Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the financial condition and results of operations of Ribbon Communications Inc. should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the U.S. Securities and Exchange Commission on February 28, 2024.
Overview
We are a leading global provider of communications technology to service providers and enterprises. We provide a broad range of software and high-performance hardware products, network solutions, and services that enable the secure delivery of data and voice communications, and high-bandwidth networking and connectivity for residential consumers and for small, medium, and large enterprises and industry verticals such as finance, education, government, utilities, and transportation. Our mission is to create a recognized global technology leader providing cloud-centric solutions that enable the secure exchange of information, with unparalleled scale, performance and elasticity. We are headquartered in Plano, Texas, and have a global presence with research and development or sales and support locations in over thirty countries around the world.
Key Trends and Economic Factors Affecting Ribbon
Supplier Disruptions. Ongoing uncertainty in the global economy due to inflation, the wars in Israel and Ukraine, national security concerns and other factors, continue to disrupt various manufacturing, commodity and financial markets, increase volatility, and impede global supply chains. Our ability to deliver our solutions as agreed upon with our customers depends in part on the ability of our global contract manufacturers, vendors, licensors and other business partners to deliver products or perform services we have procured from them.
Continued uncertain global economic conditions may cause our customers to restrict spending or delay purchases for an indeterminate period of time and consequently cause our revenues to decline. Further, such factors may negatively impact our operating costs resulting in a reduction in net income. The degree to which the ongoing wars in Israel and Ukraine and the inflationary and high interest rate environment impacts our future business, financial position and results of operations will depend on developments beyond our control.
The Ongoing Wars in Israel and Ukraine . The uncertainty resulting from the wars in Israel and Ukraine and the expansion of, and the threat of continued expansion of, one or both of these wars could result in some of our customers delaying purchases from us. As a result of safety concerns, we may close our offices in Israel from time to time. Although our employees in these offices have the ability to work remotely and business continuity plans are in place to address any medium- or long-term disruptions that could result from the closure of these offices, the office closures and general effects of employees operating in a region at war could have a negative impact on our operations. Further, a number of our employees in Israel are members of the military reserves and subject to immediate call-up in response to the war in Israel. Following the terrorist attacks in Israel in October 2023, a number of our employees have been activated for military duty and we expect that additional employees will also be activated if the war in Israel continues. While we have business continuity plans in place to address the military call-ups, it could affect the timing of projects in the short-term as the work is shifted to other team members both inside and outside of Israel.
Further, the U.S. and other European countries have imposed sanctions and trade restrictions against Russia in connection with the war in Ukraine. These sanctions and restrictions currently prohibit our ability to sell hardware products. The sanctions continue to evolve and further changes in the current sanctions or trade restrictions could further limit our ability to sell products and services to customers in Russia and, our ability to collect on outstanding accounts receivable from such customers. If we are further limited in our ability to sell products and services to Russia and other countries for an extended period, it could have a material impact on our financial results.
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Inflation and Interest Rates. We continue to see near-term impacts on our business due to inflation, including ongoing global price pressures driving up energy prices, component costs, freight premiums, and other operating costs above normal rates. Although headline inflation in the United States and Europe appears to be decreasing, core inflation (excluding food and energy prices) remains elevated and is a source of continued cost pressure on businesses and households. Interest rates have increased significantly as central banks in developed countries attempt to subdue inflation while government deficits and debt remain at high levels in many global markets. However, in September 2024, the Federal Reserve’s Federal Open Market Committee lowered the target range for the federal funds rate by 0.5% to 4.75% to 5%, noting that it has gained greater confidence that inflation is moving sustainability toward the Committee’s two percent objective. Yet, the economic outlook remains uncertain, and the implications of higher government deficits and debt, tighter monetary policy, and potentially higher long-term interest rates may drive a higher cost of capital for our business.
Presentation
Unless otherwise noted, all financial amounts, excluding tabular information, in this Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") are rounded to the nearest million dollar amount, and all percentages, excluding tabular information, are rounded to the nearest percentage point.
Operating Segments
Our Chief Operating Decision Maker assesses our performance based on the performance of two separate organizations within Ribbon: the Cloud and Edge operating segment ("Cloud and Edge") and the IP Optical Networks operating segment ("IP Optical Networks"). For additional details regarding our operating segments, see Note 13 - Operating Segment Information to our condensed consolidated financial statements.
Financial Overview
Financial Results
We reported a loss from operations of $0.9 million and income from operations of $0.9 million for the three months ended September 30, 2024 and 2023, respectively. We reported a loss from operations of $16.3 million and $41.0 million for the nine months ended September 30, 2024 and 2023, respectively.
Our revenue was $210.2 million and $203.2 million in the three months ended September 30, 2024 and 2023, respectively. Our gross profit and gross margin were $109.6 million and 52.1%, respectively, in the three months ended September 30, 2024, and $103.5 million and 50.9%, respectively, in the three months ended September 30, 2023. The higher revenue in the three months ended September 30, 2024 compared to 2023 is due to $12.3 million of higher Cloud and Edge sales, primarily to U.S. service providers and Federal agencies, partially offset by $5.2 million of lower IP Optical Networks sales led by lower sales into Eastern Europe and India, which were partially offset by growth in the U.S. rural market. Our revenue was $582.5 million and $599.9 million in the nine months ended September 30, 2024 and 2023, respectively. Our gross profit and gross margin were $299.4 million and 51.4%, respectively, in the nine months ended September 30, 2024, and $286.4 million and 47.7%, respectively, in the nine months ended September 30, 2023. The lower revenue in the nine months ended September 30, 2024 compared to 2023 is due to $15.2 million of lower Cloud and Edge sales to both U.S. service providers and enterprise customers overall, partially offset by higher Federal agency sales, and $2.2 million of lower IP Optical Networks sales.
Revenue from our Cloud and Edge segment was $128.1 million and $115.8 million in the three months ended September 30, 2024 and 2023, respectively. Gross profit and gross margin for this segment were $84.3 million and 65.9%, respectively, in the three months ended September 30, 2024, and $74.7 million and 64.6%, respectively, in the three months ended September 30, 2023. Revenue from our Cloud and Edge segment was $340.3 million and $355.5 million in the nine months ended September 30, 2024 and 2023, respectively. Gross profit and gross margin for this segment were $219.2 million and 64.4%, respectively, in the nine months ended September 30, 2024, and $220.1 million and 61.9%, respectively, in the nine months ended September 30, 2023.
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Revenue from our IP Optical Networks segment was $82.2 million and $87.4 million in the three months ended September 30, 2024 and 2023, respectively. Gross profit and gross margin for this segment were $25.3 million and 30.8%, respectively, in the three months ended September 30, 2024, and $28.8 million and 32.9%, respectively, in the three months ended September 30, 2023. Revenue from our IP Optical Networks segment was $242.2 million and $244.4 million in the nine months ended September 30, 2024 and 2023, respectively. Gross profit and gross margin for this segment were $80.2 million and 33.1%, respectively, in the nine months ended September 30, 2024, and $66.2 million and 27.1%, respectively, in the nine months ended September 30, 2023.
Our operating expenses were $110.5 million and $102.6 million in the three months ended September 30, 2024 and 2023, respectively, and $315.8 million and $327.3 million in the nine months ended September 30, 2024 and 2023, respectively. The increased operating expenses in the three months ended September 30, 2024 compared to 2023 are primarily related to a $5.0 million legal settlement and associated legal fees related to certain specific legal matters. Operating expenses for the three months ended September 30, 2024 included $6.5 million of amortization of acquired intangible assets, and $3.8 million of restructuring and related expense. Operating expenses for the three months ended September 30, 2023 included $7.2 million of amortization of acquired intangible assets, $0.8 million of acquisition-, disposal- and integration-related expense, and $2.7 million of restructuring and related expense. The decreased operating expenses in the nine months ended September 30, 2024 compared to 2023 are primarily related to lower restructuring and related expense, acquisition-, disposal- and integration-related expense and amortization of acquired intangible assets. Operating expenses for the nine months ended September 30, 2024 included $19.7 million of amortization of acquired intangible assets, and $8.8 million of restructuring and related expense. Operating expenses for the nine months ended September 30, 2023 included $21.7 million of amortization of acquired intangible assets, $3.0 million of acquisition-, disposal- and integration-related expense, and $13.9 million of restructuring and related expense.
We recorded stock-based compensation expense of $4.0 million and $5.0 million in the three months ended September 30, 2024 and 2023, respectively, and $12.1 million and $16.9 million in the nine months ended September 30, 2024 and 2023, respectively. These amounts are included as components of both Cost of revenue and Operating expenses in our condensed consolidated statements of operations.
See "Results of Operations" in this MD&A for a discussion of the changes in our revenue and expenses for three and nine months ended September 30, 2024 compared to three and nine months ended September 30, 2023.
Restructuring and Cost Reduction Initiatives
Our CODM approved workforce reductions in 2024 for certain of our operating locations to correspond with the current sales levels in those areas. We recorded $2.2 million in the three months ended September 30, 2024 related to these actions.
In February 2023, our Board of Directors approved a strategic restructuring program (the "2023 Restructuring Plan") to streamline our operations in order to support our investment in critical growth areas. The 2023 Restructuring Plan includes, among other things, charges related to a workforce reduction. Any potential positions eliminated in countries outside the United States are subject to local law and consultation requirements. In connection with the 2023 Restructuring Plan, we recorded restructuring and related expense for severance related costs of $0.1 million and $2.1 million in the three and nine months ended September 30, 2024, respectively, and $0.9 million and $9.4 million in three and nine months ended September 30, 2023, respectively. We anticipate that we will record nominal future expense for severance in connection with the 2023 Restructuring Plan.
In February 2022, our Board of Directors approved a strategic restructuring program (the "2022 Restructuring Plan") to streamline our operations in order to support our investment in critical growth areas. The 2022 Restructuring Plan includes, among other things, charges related to a consolidation of facilities and a workforce reduction. Any positions eliminated in countries outside the United States are subject to local law and consultation requirements. In connection with the 2022 Restructuring Plan, we recorded restructuring and related expense of $1.5 million and $4.5 million in the three and nine months ended September 30, 2024, respectively, for variable and other facilities-related costs, and we recorded restructuring and related expense of $1.9 million and $4.6 million in the three and nine months ended September 30, 2023, respectively. The amount for the three months ended September 30, 2023 was
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comprised of $1.7 million for variable and other facilities-related costs and $0.2 million for accelerated amortization of lease assets no longer being used with no ability or intent to sublease. The amount for the nine months ended September 30, 2023 was comprised of $3.8 million for variable and other facilities-related costs and $0.8 million for accelerated amortization of lease assets no longer being used with no ability or intent to sublease. We anticipate that we will record approximately $2 million of expense in the remainder of 2024 related to the 2022 Restructuring Plan.
For facilities that are part of a restructuring plan, for which we have no intent or ability to enter into a sublease, we recognize accelerated rent amortization over the period from the date that we commence the plan to fully or partially vacate a facility through the final vacate date. We did not record accelerated rent amortization in the three and nine months ended September 30, 2024. We recorded $0.2 million and $0.8 million for accelerated rent amortization in the three and nine months ended September 30, 2023, respectively. We continue to evaluate our properties included in our restructuring plans for accelerated amortization and/or right-of-use asset impairment. We may incur additional future expense if we are unable to sublease other locations included in these initiatives.
Critical Accounting Policies and Estimates
This MD&A is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions and beliefs of what could occur in the future given available information. We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment. The significant accounting policies that we believe are the most critical include revenue recognition, the valuation of inventory, warranty accruals, loss contingencies and reserves, stock-based compensation, the Preferred Stock and Warrants, business combinations, goodwill and intangible assets, accounting for leases, and accounting for income taxes. If actual results differ significantly from management’s estimates and projections, there could be a material effect on our condensed consolidated financial statements. There were no significant changes to our critical accounting policies from January 1, 2024 through September 30, 2024. For a further discussion of our critical accounting policies and estimates, please refer to our Annual Report on Form 10-K for the year ended December 31, 2023.
Results of Operations
Three and nine months ended September 30, 2024 and 2023
Revenue. Revenue for the three and nine months ended September 30, 2024 and 2023 was as follows (in thousands, except percentages):
Increase
Three months ended
from prior year
September 30,
September 30,
2024
2023
$
%
Product
$
112,151
$
108,501
$
3,650
3.4
%
Service
98,087
94,660
3,427
3.6
%
Total revenue
$
210,238
$
203,161
$
7,077
3.5
%
Increase/(decrease)
Nine months ended
from prior year
September 30,
September 30,
2024
2023
$
%
Product
$
298,894
$
319,166
$
(20,272)
(6.4)
%
Service
283,628
280,772
2,856
1.0
%
Total revenue
$
582,522
$
599,938
$
(17,416)
(2.9)
%
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Segment revenue for the three and nine months ended September 30, 2024 and 2023 was as follows (in thousands):
Three months ended September 30, 2024
Three months ended September 30, 2023
Cloud and
IP Optical
Cloud and
IP Optical
Edge
Networks
Total
Edge
Networks
Total
Product
$
53,455
$
58,696
$
112,151
$
42,305
$
66,196
$
108,501
Service
74,623
23,464
98,087
73,460
21,200
94,660
Total revenue
$
128,078
$
82,160
$
210,238
$
115,765
$
87,396
$
203,161
Nine months ended September 30, 2024
Nine months ended September 30, 2023
Cloud and
IP Optical
Cloud and
IP Optical
Edge
Networks
Total
Edge
Networks
Total
Product
$
124,554
$
174,340
$
298,894
$
137,496
$
181,670
$
319,166
Service
215,748
67,880
283,628
218,005
62,767
280,772
Total revenue
$
340,302
$
242,220
$
582,522
$
355,501
$
244,437
$
599,938
The increase in our product revenue in the three months ended September 30, 2024 compared to the three months ended September 30, 2023 was the result of $11 million of higher sales of our Cloud and Edge products, partially offset by $7 million of lower sales of our IP Optical Networks products. The decrease in our product revenue in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 was due to $13 million of lower sales of our Cloud and Edge products and $7 million of lower sales of our IP Optical Networks products. The increase in revenue from the sale of Cloud and Edge products in the three months ended September 30, 2024 was attributable to higher sales to U.S. service providers and Federal agencies. The decrease in revenue from the sale of IP Optical Networks products in the three months ended September 30, 2024 was attributable to lower sales into Eastern Europe and India, partially offset by higher sales in the U.S. rural market. The decrease in revenue from the sale of Cloud and Edge products in the nine months ended September 30, 2024 was attributable to lower sales to both U.S. service providers and enterprise customers overall, partially offset by higher sales to Federal agencies for network transformation projects. The decrease in revenue from the sale of IP Optical Networks products in the nine months ended September 30, 2024 was attributable to lower sales into India, partially offset by higher sales in Europe, the Middle East and Africa (“the EMEA region”).
Revenue from sales to enterprise customers was 36% and 30% of our product revenue in the three months ended September 30, 2024 and 2023, respectively. These sales were made through both our direct sales team and indirect sales channel partners. Revenue from sales to enterprise customers was 39% and 30% in the nine months ended September 30, 2024 and 2023, respectively. The increase in enterprise sales reflects stronger sales of our products to customers in the Federal agencies.
Revenue from indirect sales through our channel partner program was 34% and 33% of our product revenue in the three months ended September 30, 2024 and 2023, respectively, and 38% and 34% of our product revenue in the nine months ended September 30, 2024 and 2023, respectively. The increase in channel sales in the nine months ended September 30, 2024 reflects stronger IP Optical Networks deployments through systems integrators as well as sell-thru our service provider channel partners in Eastern Europe.
The timing of the completion of customer projects and revenue recognition criteria satisfaction may cause our product revenue to fluctuate from one period to the next.
Service revenue is primarily comprised of hardware and software maintenance and support (“maintenance revenue”) and network design, installation and other professional services (“professional services revenue”).
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Service revenue for the three and nine months ended September 30, 2024 and 2023 was comprised of the following (in thousands, except percentages):
Increase/(decrease)
Three months ended
from prior year
September 30,
September 30,
2024
2023
$
%
Maintenance
$
69,019
$
69,272
$
(253)
(0.4)
%
Professional services
29,068
25,388
3,680
14.5
%
$
98,087
$
94,660
$
3,427
3.6
%
Increase/(decrease)
Nine months ended
from prior year
September 30,
September 30,
2024
2023
$
%
Maintenance
$
204,920
$
209,488
$
(4,568)
(2.2)
%
Professional services
78,708
71,284
7,424
10.4
%
$
283,628
$
280,772
$
2,856
1.0
%
Segment service revenue for the three and nine months ended September 30, 2024 and 2023 was comprised of the following (in thousands):
Three months ended September 30, 2024
Three months ended September 30, 2023
Cloud and
IP Optical
Cloud and
IP Optical
Edge
Networks
Total
Edge
Networks
Total
Maintenance
$
53,595
$
15,424
$
69,019
$
55,004
$
14,268
$
69,272
Professional services
21,028
8,040
29,068
18,456
6,932
25,388
Total service revenue
$
74,623
$
23,464
$
98,087
$
73,460
$
21,200
$
94,660
Nine months ended September 30, 2024
Nine months ended September 30, 2023
Cloud and
IP Optical
Cloud and
IP Optical
Edge
Networks
Total
Edge
Networks
Total
Maintenance
$
159,454
$
45,466
$
204,920
$
164,848
$
44,640
$
209,488
Professional services
56,294
22,414
78,708
53,157
18,127
71,284
Total service revenue
$
215,748
$
67,880
$
283,628
$
218,005
$
62,767
$
280,772
Maintenance revenue was lower in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to modestly lower renewal rates from decommissioning some older legacy equipment with several Cloud & Edge customers.
Professional services revenue was higher in the three and nine months ended September 30, 2024 compared to the same periods in 2023 primarily due to increased sales of Cloud and Edge services to U.S. service providers and a U.S. Federal agency for voice modernization projects and growing sales of IP Optical Networks services in the EMEA region.
The following customer contributed 10% or more of our revenue in the three and nine months ended September 30, 2024 and 2023:
Three months ended
Nine months ended
September 30,
September 30,
September 30,
September 30,
Customer
2024
2023
2024
2023
Verizon Communications Inc.
15
%
11
%
13
%
11
%
Revenue from customers domiciled outside the United States was 48% and 58% in the three months ended September 30, 2024 and 2023, respectively, and 55% of revenue in both the nine months ended September 30, 2024 and 2023. U.S. revenue is increasing due to higher sales into the U.S. market from both the Cloud and Edge and IP Optical
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Networks segments. Due to the timing of project completions, we expect that the domestic and international components as a percentage of revenue may fluctuate from quarter to quarter and year to year.
Our deferred product revenue was $13 million and $17 million at September 30, 2024 and December 31, 2023, respectively. Our deferred service revenue was $100 million and $116 million at September 30, 2024 and December 31, 2023, respectively. Our deferred revenue balance may fluctuate as a result of the timing of revenue recognition, customer payments, maintenance contract renewals, contractual billing rights and maintenance revenue deferrals included in multiple element arrangements.
We expect that our total revenue in 2024 will increase modestly compared to our revenue in 2023 due to growth in the Cloud & Edge segment, particularly with the increased purchases from Verizon as part of a voice modernization project, as well as increased sales to Federal agencies, offset by lower revenue from our IP Optical segment. From a regional perspective, we anticipate continued IP Optical Networks revenue growth in 2024 from North America, and EMEA, offset by lower revenue in Eastern Europe due to additional trade restrictions. In the Cloud & Edge segment, we expect continued revenue growth from enterprise customers, including U.S. Federal agencies, as well as higher U.S. service provider spending.
Cost of Revenue/Gross Margin. Our cost of revenue consists primarily of amounts paid to third-party manufacturers for purchased materials and services, royalties, amortization of acquired technology, inventory valuation adjustments, warranty costs, and manufacturing and services personnel and related costs. Our cost of revenue, gross profit and gross margin for the three and nine months ended September 30, 2024 and 2023 were as follows (in thousands, except percentages):
Increase/(decrease)
Three months ended
from prior year
September 30,
September 30,
2024
2023
$
%
Cost of revenue:
Product
$
59,405
$
59,436
(31)
(0.1)
%
Service
34,893
33,065
1,828
5.5
%
Amortization of acquired technology
6,323
7,157
(834)
(11.7)
%
Total cost of revenue
$
100,621
$
99,658
963
1.0
%
Gross profit
$
109,617
$
103,503
$
6,114
5.9
%
Gross margin
52.1
%
50.9
%
Increase/(decrease)
Nine months ended
from prior year
September 30,
September 30,
2024
2023
$
%
Cost of revenue:
Product
$
160,044
$
189,426
(29,382)
(15.5)
%
Service
103,633
102,152
1,481
1.4
%
Amortization of acquired technology
19,406
21,985
(2,579)
(11.7)
%
Total cost of revenue
$
283,083
$
313,563
(30,480)
(9.7)
%
Gross profit
$
299,439
$
286,375
$
13,064
4.6
%
Gross margin
51.4
%
47.7
%
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Our segment cost of revenue, gross profit and gross margin for the three and nine months ended September 30, 2024 and 2023 were as follows (in thousands, except percentages):
Three months ended September 30, 2024
Three months ended September 30, 2023
Cloud and
IP Optical
Cloud and
IP Optical
Edge
Networks
Total
Edge
Networks
Total
Product
$
18,672
$
40,733
$
59,405
$
15,222
$
44,214
$
59,436
Service
23,031
11,862
34,893
22,495
10,570
33,065
Amortization of acquired technology
2,026
4,297
6,323
3,317
3,840
7,157
Total cost of revenue
$
43,729
$
56,892
$
100,621
$
41,034
$
58,624
$
99,658
Gross profit
$
84,349
$
25,268
$
109,617
$
74,731
$
28,772
$
103,503
Gross margin
65.9
%
30.8
%
52.1
%
64.6
%
32.9
%
50.9
%
Nine months ended September 30, 2024
Nine months ended September 30, 2023
Cloud and
IP Optical
Cloud and
IP Optical
Edge
Networks
Total
Edge
Networks
Total
Product
$
45,854
$
114,190
$
160,044
$
55,498
$
133,928
$
189,426
Service
68,740
34,893
103,633
69,423
32,729
102,152
Amortization of acquired technology
6,488
12,918
19,406
10,442
11,543
21,985
Total cost of revenue
$
121,082
$
162,001
$
283,083
$
135,363
$
178,200
$
313,563
Gross profit
$
219,220
$
80,219
$
299,439
$
220,138
$
66,237
$
286,375
Gross margin
64.4
%
33.1
%
51.4
%
61.9
%
27.1
%
47.7
%
Our gross margin was higher with a 1% increase overall in the three months ended September 30, 2024 compared to the three months ended September 30, 2023, due to a 1% increase in our Cloud & Edge segment, partially offset by a 2% decrease in our IP Optical Networks segment. Our gross margin increased 4% in the nine months ended September 30, 2024 compared to the same period in 2023 due to a 6% increase in our IP Optical Networks segment and a 3% increase in our Cloud & Edge segment. The higher margin in the nine months ended September 30, 2024 in our IP Optical Networks segment was primarily attributable to favorable customer and product mix along with lower material and labor costs. Our Cloud and Edge segment’s gross margin for the nine months ended September 30, 2024 increased primarily due to favorable product mix and lower amortization of acquired technology costs.
We expect gross margin in our IP Optical Networks segment to increase slightly in the fourth quarter of 2024. We expect our overall corporate gross margin in 2024 to be slightly higher compared to 2023 due to increased revenue from our Cloud & Edge segment and its higher margins due to the higher software content in its products, along with slightly higher margins from our IP Optical Networks segment due to favorable customer and product mix.
Research and Development. R&D expenses consist primarily of salaries and related personnel expenses and prototype costs for the design, development, testing, and enhancement of our products. R&D expenses for the three and nine months ended September 30, 2024 and 2023 were as follows (in thousands, except percentages):
Decrease
September 30,
September 30,
from prior year
2024
2023
$
%
Three months ended
$
45,645
$
46,229
$
(584)
(1.3)
%
Nine months ended
$
134,897
$
145,309
$
(10,412)
(7.2)
%
The decrease in our R&D expenses in the three and nine months ended September 30, 2024 compared to the three and nine months ended September 30, 2023 was attributable to lower expenses in both of our segments. However, our IP Optical Networks segment contributed the most to the improvement by decreasing costs by under $1 million and $8 million in the three and nine months ended September 30, 2024, respectively. The reduced expenses are a combination
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of lower employee headcount and outside subcontractors resulting from the cost savings implemented in the 2023 Restructuring Plan.
Our IP Optical Networks R&D investment is focused on significantly expanding our portfolio of IP Routing solutions, adding additional features and capabilities to our Optical Transport portfolio, and supporting features in our next generation SDN management and orchestration platform.
Some aspects of our R&D efforts require significant short-term expenditures, the timing of which may cause variability in our expenses. We believe that rapid technological innovation is critical to our long-term success, and we are tailoring our investments to meet the requirements of our customers and market. However, we do expect that 2024 R&D expenses will be lower than 2023 overall, with reduced investment in both segments in areas such as sustaining engineering, as well as a full year benefit from the cost savings implemented in the 2023 Restructuring Plan.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries and related personnel costs, commissions, travel and entertainment expenses, promotions, customer trial and evaluations inventory and other marketing and sales support expenses. Sales and marketing expenses for the three and nine months ended September 30, 2024 and 2023 were as follows (in thousands, except percentages):
Increase/(decrease)
September 30,
September 30,
from prior year
2024
2023
$
%
Three months ended
$
33,060
$
32,795
$
265
0.8
%
Nine months ended
$
100,760
$
102,099
$
(1,339)
(1.3)
%
The decrease in sales and marketing expenses in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 is primarily a result of the global sales organization realignment that reduced management layers, as well as reduced investment in under-performing regions, with essentially equal reductions in both of our operating segments.
We expect our sales and marketing expenses in 2024 to be similar to 2023 as we continue to benefit from the realigned global sales structure.
General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related personnel costs for executive and administrative personnel, and audit, legal and other professional fees. General and administrative expenses for the three and nine months ended September 30, 2024 and 2023 were as follows (in thousands, except percentages):
Increase
September 30,
September 30,
from prior year
2024
2023
$
%
Three months ended
$
21,588
$
12,885
$
8,703
67.5
%
Nine months ended
$
51,680
$
41,276
$
10,404
25.2
%
The increase in general and administrative expenses in the three and nine months ended September 30, 2024 compared to the three and nine months ended September 30, 2023 was primarily attributable to a $5.0 million legal settlement and associated legal fees related to certain specific legal matters, as well as increased employee costs.
We believe that our general and administrative expenses in 2024 will increase compared to our 2023 levels primarily due to higher legal fees, settlement expense, employee costs, and as a result of inflation.
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Amortization of Acquired Intangible Assets included in Operating expenses. Amortization of acquired intangible assets included in Operating expenses ("Opex Amortization") for the three and nine months ended September 30, 2024 and 2023 was as follows (in thousands, except percentages):
Decrease
September 30,
September 30,
from prior year
2024
2023
$
%
Three months ended
$
6,457
$
7,216
$
(759)
(10.5)
%
Nine months ended
$
19,671
$
21,740
$
(2,069)
(9.5)
%
Opex Amortization was lower for the three and nine months ended September 30, 2024 compared to the three and nine months ended September 30, 2023. We record our amortization in relation to expected future cash flows rather than on a straight-line basis. Accordingly, such expense may vary from one period to the next.
Acquisition-, Disposal- and Integration-Related. Acquisition-, disposal- and integration-related expenses include those expenses related to acquisitions that we would otherwise not have incurred. Acquisition- and disposal-related expenses include professional and services fees, such as legal, audit, consulting, paying agent and other fees. Integration-related expenses represent incremental costs related to combining our systems and processes with those of acquired businesses, such as third-party consulting and other third-party services.
We recorded no such expenses in the three and nine months ended September 30, 2024 compared to $0.8 million and $3.0 million of such expenses recorded in the three and nine months ended September 30, 2023, respectively. These costs were related to integration following the Company’s acquisition of ECI and included license fees for systems in the process of being retired.
Restructuring and Related. We have been committed to streamlining our operations and reducing operating costs by closing and consolidating certain facilities and reducing our worldwide workforce. Please see the additional discussion of our restructuring initiatives in the "Restructuring and Cost Reduction Initiatives" section of the Overview of this MD&A.
We recorded restructuring and related expense of $3.8 million and $2.7 million in the three months ended September 30, 2024 and 2023, respectively, and $8.8 million and $13.9 million in the nine months ended September 30, 2024 and 2023, respectively. Although we have eliminated positions as part of our restructuring initiatives, we continue to hire in certain areas that we believe are important to our future growth.
Interest Expense, Net. Interest expense and interest income for the three and nine months ended September 30, 2024 and 2023 were as follows (in thousands, except percentages):
Increase/(decrease)
Three months ended
from prior year
September 30, 2024
September 30, 2023
$
%
Interest income
$
67
$
157
$
(90)
(57.0)
%
Interest expense
(12,019)
(7,300)
$
4,719
64.7
%
Interest expense, net
$
(11,952)
$
(7,143)
$
4,809
67.3
%
Increase/(decrease)
Nine months ended
from prior year
September 30, 2024
September 30, 2023
$
%
Interest income
$
221
$
273
$
(52)
(19.0)
%
Interest expense
(22,039)
(20,604)
$
1,435
7.0
%
Interest expense, net
$
(21,818)
$
(20,331)
$
1,487
7.3
%
Our interest income was nominal in 2024 and 2023. Our interest expense in the three and nine months ended September 30, 2024 and 2023 primarily represents interest, amortization of debt issuance costs and original issue discount, and the amortization of gains in accumulated other comprehensive (loss) income from the sales of our interest
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rate swap. Interest expense in the three months ended September 30, 2024 was higher than the three months ended September 30, 2023 primarily due to higher margins under our 2024 Term Loan compared to our 2020 Term Loan, both as defined below. Interest expense in the nine months ended September 30, 2024 was higher than the nine months ended September 30, 2023 primarily due to higher margins under our 2024 Term Loan compared to our 2020 Term Loan, and higher interest in 2024 due to our interest rate swap no longer being in place, partially offset by write offs related to the refinancing of the 2020 Credit Facility with a portion of the proceeds from the 2024 Credit Facility on June 21, 2024. The write offs related to the refinancing consisted of the remaining unamortized gains in accumulated other comprehensive (loss) income from the sales of our interest rate swap totaling $4.9 million, partially offset by the write off of debt issuance costs from the 2020 Credit Facility totaling $2.0 million. Our interest expense for the nine months ended September 30, 2023 benefited from our interest rate swap that fixed our interest rate at 0.904% and was sold in March 2023. See Note 10 to our condensed consolidated financial statements for a discussion of the sale of our interest rate swap.
Other (Expense) Income, Net . We recorded other income, net of $1.1 million, and other expense, net of $2.6 million in the three months ended September 30, 2024 and 2023, respectively. We recorded other expense, net of $16.0 million and of $0.5 million in the nine months ended September 30, 2024 and 2023, respectively. Other income in the three months ended September 30, 2024 was primarily comprised of the fair value adjustment related to our Warrant liability and foreign currency exchange gains. Other expense in the three months ended September 30, 2023 was primarily attributable to foreign currency exchange losses. Other expense in the nine months ended September 30, 2024 was primarily comprised of $6.6 million of fair value adjustments, $2.7 million of accrued dividends, and the $1.8 million call premium on our Preferred Stock that we redeemed on June 25, 2024, and foreign currency exchange losses of $1.4 million. Other expense in the nine months ended September 30, 2023 was primarily comprised of foreign currency exchange losses of $1.2 million, the $1.6 million fair value adjustment of our Preferred Stock and Warrants, including dividends on the Preferred Stock, and $3.5 million of costs incurred in the Private Placement, partially offset by the gain of $7.3 million recognized from Accumulated other comprehensive income in connection with the sale of our interest rate swap.
Income Taxes. We recorded income tax provisions of $1.6 million and $4.6 million in the three months ended September 30, 2024 and 2023, respectively, and $6.5 million and $11.5 million in the nine months ended September 30, 2024 and 2023, respectively. These amounts reflect our estimates of the effective rates expected to be applicable for the respective full fiscal years, adjusted for any discrete events, which are recorded in the period that they occur. These estimates are reevaluated each quarter based on our estimated tax rate for the full year. The estimated effective tax rate includes the impact of valuation allowances in various jurisdictions. We intend to continue to maintain a valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of the respective allowances.
The Organization for Economic Cooperation and Development (the "OECD") Pillar 2 global minimum tax rules are intended to apply for tax years beginning in 2024. On February 1, 2023, the FASB staff noted that they believe that the Pillar 2 tax would be an alternative minimum tax and therefore deferred tax assets would not need to be recognized related to this parallel taxing system. On February 2, 2023, the OECD issued administrative guidance providing transition and safe harbor rules around the implementation of the Pillar 2 global minimum tax. Under an additional transitional safe harbor released July 17, 2023, the undertaxed profits rule top-up tax will not be applied by any constituent entity’s jurisdiction of residence with respect to income earned by a company’s ultimate parent entity in its jurisdiction of residence, if the ultimate parent entity’s jurisdiction has a corporate tax rate of at least 20%. This transition safe harbor will apply to fiscal years beginning on or before December 31, 2025 and ending before December 31, 2026. We are closely monitoring developments and evaluating the impacts these new rules will have on our tax rate, including eligibility to qualify for these safe harbor rules and do not expect Pillar 2 to have a significant impact on our financial statements.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial position, changes in financial position, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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Liquidity and Capital Resources
Our condensed consolidated statements of cash flows are summarized as follows (in thousands):
Nine months ended
September 30,
September 30,
2024
2023
Change
Net loss
$
(60,599)
$
(73,285)
$
12,686
Adjustments to reconcile net loss to cash flows used in operating activities:
48,393
61,754
(13,361)
Changes in operating assets and liabilities
679
8,479
(7,800)
Net cash used in operating activities
$
(11,527)
$
(3,052)
$
(8,475)
Net cash used in investing activities
$
(14,890)
$
(6,620)
$
(8,270)
Net cash provided by (used in) financing activities
$
40,177
$
(32,163)
$
72,340
We had cash, cash equivalents, and restricted cash aggregating $40 million and $27 million at September 30, 2024 and December 31, 2023, respectively. We had cash held by our non-U.S. subsidiaries aggregating $15 million and $16 million at September 30, 2024 and December 31, 2023, respectively. If we elect to repatriate all of the funds held by our non-U.S. subsidiaries as of September 30, 2024, we do not believe that the amounts of potential withholding taxes that would arise from the repatriation would have a material effect on our liquidity.
On June 21, 2024, we entered into a Senior Secured Credit Facilities Agreement (the “2024 Credit Facility” and “2024 Credit Agreement”) as guarantor, with our wholly-owned subsidiary, Ribbon Communications Operating Company, Inc., as the borrower (“Borrower”), HPS Investment Partners, LLC ("HPS"), as administrative agent, and HPS and WhiteHorse Capital Management, LLC ("WhiteHorse" and, together with HPS, the "Lenders"), pursuant to which the Lenders provided us with a $385 million senior secured credit facility comprised of (i) a $350 million term loan (the “2024 Term Loan”) and (ii) a $35 million revolving credit facility (the “2024 Revolver”), including a $20 million sublimit for letters of credit. The proceeds received from the 2024 Term Loan were used to (a) repay 100% of the amounts outstanding under the 2020 Credit Facility, (b) redeem in full the Preferred Stock and (c) pay fees and expenses related to the 2024 Credit Facility. Excess proceeds are being used by us for working capital and other general corporate purposes.
The 2024 Term Loan and the 2024 Revolver bear interest, at the Borrower’s option, at either the Alternate Base Rate (“ABR”) or Term Secured Overnight Financing Rate ("SOFR") with an Applicable Margin for each (all as defined in the 2024 Credit Agreement). Margins for the first six months are 5.25% per annum for ABR Loans and 6.25% per annum for SOFR Loans. Thereafter, margins vary based on our Consolidated Net Leverage Ratio, ranging from 4.75% to 5.25% per annum for ABR Loans and 5.75% to 6.25% per annum for SOFR Loans. The 2024 Term Loan and the 2024 Revolver will both mature on June 21, 2029. The 2024 Term Loan is being repaid in equal quarterly installments: approximately $0.9 million beginning with the third quarter of 2024 through the second quarter of 2025; approximately $2.2 million beginning with the third quarter of 2025 and ending with the second quarter of 2027; and approximately $4.4 million quarterly thereafter, with the remaining principal balance of approximately $298.4 million due on the maturity date of June 21, 2029. In connection with the establishment of the 2024 Credit Facility, $7.7 million of original issue discount was withheld by the Lenders and we incurred $6.1 million of debt issuance costs for a total of $13.8 million that is being amortized to Interest expense, net over the term of the agreement.
Our previous credit facility was the Senior Secured Credit Facilities Credit Agreement (as amended, the "2020 Credit Facility"), which we entered into on March 3, 2020, by and among us, as a guarantor, Ribbon Communications Operating Company, Inc., as the borrower (the "Borrower"), Citizens Bank, N.A., Santander Bank, N.A., and others as lenders, ("2020 Credit Facility Lenders"). For additional details regarding the terms of the 2024 Credit Facility and 2020 Credit Facility, see Note 9 to our condensed consolidated financial statements.
On March 24, 2023, we entered into the Sixth Amendment to the 2020 Credit Facility (the “Sixth Amendment”) effective March 30, 2023. The Sixth Amendment, among other things, increased the Maximum Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility), with the first, second and third quarters of 2023 increasing to
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4.50:1.00. In the fourth quarter of 2023 and the first quarter of 2024, the Maximum Consolidated Net Leverage Ratio declined to 4.25:1.00 and 4.00:1.00, respectively. Also, the Sixth Amendment reduced the minimum Consolidated Fixed Charge Coverage Ratio (as defined in the 2020 Credit Facility) to 1.10:1.00 through the first quarter of 2024. The Sixth Amendment reduced the maximum borrowings allowed under the 2020 Revolving Credit Facility from $100 million to $75 million and the sublimit available for letters of credit was reduced from $30 million to $20 million. In addition, the Sixth Amendment replaced LIBOR with the Secured Overnight Financing Rate ("SOFR") as the alternative rate that may be used by the Company for calculating interest owed under the 2020 Credit Facility with the margin now fixed at 4.5%. In conjunction with the Sixth Amendment, we made a $75 million prepayment that was applied to the final payment due upon maturity in March 2025. The $75 million prepayment was almost entirely funded with the net proceeds from the Private Placement and the sales of our interest rate swap. Debt issuance costs associated with the Sixth Amendment totaled $1.7 million and were being amortized on a straight-line basis over the remaining life of the 2020 Credit Facility to Interest expense, net and were written off in conjunction with the early extinguishment of the 2020 Credit Facility on June 21, 2024.
The 2020 Credit Facility, as amended, allowed us to incur junior secured or unsecured debt in an amount no less than $50 million, subject to certain conditions, including the requirement that 50% of the aggregate amount of such incurred debt (net of certain costs, fees and other amounts) must be applied to prepay the 2020 Credit Facility and compliance with certain leverage ratio-based covenant exceptions. Quarterly principal payments were required on the 2020 Term Loan aggregating approximately $5.0 million per quarter through March 31, 2024, and if the refinancing had not occurred, $10.0 million would have been required in each of the three quarters thereafter, with the remaining and final payment due on the maturity date in March 2025.
At September 30, 2024, we had an outstanding balance under the 2024 Term Loan of $349.1 million at an average interest rate of 11.2%, with no revolver balance and no letters of credit outstanding under our 2024 Credit Facility. Our interest rates under our 2020 Term Loan for the nine months ended September 30, 2023 benefited from a hedge instrument that was in place, specifically a fixed rate swap, which was sold in March 2023 (see Note 10). We were in compliance with all covenants of the 2024 Credit Facility and 2020 Credit Facility at both September 30, 2024 and December 31, 2023, respectively, including the Consolidated Net Leverage Ratio calculation under the 2020 Credit Facility that considered our debt to include Preferred Stock.
We use letters of credit, bank guarantees and surety bonds in the course of our business. At September 30, 2024, we had $10.4 million of letters of credit, bank guarantees, and surety bonds outstanding (collectively, "Guarantees") under various uncommitted facilities and no letters of credit outstanding under the 2024 Credit Facility. At December 31, 2023, we had Guarantees aggregating $7.9 million, comprised of $2.7 million of letters of credit under the 2020 Credit Facility described above and $5.2 million of Other Guarantees. At September 30, 2024 and December 31, 2023, we had cash collateral of $2.9 million and $0.1 million, respectively, supporting the Guarantees, which are reported in Restricted cash in our condensed consolidated balance sheets.
We are exposed to financial market risk related to foreign currency fluctuations and changes in interest rates. These exposures are actively monitored by management. To manage the volatility related to the exposure to changes in interest rates, we may enter into a derivative financial instrument. Management’s objective has been to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in interest rates. Our policies and practices are to use derivative financial instruments only to the extent necessary to manage exposures. We do not hold or issue derivative financial instruments for trading or speculative purposes.
As a result of exposure to interest rate movements, during March 2020, we entered into an interest rate swap arrangement, which effectively converted our $400 million term loan with its variable interest rate based upon one-month LIBOR to an aggregate fixed rate of 0.904%, plus a leverage-based margin as defined in the 2020 Credit Facility. On July 22, 2022, we sold $30 million of the notional amount of our interest rate swap back to our counterparty for $1.5 million, reducing the notional amount of this swap to $370 million. On August 16, 2022, we sold another $30 million of the notional amount of our interest rate swap back to our counterparty for $1.6 million, reducing the notional amount to $340 million, which approximated the term loan debt then outstanding. The gain in accumulated other comprehensive (loss) income related to the $60 million notional amount sold of $3.1 million was being released into earnings on a straight line basis over the remaining term of the 2020 Credit Facility as a decrease to interest
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expense, the amortization of which totaled $0.4 million and $0.7 million for the nine months ended September 30, 2024 and 2023, respectively. The remaining unamortized gain in accumulated other comprehensive (loss) income of approximately $0.5 million was written off to interest expense in conjunction with the refinancing of the 2020 Credit Facility on June 21, 2024. On March 24, 2023, we received $9.4 million, consisting of $0.4 million of interest and $9.0 million for the sale of $170 million of its $340 million notional amount interest rate swap back to our counterparty, reducing the notional amount to $170 million. On March 27, 2023, we received $9.8 million, consisting of $0.4 million of interest and $9.4 million for the sale of the remaining $170 million of our interest rate swap back to our counterparty. The portion of the gain in accumulated other comprehensive (loss) income related to the term loan debt prepaid on the date of the final sale of our swap totaled $7.3 million and was released into earnings immediately as Other expense, net. The portion of the gain in accumulated other comprehensive (loss) income related to our remaining term loan debt balance totaled $12.0 million and was being released into earnings on a straight line basis over the remaining term of the 2020 Credit Facility as a decrease to interest expense beginning in the second quarter of 2023, the amortization of which was $3.0 million and $3.1 million for the nine months ended September 30, 2024 and 2023, respectively. The remaining unamortized gain in accumulated other comprehensive (loss) income of $4.4 million was written off to interest expense in conjunction with the refinancing of the 2020 Credit Facility on June 21, 2024.
Our objectives in using interest rate derivatives have been to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we have used an interest rate swap as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of an agreement without exchange of the underlying notional amount.
The effective portion of changes in the fair value of designated derivatives that qualify as cash flow hedges is recorded in Accumulated other comprehensive income in the condensed consolidated balance sheet and is subsequently reclassified into earnings in the period that the hedged forecasted transactions affect earnings. During the nine months ended September 30, 2023, such a derivative was used to hedge the variable cash flows associated with the outstanding borrowings under the 2020 Credit Facility and the Company accounted for this derivative as an effective hedge until the final portion of the swap was sold on March 27, 2023. Any ineffective portion of the change in the fair value of the derivative would be recognized directly in earnings. However, we recorded no hedge ineffectiveness over the life of our swap. During the nine months ended September 30, 2023, we recorded $7.3 million of Other expense, net due to the sale of our swap.
Cash Flows from Operating Activities
Our primary source of cash from operating activities has been from cash collections from our customers. We expect cash flows from operating activities to be affected by increases and decreases in sales volumes and timing of collections, and by purchases and shipments of inventory. Our primary uses of cash for operating activities have been for personnel costs and investment in our research and development and in our sales and marketing, and general and administrative departments.
Our operating activities used cash of $11.5 million in the nine months ended September 30, 2024, primarily as a result of lower deferred revenue, accounts payable, and inventory and our net loss adjusted for non-cash expenses. These amounts were partially offset by lower accounts receivable and other operating assets, and higher accrued expenses and other long-term liabilities. Our net loss is adjusted for non-cash expenses such as amortization of intangible assets, stock-based compensation, and the increase in the fair value of our Preferred Stock liability, partially offset by a $6.7 million one time payment of accumulated dividends as a result of our redemption of our Preferred Stock liability on June 25, 2024 and $8.2 million adjustment for amortization of an accumulated other comprehensive gain related to our interest rate swap and $14.6 million for deferred income tax expense. Higher revenue in our IP Optical Networks segment and lower operating expenses company-wide due to our various cost saving initiatives, including lower employee and facilities expenses, continue to positively affect our operating cash flow.
Cash used in operating activities in the nine months ended September 30, 2023 of $3.1 million was primarily a result of lower accounts payable, accrued expenses and other long-term liabilities, our net loss adjusted for non-cash expenses, and lower deferred revenue and higher inventory, partially offset by lower accounts receivable and other
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operating assets. Higher product revenue in our IP Optical Networks segment and lower operating expenses company-wide due to our various cost saving initiatives, including lower employee and facilities expenses, all positively affected our operating cash flow in 2023.
Cash Flows from Investing Activities
Our investing activities used $14.9 million and $6.6 million of cash to purchase property and equipment in the nine months ended September 30, 2024 and 2023, respectively. The increase is primarily due to the build out of a new facility in Israel.
Cash Flows from Financing Activities
Our financing activities provided $40.2 million of cash in the nine months ended September 30, 2024. We received $342.3 million of proceeds, net of $7.7 million of original issue discount, from the issuance of term debt under the 2024 Credit Facility that was established on June 21, 2024 to refinance the 2020 Credit Facility. Also, we had $44.1 million of both borrowings and principal payments under the 2020 Revolving Credit Facility. In conjunction with the establishment of the 2024 Credit Facility, we repaid the 2020 Term Debt amounting to $235.4 million, redeemed all of the outstanding Preferred Stock totaling $56.9 million, and paid $6.0 million in debt issuance costs. Also, we paid $0.9 million in principal payments on our 2024 Term Debt. In addition, we paid $3.0 million of tax obligations related to the vesting of stock awards and units.
Our financing activities used $32.2 million of cash in the nine months ended September 30, 2023, primarily due to $90.0 million of principal payments on our term debt, including a $75.0 million prepayment in connection with the Sixth Amendment to the 2020 Credit Facility, $1.6 million of debt issuance costs also paid in connection with the Sixth Amendment, and $3.9 million for the payment of tax obligations related to the vesting of stock awards and units. In addition, we received $53.4 million of proceeds from the issuance of the Preferred Stock and Warrants in the Private Placement and had $10.0 million of net borrowings under our 2020 Revolving Credit Facility.
The rate at which we consume cash is dependent upon the cash needs of our future operations, including our contractual obligations at September 30, 2024, primarily comprised of our debt principal and interest obligations as described above, and our operating lease and purchase obligations. Our operating lease obligations totaled $52.6 million at September 30, 2024, with payments to be made aggregating $4.6 million in the remainder of 2024, $11.1 million in 2025, $9.3 million in 2026 and $27.6 million thereafter. Estimated payments for purchase obligations for the full year 2024 total approximately $101 million. We anticipate devoting substantial capital resources to continue our R&D efforts, to maintain our sales, support and marketing, and for other general corporate activities. We believe that our financial resources, along with managing discretionary expenses, will allow us to manage the ongoing impact of inflation on our business operations. Looking ahead, we have developed contingency plans to reduce costs further if the situation deteriorates.
Based on our current expectations, we believe that our current cash balances and available borrowings under the 2024 Credit Facility will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least twelve months from the date of issuance of these financial statements.
Recent Accounting Pronouncements
In December 2023, the Financial Accounting Standards Board (the "FASB") issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), which increases the disclosure requirements around rate reconciliation information and certain types of income taxes companies are required to pay. ASU 2023-09 will be effective for us beginning with our 2025 annual financial statements, with early adoption permitted. We expect the adoption of the standard will require certain additional income tax disclosures.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which improves reportable segment disclosure requirements, including enhancement of the disclosures of significant segment expenses and interim disclosure requirements, to enable investors
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to better understand an entity's overall performance and assess potential future cash flows. ASU 2023-07 will be effective for us beginning with our 2024 annual financial statements and interim financial statements thereafter and will be applied retrospectively for all periods presented in the financial statements. Our adoption of this standard will require certain additional segment disclosures.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. There have been no material changes in market risk from the information provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk of our Annual Report on Form 10-K, for the year ended December 31, 2023.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.