Ciena Corporation — FY2019 Form 10-K
Business context and period. Ciena sells networking hardware, software and services to communications service providers, Web-scale companies, cable operators and other network customers. This annual report covers the fiscal year ended October 31, 2019 (52 weeks); fiscal 2018 comprised 53 weeks. Fiscal 2019 results reflect adoption of ASC 606 using the modified retrospective method.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $3.572 billion | $3.094 billion |
| Gross profit / gross margin | $1.542 billion / 43.2% | $1.315 billion / 42.5% |
| Operating income | $346.8 million | $229.9 million |
| Net income (loss) | $253.4 million | $(344.7) million |
| Diluted EPS | $1.61 | $(2.49) |
| Cash from operations | $413.1 million | $229.3 million |
- Revenue grew 15.4%; operating income rose 50.8%. Product revenue increased 16.3% and services revenue 11.2%. Product gross margin improved to 42.5% from 41.3%; services gross margin declined to 46.7% from 48.5%.
- Networking Platforms revenue rose 17.5% to $2.911 billion, led by Converged Packet Optical. Blue Planet revenue more than doubled to $54.6 million but remained a small part of total revenue and recorded a $17.8 million segment loss. Platform Software and Services revenue fell 10.7% to $155.4 million.
- North America revenue rose 24.6% and EMEA 21.9%; APAC fell 16.8%, primarily reflecting lower network spending in India and Australia. Web-scale customers accounted for about 22% of revenue, up more than 40% year over year.
- The FY2018 net loss included a $472.8 million Tax Act-related charge, including deferred-tax remeasurement and transition tax; the year is therefore not directly comparable with FY2019 net income.
Liquidity, debt and capital allocation
- Cash, cash equivalents and investments totaled $1.024 billion at year-end, up $70.6 million. Operating cash flow was $413.1 million; capital expenditures were $62.6 million.
- Term-loan principal was $693.0 million, due in fiscal 2025; net carrying value was $687.4 million. The $300 million asset-based revolving facility had no borrowings outstanding, with $72.9 million of letters of credit issued against it.
- Management said available cash, investments, operating cash flow and the revolving facility were expected to meet working-capital, capital-expenditure and other liquidity needs for at least 12 months. The company repurchased $150.1 million of shares in FY2019 and had $349.9 million remaining under its $500 million authorization at year-end. It does not anticipate paying cash dividends in the foreseeable future.
- Backlog was $1.21 billion, versus $1.26 billion a year earlier; approximately $160.2 million was not expected to be fulfilled in FY2020. Separately, remaining performance obligations were $950 million, with about 83% expected to be recognized within 12 months.
Outlook, commentary and key risks
- Management attributed FY2019 growth to strong demand for network capacity, favorable industry and competitive dynamics, and execution of its diversification strategy. It cautioned that FY2019’s revenue and profit growth rates were not expected to continue at the same pace.
- Ciena expected Web-scale revenue to moderate from FY2019 levels as some large customers planned to reduce capital spending. The company planned to bring fifth-generation coherent modem technology, capable of up to 800G per wavelength, to market in FY2020; this is a stated plan, not a guarantee.
- Key exposures include significant customer concentration: the ten largest customers generated 59.3% of revenue; Verizon, AT&T and one Web-scale customer each exceeded 10%. Customer spending, procurement strategies and network projects can shift, and orders generally carry no minimum purchase commitments.
- Other material risks include intense competition and pricing pressure; adoption of disaggregated and “white box” network models; reliance on contract manufacturers and sole- or limited-source suppliers; inventory forecasting; currency and trade-policy volatility, including U.S.–China tariffs; and execution and adoption risks for Blue Planet and new products.
- Inventory increased to $345.0 million from $262.8 million, while inventory turns declined to 5.0 from 5.7. The auditor identified the excess-and-obsolete inventory reserve as a critical audit matter because it depends on forecasts of future demand.
- The company reported a $714.9 million net deferred tax asset and a $297.9 million goodwill balance. A $11.3 million BEAT tax expense was recorded for FY2019. Management reported no goodwill impairment in FY2019.
- The Cyan-related securities class action settlement was approved in August 2019 without admission of liability and was not material. The SEC and DOJ investigations into alleged questionable payments were closed without enforcement action against Ciena. Management did not expect the other disclosed litigation or tax contingencies to materially affect results.
- After year-end, Ciena completed its acquisition of Centina Systems on November 4, 2019, intended to expand Blue Planet service-assurance analytics. The filing provides no acquisition price in the supplied text.
Important facts for investors to verify
- Whether growth and margins can be sustained as Web-scale spending moderates and APAC demand remains weaker.
- Customer concentration and the latest spending plans of major service-provider and Web-scale customers.
- Inventory levels, reserve assumptions, delivery commitments and the conversion of backlog and remaining performance obligations into revenue and cash.
- Progress, commercial adoption and profitability of Blue Planet, Centina integration and the planned next-generation modem products.
- Debt repayment, interest-rate exposure, share repurchases and the realization of deferred tax assets, including the effects of tax and trade-policy changes.