Ciena Corporation (CIENA) — Q2 FY2017 Form 10-Q
Reporting period: Quarter and six months ended April 30, 2017. Fiscal Q2 comparisons are year over year unless otherwise noted. Amounts are in U.S. dollars.
Business context and results
Ciena sells communications networking equipment, software and services. Networking Platforms remains the largest business; management is investing in its Blue Planet software platform and pursuing broader customer and geographic diversification.
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Revenue | $707.0m | $640.7m | $1,328.5m | $1,213.8m |
| Gross profit / margin | $318.2m / 45.0% | $283.1m / 44.2% | $592.0m / 44.6% | $534.5m / 44.0% |
| Operating income | $57.8m | $28.2m | $76.9m | $39.5m |
| Net income | $38.0m | $14.0m | $41.9m | $2.5m |
| Diluted EPS | $0.25 | $0.10 | $0.29 | $0.02 |
| Operating cash flow | Not separately presented in the statements for the quarter | Not separately presented | $45.7m | $75.7m |
Q2 revenue rose 10.3% year over year and 13.8% sequentially. Products generated $584.6m and services $122.4m. Networking Platforms revenue grew 11.6% to $571.5m, led by Converged Packet Optical; Software and Software-Related Services increased 23.8% to $37.7m, while Global Services was essentially flat at $97.8m. APAC revenue increased 56.8% year over year, partly reflecting large projects in India; CALA declined 41.3%. AT&T contributed 15.2% of Q2 revenue.
Financial position, cash flow and debt
- At April 30, cash and cash equivalents were $628.6m; short- and long-term investments totaled $364.6m. Combined cash and investments were $993.3m, down $149.8m from October 31, 2016. Current assets were $1.942bn and current liabilities $806.8m.
- Six-month operating cash flow of $45.7m was below the prior-year $75.7m. Inventory used $95.6m of cash; inventory was $287.1m, up from $211.3m at fiscal year-end. Capital expenditures and related equipment/IP payments were $60.3m.
- Debt carrying amounts were approximately $1.118bn: $725.0m of convertible notes and $393.4m of term loans. The $250m ABL facility had no borrowings outstanding; $72.4m of letters of credit were supported by it.
- In January, Ciena refinanced its 2019 and 2021 term loans into a $400m term loan due January 2022, reducing principal by about $93m and using $93.6m of cash in the transaction. The remaining $185.3m principal on 0.875% convertible notes matured June 15, 2017; management expected to repay any amount remaining at maturity in cash.
Changes, outlook and notable items
Revenue growth and operating income improved substantially year over year. Q2 product gross margin eased slightly year over year, while service margin improved; consolidated gross margin increased. Management attributed sequential gross-margin improvement to product cost reductions and lower warranty expense, partly offset by price erosion and inventory provisions.
Management expects fiscal 2017 operating expenses to increase from fiscal 2016, citing R&D, enterprise-resource-planning investment and facility transitions. It believes available cash, investments, operating cash flow and the ABL facility will meet working-capital, capital-expenditure, note-repayment and other needs for at least 12 months. No specific revenue or EPS guidance is provided in the supplied filing text.
Notable items include $19.6m of six-month excess and obsolete inventory provisions, primarily tied to reduced demand forecasts for certain Networking Platforms products; $6.7m of restructuring costs, including Ottawa facility transition costs and a reduction of about 50 employees; and $2.9m of Q2 debt-modification expense. The new WaveLogic component distribution channel announced with Lumentum, NeoPhotonics and Oclaro generated no Q2 revenue. Management identifies customer concentration, price pressure, project timing, supply-chain dependence, inventory forecasting, currency movements, competition and execution of facility transitions as risks.
A Delaware Cyan acquisition-related shareholder case was dismissed with prejudice on May 11, 2017. A separate Cyan IPO securities class action remained pending; Ciena said it considers the case without merit and intends to defend it. The filing says management did not expect ordinary-course legal matters to have a material effect.
Key facts for investors to verify
- Whether the June 2017 convertible-note maturity was repaid in cash, converted, or otherwise settled, and the resulting liquidity and dilution effects.
- Whether elevated finished-goods and deferred-cost inventory converts to accepted customer deliveries, and whether further inventory provisions are needed.
- Whether growth in APAC and software can continue while CALA and legacy Optical Transport remain weak, and whether customer concentration changes.
- Progress and costs of Ottawa and India facility transitions, and actual fiscal 2017 operating-expense trends versus management’s expectation.
- Adoption, economics and potential channel conflict associated with Blue Planet and the WaveLogic component distribution relationships.