Ciena Corporation — Q1 Fiscal 2013 Form 10-Q
Reporting period: Three months ended January 31, 2013; unaudited. Comparisons are with the three months ended January 31, 2012 unless otherwise noted. Fiscal 2012 included an extra week in its fourth quarter.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2013 |
|---|---|---|
| Revenue | $416.7 million | $453.1 million (+8.7%) |
| Gross profit / margin | $167.8 million / 40.3% | $195.8 million / 43.2% |
| Operating expenses | $198.9 million | $201.4 million |
| Operating loss | $31.2 million | $5.6 million |
| Net loss | $47.7 million | $47.3 million |
| Diluted loss per share | $0.49 | $0.47 |
| Cash from operating activities | $12.9 million provided | $45.7 million used |
Product revenue rose 5.8% to $353.1 million; services revenue increased 20.5% to $100.0 million. Product gross margin was 44.3% (40.7% prior year), and service gross margin was 39.2% (38.3%). Management attributed margin improvement to product and software mix, lower warranty and inventory charges, and supply-chain efficiencies.
Segment revenue, with prior-year results restated for the new segment structure, was: Converged Packet Optical $240.0 million (+18.8%); Packet Networking $45.8 million (+113.2%); Optical Transport $57.6 million (−46.5%); and Software and Services $109.7 million (+28.3%). Optical Transport’s decline reflected the transition from stand-alone legacy platforms toward converged network architectures. Segment profit is a management measure and excludes specified corporate and other costs.
Liquidity, debt and balance sheet
- At January 31, cash and cash equivalents were $552.3 million and short-term investments, all U.S. government obligations, were $84.9 million; combined liquidity was $637.2 million. Combined cash and investments declined $55.3 million from October 31, 2012.
- Operating cash use of $45.7 million included $78.2 million used in working capital, partly offset by $32.5 million generated before working-capital changes. Accounts receivable increased $49.3 million; inventory increased $6.8 million. DSO was 78 days, compared with 86 days in the year-earlier quarter.
- Current assets were $1.435 billion versus current liabilities of $693.7 million. Stockholders’ deficit was $78.6 million.
- Convertible notes had an aggregate carrying value of approximately $1.425 billion. The $216.2 million of 0.25% notes due May 1, 2013 were expected to be repaid in Q2 FY2013. No borrowings were outstanding under the $150 million revolving credit facility; $51.8 million of letters of credit were collateralized by it.
- In December 2012, Ciena exchanged $187.5 million principal amount of 2015 notes for 4.0% notes due 2020. The transaction generated a $28.6 million non-cash extinguishment loss. Another $187.5 million principal amount of 2015 notes remained outstanding.
Outlook, management commentary and risks
- Management expected FY2013 operating expenses to increase from FY2012, citing support for global sales coverage and competitive employee compensation; some Q1 R&D expense reductions reflected activities expected to occur in later quarters.
- Management expected gross margin to fluctuate and did not expect Q1’s 43.2% margin to be sustained for the rest of FY2013. Revenue was down 2.7% sequentially from Q4 FY2012, which management attributed partly to seasonal customer procurement and deployment patterns.
- Management believed cash, cash equivalents and investments would meet working-capital, capital-expenditure and other liquidity requirements for at least the next 12 months.
- Two customers each represented more than 10% of Q1 revenue and together accounted for 26.4%; one customer represented 10% of accounts receivable at quarter-end. Customer concentration, service-provider spending, macroeconomic uncertainty and intense competition may create volatility in revenue, margins and collections.
- Other significant exposures include component and contract-manufacturer dependence, inventory obsolescence, foreign-exchange movements, product development and performance risks, and substantial convertible-note obligations. Ciena reported Mexican tax assessments with up to $5.9 million of possible unaccrued losses, and patent litigation involving Cheetah Omni and Graywire. Management did not expect the described tax and legal matters to have a material effect, while noting uncertainty around outcomes.
- The Ontario grant can provide up to C$25 million through fiscal 2015 and is subject to recoupment if specified milestones are not met. Ciena had recorded C$12.2 million of cumulative benefit by quarter-end.
Important facts for investors to verify
- Whether Ciena repaid the $216.2 million notes due May 1, 2013, and the resulting effect on liquidity and debt service.
- Whether working-capital cash use, particularly receivables and prepaid balances, reversed in subsequent quarters.
- Whether the growth in Converged Packet Optical, Packet Networking, and Software and Services offset continuing Optical Transport declines, and whether gross margins held up as management anticipated.
- How the two large customers’ purchasing patterns and the broader service-provider capital-spending environment affected revenue concentration and forecasts.
- Developments in the patent and tax matters, and whether restructuring, supply-chain changes, inventory reserves, or the Ontario grant led to further material costs or benefits.