Q4 2019 Earnings Call
Greetings and welcome to the written communications fourth quarter and full year 2019 financial results Conference call.
At this time of participants really listen only mode.
A question answer session will follow the formal presentation.
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So my pleasure to introduce your host Lindsay summaries busy. Please go ahead.
Good afternoon, and welcome to ribbons fourth quarter 2019 financial results Conference call.
I'm Lundy salaries investor relations for them.
On the call with me today, our Kevin Reilly Britain and from co CEO and CTO, Daryl Raiford CFO.
Todays call is being webcast live and will be archived on the Investor Relations section of our web site at rhythm Communications Dotcom, where both our press release and our supplemental data are currently available including saw slight detailing our historical financial performance.
I'd like to remind you that during this call we may make certain forward looking statements.
Statements are based on our current expectation.
Forecasts and or assumptions regarding Robbins business.
Financial results growth anticipated completion of and benefits from acquisition, including the pending combination with easy I.
You expected closing date of the pending merger, our restructuring and cost containment activity.
Management and board changes global economic conditions and other opportunities in the marketplace.
Include risks and uncertainties that could cause our actual results to differ materially from the statements discussed today.
Any forward looking statements are qualified in their entirety by cautionary statements contained in Robyn annual report on form 10-K, and the company's other FCC filing.
Well, we may elect to update or revise forward looking statements at some point, we specifically disclaim any obligation to do so except as may be required by law.
We utilize various metrics to assess the performance of our business.
Not all of these metrics are GAAP metrics, and where our metrics are discussed on a non-GAAP basis. We have provided a reconciliation of GAAP to non-GAAP results in our press release and within the supplemental presentation on the Investor Relations section of our website.
Fitments that profitability refer to adjusted EBITDA, unless otherwise indicated and on a non-GAAP basically and now I would like to turn the call over to Darryl.
Thank you Lindsay.
I'll take you through the fourth quarter and full year 2019 highlights and financial results, then turned to cold to Kevin to discuss both ribbons ongoing strategy and pending combination with DCR.
As a reminder, slides detailing our historical financial performance are available on the Investor Relations section of our website.
Before I start I'd like to highlight the ribbon board of directors and now the appointment of Bruce Mcclelland as our new CEO effective March 1st 2020.
Bruce was recently the CEO, there, which was acquired by Commscope in 2090.
The board believes his deep industry knowledge and long track record of growing and diversifying revenue streams, while successfully integrating acquisitions.
Make Bruce the right person to lead the company and drive long term value for our customers and stockholders.
The management team is very excited to have Brewster one ribbon at this important time, we're looking forward to working with him to help leaves the company through the next chapter of growth.
Additionally, the board today announced the appointment of two very talented new board members and we'd like why is welcome them terrific.
Now turning to our results in as highlighted on page nine of our posted earnings Doug.
Fourth quarter 2019 financial results were as follows.
Total revenue was $161 million.
Non-GAAP gross margin was 68%.
Non-GAAP operating expenses were $69 million.
Non-GAAP diluted earnings per share was 27 cents.
In adjusted EBIT da was $43 million.
For the full year total revenue was $563 million.
Non-GAAP gross margin was 63%.
Non-GAAP operating expenses were $281 million.
Non-GAAP diluted earnings per share was 47 cents.
And adjusted EBITDA was $86 million.
First let me start by addressing revenue for 2019 overall sales were down slightly.
But with a positive shift in mix towards a higher concentration of software.
In the fourth quarter 2019 software product revenue grew 35% year over year to $41 million, achieving 51% of total product revenue.
Similarly for the full year 2019, our software product revenue grew 23% to $122 million for the full year in represented 47% of total product revenue.
Most of our software growth came from increasing sales a virtualized software for sbcs with contributing growth from our new security analytics and application software products.
In terms of our service provider enterprise product revenue mix.
We continue to see improving trends in our faster growing enterprise market.
Enterprise product revenue grew to 29% of total product revenue in the fourth quarter 2019.
As compared to 23%.
In the last year likewise for the full year enterprise customers accounted for 27% of our product revenue growing from 21% the previous full year.
As you know, we sell our products into the service provider and enterprise markets in three solution categories.
Session control.
Network transformation and applications and security.
Session control revenue was $45 million in fourth quarter 2019.
$12 million lower than fourth quarter 2018.
Well together network transformation in applications. The security revenue was $36 million in fourth quarter, 2019, and increase of 6 million from last year.
For full year 2019 session control revenue was $145 million.
$18 million less than 2018 and network transformation in application security was $117 million approximately flat with 2080.
Our fourth quarter and full year gross profit was higher than corresponding period last year.
Our 35% growth in pure software product revenue drove another record quarterly gross margin for within with fourth quarter gross margin of 68% and a record full year non-GAAP gross margin for ribbon of 63%.
This is fully on track with the benefits, we expected from shifting our product portfolio to sales of pure software and software as a service.
Turning to profitability.
Adjusted EBITDA in the fourth quarter, 2019 was $43 million, representing a record EBITDA margin of 27%.
As compared to $29 million or 17% in the fourth quarter 2018.
Full year 2019, adjusted EBITDA was $86 million.
Or 15% margin.
This compares to 62 million or an 11% margin for full year 2018.
We're very pleased with our growth is sustainable profit and we continue to target a longer term operating model of 20% adjusted EBITDA margin.
Now turning to the balance sheet cash was 45 million at December 30, Onest 2019, and 11% increase over September 30.
Borrowings under our revolving line of credit were reduced from 55 million at fiscal year end 2018 to 8 million.
The into 2019.
In total we reduced borrowings and retired acquisition deferred consideration by $45 million during 2019.
During the fourth quarter 2019, we evaluated the carrying value of our goodwill balance.
Which resulted in a reduction to goodwill of $164 million.
And is reflected as a noncash charge.
The company generated positive cash flow from operations of $33 million.
Which was more than double what we realized in the fourth quarter 2018.
For the full year 2019 positive cash flow from operations was $56 million.
As compared to $10 million of cash used in operations in 2018.
Taking into account capital expenditures.
I've been generated Unlevered free cash flow of $49 billion in 2019, a large improvement from full year 2018.
Turning to 2020.
Our outlook for full year adjusted EBITDA is between 90 million to $95 million on a standalone basis, excluding the pending transaction.
We're forecasting low single digit revenue growth for the full year 2020.
And we anticipate that 20, Twentys quarterly revenue seasonality will be comparable to our experience in 2019.
This revenue outlook is based on our expectation for continued market pressure in the service provider space, coupled with growth in our energy enterprise products.
To be clear.
Our outlook for revenue and profitability excludes the pending acquisition of VCR.
Once we complete that transaction, we expect to be in a position to further comment on the combined company.
And now I'd like to turn the call over to Kevin to comment more specifically on accomplishments and strategy for 2020.
Thank you Darryl.
As I reflect on 2019, we realize significant progress on our March towards increased software sales investing in our intelligent and strategy and pivoting our strategic investments in applications towards growth Im very encouraged by the progress we have made on operational cost controls expanding our business with customers around the world and realize.
During the next phase of our corporate strategy with the announcement and stockholder approval Dcs merger.
He has worked tirelessly to right size, our spend and pivot ribbon into new product domains and selling models.
Towards this end in 2019, we continue to optimize our operational spend by realizing an 8% year over year reduction in non-GAAP operating expenses.
I will now take a few minutes to comment on the 2019 accomplishments that are top of mind and more importantly serve to underpin what I believe is a strong business foundation for 2020.
In 2019, we continued to make solid progress on expanding our software sales and growing our public cloud business. A software sales grew from 36% of total product revenue in 2018% to 47% of total park product revenue in 2019, driving a gross margin improvement of 200 basis points.
In total we now have over 850 customers were purchase of software SBC solutions with 45% of those customers leveraging our technology for Microsoft Skype for business, It seems reflecting solid progress on our partnership with Microsoft.
With respect for our public cloud business, we have active production instances, Amazon, Google cloud and Azure.
This gives us great confidence that we are leading our industry on software transformation in cloud migration wood products that are highly differentiated.
Our customers trust driven to transform and secure their voice services and software and cloud infrastructure.
Our SBC session counts grew 5% year over year in 2019, and we have more than doubled our annual SBC session count since 2016.
This is another proof point that gives us confidence that we are best in class have the right offers and our valued by the most discriminating customers.
In 2019, we made solid strides on revenue diversification to improved stability and linearity of our business. The split between our service provider in the enterprise business improved with enterprise revenue rising from 21% of total product revenue in 2018% to 27% in 2019.
We also recognize a modest increase in our services business. The performance of our services business has been a key corporate initiatives and we're very proud of the work our team has done.
We have focused on long term support contracts for installed products and have realized updrafts from new product service sales.
At the same time, our professional services business has improved year over year.
As telecommunication services become increasingly more complex and software oriented service providers are looking to their vendors to help with the transition software and cloud infrastructure.
Driven has been a leader in this transformation at scale with tier ones, such as Verizon, which has put is an excellent position to monetize professional services to facilitate these large digital transformation projects.
Well, we pivot to 2020 I'd like to provide some customer proof points that I believe highlight our progress and validate our strategy.
We are deeply engaged with two tier one service of our it is one in us and one in Japan on Operationalizing sit interconnect based on our software SBC solution.
These projects benefit from the R&D investments, we made to implement horizons voice over LTE deployment, and we're now executing on our strategy of repeating that win with tier ones globally.
We announced Peerless communications as a new design win for our cloud to Ed solution, which represents a significant accomplishment for edge Mark product line and further validates our intelligent edge strategy.
Andy successfully launched with two tier one service of art as in 2019.
18 T has leveraged candy see pass to launch its apiay marketplace with radio as an announced customer.
Meanwhile, at this a lot has leveraged candy ucas to launch as cloud talk offerings.
We made great strides with our ribbon analytics platform in 2019, increasing our customer base from 10 to 41 customers.
I would just under 80% of those customers representing renewables license sales. While these numbers are encouraging in their own right I'm, especially encouraged by the fact that 18 of 41 analytics customers purchased a security applications. In addition to our network operations applications.
This validates our strategy to beachhead the platform and horizontally, so new applications and use cases.
I would like to highlight that Fivenines, a strategic customer for rhythm is leveraging driven analytics from multiple use cases.
Looking to 2020, we're very excited about the opportunities are driven to transform into a more growth oriented business.
We believe our planned integration with Sci will unlock a very sizable and valued growth segment for them.
Pending the completion of this combination coupled with our solid organic tailwinds from 2019 will lead to accompany the is significantly different and focused on growth.
Ribbon leadership team has spent a significant amount of time preparing for these integration and I can say the foundation of the Dealogic has only grown stronger.
We have discussed the combined company strengths with our customers and received very positive feedback.
So both companies are confident that we're in a path for timely deal closure, followed by focus integration efforts to unlock revenue expansion.
You see represents our next and most or third state of step towards expanding driven strategy and product reach into the data domain.
You see I provide significant tam expansion with opportunities to compete for Fiveg business, while at the same time, serving the ever increasing data demands on non fiveg infrastructure.
While we will look to our global Salesforce to expand Sci sales reach this is much more than a cross selling play.
We believe that there are significant opportunity to bundle ribbon analytics on top of the CIO packet optical products to deliver a combined offering that unlocks deep network insights and raises the bar on network operations security and data monetization.
We have confirmed the value that our customers are willing to attached to our solutions. When we bundle analytics enabled business intelligence to unlock new revenue generating use cases.
And enable opex reductions through network automation and optimization.
We believe that together ribbon Sci can apply this strategy to raise the standard on products that are already highly differentiated and winning in the market.
Focusing on driven Standalone business as we drive into 2020, we will continue our mission to optimize and monetize our customers digital transformation journey by delivering best in class hardware software and cloud based solutions.
Our enterprise edge business is an area, where we believe we can build momentum in 2020 and realize growth.
Last month, we launched our next generation intelligent edge portfolio, reflecting the strategic investments we have made into the edgewater assets since its acquisition.
The centerpiece of this launch is our new edge Mark 6000 platform. This platform provides industry, leading features and a container based architecture for delivering maximum flexibility and feature enhancement capability.
We have the broader set of Microsoft's certified solutions, and our focus on becoming the leading edge infrastructure provider for ucas consumption.
We believe our solutions in both hardware and software will enable us to win and grow as Ucas production continues to ramp.
We believe this opportunity is very real with only 15% of the global addressable Ucas market converted.
As a ucas market leaders when our strategy is to win with them by delivering Sip Trunking security solutions and supported their applications.
We believe that our service about a core business is stable with modest growth opportunities. As I noted we are now realizing momentum with increased software sales and repeating wins. Our strategy is to continue improving our software mix increased deployed SPC session counts year over year.
We believe our investments in and momentum with ribbon analytics bundled with our large deployed footprint, our key competitive advantage that habits position to extract value for our large service provider install base.
In 2020, you'll hear us message more around security as it relates to identity assurance in particular, North America segment strong position against Robo, calling and we view this as a new application that we are ideally positioned to capitalize on.
We developed and now have the opportunity to overlay robo, calling mitigation software on top of our large deployed footprint.
The effectiveness of this strategy is underpinned by the successful Onboarding of six carriers for Robo call mitigation in 2019.
We will look to expand this business in 2020 in use these wins as a springboard to up sell a broader security offering on identity assurance.
To summarize we exited 2019 with very positive momentum in our organic business that has it seem excited about the opportunity for growth in 2020.
Namely, we we recorded year over year revenue growth and software analytics handy and professional services, while focusing on the overall performance of our services business.
Our 2019 proof points give us confidence that we have the right offers to take advantage of these digital transformations and we believe that our target markets will accelerate in 2020.
We are highly focused and aligned with the Sci team to rapidly integrate post closing and unlock packet optical business growth.
2020, you will see ribbon continue to optimize R&D investments to fuel our growth initiatives, including packet optical edge and cloud based offerings.
As a result, I expect ribbon to exit 2020, as a company that is significantly different and much more growth oriented.
That concludes our formal remarks I want to thank all of you for your continued support of driven at this time I would like to turn the call over to the operator for questions.
Operator, we're now ready for our first question.
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One moment, please what we pull for questions.
Our first question today is coming from Paul Silverstein from Cowen and company. Your line is now lives.
So turning also during the question.
Just curious it's not a huge difference, but if I look good I think your last proxy filing youre projecting six or 9 million revenue and owner 2 million EBITDA.
I remember the guidance. This evening, you're projecting 580 million in revenue and name you can maybe 5 million in EBITDA.
What account what changed what accounts for the difference.
From more when you ask commentary.
Youre right Paul Hello. This is Daryl it's nice to speak with you are for our forecast from the proxy in the mid third quarters did in did anticipate a perhaps modest improvement in the service provider market that we that we think based on our current outlook will with some of this persisting, we've we've moderated that to the key.
Current guidance that we've given you.
Hi, Joe I'm, sorry that that's based on macro environment, that's based on the healthcare spend or that's something else something above and beyond based on the health of carrier spend.
Got it alright, and I appreciate the color at all for Tonight greatly appreciated on that score when you look out to next year I assume you're expecting growth from enterprise. It sounds like your storage and servers, whether it be somewhat better than your previous involved but I trust that sold challenge when all of you respond.
Yes, we are expect yes, we've experienced good growth in our enterprise businesses as we said, it's approaching 29% to product revenue. We feel good about that that market is growing faster and we do expect to continue to to benefit from that we also do expect the service provider conditions again, primarily in the us.
But elsewhere will persist.
We've heard a lot of that from other from our peers as well and we're taking that into account in terms of our overall view.
So John if I can push you on this getting to that low single digit growth rate and you're talking about for for Rubin proper before taking into account.
Can you give any sense for what type of growth, respectively enterprise business and what type of headwinds are expecting and carrier and service provider.
Well, we certainly we havent disaggregate it we would have desegregated in terms of our outlook and I appreciate that you're always.
We're always interested in in revenue components, we do think that.
The the enterprise edge business is growing.
We will and content will it has grown and we'll continue to grow very nicely.
The service provider business.
Has a long long.
Sales cycle.
Looked very large orders subject to the network demands and the Capex. The capex forecast of the service providers and we think that we have good visibility into that so based on the order pipeline and just based on what we're seeing what we talked to customers we feel like.
We'll take a will take just a really modest growth view in terms of service provider spend and that's up and down within some of our solution categories too. We do expect some of our solution categories like session control to to improve.
Through Twentytwenty, but that's basically what we're seeing.
All right as one last question, there's little more than four I understand Bruce has been one company for about 10 minutes.
But that said yes.
I don't want to rehash.
Yeah, Hi acquisition in terms of my view, but given that you guys pretty far I think objective. We speaking is pretty for outside of Rubens historical core competency of you see again, putting aside you have a presence with with carriers today, but I guess my question for Bruce and Kevin.
And you.
If you're willing to do is July and you're trying to go Bruce is fine our track record in terms of M&A.
In contemplating future M&A deals are there any limits to what you would not do.
That's a that's a great question. Paul This is Kevin I'll take that fit the connect with you again.
I think I think for now I don't want to speak for Bruce.
Basically and we're looking forward to him joining the team in I'll, let him speak for himself once these here.
But in terms of M&A down the road I think we we have a large integration ahead of us.
We're very focused on getting you see I integrated onboarded and focusing on sales growth with Sci switches.
One of the fundamental theses of the deal.
And that is what were entirely focused on in terms of what we what we would consider down the road I think we have demonstrated history of evaluating what are the market opportunities and can we go after them organically or do we benefit from M&A to move faster and addressing and dress and opportunity to more timely manner. So I think.
Yes.
It would be disingenuous for me to try to predict what's in play and whats autoplay I'm in the future, but what I will say is that we now have a pretty broad base to expand off of we now have.
Offerings for service provider voice now service provided data with Sci and now we also have offerings for enterprise voice and enterprise data with our organic enterprise assets and our Edgewater assets. So as we look forward and in terms of market opportunities down the road I think we have a broad based to consider.
Where we want to add too and whether we want to do that organically or inorganically.
All right I'll take the rest of course is off line I appreciate it. Thank you.
Well thank you Paul.
Okay.
Thank you as a reminder, star one to be placing the question Q1 moment. Please what we pull for further questions.
Hey region of our question and answer session. Our this turn the floor back over to Kevin for any further closing comments.
Yes, so on behalf of Daryl the leadership team and myself I would just like to thank everybody for joining the call today and look forward to correspond with you in future. Thank you.
Thank you that does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.