Ciena Corporation — Q1 FY2017 Form 10-Q
Reporting period: Three months ended January 31, 2017. Results are unaudited and compared with the three months ended January 31, 2016, unless otherwise noted. Ciena provides networking equipment, software and services.
Financial results
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Revenue | $621.5 million | $573.1 million | +8.4% |
| Gross profit / margin | $273.8 million / 44.1% | $251.5 million / 43.9% | Margin +0.2 percentage points |
| Operating expenses | $254.7 million | $240.2 million | +6.0% |
| Operating income / margin | $19.1 million / 3.1% | $11.2 million / 2.0% | Improved |
| Net income (loss) | $3.9 million | $(11.5) million | Returned to profit |
| Diluted EPS | $0.03 | $(0.08) | Improved |
| Operating cash flow | $(26.3) million | $15.0 million | Cash use |
Product revenue rose 10.8% to $507.0 million; services revenue declined 0.9% to $114.5 million. Networking Platforms revenue increased 9.0%, Software and Software-Related Services rose 54.9%, and Global Services declined 6.1%. Regional growth was strongest in APAC (+59.1%); CALA revenue fell 19.8%.
Management attributed the improvement in product gross profit to higher software revenue, product cost reductions and lower warranty expense, partly offset by market-based price erosion. Services gross margin slipped to 46.8% from 47.0%, principally due to early-stage deployment costs. R&D expense rose 8.2%; G&A rose 15.2%. Restructuring expense was $2.4 million, including costs associated with a workforce reduction of approximately 50 employees.
Liquidity, cash flow and debt
At January 31, 2017, cash and cash equivalents were $693.9 million, short-term investments $250.1 million and long-term investments $109.9 million, totaling approximately $1.054 billion. The combined balance declined $89.2 million from October 31, 2016. Current assets were $2.00 billion and current liabilities $841.6 million.
Operating cash use of $26.3 million reflected an $88.9 million working-capital outflow, primarily a $78.7 million inventory increase, partly offset by $62.7 million of net income adjusted for non-cash charges. Capital expenditures were $25.7 million. Inventory was $284.6 million, up from $211.3 million at fiscal year-end; the company cited higher finished goods to meet delivery schedules. Inventory turns were 4.0 and days sales outstanding were 86.
Balance-sheet debt carrying value was approximately $1.210 billion, including $190.1 million current and $1.020 billion long-term. Ciena had no ABL Credit Facility borrowings; $71.3 million of letters of credit were supported by the facility. It repurchased $46.3 million principal of 0.875% convertible notes during the quarter and said it expected to repay the remaining 2017 notes using cash and investments.
The filing describes a refinancing into a $400 million term loan maturing January 30, 2022, with $93.1 million of existing principal repaid. The refinancing is identified as a subsequent event, although the stated January 30 transaction date precedes the January 31 quarter-end. The new loan bears interest at LIBOR plus 2.50% (LIBOR floor 0.75%) or a specified base rate, at Ciena’s election.
Outlook, commentary and risks
- No quantified revenue, margin or earnings guidance is provided. Management expects FY2017 operating expenses to increase from FY2016 levels to fund R&D, ERP work and facilities transitions, particularly in Ottawa and Gurgaon.
- Management cited normal first-quarter seasonality: customer procurement and service-provider deployment activity often slow toward calendar year-end. Sequential revenue fell 13.2% from Q4 FY2016, and gross margin decreased from 44.5% to 44.1%.
- Management said available liquidity and other sources should meet working-capital, capital-expenditure, debt-repayment and other needs for at least the next 12 months.
- Customer concentration remains significant: AT&T represented 15.5% of quarterly revenue and Verizon 11.8%. The filing highlights risks from customer spending changes, competition and price erosion, demand forecasting and inventory obsolescence, limited-source suppliers, contract manufacturers, foreign exchange, indebtedness and facilities transitions.
- Inventory obsolescence provisions were $5.4 million, primarily related to lower forecast demand for certain Networking Platforms products. Management also cited uncertainty in customer adoption of Blue Planet and changing network procurement models.
- Contingencies include Cyan-related shareholder litigation and a securities class action, as well as a stayed patent case. Ciena said it intends to defend the matters and does not expect their resolution to materially affect its financial position, results or cash flows. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts to verify
- Whether cash generation improves as the inventory build is converted into customer deliveries, and whether inventory reserves remain adequate.
- Whether growth in software and newer networking products offsets declines in Global Services and legacy Optical Transport products.
- How customer concentration, especially AT&T and Verizon spending, affects future revenue and margins amid pricing pressure.
- The repayment or refinancing of the remaining 0.875% notes due June 2017, and the final terms and interest-rate exposure of the new term loan.
- Execution costs and operational continuity during Ottawa and Gurgaon facility transitions and the ERP upgrade.
- Developments in the disclosed litigation and any changes to restructuring, inventory, warranty or other contingencies.