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Ribbon munications (RBBN) - 2022 Q4 - Annual Report

Part I Business Ribbon Communications provides secure data and voice communication technology to service providers and enterprises, driven by 5G, fiber, and cloud communication trends Company Overview and History Ribbon Communications, formed by the 2017 Sonus and GENBAND merger, provides global communication technology and expanded its portfolio with the 2020 ECI Telecom acquisition - Ribbon is a global provider of communications technology, offering a wide range of software and hardware products for secure data and voice communications to service providers and enterprises12 - The company was formed through the merger of Sonus Networks, Inc and GENBAND US LLC in October 201713 - A key acquisition was ECI Telecom Group Ltd in March 2020, expanding Ribbon's portfolio into optical transport and IP networking15 Industry Background The communications industry is transforming due to 5G deployment, surging fiber demand, cloud communication adoption, and CSP network modernization for efficiency and critical infrastructure - The deployment of 5G mobile technology is a major investment cycle, driving needs for enhanced capacity, coverage, and new applications like VR, cloud gaming, and IoT1516 - Exponential data traffic growth is fueling investment in fiber access networks to address broadband bottlenecks, with government initiatives like the RDOF in the U.S. providing significant funding1718 - The shift to cloud communications (e.g., Microsoft Teams, Zoom) has accelerated, requiring secure and scalable solutions20 - CSPs are modernizing their networks towards software-centric, cloud-native architectures to reduce costs and improve efficiency, sometimes replacing incumbent vendors due to security concerns2122 Strategy Overview Ribbon's strategy focuses on operational integration, cross-selling its IP and Optical portfolio, growing North American market share, capitalizing on 5G, and transitioning to software-centric as-a-Service models - Re-organized the company in 2023 under a Chief Operating Officer and a single Global Sales Leader to enhance collaboration and operational efficiency under the "Ribbon 3.0" program27 - Focus on cross-selling the combined portfolio to its global customer base, with a particular emphasis on penetrating the largest service providers27 - Prioritizing growth in the North American IP Optical Networks market by leveraging its existing service provider and enterprise relationships27 - Significant R&D investment to address opportunities in the 5G rollout, including recent wins with Bharti Airtel in India and Rogers in Canada32 - Aggressively transitioning its product portfolio towards software, cloud-native offerings, and as-a-Service models to improve profitability32 Customers Ribbon serves a diverse global customer base across 140+ countries, including service providers and enterprises, with Verizon accounting for 15% and the top five customers for 34% of 2022 revenue - Verizon Communications Inc accounted for approximately 15% of total revenue in the year ended December 31, 202230 - The top five customers represented approximately 34% of total revenue in the year ended December 31, 202230 Segment Information The company operates two segments: Cloud and Edge for voice communications, and IP Optical Networks for IP networking, switching, routing, and optical transport solutions - Effective in Q4 2020, following the ECI Acquisition, the company began assessing performance based on two segments: Cloud and Edge, and IP Optical Networks31 Cloud and Edge Business Segment The Cloud and Edge segment provides software and hardware for VoIP, VoLTE, and UC&C services, focusing on SBCs and network transformation, competing with major telecom and tech firms - Provides software and hardware for VoIP, VoLTE, VoNR, and UC&C services, with a focus on cloud-native deployments32 - The portfolio includes Session Border Controller (SBC) products for securing voice traffic and Network Transformation products for modernizing legacy voice networks3335 - Key competitors include major telecommunications equipment companies like Ericsson, Huawei, Nokia, and technology firms like Oracle and Cisco3537 IP Optical Networks Business Segment The IP Optical Networks segment provides high-performance hardware and software for IP networking, switching, routing, and optical transport, including Apollo, Neptune, and Muse SDN, competing with Ciena, Cisco, and Nokia - Provides solutions for IP networking, switching, routing, and optical transport for service providers and critical infrastructure38 - The product portfolio includes the Apollo line for optical transport, the Neptune line for IP/MPLS switching and routing, and the Muse SDN software for orchestration4041 - Competes with Ciena, Cisco, Nokia, and Infinera, among others, and believes its integrated multi-layer IP optical solutions are a key differentiator42 Services and Support Ribbon's Global Services offers comprehensive support including professional services, maintenance, managed services, and education to complement its product offerings - Offers a broad range of services including professional services, maintenance support, managed services, and education services to help customers reduce costs and improve productivity43 Sales and Marketing The company employs a dual sales strategy with direct sales for service providers and indirect channels for enterprises, supported by marketing focused on brand awareness and demand generation - Employs a direct sales force for service providers and indirect channels (resellers, distributors) for enterprises44 - Marketing is responsible for brand building, corporate messaging, and demand generation campaigns in conjunction with the sales force4546 Manufacturing and Sourcing Ribbon outsources manufacturing to global contract manufacturers, manages a strategic supply chain for key components, and mitigates disruptions through inventory investment and product redesigns - Relies on global contract manufacturers for product manufacturing, assembly, and testing, with a flexible manufacturing landscape to mitigate risks4748 - Manages supply chain for key components and has been implementing actions like inventory investment and redesigns to manage disruptions that began in mid-20204952 Research and Development The company's R&D focuses on technology leadership, with Cloud and Edge R&D transitioning to cloud-native solutions, and IP Optical R&D improving performance and investing in open networking - Cloud and Edge R&D focuses on moving customers to virtualized, cloud-native, and as-a-Service (aaS) solutions56 - IP Optical Networks R&D focuses on improving performance, cost-per-bit, and operational efficiency, with investment in open and disaggregated solutions57 Intellectual Property Ribbon considers intellectual property fundamental, holding 669 U.S. patents and 276 foreign patents as of December 31, 2022, and actively manages its IP rights including licensing and defending against infringement Intellectual Property Portfolio as of Dec 31, 2022 | Jurisdiction | Issued Patents | In-Process Applications | Registered Trademarks | | :--- | :--- | :--- | :--- | | U.S. | 669 | 44 | 34 | | Foreign | 276 | 16 | 118 | Our Employees and Corporate Responsibility As of December 31, 2022, Ribbon had 3,394 employees globally, with a 13.3% voluntary turnover rate, focusing on DEI and ESG principles, including ISO 9001 and ISO 14001 certifications Employee Distribution as of Dec 31, 2022 | Region | Number of employees | Percentage of total | | :--- | :--- | :--- | | Asia | 1,276 | 38% | | North America | 943 | 28% | | EMEA | 1,056 | 31% | | LATAM | 119 | 3% | | Total | 3,394 | 100% | - In 2022, the company hired 407 employees, and the global voluntary employee turnover rate was 13.3%70 - As of December 31, 2022, 23% of employees identified as female69 - The company has a strategic focus on ESG practices, aligning with standards like RoHS and holding ISO 9001 and ISO 14001 certifications8081 Seasonality The company's business experiences seasonality, with higher order volume in the fourth quarter due to customer spending and lower volume and revenue in the first quarter - Typically experiences higher order volume in the fourth quarter due to customer spending cycles84 - Typically experiences lower order volume and revenue in the first quarter as customers operationalize annual budgets84 Risk Factors The company faces significant business, operational, and financial risks, including unpredictable results, intense competition, supply chain issues, geopolitical instability, regulatory compliance, and debt covenant management - Business Risks: Unpredictable quarterly revenue, intense competition from large and small players, reliance on key customers like Verizon (15% of 2022 revenue), and risks associated with restructuring activities89929599 - Supply Chain & Manufacturing Risks: Reliance on a small number of contract manufacturers and single or limited sources for some components, which can lead to delays and increased costs120122 - International Risks: International operations account for 57% of revenue and are subject to geopolitical instability (e.g., Russia-Ukraine conflict, conditions in Israel), currency fluctuations, and trade tariffs142144146149 - Regulatory & Security Risks: Compliance with complex data privacy laws (e.g., GDPR), anti-bribery laws (FCPA, UKBA), and export controls; vulnerability to cybersecurity breaches158160164165 - Financial Risks: The company's credit agreement imposes operating limitations and requires meeting financial covenants, with a risk of goodwill or intangible asset impairment, which has occurred in prior years170171174 Properties The company consolidated facilities, relocating headquarters to Plano, Texas, with other principal leased facilities in Westford, Ottawa, and Petah Tikva, some of which are being subleased as part of restructuring Principal Leased Facilities | Location | Principal Use | Lease Expiration | | :--- | :--- | :--- | | Plano, Texas | Corporate headquarters, R&D, Sales, etc. | September 2032 | | Westford, Massachusetts | R&D, Customer Support, etc. | August 2028 | | Ottawa, Canada | R&D, Customer Support, etc. | December 2029 | | Petah Tikva, Israel (Main) | R&D, Sales, etc. | January 2025 | - The company initiated a plan in 2019 to consolidate facilities, relocating its corporate headquarters to a new office in Plano, Texas in Q1 2021192 Legal Proceedings The company is subject to ordinary course legal proceedings, with material details in Note 25, and management does not anticipate a material adverse effect on financial condition - The company is subject to legal proceedings and claims that have arisen in the ordinary course of business197 - Material legal proceedings are described in Note 25, "Commitments and Contingencies"197 Mine Safety Disclosures This item is not applicable to the company - Not applicable199 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Ribbon's common stock trades on Nasdaq under "RBBN", with 374 holders of record as of March 28, 2023, and the company repurchased 35,857 shares in Q4 2022 for tax withholding obligations - The company's common stock trades on The Nasdaq Global Select Market under the symbol "RBBN"202 - During Q4 2022, 35,857 shares were repurchased from employees to satisfy tax withholding obligations related to vested restricted stock205 Stock Performance vs. Indices (Dec 31, 2017 - Dec 31, 2022) | Index | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Ribbon Communications Inc. | $100.00 | $62.35 | $40.10 | $84.86 | $78.27 | $36.09 | | Nasdaq Composite | $100.00 | $97.16 | $132.81 | $192.47 | $235.15 | $158.65 | | Russell 2000 | $100.00 | $88.99 | $111.70 | $134.00 | $153.85 | $122.41 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, Ribbon's revenue decreased 3% to $819.8 million, resulting in a $98.1 million net loss, driven by Cloud and Edge decline and lower gross margins, while navigating economic headwinds and managing debt Overview and Key Trends The company's performance is influenced by global supply chain impacts from COVID-19, customer purchase delays due to the Ukraine conflict, and rising costs from inflation and interest rates - The military conflict in Ukraine has led to customer purchase delays and sanctions that prohibit the sale of certain products and services to Russia214 - Inflation is causing near-term impacts, including higher component costs, freight premiums, and other operating costs215 Key Corporate and Financial Events In 2022, Ribbon completed a $52.1 million equity offering, initiated a restructuring plan incurring $10.2 million in expenses, and settled its AVCT investment, acquiring a perpetual software license - On August 12, 2022, the company completed an equity offering, raising aggregate gross proceeds of approximately $52.1 million219 - A 2022 Restructuring Plan was approved, resulting in $10.2 million of restructuring expenses in 2022, with an additional $8 million anticipated221222 - On August 29, 2022, the company settled with AVCT, canceling its investment in AVCT shares and warrants (fair value $2.6 million) and acquiring a perpetual license for $2.5 million cash232 Results of Operations (2022 vs. 2021) In 2022, total revenue decreased 3.0% to $819.8 million, driven by Cloud and Edge decline, while gross margin fell to 48.9%; operating expenses decreased due to the absence of a $116.0 million goodwill impairment, leading to a net loss of $98.1 million Revenue by Type (in thousands) | Revenue Type | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Product | $442,680 | $453,042 | $(10,362) | (2.3)% | | Service | $377,080 | $391,915 | $(14,835) | (3.8)% | | Total Revenue | $819,760 | $844,957 | $(25,197) | (3.0)% | Revenue by Segment (in thousands) | Segment | 2022 | 2021 | | :--- | :--- | :--- | | Cloud and Edge | $508,137 | $556,656 | | IP Optical Networks | $311,623 | $288,301 | | Total Revenue | $819,760 | $844,957 | Gross Profit and Margin | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Gross Profit | $400.9M | $444.7M | | Gross Margin | 48.9% | 52.6% | | Cloud and Edge Gross Margin | 61.1% | 61.7% | | IP Optical Networks Gross Margin | 29.1% | 35.1% | - Operating expenses were $449.3 million in 2022 compared to $562.5 million in 2021, with 2021 including a significant $116.0 million goodwill impairment charge that did not recur in 2022240 - Net loss improved to $98.1 million in 2022 from a net loss of $177.2 million in 2021238 Liquidity and Capital Resources Cash and restricted cash decreased to $67.3 million at year-end 2022, with $26.4 million net cash used in operations, while the company maintains a $500 million credit facility with $330.4 million outstanding debt Cash Flow Summary (in thousands) | Cash Flow | 2022 | 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(26,364) | $19,182 | | Net cash used in investing activities | $(12,136) | $(14,188) | | Net cash provided by (used in) financing activities | $931 | $(33,683) | - Cash and restricted cash totaled $67.3 million at Dec 31, 2022, down from $106.5 million at Dec 31, 2021317 - As of Dec 31, 2022, the outstanding balance under the 2020 Term Loan was $330.4 million, and the company was in compliance with all debt covenants333 - The company uses an interest rate swap to manage exposure to interest rate movements on its variable-rate debt, selling portions of the swap notional amount for a total of $3.1 million in 2022335 Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate and foreign currency risks, using an interest rate swap to mitigate variable-rate debt volatility, with hypothetical changes impacting 2022 interest expense by $2 million and net loss by $16 million - The company uses an interest rate swap to manage interest rate risk on its variable-rate debt; the derivative had a fair value of $25.4 million at Dec 31, 2022355356 - A hypothetical +/- 50 basis point change in interest rates would have changed 2022 interest expense by approximately $2 million (excluding the impact of the interest rate swap)357 - A hypothetical 10% adverse movement in foreign currency exchange rates would have adversely affected 2022 revenue by ~$21 million and net loss by ~$16 million358 Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal year 2022, including the auditor's report, balance sheets, income statements, cash flows, and detailed notes on accounting policies and financial matters Consolidated Financial Highlights (Year Ended Dec 31, 2022) | Metric | Amount (in thousands) | | :--- | :--- | | Total Revenue | $819,760 | | Gross Profit | $400,936 | | Loss from Operations | $(48,324) | | Net Loss | $(98,083) | | Diluted Loss Per Share | $(0.63) | | Total Assets | $1,255,564 | | Total Liabilities | $737,137 | | Total Stockholders' Equity | $518,427 | - The Report of Independent Registered Public Accounting Firm, Deloitte & Touche LLP, provides an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting363364 - Critical Audit Matters identified by the auditor include Revenue Recognition (specifically the estimation of standalone selling price) and the impairment testing of Goodwill for the IP Optical Networks reporting unit367368370 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure No changes in or disagreements with accountants on accounting and financial disclosure were reported during the period - None reported671 Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with Deloitte & Touche LLP issuing an unqualified opinion - Management concluded that disclosure controls and procedures were effective as of December 31, 2022672 - Management concluded that internal control over financial reporting was effective as of December 31, 2022, based on the COSO 2013 framework674 - The independent registered public accounting firm, Deloitte & Touche LLP, issued an unqualified opinion on the company's internal control over financial reporting678 Other Information No other information is reported for this item - None685 Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement - Required information is incorporated by reference from the company's 2023 Proxy Statement689 Executive Compensation Information regarding executive compensation is incorporated by reference from the 2023 Proxy Statement - Required information is incorporated by reference from the company's 2023 Proxy Statement690 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership of beneficial owners, management, and related stockholder matters is incorporated by reference from the 2023 Proxy Statement - Required information is incorporated by reference from the company's 2023 Proxy Statement691 Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2023 Proxy Statement - Required information is incorporated by reference from the company's 2023 Proxy Statement692 Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the 2023 Proxy Statement - Required information will be included in the company's 2023 Proxy Statement and is incorporated by reference693 Part IV Exhibit and Financial Statement Schedules This section lists financial statements included in Item 8 and provides an index of all exhibits filed with the Form 10-K, with financial statement schedules omitted as not applicable - The consolidated financial statements are listed under Item 8695 - All financial statement schedules are omitted as they are not applicable or the information is included elsewhere696 - A list of exhibits filed with the report is provided in the Exhibit Index697 Form 10-K Summary No Form 10-K summary is provided - None698