Ciena Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended October 31, 2018 (53 weeks); comparison is with FY2017 (52 weeks). Ciena provides networking hardware, software and services for communications, Web-scale and other network operators. The filing also reports fourth-quarter results.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $3.094 billion | $2.802 billion |
| Gross profit / margin | $1.315 billion / 42.5% | $1.246 billion / 44.5% |
| Operating income | $229.9 million | $214.7 million |
| Net income (loss) | $(344.7) million | $1.262 billion |
| Operating cash flow | $229.3 million | $234.9 million |
| Cash, cash equivalents and investments | $953.4 million | $969.4 million |
| Debt, net of discounts and issuance costs | $693.5 million | $936.0 million |
Revenue grew 10.4%. Product revenue rose 10.6% to $2.565 billion and services revenue rose 9.5% to $528.8 million. Operating income increased about 7%, while gross margin declined 2.0 percentage points, primarily due to aggressive pricing and lower-margin early deployments as Ciena pursued market share. Operating expenses increased 5.2% to $1.085 billion.
The reported net loss principally reflects a $493.5 million income-tax provision, including a $438.2 million charge to remeasure deferred tax assets after U.S. tax-rate changes and a $34.6 million transition-tax charge. FY2017 net income included a $1.2 billion non-cash tax benefit from reversing much of a deferred-tax valuation allowance; the reported net-income comparison is therefore not representative of operating trends.
Fourth-quarter revenue was $899.4 million, operating income was $95.9 million and net income was $64.0 million. Fourth-quarter FY2017 revenue was $744.4 million, operating income was $55.8 million and net income was $1.160 billion, the latter reflecting the tax benefit noted above.
Operating cash flow was slightly lower year over year. Working capital used $150.7 million of cash, including a $168.4 million use from accounts receivable; days sales outstanding increased to 92 days from 80. Capital expenditures were $67.6 million. At year-end, current assets were $2.143 billion and current liabilities were $963.0 million. The $250 million asset-based revolving facility had no borrowings outstanding; $61.7 million of letters of credit were supported by it.
Material changes and business drivers
- Networking Platforms revenue rose 10.0% to $2.478 billion. Converged Packet Optical increased 13.1%, led by Waveserver sales to Web-scale providers and higher 6500 platform sales; Packet Networking declined 9.5%, in part due to lower sales to AT&T.
- Software and Software-Related Services revenue rose 24.6% to $200.7 million. Blue Planet revenue grew 66.1% to $26.8 million, but remained less than 1% of total revenue.
- Global Services revenue increased 7.1% to $415.6 million. APAC revenue rose 21.2%; CALA declined 14.7%.
- The ten largest customers generated 56.5% of revenue, versus 55.6% in FY2017. AT&T contributed 12.1% of revenue, down from 16.0%; Verizon contributed 10.3% in both years.
- Backlog was $1.26 billion, up from $1.13 billion. Approximately $226.8 million was not expected to be fulfilled in FY2019; the company cautions that backlog is not a reliable stand-alone forecast of revenue.
Outlook, management commentary and risks
Management said revenue growth accelerated, supported by technology innovation, customer and market diversification, Web-scale demand and international share gains. No specific FY2019 revenue or earnings guidance is provided in the supplied filing text. Management expected cash, operating cash flow and available credit to meet working-capital, capital-expenditure and other liquidity needs for at least the next 12 months.
Ciena refinanced its term loan in September 2018, replacing approximately $394 million due in 2022 with a $700 million term loan due in 2025. The new loan requires quarterly principal installments and bears floating-rate interest; swaps fix the LIBOR rate on approximately half of the principal through September 2023. During FY2018, Ciena also converted its $187.5 million 2020 convertible notes into shares, repaid the $288.7 million principal of its 2018 New Notes in cash, and repurchased $111.0 million of stock. A new authorization for up to $500 million of repurchases was announced after year-end.
Other notable items include the acquisitions of Packet Design and DonRiver for approximately $41.1 million and $54.2 million, respectively; $18.7 million in restructuring charges, including workforce reductions of about 240 employees; and a $12.9 million FY2018 research-and-development expense benefit from the ENCQOR government grant. Ciena expects ASC 606 adoption in FY2019 to have no material impact on total revenue for that year, though timing may vary by quarter.
Key risks include customer concentration and variable network spending, price competition and margin pressure, uncertain adoption of Blue Planet and new network procurement models, component and contract-manufacturer dependence, inventory obsolescence, foreign exchange and trade-policy exposure, and the effect of outstanding debt. Ciena disclosed an ongoing SEC investigation concerning certain payments to a customer employee in an ASEAN country; the DOJ declined prosecution and closed its investigation in December 2018, while the SEC matter remained open. No provision was recorded, and the ultimate outcome was uncertain. The filing also describes a proposed settlement of a Cyan-related securities class action, subject to court approval.
Important facts for investors to verify
- Whether revenue growth continues while gross margin recovers from FY2018’s decline and competitive pricing pressures.
- Whether customer concentration, including AT&T’s reduced spending, and elevated receivables and DSO affect cash conversion.
- Whether Blue Planet’s growth translates into material software revenue and profitability, and whether the acquisitions deliver expected benefits.
- The continuing realization and recoverability of the $745.0 million net deferred tax asset, and the effects of future tax rules and tax-authority reviews.
- Debt-service requirements, variable interest-rate exposure, and the cash and dilution effects of note conversions and share repurchases.
- The outcome of the SEC investigation and court approval of the proposed securities-litigation settlement.