CIENA CORP quarterly report, Q1 FY2020

Ciena Corporation — Q1 FY2020 Form 10-Q

Reporting period: Three months ended January 31, 2020; comparisons are with the three months ended January 31, 2019. Amounts are in U.S. dollars unless noted. Interim financial statements are unaudited.

Business context and results

Ciena supplies networking hardware, software and services to communications service providers, cable and multiservice operators, web-scale providers, governments and other network operators. Its offerings include Networking Platforms, Platform Software and Services, Blue Planet automation software and Global Services.

Metric	Q1 FY2020	Q1 FY2019	Change
Revenue	$832.9 million	$778.5 million	+7.0%
Gross profit / gross margin	$370.5 million / 44.5%	$323.3 million / 41.5%	Margin +3.0 percentage points
Operating income	$78.0 million	$47.9 million	+62.6%
Net income	$62.3 million	$33.6 million	+85.4%
Diluted EPS	$0.40	$0.21	Up
Cash from operating activities	$39.8 million	$(14.1) million	Improved

Revenue and material changes

• Networking Platforms revenue rose 6.2% to $659.1 million, driven by Converged Packet Optical growth of 7.8%; Packet Networking declined 5.7%.
• Platform Software and Services increased 24.7% to $51.9 million. Blue Planet revenue was $15.5 million, up 3.3%, but the segment remained loss-making, with a $3.1 million segment loss.
• Global Services revenue increased 5.0% to $106.5 million, mainly reflecting higher installation and deployment sales.
• Americas revenue rose 11.1% to $574.0 million; EMEA was broadly flat at $130.0 million; APAC declined 2.9% to $128.9 million. U.S. revenue was $524.3 million.
• Verizon contributed $114.5 million and AT&T $84.0 million; together they represented about 23.8% of revenue. A web-scale provider that exceeded 10% of revenue in the prior-year quarter was below that threshold in Q1 FY2020.
• Management attributed improved gross margin to favorable customer and product mix, product cost reductions, and improved services mix. Operating expenses increased 6.2% to $292.6 million, including higher selling and marketing, restructuring and acquisition costs.

Cash, debt and liquidity

• Cash and cash equivalents were $837.3 million; short- and long-term investments totaled $120.1 million. Cash, cash equivalents and investments were $957.4 million, down $66.6 million from October 31, 2019.
• Operating cash flow was $39.8 million, compared with cash use of $14.1 million a year earlier. Working capital used $103.6 million, including $142.2 million of cash used in accounts payable, accruals and other obligations, partly offset by $64.9 million from accounts receivable collections.
• Investing cash use was $54.9 million, including $26.8 million of equipment and intellectual-property spending and $28.3 million for the Centina acquisition. Financing cash use was $51.0 million, including $49.2 million of repurchases under the stock-repurchase program.
• Ciena refinanced its $693.0 million senior secured term loan in January, retaining a September 2025 maturity and lowering the applicable interest-rate margin. The January 31 net carrying value was $687.8 million; the company reported no borrowings under its $300 million ABL facility, which supported $81.9 million of letters of credit.
• Operating lease liabilities totaled $72.0 million and finance lease liabilities $66.8 million. Adoption of lease accounting in November 2019 added recognized right-of-use assets and lease liabilities; prior periods were not restated.
• The company reported sufficient liquidity to meet working-capital, capital-expenditure and other needs for at least the next 12 months, based on current expectations.

Outlook, commentary and risks

• No quantified full-year guidance is provided in the supplied filing text. Management expected the then-current COVID-19-related supply and logistics disruptions to adversely affect Q2 FY2020 revenue and results; the wider impact remained uncertain.
• Ciena reported some China-related supply delays and logistics challenges affecting customer fulfillment. It identified possible further supplier, manufacturing, distribution and demand disruptions as risks.
• Management cited quarterly variability in customer orders, network deployment timing, product and customer mix, price erosion, competitive pricing, component availability, inventory forecasting, foreign exchange and reliance on contract manufacturers as factors that can affect revenue and margins.
• Inventory obsolescence expense was $6.7 million, primarily associated with lower forecast demand for certain Networking Platforms products. Restructuring charges were $4.5 million; the company reduced its workforce by approximately 22 employees during the quarter.
• Ciena acquired Centina Systems for approximately $34.0 million in cash to expand Blue Planet’s service-assurance and analytics capabilities. It also began market trials of 800-gigabit WaveLogic technology and announced planned products for 5G transport and automation.
• Remaining performance obligations were $905 million at January 31, 2020; Ciena expected approximately 82% to be recognized as revenue within 12 months. The filing cautions that purchase orders and timing do not guarantee revenue realization.
• The filing states that ordinary-course litigation and tax contingencies are not expected to have a material effect. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Key facts for investors to verify

• Whether COVID-19 disruptions and related supply or demand effects materially affected Q2 results and subsequent periods.
• Whether gross-margin improvement is sustainable amid pricing pressure, deployment mix changes and inventory risks.
• Customer concentration, order timing and conversion of the $905 million RPO balance into recognized revenue.
• Blue Planet’s progress toward growth and profitability following the Centina acquisition and continued investment.
• Cash generation and working-capital trends, alongside debt service, lease obligations and ongoing share repurchases.