Shares of Ribbon Communications (RBBN) have sunk 16% following the release of the company’s Q2 results on July 24. Revenue for the period fell 8.5% year-over-year to $192.6 million, missing its guided range of $200-210 million and coming in $12.3 million below the $204.9 million analysts had anticipated. Additionally, the midpoints of RBBN’s revenue and adjusted EBITDA guidance for Q3 of $205-220 million and $25-30 million also fall short of the $219.1 million and $30.2 million consensus estimates. RBBN also revised down its full-year outlook for revenue to $830-850 million from $840-870 million and cut its adjusted EBITDA forecast to $105-115 million from $110-120 million.
However, the revenue shortfall in Q2 was almost entirely due to the delay of a large Cloud & Edge deal with a U.S. federal agency that should still close in the current quarter. And despite this pressure, adjusted EBITDA held up well, falling just 4.4% to $21.7 million thanks to demand from Tier 1 service providers in the U.S. continuing to stabilize, the expansion in gross margin from lower product costs and a favorable regional sales mix, and last year’s restructuring efforts driving down R&D and sales expenses. Further aided by lower interest expense, adjusted net income actually rose 10.0% to $8.5 million or 5 cents per share, which met analysts’ expectations.
What’s more, the weaker Q3 and reduced full-year forecasts are solely due to RBBN’s decision to suspend product shipments into Eastern Europe because of the ongoing war in Ukraine, which has complicated operations in the region. Despite this headwind, which is expected to shave roughly $20-25 million off the top line in the second half, the updated revenue and adjusted EBITDA targets for 2024 are only $15 million and $5 million lower at their midpoints, suggesting a return to 9% growth in both measures over the rest of the year.
This confidence is bolstered by several factors, including the strong start to the Verizon Voice Network modernization contract, expected to ramp up significantly over the next two quarters; a robust pipeline of U.S. rural broadband opportunities supported by federal funding programs like Rural Digital Opportunity Fund and ReConnect; significant growth anticipated in enterprise and U.S. federal defense agency projects; a projected 30% increase in business from India due to renewed network spending by Vodafone Idea; and a seasonal boost in the EMEA region, excluding Eastern Europe, with sales expected to rise by approximately 30%.
Moreover, disruptions in the competitive landscape, such as Microsoft’s discontinuation of the Metaswitch portfolio, present additional opportunities for RBBN to expand its market share that I believe are not yet reflected in its guidance. The same applies to potential opportunities arising from recent industry announcements, such as the Nokia-Infinera combination and the HPE-Juniper deal. These consolidations are expected to create market disruptions that RBBN intends to capitalize on, providing further upside potential to its current outlook. As this continues to unfold, I expect the stock to recover from this knee-jerk sell-off and resume its recent upward trajectory in short order.
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