Ciena Corporation — Q2 FY2018 Form 10-Q
Reporting period: Quarter and six months ended April 30, 2018. Dollar amounts below are in millions unless noted. Comparisons are with the corresponding 2017 periods.
Business context and results
Ciena supplies networking hardware, software and services. Networking Platforms generated 81% of quarterly revenue; the company is seeking growth through customer diversification, including Web-scale providers and international service providers.
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Revenue | $730.0 | $707.0 | $1,376.1 | $1,328.5 |
| Gross profit / margin | $293.3 / 40.2% | $318.2 / 45.0% | $565.1 / 41.1% | $592.0 / 44.6% |
| Operating income | $32.1 | $57.8 | $48.8 | $76.9 |
| Net income (loss) | $13.9 | $38.0 | $(459.5) | $41.9 |
| Diluted EPS | $0.09 | $0.25 | $(3.19) | $0.29 |
| Operating cash flow | Not provided for quarter | $73.1 | $45.7 |
Financial position and cash flow
- Cash and cash equivalents were $652.1; short- and long-term investments totaled $327.5. Combined cash and investments were $979.6, up $10.1 from October 31, 2017.
- Total debt carrying value was approximately $938.7, including $353.2 current and $585.5 long-term. The $350 million principal amount of 3.75% convertible notes matures October 15, 2018. Ciena said it expected available liquidity to cover operating needs and this maturity for at least the next 12 months, and intended to cash-settle the principal of converted New Notes.
- The $250 million asset-backed revolving facility had no borrowings; $61.4 of letters of credit were collateralized by it.
- Six-month operating cash flow of $73.1 included a large noncash deferred tax provision of $481.4. Capital expenditures were $31.9; repurchases used $38.0 of cash during the period.
Material changes and drivers
- Quarterly revenue rose 3.2%, but gross profit fell 7.8% and gross margin declined 4.8 percentage points. Product gross margin fell to 38.3% from 44.0%; services gross margin was 49.0% versus 49.8%.
- Management attributed product margin pressure to aggressive pricing and early-stage network deployments with a higher mix of lower-margin common equipment. Product cost reductions and lower inventory-obsolescence provisions partly offset the pressure.
- Waveserver sales drove much of Networking Platforms’ growth. Six-month Software and Software-Related Services revenue grew 19.6%, including increased Blue Planet and advanced software application sales. Networking Platforms segment profit declined 18.5% for the six months; software segment profit increased 160.5%.
- The six-month $484.4 income tax provision produced the reported net loss. It included provisional Tax Act charges of $431.3 for deferred-tax-asset remeasurement and $45.6 for transition tax on foreign earnings. The filing cautions that estimates may change. Net deferred tax assets were $734.8, with a $147.0 valuation allowance.
- AT&T accounted for 12.8% of six-month revenue, down from 15.4% a year earlier. EMEA and APAC revenue grew; CALA revenue declined.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided. Management expected fiscal 2018 operating expenses to increase from fiscal 2017 to fund R&D, and warned that quarterly gross margin could fluctuate or decline as it pursues market share.
- A Canadian government ENCQOR grant provided an $8.1 benefit recorded as a reduction in R&D expense through April 30. Ciena said it expected quarterly operating-expense benefits of approximately $2.3 during the grant term; payments are subject to investment, employment and project milestones.
- Ciena recorded $10.3 of restructuring costs in the first six months, including a workforce reduction of approximately 150 employees and facility-related commitments. It also recorded $15.0 of inventory-obsolescence provision, primarily reflecting lower forecast demand for certain Networking Platforms products.
- The company continued cooperating with the SEC and DOJ concerning an internal investigation into alleged questionable payments by a third-party vendor to a customer employee in an ASEAN country. No provision was recorded; the outcome was uncertain and potential fines or other penalties were identified as possible risks.
- A securities class action related to the Cyan acquisition remained pending; Ciena said it considered the case without merit and intended to defend it. The filing also highlights customer concentration, supplier availability, pricing pressure, foreign exchange, tax estimates and indebtedness as risks.
- After quarter-end, Ciena agreed to acquire Packet Design, a network performance management software provider, with closing expected in fiscal Q3 subject to customary conditions. Through June 4, it repurchased an additional $15.4 of stock; $245.5 remained authorized under its $300 million repurchase program.
Investor facts to verify
- Whether product gross-margin pressure and Networking Platforms segment-profit declines persist as deployments mature and pricing conditions evolve.
- Final Tax Act accounting, including the provisional charges, deferred-tax-asset valuation and any future noncash adjustments.
- Funding and settlement of the October 2018 convertible-note maturity, and the effect of continued share repurchases on liquidity.
- Developments and potential financial consequences of the SEC/DOJ review and Cyan-related litigation.
- Achievement of ENCQOR grant milestones, expected grant benefits, and completion and integration of the Packet Design acquisition.