Ciena Corporation — Q1 FY2018 Form 10-Q
Reporting period: Three months ended January 31, 2018, compared with the three months ended January 31, 2017. Ciena provides networking hardware, software and services. Fiscal 2018 is a 53-week year.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $646.1 million | $621.5 million |
| Gross profit / margin | $271.8 million / 42.1% | $273.8 million / 44.1% |
| Operating income / margin | $16.7 million / 2.6% | $19.1 million / 3.1% |
| Pre-tax income | $4.6 million | $4.3 million |
| Net income (loss) / diluted EPS | $(473.4) million / $(3.29) | $3.9 million / $0.03 |
| Operating cash flow | $35.7 million | $(26.3) million |
Revenue rose 4.0%. Product revenue increased 3.7%, while services revenue increased 5.3%. Product gross margin fell to 40.4% from 43.4%; service gross margin improved to 49.2% from 46.8%.
The net loss primarily reflects a provisional $477.9 million income tax charge under the Tax Cuts and Jobs Act: $431.3 million for remeasurement of deferred tax assets and $45.6 million for the transition tax. The charge was largely noncash; operating cash flow included a $476.9 million deferred-tax adjustment.
Balance sheet, liquidity and debt
- Cash and cash equivalents were $648.9 million; short- and long-term investments totaled $337.9 million. Combined cash, cash equivalents and investments were $986.8 million, up $17.3 million from October 31, 2017.
- Current assets were $1.923 billion and current liabilities $933.4 million. Accounts receivable was $553.7 million and inventory was $255.3 million.
- Total debt carrying value was approximately $937.4 million: $352.8 million current and $584.6 million long-term. This includes convertible notes, including approximately $349.9 million carrying value due October 2018, and a term loan due January 2022. The filing reports no borrowings under its $250 million ABL revolving facility; $70 million of letters of credit were supported by it.
- Cash used in investing activities was $33.5 million, including $25.7 million for equipment and intellectual property. Financing activities provided $5.0 million. Ciena paid $10.0 million in interest.
Changes and operating trends
- Networking Platforms revenue increased 1.2% to $496.0 million, but segment profit fell 22.1% to $88.6 million, primarily on lower product margins and higher R&D costs.
- Software and Software-Related Services revenue increased 35.8% to $53.5 million; segment profit rose to $23.6 million from $7.7 million. Blue Planet platform sales contributed to growth.
- Global Services revenue increased 4.8% to $96.6 million; segment profit increased 15.7% to $41.0 million.
- APAC revenue increased 24.7% to $110.8 million, while North American revenue declined 0.7% to $402.9 million. AT&T and Verizon together represented $159.1 million of quarterly revenue.
- Inventory included a $6.8 million excess-and-obsolescence provision, primarily related to reduced forecast demand for certain Networking Platforms products. Ciena also recorded $6.0 million of restructuring costs, including a workforce reduction of about 100 employees and charges for excess facilities.
Outlook, risks and unusual items
- No specific numerical revenue or earnings guidance is provided in the filing. Management expects operating expenses to increase in FY2018 to fund R&D, and cautions that quarterly gross margins may fluctuate or decline as it pursues market share, particularly in international communications-service-provider markets.
- The Tax Act amounts are provisional and may change as the company completes its analysis and receives further guidance. Ciena reported a $739.4 million net deferred tax asset and a $151.1 million valuation allowance at January 31, 2018.
- Management believes available liquidity and other sources will meet working-capital, capital-expenditure and other requirements for at least the next 12 months, including cash settlement of principal on the New 2018 convertible notes if converted.
- Ciena is cooperating with the SEC and DOJ in an ongoing review of an internal investigation into alleged questionable payments involving a customer employee in an ASEAN country. No provision was recorded; the outcome cannot be predicted. The filing also describes a Cyan-related securities class action, which Ciena says it will defend vigorously.
- The board authorized up to $300 million of share repurchases through FY2020. Ciena repurchased $5.8 million of shares during the quarter and, after quarter-end through March 5, repurchased a further $13.8 million.
Important facts for investors to verify
- How the provisional Tax Act charge and deferred-tax-asset remeasurement are finalized, and whether further adjustments affect earnings.
- Whether product gross-margin pressure persists and whether software growth can continue to offset weaker Networking Platforms profitability.
- The maturity and settlement implications of the 2018 convertible notes, alongside total debt and interest costs.
- Developments in the SEC/DOJ review and Cyan litigation, including any potential financial or operational consequences.
- Revenue concentration and customer spending trends, particularly for AT&T and Verizon, and the sustainability of APAC growth.