RBBN - Ribbon Communications: Strong Prospect In The Communication Technology Space

2023-03-13 14:45:36 ET

Summary

• RBBN posted strong Q4 FY22 results with solid net income growth.
• The IP optical business proved to be the outperformer for the company, with a 17% y-o-y revenue growth.
• FY23 adjusted EBITDA estimated to be in the range of $95-$110 million, representing 48%-80% increase compared to FY22.
• The Wall Street analysts have an average price target of $5.88, representing a 38% upside from current price levels.
• I assign a buy rating for RBBN.

Investment Thesis

Ribbon Communications Inc. ( RBBN ) is a global communication technology provider headquartered in Texas, United States. My thesis is primarily based on its performance in the recent quarterly results and its future growth prospects. I will also be analyzing its valuation at current price levels and the risk faced by the company. I believe RBBN is a great investment opportunity in the communication technology space with a cheap valuation and advanced technology-backed product portfolio.

Company Overview

RBBN classifies its business into two business segments; the Internet protocol optical network ((IP)) segment and the cloud and edge segment. The IP optical segment comprises IP networking, optical transport, and routing systems to enable multiple communication technologies like 5G. The cloud and edge segment provides cloud computing, voice-over internet protocol, and web-based real-time communications. RBBN has clients in over 140 countries, most of them located in the North America and Asia Pacific region.

Q4 FY2022 Results

RBBN posted strong fourth-quarter results with solid net income growth. The IP optical business proved to be the outperformer for the company, with a 17% revenue growth. RBBN beat the market revenue and income expectation by a significant margin. I believe the continued product innovation and customer acquisition could help the company in the coming quarters.

The Q4 FY2022 revenue stood at $233 million, up 1.5% compared to $230 million in the corresponding quarter last year. As per my analysis, the IP optical product business proved to be the primary revenue driver, with the IP routing portfolio experiencing a y-o-y 34% growth. When we break down the revenue, we realize that the revenue from IP optical network experienced a growth of 17% to $97 million compared to $83 million in the same quarter last year. On the other hand, the cloud & edge segment reported a 6.5% fall in revenues to $137 million from $147 million in the same quarter the previous year. This reflects that the company is shifting its focus on the IP optical segment and looking to capitalize on the fast-growing IP product and services market. The gross margin for the quarter was reported at 48.8% compared to 49.8% in the same quarter last year. I believe this slight decline is not concerning, given the high inflationary environment in which the company is operating. RBBN turned profitable this quarter, reporting a net income of $20.5 million compared to a net loss of $96 million in the year-ago period. This is a significant increase, and it reflects that the company is on the right growth track. I believe that new product launches and effective customer acquisition coupled with a better product mix will result in even higher profits for the firm in the coming quarters. RBBN reported EPS of $0.12, an increase of $0.77 compared to a loss per share of $0.65 in the same quarter last year.

Now let us have a look at RBBN’s balance sheet. They reported cash and cash equivalents of $67 million against long-term debt of $306 million. The company is focusing on gradually reducing its debt burden, and as a step in that direction, they have repaid $45 million of long-term debt in FY22, reducing the long-term debt from $350 million in FY21 to $306 million in FY22. I believe this reduction in debt will have a positive impact on the company’s profitability as it will reduce the interest burden, especially in this high-interest rate environment.

Overall, the fourth quarter results were quite positive, and the management has given optimistic guidance for FY23. The revenues for FY23 are estimated to be in the range of $840-$870 million, representing an increase of 6% on the higher end compared to revenue of $820 million in FY22. The most important point that I want to highlight is the adjusted EBITDA growth which is estimated to be in the range of $95-$110 million, reflecting a solid 80% increase on the higher end compared to the FY22 adjusted EBITDA of $64 million. This reflects the fact that the company is planning on increasing profitability in the coming quarters, which in turn will result in the improved financial position of the company. RBBN is a strong prospect when it comes to 5G technology, as it is one of the leading IP optical product and service providers in the North American region. With the recent partnerships with Bharti Airtel and Liberty Latin America, the company is expanding its operations in the Asia Pacific and South American regions as well. I believe this could help the company diversify its geographical risk.

Key Risk Factor

High interest obligation: RBBN has a long-term debt of $306 million as of 31st December 2022. This debt resulted in $6 million in interest payments for Q4 FY22. This high-interest obligation puts a dent in the company’s profit margins. The interest expense has increased 50% from $4 million in Q4 FY21 to $6 million in Q4 FY22 despite a reduction in the total debt value. This is the result of higher interest rates which have adversely affected interest expenses. However, as I mentioned earlier, the company is taking active steps to mitigate this risk by gradually reducing its debt exposure.

Quant Rating and Valuation

RBBN has a Quant rating of strong buy by Seeking Alpha which reflects its upside potential. The factor grades reflect the same with an A+ grade in both growth and momentum, which represents that the company is on a solid growth track with stock price momentum on its side. It has a C- grade when it comes to profitability, suggesting that there is vast room for improvement, but the profitability grade has shown significant improvement over the past six months, and it will continue to improve in the future. The Wall Street rating of strong buy on RBBN further solidifies my thesis.

RBBN is trading at a share price of $4.25, a YTD increase of 55%. The company has a market cap of $715 million. In the past few months, the stock has rallied more than 50%, but I believe there is still room for stock price growth at the current valuation. RBBN is trading at a forward non-GAAP P/E multiple of 14.5x against the industry standard of 19x, which reflects that the stock is significantly undervalued at current price levels. The Wall Street analysts have an average price target of $5.88 , representing a 38% upside from current price levels.

Conclusion

RBBN is expanding its IP optical portfolio by introducing new features and aggressively acquiring new customers globally. I believe they are a strong prospect in the 5G space, and with consistent investment in R & D, they have been successful in producing cutting-edge technology. The strong fourth-quarter results and optimistic guidance for FY23 are big positives for investors. I believe RBBN is undervalued at its current valuation, and there is significant upside potential in the stock. Considering all the risk and growth factors, I think RBBN provides a favorable risk-reward profile. Therefore, I assign a buy rating for RBBN.

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