Ciena Corporation — Q1 FY2014 Form 10-Q
Reporting period: Three months ended January 31, 2014. Unaudited interim results; comparisons are with the quarter ended January 31, 2013 unless otherwise noted. Ciena supplies communications networking equipment, software and services.
Financial results and liquidity
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Revenue | $533.7 million | $453.1 million |
| Gross profit / margin | $225.9 million / 42.3% | $195.8 million / 43.2% |
| Operating income (loss) | $3.4 million | $(5.6) million |
| Net loss | $(15.9) million | $(47.3) million |
| Basic and diluted loss per share | $(0.15) | $(0.47) |
| Cash used in operating activities | $37.2 million | $45.7 million |
Revenue rose 17.8% year over year, led by Converged Packet Optical. Gross margin declined year over year, despite management reporting a sequential improvement to 42.3% from 39.7% in Q4 FY2013. The quarterly net loss included a $6.0 million loss in interest and other income, chiefly foreign-exchange losses; Q1 FY2013 included a non-cash $28.6 million loss on extinguishment of debt.
Cash and cash equivalents were $330.1 million at January 31, 2014. Short- and long-term investments totaled $110.0 million, bringing cash and investments to $440.1 million, down $46.4 million from October 31, 2013. Operating cash use reflected $78.5 million of working-capital outflows, including increased receivables and inventory. Days sales outstanding rose to 88 from 78 a year earlier.
Total liabilities were $1.887 billion, including $1.213 billion carrying value of convertible notes. Ciena reported no borrowings under its $150 million revolving credit facility; $51.4 million of letters of credit were supported by it. Current assets were $1.417 billion and current liabilities $616.2 million. Stockholders’ deficit was $86.9 million.
Material changes and segment performance
- Converged Packet Optical revenue increased 38.9% to $333.4 million; segment profit rose to $78.7 million from $47.1 million.
- Packet Networking revenue increased 12.8% to $51.7 million, but segment profit fell to $0.4 million from $5.1 million.
- Optical Transport revenue declined 30.4% to $40.1 million, reflecting the shift from stand-alone transport platforms toward converged architectures; segment profit fell to $15.7 million from $20.6 million.
- Software and Services revenue was $108.5 million, down 1.1%; segment profit fell to $29.6 million from $33.9 million.
- U.S. revenue grew 20.1% to $317.5 million; international revenue grew 14.5% to $216.3 million. One customer represented 18.8% of quarterly revenue. Two customers together represented 24.5% of receivables at quarter-end.
Outlook, management commentary and risks
Management attributed the sequential revenue decline of 8.5% from Q4 FY2013 partly to normal first-quarter seasonality in customer procurement and network deployments. It expects operating expenses to increase in fiscal 2014 from fiscal 2013 levels to support business growth and research and development. The filing gives no specific revenue or earnings guidance. Management believes available cash, cash equivalents and investments will meet operating, capital expenditure and other liquidity needs for at least the next 12 months.
Management cited demand for high-capacity converged networks, particularly in North America, as a growth opportunity, while noting intense competition, pricing pressure and uncertain market conditions. Key risks include dependence on a small number of large service-provider customers, customer spending volatility, supplier and contract-manufacturer constraints, inventory obsolescence, foreign-exchange exposure, and substantial convertible-note obligations. Inventory increased to $284.1 million; the quarter included a $5.4 million obsolescence provision and an $8.0 million warranty provision.
Ciena disclosed an India tax assessment received in February 2014 relating to 2009, with possible exposure up to $3.5 million; it had accrued $0.4 million and had appealed. A patent lawsuit by Graywire remained stayed. The company said it did not expect ordinary-course legal matters to have a material effect. A conditional Ontario grant may be subject to recoupment if specified investment, employment or project milestones are not met.
Important facts for investors to verify
- Whether strong growth in Converged Packet Optical offsets continuing declines in Optical Transport and weakness in other segment profits.
- Whether receivables, inventory and working-capital usage normalize, and whether the finished-goods build supports shipments without further obsolescence charges.
- How foreign-exchange movements, warranty costs and competitive pricing affect margins and earnings.
- The company’s ability to manage approximately $1.2 billion of convertible-note carrying value, including the 2015 notes’ maturity and the related credit-facility early-maturity provision.
- The outcome of the India tax appeal and compliance with Ontario grant milestones.