Business context and reporting period
Ciena Corporation provides networking hardware, software and services to network operators. This unaudited Form 10-Q covers fiscal Q3 and the nine months ended July 31, 2021; comparisons are with the periods ended August 1, 2020.
Financial performance and position
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $988.1 million | $976.7 million | $2,579.2 million | $2,703.7 million |
| Gross profit / margin | $474.6 million / 48.0% | $464.7 million / 47.6% | $1,244.9 million / 48.3% | $1,248.5 million / 46.2% |
| Operating income | $148.5 million | $188.0 million | $357.9 million | $393.5 million |
| Net income | $238.2 million | $142.3 million | $396.7 million | $296.3 million |
| Diluted EPS | $1.52 | $0.91 | $2.53 | $1.90 |
| Operating cash flow | Not separately stated | Not separately stated | $286.8 million | $306.4 million |
Q3 product revenue declined 1.8% year over year to $804.4 million, while services revenue rose 16.5% to $183.7 million. In the first nine months, product revenue fell 7.8% and services revenue increased 10.9%. Product gross margin improved, but services gross margin fell to 49.2% from 51.9% in Q3 and to 48.9% from 50.9% year to date.
At July 31, cash and cash equivalents were $1.230 billion, with short- and long-term investments of $242.9 million; combined cash and investments totaled $1.473 billion. Total debt carrying value was approximately $678.8 million, primarily the term loan due September 2025. The $300 million ABL facility had no borrowings outstanding; $84.6 million of letters of credit were supported by it. Total assets were $4.656 billion and total liabilities $1.732 billion.
Material changes versus comparable periods
- Q3 revenue rose 1.2%, but operating income decreased 21.0%; operating expenses increased 17.9%, including higher R&D, selling and marketing costs.
- Year-to-date revenue decreased 4.6%, and operating income fell 9.0%. Networking Platforms revenue declined 8.4%, partly offset by growth in Platform Software and Services, Blue Planet and Global Services.
- Reported net income rose despite lower operating income, primarily because of a one-time $124.2 million deferred-tax benefit from an internal transfer of certain non-U.S. intangible assets.
- Year-to-date operating cash flow declined to $286.8 million from $306.4 million. Working capital used $165.1 million, including $163.1 million from higher receivables and $38.8 million from inventory growth. Cash and investments nevertheless increased $151.8 million from October 31, 2020.
Outlook, commentary, risks and unusual items
- Management reported stronger orders in Q2 and Q3 after a period of customer spending constraints, but cautioned that some orders may reflect catch-up purchasing or customer efforts to secure supply.
- Semiconductor and other component shortages, longer lead times and higher costs worsened in Q3. Management expects constraints to persist through at least the first half of fiscal 2022, potentially affecting product availability, costs, cash use, growth and margins. The company has increased inventory and made or extended some non-cancellable supplier commitments.
- Management expects elevated short-term gross margins to decline as business mix normalizes and supply constraints affect product costs. COVID-related site access, project delays, shipping disruption and travel restrictions also continue to affect fulfillment and sales activities.
- Net income benefited from the $124.2 million tax item. Year-to-date results also included $41.3 million of Canadian Emergency Wage Subsidy benefits, including $35.2 million related to fiscal 2020 wages; management does not expect a similar proportional benefit in future periods.
- Remaining performance obligations were $1.4 billion at July 31, with approximately 85% expected to be recognized as revenue within 12 months. Q3 revenue was concentrated: Verizon, a web-scale provider and AT&T together represented approximately $370.8 million.
- Subsequent events: Ciena agreed on August 31 to acquire AT&T’s Vyatta virtual routing and switching technology. It repurchased a further $10.0 million of shares through September 3. Management reported no material expected impact from ordinary-course litigation or tax contingencies.
Important facts for investors to verify
- Assess underlying earnings excluding the $124.2 million discrete tax benefit and the temporary wage subsidy benefits.
- Track whether component shortages, supplier commitments and higher inventory translate into delivery delays, additional cash needs or margin pressure.
- Monitor revenue recovery in Networking Platforms and the durability of growth in software and services, including customer and regional concentration.
- Review cash conversion and working-capital trends, particularly receivables, inventory, and the reported 102 days sales outstanding.
- Confirm the timing, terms and integration effects of the Vyatta technology acquisition and the pace of share repurchases.