Ciena Corporation (CIEN) — Q2 FY2019 Form 10-Q
Reporting period: Unaudited quarter and six months ended April 30, 2019; comparisons are to the corresponding 2018 periods. Ciena sells networking platforms, software and related services, and global services to communications, web-scale and other network operators.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $865.0 million | $730.0 million | $1,643.5 million | $1,376.1 million |
| Gross profit / margin | $374.7 million / 43.3% | $293.3 million / 40.2% | $698.0 million / 42.5% | $565.1 million / 41.1% |
| Operating income / margin | $80.3 million / 9.3% | $32.1 million / 4.4% | $128.3 million / 7.8% | $48.8 million / 3.5% |
| Net income (loss) | $52.7 million | $13.9 million | $86.4 million | $(459.5) million |
| Diluted EPS | $0.33 | $0.09 | $0.55 | $(3.19) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $90.0 million | $73.1 million |
- Q2 revenue grew 18.5% year over year; six-month revenue grew 19.4%. Networking Platforms was the largest segment, with Q2 revenue of $697.0 million, up 17.8%. Global Services revenue was $120.3 million, up 20.9%; Software and Software-Related Services revenue was $47.7 million, up 23.1%, led by Blue Planet.
- Q2 gross margin expanded 3.1 percentage points. Management cited product cost reductions, manufacturing efficiencies and favorable customer and deployment mix, partly offset by price compression. Six-month service gross margin declined to 46.9% from 49.1%, including lower margins in Blue Planet services and early-stage international deployments.
- Six-month 2018 net loss included $484.4 million in income tax expense, largely reflecting the Tax Act deferred-tax remeasurement and transition-tax charge. The comparison therefore does not represent solely a change in underlying operating performance.
- ASC 606 was adopted in FY2019 using the modified retrospective method; prior-year results were not restated. Adoption increased reported Q2 revenue by $14.2 million and six-month revenue by $25.1 million versus the amounts that would have been reported without adoption. Management said the net-income effect was not material.
Liquidity, debt and capital allocation
- At April 30, 2019, cash and cash equivalents were $699.1 million and short-term investments were $119.3 million; total cash, cash equivalents and investments were $818.5 million, down $134.9 million from October 31, 2018.
- Six-month operating cash flow of $90.0 million reflected $212.0 million of net income adjusted for non-cash charges, offset by $122.0 million of working-capital use. Inventory growth used $109.6 million of cash.
- Term-loan carrying value was $690.4 million, including $7.0 million current and $683.4 million long-term. The loan matures in 2025; its stated rate was 4.50% at quarter-end. A $350 million portion is fixed through September 2023 under interest-rate swaps.
- The $250 million asset-backed revolving facility had no borrowings outstanding; $75.2 million of letters of credit were supported by it. Management stated available liquidity should cover working capital, capital expenditures and other needs for at least 12 months.
- During the six months, Ciena paid $111.3 million to settle the convertible-note conversion liability, repurchased $65.1 million of stock under its authorization, and spent $15.9 million on shares withheld for employee taxes. By June 7, it had repurchased 2.24 million shares cumulatively, with $416.2 million remaining under the $500 million authorization.
Outlook, risks and contingencies
- Management attributed growth to strong network-operator demand for capacity, favorable industry and competitive conditions, innovation, market-share gains and broader customer and geographic reach. It cautioned that the reported revenue and profit growth rates are not expected to be sustainable over the long term. No specific financial guidance was provided in the supplied filing text.
- Remaining performance obligations were $1.28 billion at April 30; Ciena expected approximately 83% to be recognized as revenue within the following 12 months. These obligations are subject to contract terms and timing of transfer of control.
- Risks include dependence on large customers and network-investment cycles, pricing pressure, foreign-exchange movements, inventory forecasting and obsolescence, and reliance on third-party manufacturers and sole- or limited-source components. The filing highlights uncertainty from U.S.–China tariffs and restrictions involving Huawei, as well as potential trade actions affecting Mexico-based manufacturing.
- Inventory was $359.4 million, up from $262.8 million at October 31, 2018; the company recorded a $10.2 million six-month obsolescence provision, primarily due to reduced forecast demand for certain Networking Platforms products.
- The DOJ closed its investigation of alleged improper payments, but Ciena continued cooperating with the SEC. The company said the outcome could not be predicted, had recorded no provision, and did not then expect a material adverse effect. A proposed settlement in a Cyan-related securities class action remained subject to court approval; Ciena said its terms were not material.
- Ciena recorded $6.3 million in six-month restructuring costs, including a workforce reduction of about 95 employees and charges for excess facilities. It also noted that adoption of the lease accounting standard is expected to put operating lease assets and liabilities on the balance sheet beginning FY2020.
Key facts for investors to verify
- Assess revenue and margin trends on a comparable basis, accounting for ASC 606’s impact and the unadjusted 2018 comparison.
- Track whether inventory growth converts to shipments and cash, and whether the $10.2 million obsolescence provision adequately reflects demand risk.
- Review customer concentration: AT&T and Verizon each exceeded 10% of Q2 revenue; a web-scale provider exceeded 10% for the six-month period.
- Monitor the SEC investigation, court approval of the Cyan settlement, and any resulting financial or compliance developments.
- Follow trade restrictions, tariffs, component availability and contract-manufacturer exposure, alongside the use of cash for debt service and repurchases.