncertainty over Indian telecom operators’ adjusted gross revenue liabilities, which could constrain their investment and affect Ribbon’s business in India.
- The ECI acquisition added a $15.7 million warranty liability. Restructuring plans included facility consolidation and workforce changes, with related actions expected to be completed by the end of 2020.
Investor verification points
- Separate organic performance from ECI’s post-close contribution and assess the effect of acquisition-related expenses and purchase accounting.
- Track COVID-19 effects on customer spending, supply availability, delivery, collections, and management’s revenue and margin expectations.
- Review debt repayment requirements, covenant headroom, interest costs, the swap’s fair value and restricted cash; confirm whether liquidity assumptions remain adequate.
- Monitor integration progress, preliminary ECI valuation changes, potential impairments, restructuring costs and expected savings.
- Confirm the status and potential exposure of the securities litigation and the possible effect of Indian telecom-sector investment constraints.
- The filing reports no shares repurchased under the public program in Q1; shares withheld for employee tax obligations should not be mistaken for program repurchases.