Ciena Corporation — Q1 FY2019 Form 10-Q
Reporting period: Three months ended January 31, 2019; comparisons are with the quarter ended January 31, 2018. Ciena provides networking hardware, software and services. Results are unaudited.
Financial results
| Metric | Q1 FY2019 | Q1 FY2018 | Change / context |
|---|---|---|---|
| Revenue | $778.5 million | $646.1 million | Up 20.5% |
| Gross profit / margin | $323.3 million / 41.5% | $271.8 million / 42.1% | Margin down 0.6 percentage points |
| Operating income / margin | $47.9 million / 6.2% | $16.7 million / 2.6% | Improved |
| Net income (loss) | $33.6 million | $(473.4) million | Prior-year loss primarily reflected Tax Act charges |
| Diluted EPS | $0.21 | $(3.29) | Prior-year comparison materially distorted by tax expense |
| Operating cash flow | $(14.1) million | $35.7 million | Working capital use outweighed adjusted net income |
Revenue growth was led by Networking Platforms, up 25.1% to $620.6 million, especially Converged Packet Optical, up 28.5%. Software and Software-Related Services grew 5.8% to $56.6 million; Global Services grew 4.9% to $101.4 million. Product gross margin increased to 40.8% from 40.4%, while service gross margin fell to 45.0% from 49.2%. Management attributed product margin improvement to cost reductions, manufacturing efficiencies and lower inventory obsolescence; service margin pressure reflected software-services costs and early-stage international deployments.
Balance sheet, cash and debt
- Cash and cash equivalents were $668.8 million; short-term investments were $119.1 million. Combined cash and investments totaled $788.0 million, down $165.4 million from October 31, 2018.
- Term-loan carrying value was $691.9 million, including $7.0 million current and $684.9 million long-term. The $698.3 million principal loan matures in 2025. No ABL borrowings were outstanding; the $250 million facility supported $68.7 million of letters of credit.
- Current assets were $2.09 billion versus current liabilities of $700.8 million. Inventory rose $60.4 million to $323.1 million; the quarter used $67.6 million of cash for inventory buildup.
- Cash outflows also included $111.3 million to settle the converted notes’ conversion feature, $19.7 million of program repurchases and $10.0 million for employee tax-withholding share repurchases. Capital expenditures were $15.3 million.
Changes, accounting and unusual items
- Ciena adopted ASC 606 using the modified retrospective method; prior-year results were not restated. Adoption increased reported Q1 revenue by $10.9 million and net income by $0.4 million versus the former accounting method. The reported year-over-year comparison is therefore not fully like-for-like.
- The Q1 FY2018 tax provision of $477.9 million included approximately $431.3 million for deferred-tax remeasurement and $45.6 million for the transition tax under the Tax Act. Q1 FY2019 tax provision was $9.1 million.
- Operating expenses were $275.4 million, up 8.0%; R&D and selling and marketing expenses increased. Restructuring costs were $2.3 million, compared with $6.0 million, and included workforce and facility actions.
- Ciena authorized a $500 million share-repurchase program and repurchased 591,897 shares for $21.2 million during the quarter. Through March 6, 2019, it had repurchased 982,799 shares in total, with $463.0 million of authorization remaining.
Outlook, risks and contingencies
The filing gives no specific forward revenue, earnings or margin guidance. Remaining performance obligations were $1.07 billion at January 31, 2019; Ciena expected approximately 80% to be recognized within 12 months. Management said available liquidity, expected operating cash flow and the ABL facility should cover working capital, capital expenditures and other requirements for at least the next 12 months.
Key stated risks include customer spending and concentration, competitive pricing and margin pressure, demand forecasting and inventory exposure, supply-chain and contract-manufacturer dependence, foreign exchange, cybersecurity, debt, and execution of growth and acquisition strategies. Three customers—AT&T, a Web-scale provider and Verizon—accounted for $272.5 million of quarterly revenue combined. Ciena recorded a $4.7 million inventory-obsolescence provision, primarily related to lower forecast demand for certain Networking Platforms products.
The DOJ declined prosecution and closed its investigation into alleged payments involving a customer; Ciena continued to cooperate with the SEC, whose investigation remained ongoing. No provision was recorded, and the outcome could not be predicted. A securities class-action settlement related to the Cyan acquisition remained subject to court approval. Ciena said other ordinary-course legal and tax matters were not expected to have a material effect.
Important facts for investors to verify
- How much of reported revenue growth and earnings reflects ASC 606 timing changes, and how do results compare on a consistent accounting basis?
- Whether inventory growth converts into sales and cash, given negative operating cash flow and management’s explanation of customer delivery schedules.
- Whether service gross-margin pressure persists and whether Networking Platforms growth can be sustained without further pricing concessions.
- Customer concentration, large-project timing, and the extent to which the $1.07 billion of remaining obligations is delivered and recognized as expected.
- Developments in the SEC investigation and court approval of the proposed Cyan-related settlement.
- Share repurchases, debt service and liquidity trends, including cash generation after the note settlement and inventory investment.