Ciena Corporation — Form 10-K Summary
Reporting period: Fiscal year ended October 31, 2013; fiscal 2013 had 52 weeks. The filing also reports fourth-quarter results. Ciena sells communications-network equipment, software and services, with a focus on converged packet-optical networks. Its four reporting segments are Converged Packet Optical, Packet Networking, Optical Transport, and Software and Services.
Financial performance
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $2.083 billion | $1.834 billion |
| Gross profit / margin | $865.2 million / 41.5% | $724.2 million / 39.5% |
| Operating income (loss) | $(1.8) million | $(79.8) million |
| Net income (loss) | $(85.4) million | $(144.0) million |
| Diluted loss per share | $(0.83) | $(1.45) |
| Cash from operating activities | $44.7 million | $107.1 million |
- Revenue increased 13.6% year over year. Product revenue rose 15.5% to $1.680 billion; services revenue rose 6.2% to $402.4 million.
- Gross margin improved, primarily from a more favorable product mix, stronger packet-platform and software sales, lower warranty costs, and supply-chain efficiencies.
- Operating expenses increased 7.8% to $867.0 million, including higher research and development and selling and marketing costs. The net loss included a $28.6 million non-cash loss on convertible-note exchanges and $44.0 million of interest expense.
- Operating cash flow was positive, but lower than in fiscal 2012. Net loss adjusted for non-cash charges provided $161.4 million; working-capital changes used approximately $116.7 million, including a $145.4 million use from higher receivables. Days sales outstanding increased from 69 to 84.
Fourth quarter
Revenue was $583.4 million, up 8.4% sequentially and approximately 25% from fourth-quarter fiscal 2012. Operating loss was $0.4 million and net loss was $9.8 million, or $0.09 per share; the prior-year quarter reported a $38.8 million net loss. Gross margin fell to 39.7% from 42.4% in the prior quarter, reflecting lower-margin common equipment in large international network deployments. Operating expenses increased to $232.1 million. Cash from operations was $3.6 million, with working-capital changes using $41.9 million.
Liquidity, debt and other key metrics
- At year-end, cash and cash equivalents were $346.5 million; short- and long-term investments totaled $140.0 million. Combined cash and investments were $486.5 million, down $206.0 million from fiscal 2012.
- Total assets were $1.803 billion and total liabilities were $1.885 billion; stockholders’ deficit was $82.7 million. Current assets were $1.396 billion and current liabilities were $615.1 million.
- Convertible notes had a carrying value of $1.212 billion; aggregate principal including accretion was approximately $1.2 billion. Ciena repaid $216.2 million of 0.25% notes at maturity and exchanged $187.5 million of 2015 notes for 2020 notes. The $150 million asset-based revolving credit facility had no borrowings outstanding; $43.6 million of letters of credit were supported by it.
- Backlog increased to approximately $1.0 billion from $902.0 million. Management cautions that backlog is not a reliable indicator of revenue in any specific period and includes cancellable or changeable orders.
Changes versus the prior year
- Converged Packet Optical revenue rose 24.8% to $1.187 billion, led by the 6500 platform; Packet Networking grew 72.8% to $222.9 million. Software and Services increased 9.6% to $438.6 million.
- Optical Transport revenue fell 33.9% to $233.8 million as customers shifted from stand-alone legacy transport platforms toward converged architectures.
- U.S. revenue rose 25.2% to $1.217 billion; international revenue was nearly flat at $865.1 million. AT&T represented 17.9% of fiscal 2013 revenue, versus 13.5% in fiscal 2012; the ten largest customers accounted for 59.4%.
- Cash and investments declined from $692.5 million to $486.5 million, principally reflecting the $216.2 million note repayment and operating, investing and other cash uses.
Outlook, risks and unusual items
- Management said market conditions improved during fiscal 2013, particularly among large North American service providers, but noted that the recovery and its longer-term effect remained uncertain. It expects fiscal 2014 operating expenses to increase to support growth and research and development.
- Strategy centers on converged, programmable network architectures, software-defined control, packet capabilities and higher-speed optical transport. Execution depends on customer adoption, timely product development, and successful cost and supply-chain initiatives.
- Key risks include intense competition and pricing pressure; reliance on a small number of large service-provider customers; volatile customer capital spending; component and contract-manufacturer dependencies; inventory forecasting and obsolescence; product performance and cybersecurity; foreign-exchange exposure; and substantial convertible debt.
- Liquidity and debt considerations include the $200 million minimum unrestricted-cash requirement under the credit agreement and early maturity of the facility on December 15, 2014 if 2015 notes remained outstanding then. Contractual obligations totaled $1.711 billion, including $1.255 billion of principal due at maturity and $150.6 million of note interest.
- Ciena settled Cheetah Omni patent litigation for $1.5 million and a license. The Graywire matter remained stayed; the company said it did not expect ordinary-course legal matters to materially affect results, financial position or cash flows.
- The company recorded a CAD $5.5 million benefit from an Ontario development grant in fiscal 2013; grant funding is conditional on investment, employment and project milestones. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether growth in Converged Packet Optical and Packet Networking can offset continuing declines in Optical Transport, and whether improved demand persists.
- Receivables collection and cash conversion, given the increase in days sales outstanding and the large working-capital use.
- Debt maturities, interest burden, conversion terms and compliance with the credit facility’s liquidity and covenant requirements.
- Customer concentration, especially AT&T exposure, and the sustainability of large international deployments and their margins.
- Inventory reserves, warranty claims, supply-chain transitions, and progress against product-development and operating-expense plans.