UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended January 28, 2023
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number: 001-36250
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation)
(Address of principal executive offices)
(I.R.S. Employer Identification No.)
(Zip Code)
(410 ) 694-5700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | |||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
| Class | Outstanding as of March 3, 2023 | |||||||
| Common Stock, par value $0.01 per share | ||||||||
CIENA CORPORATION
INDEX
FORM 10-Q
| PAGE NUMBER | |||||
2
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CIENA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
| Quarter Ended | |||||||||||
| January 28, | January 29, | ||||||||||
| 2023 | 2022 | ||||||||||
| Revenue: | |||||||||||
| Products | $ | $ | |||||||||
| Services | |||||||||||
| Total revenue | |||||||||||
| Cost of goods sold: | |||||||||||
| Products | |||||||||||
| Services | |||||||||||
| Total cost of goods sold | |||||||||||
| Gross profit | |||||||||||
| Operating expenses: | |||||||||||
| Research and development | |||||||||||
| Selling and marketing | |||||||||||
| General and administrative | |||||||||||
| Significant asset impairments and restructuring costs | |||||||||||
| Amortization of intangible assets | |||||||||||
| Acquisition and integration costs | |||||||||||
| Total operating expenses | |||||||||||
| Income from operations | |||||||||||
| Interest and other income, net | |||||||||||
| Interest expense | ( | ( | |||||||||
| Income before income taxes | |||||||||||
| Provision for income taxes | |||||||||||
| Net income | $ | $ | |||||||||
| Basic net income per common share | $ | $ | |||||||||
| Diluted net income per potential common share | $ | $ | |||||||||
| Weighted average basic common shares outstanding | |||||||||||
| Weighted average dilutive potential common shares outstanding | |||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
CIENA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
| Quarter Ended | |||||||||||
| January 28, | January 29, | ||||||||||
| 2023 | 2022 | ||||||||||
| Net income | $ | $ | |||||||||
| Change in unrealized gain (loss) on available-for-sale securities, net of tax | ( | ||||||||||
| Change in unrealized gain (loss) on foreign currency forward contracts, net of tax | ( | ||||||||||
| Change in unrealized gain (loss) on forward starting interest rate swaps, net of tax | ( | ||||||||||
| Change in cumulative translation adjustments | ( | ||||||||||
| Other comprehensive gain (loss) | ( | ||||||||||
| Total comprehensive income | $ | $ | |||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
CIENA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
| January 28, 2023 | October 29, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
Accounts receivable, net of allowance for credit losses of $ | |||||||||||
| Inventories, net | |||||||||||
| Prepaid expenses and other | |||||||||||
| Total current assets | |||||||||||
| Long-term investments | |||||||||||
| Equipment, building, furniture and fixtures, net | |||||||||||
| Operating right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Deferred tax asset, net | |||||||||||
| Other long-term assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities and other short-term obligations | |||||||||||
| Deferred revenue | |||||||||||
| Operating lease liabilities | |||||||||||
| Current portion of long-term debt | |||||||||||
| Total current liabilities | |||||||||||
| Long-term deferred revenue | |||||||||||
| Other long-term obligations | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Long-term debt, net | |||||||||||
| Total liabilities | $ | $ | |||||||||
Commitments and contingencies (Note 22) | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock – par value $ | |||||||||||
Common stock – par value $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
CIENA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
| Three Months Ended | |||||||||||
| January 28, | January 29, | ||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows used in operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash used in operating activities: | |||||||||||
| Depreciation of equipment, building, furniture and fixtures, and amortization of leasehold improvements | |||||||||||
| Share-based compensation costs | |||||||||||
| Amortization of intangible assets | |||||||||||
| Deferred taxes | ( | ( | |||||||||
| Provision for inventory excess and obsolescence | |||||||||||
| Provision for warranty | |||||||||||
| Gain on cost method equity investment | ( | ( | |||||||||
| Other | ( | ||||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Inventories | ( | ( | |||||||||
| Prepaid expenses and other | ( | ||||||||||
| Operating lease right-of-use assets | |||||||||||
| Accounts payable, accruals and other obligations | ( | ( | |||||||||
| Deferred revenue | |||||||||||
| Short- and long-term operating lease liabilities | ( | ( | |||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash flows used in investing activities: | |||||||||||
| Payments for equipment, furniture, fixtures and intellectual property | ( | ( | |||||||||
| Purchases of investments | ( | ( | |||||||||
| Proceeds from sales and maturities of investments | |||||||||||
| Settlement of foreign currency forward contracts, net | ( | ||||||||||
| Acquisition of business, net of cash acquired | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows provided by financing activities: | |||||||||||
| Proceeds from issuance of senior notes | |||||||||||
| Proceeds from issuance of term loan, net | |||||||||||
| Payment of long-term debt | ( | ||||||||||
| Payment of debt issuance costs | ( | ( | |||||||||
| Payment of finance lease obligations | ( | ( | |||||||||
| Shares repurchased for tax withholdings on vesting of stock unit awards | ( | ( | |||||||||
| Repurchases of common stock - repurchase program | ( | ||||||||||
| Proceeds from issuance of common stock | |||||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( | ||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
| Supplemental disclosure of cash flow information | |||||||||||
| Cash paid during the period for interest | $ | $ | |||||||||
| Cash paid during the period for income taxes, net | $ | $ | |||||||||
| Operating lease payments | $ | $ | |||||||||
| Non-cash investing and financing activities | |||||||||||
| Purchase of equipment in accounts payable | $ | $ | |||||||||
| Operating right-of-use assets subject to lease liability | $ | $ | |||||||||
| Gain on cost method equity investment | $ | $ | |||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
6
CIENA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(unaudited)
| Common Stock Shares | Par Value | Additional Paid-in-Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||
| Balance at October 29, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Issuance of shares from employee equity plans | — | — | |||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Shares repurchased for tax withholdings on vesting of stock unit awards | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Balance at January 28, 2023 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Common Stock Shares | Par Value | Additional Paid-in-Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||
| Balance at October 30, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Repurchase of common stock - repurchase program | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Issuance of shares from employee equity plans | — | — | |||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Shares repurchased for tax withholdings on vesting of stock unit awards | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Balance at January 29, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
7
CIENA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) INTERIM FINANCIAL STATEMENTS
The interim financial statements included herein for Ciena Corporation and its wholly owned subsidiaries (“Ciena”) have been prepared by Ciena, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”).
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires Ciena to make judgments, assumptions, and estimates that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Among other things, these estimates form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions. To the extent that there are material differences between Ciena’s estimates and actual results, Ciena’s consolidated financial statements will be affected.
In the opinion of management, the financial statements included in this report reflect all normal recurring adjustments that Ciena considers necessary for the fair statement of the results of operations of Ciena for the interim periods covered and of the financial position of Ciena at the date of the interim balance sheets. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations. The Condensed Consolidated Balance Sheet as of October 29, 2022 was derived from audited financial statements, but does not include all disclosures required by GAAP. However, Ciena believes that the disclosures are adequate to understand the information presented herein. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. These financial statements should be read in conjunction with Ciena’s audited consolidated financial statements and the notes thereto included in Ciena’s annual report on Form 10-K for fiscal 2022 (the “2022 Annual Report”).
(2) SIGNIFICANT ACCOUNTING POLICIES
Except for the changes in certain policies described below, there have been no material changes to Ciena’s significant accounting policies, compared to the accounting policies described in Note 1, Ciena Corporation and Significant Accounting Policies and Estimates, in Notes to Consolidated Financial Statements in Item 8 of Part II of the 2022 Annual Report.
Newly Issued Accounting Standards - Not Yet Effective
In October 2021, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2021-08 (“ASU 2021-08”), Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers to improve the accounting for acquired revenue contracts with customers in a business combination to address recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. ASU 2021-08 is effective for annual periods beginning after December 15, 2022 on a prospective basis. Early adoption is permitted. Ciena is currently evaluating the impact of this ASU on its condensed consolidated financial statements and related disclosures.
(3)REVENUE
Disaggregation of Revenue
Ciena’s disaggregated revenue as presented below depicts the nature, amount, and timing of revenue and cash flows for similar groupings of Ciena’s various offerings. The sales cycle, contractual obligations, customer requirements, and go-to-market strategies may differ across Ciena’s product lines, resulting in different economic risk profiles for each line.
8
| Quarter Ended January 28, 2023 | |||||||||||||||||||||||||||||
| Networking Platforms | Platform Software and Services | Blue Planet Automation Software and Services | Global Services | Total | |||||||||||||||||||||||||
| Product lines: | |||||||||||||||||||||||||||||
Converged Packet Optical | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Routing and Switching | |||||||||||||||||||||||||||||
Platform Software and Services | |||||||||||||||||||||||||||||
Blue Planet Automation Software and Services | |||||||||||||||||||||||||||||
Maintenance Support and Training | |||||||||||||||||||||||||||||
Installation and Deployment | |||||||||||||||||||||||||||||
Consulting and Network Design | |||||||||||||||||||||||||||||
Total revenue by product line | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Timing of revenue recognition: | |||||||||||||||||||||||||||||
Products and services at a point in time | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Services transferred over time | |||||||||||||||||||||||||||||
Total revenue by timing of revenue recognition | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Quarter Ended January 29, 2022 | |||||||||||||||||||||||||||||
| Networking Platforms | Platform Software and Services | Blue Planet Automation Software and Services | Global Services | Total | |||||||||||||||||||||||||
| Product lines: | |||||||||||||||||||||||||||||
Converged Packet Optical | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Routing and Switching | |||||||||||||||||||||||||||||
Platform Software and Services | |||||||||||||||||||||||||||||
Blue Planet Automation Software and Services | |||||||||||||||||||||||||||||
Maintenance Support and Training | |||||||||||||||||||||||||||||
Installation and Deployment | |||||||||||||||||||||||||||||
Consulting and Network Design | |||||||||||||||||||||||||||||
Total revenue by product line | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Timing of revenue recognition: | |||||||||||||||||||||||||||||
Products and services at a point in time | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Services transferred over time | |||||||||||||||||||||||||||||
Total revenue by timing of revenue recognition | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Ciena reports its sales geographically using the following markets: (i) the United States, Canada, the Caribbean and Latin America (“Americas”); (ii) Europe, Middle East and Africa (“EMEA”); and (iii) Asia Pacific, Japan and India (“APAC”). Within each geographic area, Ciena maintains specific teams or personnel that focus on a particular region, country, customer, or market vertical. These teams include sales management, account salespersons, and sales engineers, as well as services professionals and commercial management personnel. The following table reflects Ciena’s geographic distribution of revenue based principally on the relevant location for Ciena’s delivery of products and performance of services.
9
| Quarter Ended | ||||||||||||||
| January 28, | January 29, | |||||||||||||
| 2023 | 2022 | |||||||||||||
| Geographic distribution: | ||||||||||||||
Americas | $ | $ | ||||||||||||
EMEA | ||||||||||||||
APAC | ||||||||||||||
Total revenue by geographic distribution | $ | $ | ||||||||||||
Ciena’s revenue includes $693.6 million and $543.5 million of United States revenue for the first quarter of fiscal 2023 and 2022, respectively. No other country accounted for 10% or more of total revenue for the periods presented above.
For the periods below, the only customers that accounted for at least 10% of Ciena’s revenue were as follows (in thousands):
| Quarter Ended | |||||||||||
| January 28, | January 29, | ||||||||||
| 2023 | 2022 | ||||||||||
| AT&T | $ | $ | |||||||||
| Web-scale provider | n/a | ||||||||||
| Total | $ | $ | |||||||||
_____________________________________
n/a Denotes revenue representing less than 10% of total revenue for the period
The Web-scale provider noted in the above table purchased products from each of Ciena’s operating segments excluding Blue Planet® Automation Software and Services. AT&T purchased products and services from each of Ciena’s operating segments for each of the periods presented.
•Networking Platforms revenue reflects sales of Ciena’s Converged Packet Optical and Routing and Switching product lines.
•Converged Packet Optical - includes the 6500 Packet-Optical Platform, the Waveserver® modular interconnect system, the 6500 Reconfigurable Line System (RLS), the 5400 family of Packet-Optical Platforms, and the Coherent ELS open line system (OLS). This product line includes the WL5n 100G-400G
coherent pluggable transceivers. This product line also includes the Z-Series Packet-Optical Platform and Optical Microsystems products.
•Routing and Switching - includes the 3000 family of service delivery platforms and the 5000 family of service aggregation. This product line also includes the 6500 Packet Transport System (PTS), which combines packet switching, control plane operation, and integrated optics, the 8100 Coherent IP networking platforms, the 8700 Packetwave Platform, and Vyatta virtual routing and switching products. This product line also includes SD-Edge software and passive optical network (“PON”) routing and switching portfolio (“RSP”) components from our recent acquisitions of Benu Networks, Inc. (“Benu”) and Tibit Communications, Inc. (“Tibit”) respectively, during the first quarter of fiscal 2023.
The Networking Platforms segment also includes sales of operating system software and enhanced software features embedded in each of the product lines above. Revenue from this segment is included in product revenue on the Condensed Consolidated Statements of Operations. Operating system software and enhanced software features embedded in Ciena hardware are each considered distinct performance obligations for which the revenue is generally recognized upfront at a point in time upon transfer of control.
•Platform Software and Services offerings provide domain control management, analytics, data and planning tools, and applications to assist customers in managing their networks, including by creating more efficient operations and more proactive visibility into their networks. Ciena’s platform software includes its Manage, Control and Plan (“MCP”) domain controller solution, its suite of MCP applications, and its OneControl Unified Management System, as well as planning tools and a number of legacy software solutions that support Ciena’s installed base of network solutions.
10
Platform software-related services revenue includes sales of subscription, installation, support, and consulting services related to Ciena’s software platforms, operating system software and enhanced software features embedded in each of the Networking Platforms product lines above. Revenue from the software portion of this segment is included in product revenue on the Condensed Consolidated Statements of Operations. Revenue from services portions of this segment is included in services revenue on the Condensed Consolidated Statements of Operations.
•Blue Planet Automation Software and Services is a comprehensive, cloud native, and standards-based software portfolio, together with related services, that enables customers to realize digital transformation through the automation of the services lifecycle. Ciena’s Blue Planet Automation Platform includes multi-domain service orchestration (MDSO), inventory management (BPI), route optimization and analysis (ROA), network function virtualization orchestration (NFVO), and unified assurance and analytics (UAA). Services revenue includes sales of subscription, installation, support, consulting and design services related to Ciena’s Blue Planet Automation Platform. Revenue from the software portion of this segment is included in product revenue on the Condensed Consolidated Statements of Operations. Revenue from services portions of this segment is included in services revenue on the Condensed Consolidated Statements of Operations.
Ciena’s software platform revenue typically reflects either perpetual or term-based software licenses, and these sales are considered distinct performance obligations in which revenue is generally recognized upfront at a point in time upon transfer of control. Revenue from software subscription and support is recognized ratably over the period during which the services are performed. Revenue from professional services for solution customization, software and solution support services, consulting and design, and build-operate-transfer services relating to Ciena’s software offerings is recognized over time with Ciena applying the input method to determine the amount of revenue to be recognized in a given period.
•Global Services revenue reflects sales of a broad range of Ciena’s services for maintenance support and training, installation and deployment, and consulting and network design activities. Revenue from this segment is included in services revenue on the Condensed Consolidated Statements of Operations.
Ciena’s Global Services are considered a distinct performance obligation for which revenue is generally recognized over time. Revenue from maintenance support is recognized ratably over the period during which the services are performed. Revenue from installation and deployment services and consulting and network design services is also recognized over time with Ciena applying the input method to determine the amount of revenue to be recognized in a given period. Revenue from training services is generally recognized at a point in time upon completion of the service.
Contract Balances
| Balance at January 28, 2023 | Balance at October 29, 2022 | |||||||||||||
| Accounts receivable, net | $ | $ | ||||||||||||
| Contract assets for unbilled accounts receivable, net | $ | $ | ||||||||||||
| Deferred revenue | $ | $ | ||||||||||||
Ciena’s contract assets represent unbilled accounts receivable, net where transfer of a product or service has occurred but invoicing is conditional upon completion of future performance obligations. These amounts are primarily related to installation and deployment and professional services arrangements where transfer of control has occurred, but Ciena has not yet invoiced the customer. Contract assets are included in prepaid expenses and other on the Condensed Consolidated Balance Sheets. See Note 11 below.
Contract liabilities consist of deferred revenue and represent advanced payments against non-cancelable customer orders received prior to revenue recognition. Ciena recognized approximately $67.9 million and $56.8 million of revenue during the first three months of fiscal 2023 and 2022, respectively, that was included in the deferred revenue balance at October 29, 2022 and October 30, 2021, respectively. Revenue recognized due to changes in transaction price from performance obligations satisfied or partially satisfied in previous periods was immaterial during the three months ended January 28, 2023 and January 29, 2022.
Capitalized Contract Acquisition Costs
11
Capitalized contract acquisition costs consist of deferred sales commissions, and were $38.2 million and $39.7 million as of January 28, 2023 and October 29, 2022, respectively. Capitalized contract acquisition costs were included in (i) prepaid expenses and other and (ii) other long-term assets. The amortization expense associated with these costs was $7.2 million and $7.0 million during the first three months of fiscal 2023 and 2022, respectively, and was included in selling and marketing expense on the Condensed Consolidated Statements of Operations.
Remaining Performance Obligations
Remaining Performance Obligations (“RPO”) are comprised of non-cancelable customer purchase orders for products and services that are awaiting transfer of control for revenue recognition under the applicable contract terms. As of January 28, 2023, the aggregate amount of RPO was $2.7 billion. As of January 28, 2023, Ciena expects approximately 90 % of the RPO to be recognized as revenue within the next 12 months.
(4)BUSINESS COMBINATIONS
Benu and Tibit Acquisitions
On November 17, 2022, Ciena acquired Benu, a portfolio of cloud-native software solutions, including a virtual Broadband Network Gateway ((v)BNG), that complements Ciena’s existing portfolio of broadband access solutions. On December 30, 2022, Ciena acquired Tibit, a provider and developer of PON-specific hardware and operating software that can be integrated into a carrier-grade Ethernet switch and will strengthen Ciena’s portfolio of next-generation PON solutions that support residential, enterprise, and mobility use cases. These businesses were acquired for an aggregate of approximately $291.7 million, of which $244.7 million was paid in cash and $47.0 million represents the fair value of Ciena’s previously held cost method equity investment in Tibit. The acquisition of Tibit triggered the remeasurement of Ciena’s previously held investment in Tibit to fair value, which resulted in Ciena recognizing a gain on its cost method equity investment of $26.5 million. Each of these transactions has been accounted for as the acquisition of a business.
Ciena incurred approximately $2.5 million in acquisition-related costs associated with these acquisitions. These costs and expenses primarily include fees associated with financial, legal, and accounting advisors and employment-related costs. These costs were recorded in acquisition and integration costs on the Condensed Consolidated Statement of Operations.
The following table summarizes the final purchase price allocation related to the acquisitions based on the estimated fair value of the acquired assets and assumed liabilities (in thousands):
| Amount | |||||
| Cash and cash equivalents | $ | ||||
| Accounts receivable, net | |||||
| Inventories, net | |||||
| Prepaid expenses and other | |||||
| Equipment, furniture and fixtures | |||||
| Goodwill | |||||
| Developed technology | |||||
| In-process technology | |||||
| Customer relationships and contracts | |||||
| Order backlog | |||||
| Deferred tax asset, net | ( | ||||
| Accounts payable | ( | ||||
| Accrued liabilities and other short-term obligations | ( | ||||
| Deferred revenue | ( | ||||
| Other long-term obligations | ( | ||||
| Total purchase consideration | $ | ||||
12
Developed technology represents purchased technology that has reached technological feasibility and for which the acquired companies had substantially completed development as of the date of acquisition. Fair value was determined using future discounted cash flows related to the projected income stream of the developed technology for a discrete projection period. Cash flows were discounted to their present value as of the closing date. Developed technology is amortized on a straight-line basis over its estimated useful life of five years .
In-process technology represents purchased technology that had not reached technological feasibility as of the date of acquisition. Fair value was determined using future discounted cash flows related to the projected income stream of the in-process technology for a discrete projection period. Cash flows were discounted to their present value as of the closing date. Upon completion of the in-process technology, it will be amortized on a straight line basis over its estimated useful life, which will be determined on that date.
Customer relationships and contracts represent agreements with existing Tibit customers and have an estimated useful life of three years . Order backlog is amortized over the fulfillment period.
The goodwill generated from these acquisitions is primarily related to expected economic synergies. The total goodwill amount was recorded in the Networking Platforms segment. The goodwill is not deductible for income tax purposes.
Pro forma disclosures have not been included due to immateriality. The amounts of revenue and earnings for these acquisitions since the acquisition dates, which are included on the Condensed Consolidated Statement of Operations for the reporting period are immaterial.
(5)SIGNIFICANT ASSET IMPAIRMENT AND RESTRUCTURING COSTS
Restructuring Costs
Ciena has undertaken a number of restructuring activities intended to reduce expense and to align its workforce and costs with market opportunities, product development, and business strategies. The following table sets forth the restructuring activity and balance of the restructuring liability accounts, which are included in accrued liabilities and other short-term obligations on the Condensed Consolidated Balance Sheets, for the three months ended January 28, 2023 (in thousands):
| Workforce reduction | Other restructuring activities | Total | |||||||||||||||
| Balance at October 29, 2022 | $ | $ | $ | ||||||||||||||
| Charges | (1) | (2) | |||||||||||||||
| Cash payments | ( | ( | ( | ||||||||||||||
| Balance at January 28, 2023 | $ | $ | $ | ||||||||||||||
| Current restructuring liabilities | $ | $ | $ | ||||||||||||||
(1) Reflects employee costs associated with workforce reductions during the three months ended January 28, 2023 as part of a business optimization strategy to improve gross margin, constrain operating expense, and redesign certain business processes.
(2) Primarily represents the redesign of certain business processes associated with Ciena’s supply chain and distribution structure reorganization and costs related to restructured real estate facilities.
The following table sets forth the restructuring activity and balance of the restructuring liability accounts, which are included in accrued liabilities and other short-term obligations on the Condensed Consolidated Balance Sheets for the three months ended January 29, 2022 (in thousands):
| Workforce reduction | Other restructuring activities | Total | |||||||||||||||
| Balance at October 30, 2021 | $ | $ | $ | ||||||||||||||
| Charges | (1) | (2) | |||||||||||||||
| Cash payments | ( | ( | ( | ||||||||||||||
| Balance at January 29, 2022 | $ | $ | $ | ||||||||||||||
| Current restructuring liabilities | $ | $ | $ | ||||||||||||||
(1) Reflects employee costs associated with workforce reductions during the three months ended January 29, 2022 as part of a business optimization strategy to improve gross margin, constrain operating expense, and redesign certain business processes.
13
(6) INTEREST AND OTHER INCOME, NET
The components of interest and other income, net, are as follows for the periods indicated (in thousands):
| Quarter Ended | |||||||||||
| January 28, | January 29, | ||||||||||
| 2023 | 2022 | ||||||||||
| Interest income | $ | $ | |||||||||
| Losses on non-hedge designated foreign currency forward contracts | ( | ( | |||||||||
| Foreign currency exchange gains (losses) | ( | ||||||||||
| Gain on cost method equity investment | |||||||||||
| Other | ( | ||||||||||
| Interest and other income, net | $ | $ | |||||||||
During the first quarter of fiscal 2023, the acquisition of Tibit triggered the remeasurement of Ciena’s previously held investment in Tibit to fair value, which resulted in Ciena recognizing a gain on its cost method equity investment of $26.5 million. See Note 4 above.
(7) INCOME TAXES
The effective tax rate for the quarter and three months ended January 28, 2023 was higher than the effective tax rate for the
quarter and three months ended January 29, 2022, primarily due to the mandatory capitalization of research and development expenses in the first quarter of fiscal 2023.
(8) CASH EQUIVALENT, SHORT-TERM AND LONG-TERM INVESTMENTS
As of the dates indicated, investments are comprised of the following (in thousands):
| January 28, 2023 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||
| U.S. government obligations | $ | $ | $ | ( | $ | ||||||||||||||||||
| Corporate debt securities | ( | ||||||||||||||||||||||
| Time deposits | |||||||||||||||||||||||
| $ | $ | $ | ( | $ | |||||||||||||||||||
| Included in cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Included in short-term investments | ( | ||||||||||||||||||||||
| Included in long-term investments | ( | ||||||||||||||||||||||
| $ | $ | $ | ( | $ | |||||||||||||||||||
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| October 29, 2022 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||
| U.S. government obligations | $ | $ | $ | ( | $ | ||||||||||||||||||
| Corporate debt securities | ( | ||||||||||||||||||||||
| Time deposits | ( | ||||||||||||||||||||||
| $ | $ | $ | ( | $ | |||||||||||||||||||
| Included in cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Included in short-term investments | ( | ||||||||||||||||||||||
| Included in long-term investments | ( | ||||||||||||||||||||||
| $ | $ | $ | ( | $ | |||||||||||||||||||
| Amortized Cost | Estimated Fair Value | ||||||||||
| Less than one year | $ | $ | |||||||||
| Due in 1-2 years | |||||||||||
| $ | $ | ||||||||||
(9) FAIR VALUE MEASUREMENTS
| January 28, 2023 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| Bond mutual fund | |||||||||||||||||||||||
| Time deposits | |||||||||||||||||||||||
| Deferred compensation plan assets | |||||||||||||||||||||||
| U.S. government obligations | |||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||
| Foreign currency forward contracts | |||||||||||||||||||||||
| Forward starting interest rate swaps | |||||||||||||||||||||||
| Total assets measured at fair value | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Foreign currency forward contracts | $ | $ | $ | $ | |||||||||||||||||||
| Forward starting interest rate swaps | |||||||||||||||||||||||
| Total liabilities measured at fair value | $ | $ | $ | $ | |||||||||||||||||||
15
| October 29, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| Bond mutual fund | |||||||||||||||||||||||
| Time deposits | |||||||||||||||||||||||
| Deferred compensation plan assets | |||||||||||||||||||||||
| U.S. government obligations | |||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||
| Foreign currency forward contracts | |||||||||||||||||||||||
| Forward starting interest rate swaps | |||||||||||||||||||||||
| Total assets measured at fair value | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Foreign currency forward contracts | $ | $ | $ | $ | |||||||||||||||||||
| Total liabilities measured at fair value | $ | $ | $ | $ | |||||||||||||||||||
As of the dates indicated, the assets and liabilities above are presented on Ciena’s Condensed Consolidated Balance Sheets as follows (in thousands):
| January 28, 2023 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Short-term investments | |||||||||||||||||||||||
| Prepaid expenses and other | |||||||||||||||||||||||
| Long-term investments | |||||||||||||||||||||||
| Other long-term assets | |||||||||||||||||||||||
| Total assets measured at fair value | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Accrued liabilities and other short-term obligations | $ | $ | $ | $ | |||||||||||||||||||
| Other long-term obligations | |||||||||||||||||||||||
| Total liabilities measured at fair value | $ | $ | $ | $ | |||||||||||||||||||
| October 29, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Short-term investments | |||||||||||||||||||||||
| Prepaid expenses and other | |||||||||||||||||||||||
| Long-term investments | |||||||||||||||||||||||
| Other long-term assets | |||||||||||||||||||||||
| Total assets measured at fair value | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Accrued liabilities and other short-term obligations | $ | $ | $ | $ | |||||||||||||||||||
| Total liabilities measured at fair value | $ | $ | $ | $ | |||||||||||||||||||
16
(10) INVENTORIES
As of the dates indicated, inventories are comprised of the following (in thousands):
| January 28, 2023 | October 29, 2022 | ||||||||||
| Raw materials | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Finished goods | |||||||||||
| Deferred cost of goods sold | |||||||||||
| Gross inventories | |||||||||||
| Reserve for inventory excess and obsolescence | ( | ( | |||||||||
| Inventories, net | $ | $ | |||||||||
The increase in raw materials inventory is related to the steps Ciena is taking to mitigate the impact of current supply chain constraints in the context of the global market shortage of semiconductor components. Ciena writes down its inventory for estimated obsolescence or unmarketable inventory by an amount equal to the difference between the cost of inventory and the estimated net realizable value based on assumptions about future demand, which are affected by changes in Ciena’s strategic direction, discontinuance of a product or introduction of newer versions of products, declines in the sales of or forecasted demand for certain products, and general market conditions. During the first three months of fiscal 2023, Ciena recorded a provision for inventory excess and obsolescence of $5.5 million, primarily related to a decrease in the forecasted demand for certain Networking Platforms products. Deductions from the provision for excess and obsolete inventory relate primarily to disposal activities.
(11) PREPAID EXPENSES AND OTHER
As of the dates indicated, prepaid expenses and other are comprised of the following (in thousands):
| January 28, 2023 | October 29, 2022 | ||||||||||
| Contract assets for unbilled accounts receivable, net | $ | $ | |||||||||
| Prepaid VAT and other taxes | |||||||||||
| Prepaid expenses | |||||||||||
| Product demonstration equipment, net | |||||||||||
| Capitalized contract acquisition costs | |||||||||||
| Other non-trade receivables | |||||||||||
| Derivative assets | |||||||||||
| Deferred deployment expense | |||||||||||
| $ | $ | ||||||||||
Depreciation of product demonstration equipment was $1.9 million during the first three months of fiscal 2023 and $2.4 million during the first three months of fiscal 2022.
For further discussion on contract assets and capitalized contract acquisition costs, see Note 3 above.
(12) INTANGIBLE ASSETS
17
| January 28, 2023 | October 29, 2022 | ||||||||||||||||||||||||||||||||||
| Gross Intangible | Accumulated Amortization | Net Intangible | Gross Intangible | Accumulated Amortization | Net Intangible | ||||||||||||||||||||||||||||||
| Developed technology | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| In-process technology | |||||||||||||||||||||||||||||||||||
| Patents and licenses | ( | ( | |||||||||||||||||||||||||||||||||
| Customer relationships, covenants not to compete, outstanding purchase orders and contracts | ( | ( | |||||||||||||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
The aggregate amortization expense of intangible assets was $10.3 million during the first three months of fiscal 2023 and $12.2 million during the first three months of fiscal 2022. Expected future amortization of intangible assets for the fiscal years indicated is as follows (in thousands):
| Fiscal Year | Amount | |||||||
Remaining fiscal 2023 | $ | |||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| $ | (1) | |||||||
(1) Does not include amortization of in-process technology, as estimation of the timing of future amortization expense would be impractical.
(13) GOODWILL
The following table presents the goodwill allocated to Ciena’s operating segments as of January 28, 2023 and October 29, 2022, as well as the changes to goodwill during first quarter of fiscal 2023 (in thousands):
| Balance at October 29, 2022 | Acquisitions | Impairments | Translation | Balance at January 28, 2023 | ||||||||||||||||||||||||||||
| Platform Software and Services | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Blue Planet Automation Software and Services | ||||||||||||||||||||||||||||||||
| Networking Platforms | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
(14) OTHER BALANCE SHEET DETAILS
18
| January 28, 2023 | October 29, 2022 | ||||||||||
Compensation, payroll related tax and benefits (1) | $ | $ | |||||||||
| Warranty | |||||||||||
| Vacation | |||||||||||
| Income taxes payable | |||||||||||
| Interest payable | |||||||||||
| Foreign currency forward contracts | |||||||||||
| Other | |||||||||||
| $ | $ | ||||||||||
(1) Reduction is primarily due to bonus payments to employees under Ciena’s 2023 annual cash incentive compensation plan in
the first quarter of fiscal 2023.
The following table summarizes the activity in Ciena’s accrued warranty for the periods indicated (in thousands):
| Beginning Balance | Current Period Provisions | Settlements | Ending Balance | |||||||||||||||||||||||
Three Months Ended January 29, 2022 | $ | ( | $ | |||||||||||||||||||||||
Three Months Ended January 28, 2023 | $ | ( | $ | |||||||||||||||||||||||
As of the dates indicated, deferred revenue is comprised of the following (in thousands):
| January 28, 2023 | October 29, 2022 | ||||||||||
| Products | $ | $ | |||||||||
| Services | |||||||||||
| Total deferred revenue | |||||||||||
| Less current portion | ( | ( | |||||||||
| Long-term deferred revenue | $ | $ | |||||||||
(15) DERIVATIVE INSTRUMENTS
Foreign Currency Derivatives
Ciena conducts business globally in numerous currencies, and thus is exposed to adverse foreign currency exchange rate changes. To limit this exposure, Ciena enters into foreign currency contracts. Ciena does not enter into such contracts for speculative purposes.
As of January 28, 2023 and October 29, 2022, Ciena had forward contracts to hedge its foreign exchange exposure in order to reduce variability in certain currencies that is principally related to research and development activities. The notional amount of these contracts was approximately $265.6 million and $272.2 million as of January 28, 2023 and October 29, 2022, respectively. These foreign exchange contracts have maturities of 24 months or less and have been designated as cash flow hedges.
As of January 28, 2023 and October 29, 2022, Ciena had forward contracts to hedge its foreign exchange exposure in order to reduce the variability in various currencies of certain balance sheet items. The notional amount of these contracts was approximately $150.0 million and $108.0 million as of January 28, 2023 and October 29, 2022, respectively. These foreign exchange contracts have maturities of 12 months or less and have not been designated as hedges for accounting purposes.
Interest Rate Derivatives
Ciena is exposed to floating rates of interest on its term loan borrowings (see Note 16 below) and has hedged such risk by entering into floating-to-fixed interest rate swap arrangements.
19
Prior to amending the 2025 Term Loan (as defined in Note 16 below) to replace LIBOR with the Secured Overnight Financing Rate (“SOFR”) (see Note 16 below), Ciena was exposed to floating rates of LIBOR interest on its 2025 Term Loan borrowings. Ciena hedged this risk by entering into floating-to-fixed interest rate swap arrangements (“interest rate swaps”). The interest rate swaps fix the LIBOR rate for $350.0 million of the 2025 Term Loan at 2.957 % through September 2023. In January 2023, Ciena entered into a LIBOR to SOFR basis swap (“basis swap”) to hedge its exposure to SOFR rate. The basis swap offsets the LIBOR exposure risk of the interest rate swaps and effectively fixes the SOFR rate for $350.0 million of the 2025 Term Loan at 2.883 % through September 2023. The total notional amount of these swaps in effect was $350.0 350.0 million of the 2025 Term Loan at 2.968 % from September 2023 through the 2025 Term Loan maturity. The total notional amount of forward starting swaps effective September 2023 was $350 million as of January 28, 2023.
In January 2023, Ciena entered into floating-to-fixed interest rate swap arrangements (“2028 interest rate swaps”). The 2028 interest rate swaps fix the SOFR rate of approximately $350.0 million of the principal amount of the 2030 Term Loan (as defined in Note 16 below) at 3.47 % through January 2028. The total notional amount of these interest rate swaps in effect as of January 28, 2023 was $350.0 million.
Ciena expects the variable rate payments to be received under the terms of the interest rate swaps, basis swap, forward starting swaps, and 2028 interest rate swaps to offset exactly the forecasted variable rate payments on the equivalent notional amounts of the 2025 Term Loan and 2030 Term Loan. These derivative contracts have been designated as cash flow hedges.
Other information regarding Ciena’s derivatives is immaterial for separate financial statement presentation. See Note 6 and Note 9 above.
(16)SHORT-TERM AND LONG-TERM DEBT
Outstanding Term Loans Payable
2025 Term Loan
On January 23, 2020, Ciena entered into a Refinancing Amendment to Credit Agreement pursuant to which Ciena refinanced the entire outstanding amount of its then existing senior secured term loan and incurred a new senior secured term loan in an aggregate principal amount of $693.0 million and maturing on September 28, 2025 (the “2025 Term Loan”).
On January 19, 2023, in connection with the Incremental Agreement (as defined below) to the Credit Agreement (as defined below), the Credit Agreement was amended to replace LIBOR with SOFR for the 2025 Term Loan in response to pending impact of Accounting Standards Codification 848 Reference Rate Reform.
The net carrying value of the 2025 Term Loan was comprised of the following as of the dates indicated (in thousands):
| January 28, 2023 | October 29, 2022 | |||||||||||||||||||||||||||||||
| Principal Balance | Unamortized Discount | Deferred Debt Issuance Costs | Net Carrying Value | Net Carrying Value | ||||||||||||||||||||||||||||
| 2025 Term Loan | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||
Deferred debt issuance costs that were deducted from the carrying amounts of the 2025 Term Loan totaled $1.6 million as of January 28, 2023 and $1.7 million at October 29, 2022. Deferred debt issuance costs are amortized using the straight-line method, which approximates the effect of the effective interest rate, through the maturity of the 2025 Term Loan. The amortization of deferred debt issuance costs for the 2025 Term Loan is included in interest expense, and was $0.2
As of January 28, 2023, the estimated fair value of the 2025 Term Loan was $670.6 million. Ciena’s 2025 Term Loan is categorized as Level 2 in the fair value hierarchy. Ciena estimated the fair value of its 2025 Term Loan using a market approach based on observable inputs, such as current market transactions involving comparable securities.
2030 Term Loan
20
On January 19, 2023, Ciena entered into an Incremental Joinder and Amendment Agreement (the “Incremental Agreement”) to its Credit Agreement, dated July 15, 2014, as amended (the “Credit Agreement”), by and among Ciena, the lenders party thereto and Bank of America, N.A., as administrative agent, pursuant to which Ciena incurred a new tranche of senior secured term loans in an aggregate principal amount of $500.0 million and maturing on January 19, 2030 (the “2030 Term Loan”). Net of original issue discount and debt issuance costs, the $493.5 million in proceeds from the 2030 Term Loan are intended to be used for general corporate purposes.
The Incremental Agreement amends the Credit Agreement and provides that the 2030 Term Loan will, among other things:
•mature on January 19, 2030;
•amortize in equal quarterly installments in aggregate amounts equal to 0.25 % of the principal amount of the 2030 Term Loan as of January 19, 2023, or $1.25 million, with the balance payable at maturity;
•be subject to mandatory prepayment on the same basis as the 2025 Term Loan, including on the occurrence of certain specified events such as asset sales, debt issuances, and receipt of annual Excess Cash Flow (as defined in the Credit Agreement);
•bear interest, at Ciena’s election, at a per annum rate equal to (a) SOFR (subject to a floor of 0.00 %) plus an applicable margin of 2.50 %, or (b) a base rate (subject to a floor of 1.00 %) plus an applicable margin of 1.50 %; and
•be repayable at any time at Ciena’s election, provided that repayment of the 2030 Term Loan with proceeds of certain indebtedness prior to July 19, 2023 will require a prepayment premium of 1.00 % of the aggregate principal amount of such prepayment.
Except as amended by the Incremental Agreement, the remaining terms of the Credit Agreement remain in full force and effect.
The net carrying value of the 2030 Term Loan was comprised of the following for the periods indicated (in thousands):
| January 28, 2023 | ||||||||||||||||||||||||||
| Principal Balance | Unamortized Discount | Deferred Debt Issuance Costs | Net Carrying Value | |||||||||||||||||||||||
| 2030 Term Loan | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||
Deferred debt issuance costs that were deducted from the carrying amounts of the 2030 Term Loan totaled $4.8 million as of January 28, 2023. Deferred debt issuance costs are amortized using the straight-line method, which approximates the effect of the effective interest rate, through the maturity of the 2030 Term Loan. The amortization of deferred debt issuance costs for the 2030 Term Loan is included in interest expense and was minimal during the first three months of fiscal 2023. The carrying value of the 2030 Term Loan listed above is also net of any unamortized debt discounts.
As of January 28, 2023, the estimated fair value of the 2030 Term Loan was $499.4 million. Ciena’s 2030 Term Loan is categorized as Level 2 in the fair value hierarchy. Ciena estimated the fair value of its 2030 Term Loan using a market approach based on observable inputs, such as current market transactions involving comparable securities.
Outstanding Senior Notes Payable
2030 Notes
On January 18, 2022, Ciena entered into an Indenture among Ciena, as issuer, certain domestic subsidiaries of Ciena, as guarantors, and U.S. Bank National Association, as trustee, pursuant to which Ciena issued $400.0 million in aggregate principal amount of 4.00 % senior notes due 2030 (the “2030 Notes”).
The net carrying value of the 2030 Notes was comprised of the following as of the dates indicated (in thousands):
| January 28, 2023 | October 29, 2022 | |||||||||||||||||||||||||
| Principal Balance | Deferred Debt Issuance Costs | Net Carrying Value | Net Carrying Value | |||||||||||||||||||||||
2030 Senior Notes | $ | $ | ( | $ | $ | |||||||||||||||||||||
21
Deferred debt issuance costs that were deducted from the carrying amount of the 2030 Notes totaled $4.8 million as of January 28, 2023 and $5.0 million as of October 29, 2022. Deferred debt issuance costs are amortized using the straight-line method, which approximates the effect of the effective interest rate, through the maturity of the 2030 Notes. The amortization of deferred debt issuance costs for the 2030 Notes is included in interest expense, and was $0.2 million during the first three months of fiscal 2023 and was minimal during the first three months of fiscal 2022.
As of January 28, 2023, the estimated fair value of the 2030 Notes was $351.0 million. The 2030 Notes are categorized as Level 2 in the fair value hierarchy. Ciena estimated the fair value of its 2030 Notes using a market approach based on observable inputs, such as current market transactions involving comparable securities.
(17) ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table summarizes the changes in accumulated balances of other comprehensive income (“AOCI”), net of tax, for the three months ended January 28, 2023 (in thousands):
| Unrealized Gain (Loss) on | Cumulative | ||||||||||||||||||||||||||||
| Available-for-sale Securities | Foreign Currency Forward Contracts | Forward Starting Interest Rate Swaps | Foreign Currency Translation Adjustment | Total | |||||||||||||||||||||||||
| Balance at October 29, 2022 | $ | ( | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||||||
| Other comprehensive gain (loss) before reclassifications | ( | ||||||||||||||||||||||||||||
| Amounts reclassified from AOCI | ( | ( | ( | ||||||||||||||||||||||||||
| Balance at January 28, 2023 | $ | ( | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||||||
The following table summarizes the changes in AOCI, net of tax, for the three months ended January 29, 2022 (in thousands):
| Unrealized Gain (Loss) on | Cumulative | ||||||||||||||||||||||||||||
| Available-for-sale Securities | Foreign Currency Forward Contracts | Forward Starting Interest Rate Swaps | Foreign Currency Translation Adjustment | Total | |||||||||||||||||||||||||
| Balance at October 30, 2021 | $ | ( | $ | $ | ( | $ | $ | ||||||||||||||||||||||
| Other comprehensive gain (loss) before reclassifications | ( | ( | ( | ( | |||||||||||||||||||||||||
| Amounts reclassified from AOCI | ( | ||||||||||||||||||||||||||||
| Balance at January 29, 2022 | $ | ( | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||
All amounts reclassified from AOCI, related to settlement (gains) losses on foreign currency forward contracts designated as cash flow hedges, impacted research and development expense on the Condensed Consolidated Statements of Operations. All amounts reclassified from AOCI, related to settlement (gains) losses on forward starting interest rate swaps designated as cash flow hedges, impacted interest and other income, net, on the Condensed Consolidated Statements of Operations.
(18) EARNINGS PER SHARE CALCULATION
Basic net income per common share (“Basic EPS”) is computed using the weighted average number of common shares outstanding. Diluted net income per potential common share (“Diluted EPS”) is computed using the weighted average number of the following, in each case, to the extent that the effect is not anti-dilutive: (i) common shares outstanding; (ii) shares issuable upon vesting of stock unit awards; and (iii) shares issuable under Ciena’s employee stock purchase plan and upon exercise of outstanding stock options, using the treasury stock method.
22
| Quarter Ended | |||||||||||
| January 28, | January 29, | ||||||||||
| 2023 | 2022 | ||||||||||
| Net income | $ | $ | |||||||||
| Basic weighted average shares outstanding | |||||||||||
| Effect of dilutive potential common shares | |||||||||||
| Diluted weighted average shares | |||||||||||
| Basic EPS | $ | $ | |||||||||
| Diluted EPS | $ | $ | |||||||||
| Antidilutive employee share-based awards, excluded | |||||||||||
(19) STOCKHOLDERS’ EQUITY
Stock Repurchase Program
On December 9, 2021, Ciena announced that its Board of Directors authorized a program to repurchase up to $1.0 billion of its common stock.
During the first three months of fiscal 2023, Ciena did not repurchase any additional shares of its common stock. As of January 28, 2023, Ciena has repurchased an aggregate of 8.4 million shares for an aggregate purchase price of $500.0 million at an average price of $59.28 per share and has an aggregate of $500.0 million of authorized funds remaining under its stock repurchase program. The purchase price for the shares of Ciena’s stock repurchased is reflected as a reduction of common stock and additional paid-in capital.
Stock Repurchases Related to Stock Unit Award Tax Withholdings
Ciena repurchases shares of its common stock to satisfy employee tax withholding obligations due on vesting of stock unit awards. The related purchase price of $13.0 million for the shares of Ciena’s stock repurchased during the first three months of fiscal 2023 is reflected as a reduction to stockholders’ equity. Ciena is required to allocate the purchase price of the repurchased shares as a reduction of common stock and additional paid-in capital.
(20) SHARE-BASED COMPENSATION EXPENSE
The following table summarizes share-based compensation expense for the periods indicated (in thousands):
| Quarter Ended | |||||||||||
| January 28, | January 29, | ||||||||||
| 2023 | 2022 | ||||||||||
| Products | $ | $ | |||||||||
| Services | |||||||||||
| Share-based compensation expense included in cost of goods sold | |||||||||||
| Research and development | |||||||||||
| Selling and marketing | |||||||||||
| General and administrative | |||||||||||
| Share-based compensation expense included in operating expense | |||||||||||
| Share-based compensation expense capitalized in inventory, net | |||||||||||
| Total share-based compensation expense | $ | $ | |||||||||
As of January 28, 2023, total unrecognized share-based compensation expense was approximately $292.6 million, which relates to unvested stock unit awards and is expected to be recognized over a weighted-average period of 1.6 years.
Stock Unit Awards
23
(21) SEGMENTS AND ENTITY-WIDE DISCLOSURES
Segment Reporting
Ciena has the following operating segments for reporting purposes: (i) Networking Platforms; (ii) Platform Software and Services; (iii) Blue Planet Automation Software and Services; and (iv) Global Services.
Ciena's long-lived assets, including equipment, building, furniture and fixtures, right-of-use (“ROU”) assets, finite-lived intangible assets, and maintenance spares, are not reviewed by Ciena's chief operating decision maker for purposes of evaluating performance and allocating resources. As of January 28, 2023, equipment, building, furniture and fixtures, net, totaled $279.0 million, and operating ROU assets totaled $48.4 million both of which support asset groups within Ciena’s four operating segments and unallocated selling and general and administrative activities. As of January 28, 2023, finite-lived intangible assets, goodwill and maintenance spares are assigned to asset groups within the following segments (in thousands):
| January 28, 2023 | |||||||||||||||||||||||||||||
| Networking Platforms | Platform Software and Services | Blue Planet Automation Software and Services | Global Services | Total | |||||||||||||||||||||||||
| Other intangible assets, net | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Goodwill | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Maintenance spares, net | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Segment Profit (Loss)
Segment profit (loss) is determined based on internal performance measures used by Ciena’s chief executive officer to assess the performance of each operating segment in a given period. In connection with that assessment, the chief executive officer excludes the following items: selling and marketing costs; general and administrative costs; significant asset impairments and restructuring costs; amortization of intangible assets; acquisition and integration costs; interest and other income, net; interest expense; and provision for income taxes.
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| Quarter Ended | |||||||||||
| January 28, | January 29, | ||||||||||
| 2023 | 2022 | ||||||||||
| Segment profit (loss): | |||||||||||
| Networking Platforms | $ | $ | |||||||||
| Platform Software and Services | |||||||||||
| Blue Planet Automation Software and Services | ( | ( | |||||||||
| Global Services | |||||||||||
| Total segment profit | |||||||||||
| Less: Non-performance operating expenses | |||||||||||
| Selling and marketing | |||||||||||
| General and administrative | |||||||||||
| Significant asset impairments and restructuring costs | |||||||||||
| Amortization of intangible assets | |||||||||||
| Acquisition and integration costs | |||||||||||
| Add: Other non-performance financial items | |||||||||||
| Interest and other income, net | |||||||||||
| Interest expense | ( | ( | |||||||||
| Less: Provision for income taxes | |||||||||||
| Net income | $ | $ | |||||||||
Entity-Wide Reporting
The following table reflects Ciena’s geographic distribution of equipment, building, furniture and fixtures, net, and operating ROU assets, with any country accounting for at least 10% of total equipment, building, furniture and fixtures, net, and operating ROU assets specifically identified. Equipment, building, furniture and fixtures, net, and operating ROU assets attributable to geographic regions outside of the United States and Canada are reflected as “Other International.” For the periods below, Ciena’s geographic distribution of equipment, building, furniture and fixtures, net, and operating ROU assets was as follows (in thousands):
| January 28, 2023 | October 29, 2022 | ||||||||||
| Canada | $ | $ | |||||||||
| United States | |||||||||||
| Other International | |||||||||||
| Total | $ | $ | |||||||||
(22) COMMITMENTS AND CONTINGENCIES
Tax Contingencies
Ciena is subject to various tax liabilities arising in the ordinary course of business. Ciena does not expect that the ultimate settlement of these tax liabilities will have a material effect on its results of operations, financial position, or cash flows.
Litigation
Ciena is subject to various legal proceedings, claims, and other matters arising in the ordinary course of business, including those that relate to employment, commercial, tax, and other regulatory matters. Ciena is also subject to intellectual property related claims, including claims against third parties that may involve contractual indemnification obligations on the part of Ciena. Ciena does not expect that the ultimate costs to resolve such matters will have a material effect on its results of operations, financial position, or cash flows.
(23) SUBSEQUENT EVENTS
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ABL Credit Facility
On February 10, 2023, Ciena modified its senior secured asset-backed revolving credit facility (the “ABL Credit Facility”), which provides for a total commitment of $300 million, to extend its maturity date to September 28, 2025. Other terms of the ABL Credit Facility remain unchanged.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Statements
This report contains statements that discuss future events or expectations, projections of results of operations or financial condition, changes in the markets for our products and services, trends in our business, operational matters including the expansion of manufacturing capacity and accumulation of inventory, business prospects and strategies and other “forward-looking” information. Forward-looking statements may appear throughout this report, including in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.” In some cases, you can identify “forward-looking statements” by words like “may,” “will,” “would,” “can,” “should,” “could,” “expects,” “future,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “projects,” “targets,” “prepare,” or “continue” or the negative of those words and other comparable words. You should be aware that the forward-looking statements contained in this report are based on our current views and assumptions, and are subject to known and unknown risks, uncertainties and other factors that may cause actual events or results to differ materially.
For a discussion identifying some of the important factors that could cause actual results to vary materially from those anticipated in the forward-looking statements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in this report. For a more complete understanding of the risks associated with an investment in our securities, you should review these factors and the rest of this report in combination with the more detailed description of our business and management’s discussion and analysis of financial condition and risk factors described in our annual report on Form 10-K for fiscal 2022, which we filed with the Securities and Exchange Commission (the “SEC”) on December 16, 2022 (our “2022 Annual Report”). However, we operate in a very competitive and dynamic environment and new risks and uncertainties emerge, are identified or become apparent from time to time and therefore may not be identified in this report. We cannot predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this report. You should be aware that the forward-looking statements contained in this report are based on our current views and assumptions. We undertake no obligation to revise or to update any forward-looking statements made in this report to reflect events or circumstances after the date hereof or to reflect new information or the occurrence of unanticipated events, except as required by law. The forward-looking statements in this report are intended to be subject to protection afforded by the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Unless the context requires otherwise, references in this report to “Ciena,” the “Company,” “we,” “us,” and “our” refer to Ciena Corporation and its consolidated subsidiaries.
Overview
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Condensed Consolidated Financial Statements and the accompanying notes thereto included in Item 1 of Part I of this report and in Item 8 of Part II of our 2022 Annual Report.
We are a networking systems, services, and software company, providing solutions that enable a wide range of network operators to deploy and manage next-generation networks that deliver services to businesses and consumers. We provide hardware, software, and services that support the delivery of video, data, and voice traffic over core, metro, aggregation, and access communications networks. Our solutions are used globally by communications service providers, cable and multiservice operators, Web-scale providers, submarine network operators, governments, and enterprises across multiple industry verticals. Our portfolio is designed to enable the Adaptive Network, which is our vision for a network end state that leverages a programmable and scalable network infrastructure, driven by software control and automation capabilities, that are informed by analytics and intelligence. Our solutions include Networking Platforms, including our Converged Packet Optical and Routing and Switching portfolios, which can be applied from the network core to end-user access points, and which allow network operators to scale capacity, increase transmission speeds, allocate traffic efficiently and adapt dynamically to changing end-user service demands. To complement our Networking Platforms, we offer Platform Software, which includes our MCP applications that deliver advanced multi-layer domain control and operations. Through our Blue Planet Software we also enable complete service lifecycle management automation with productized open source software (OSS) and service assurance solutions that help our customers to achieve closed loop automation across multi-vendor and multi-domain environments.
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Order Volumes
From the second quarter of fiscal 2021 through the third quarter of fiscal 2022, we received unprecedented orders for our products and services. Our quarterly order volumes during this period significantly exceeded our revenue and historical order volumes, with some concentration of orders among certain existing Web-scale and North America-based service provider customers. We believe some portion of these orders reflected pre-pandemic design wins for which orders were delayed due to the dynamics of the COVID-19 pandemic. We also believe some portion of these orders reflected customer acceleration of future orders due to lengthened lead times or the implementation of security of supply strategies to address the supply constraints described below. Our order growth relative to revenue began to moderate in the fourth quarter of fiscal 2022. We expect order growth relative to revenue to continue to moderate, and we do not expect the very high level of orders we experienced during this period to continue. However, over the longer term, we continue to believe that certain trends and shifts in business and consumer behaviors, including 5G, enterprise and consumer cloud network adoption, increasing demands on the network edge, and network operator focus on resilience and automation, represent positive, long-term opportunities for our business.
Backlog
Historically, a significant portion of our quarterly revenue was generated from customer orders received during that same quarter (which we refer to as “book to revenue”) and therefore less predictable and subject to fluctuation. More recently, however, we have generated a significant backlog of customer orders, and our results can be more significantly impacted by availability of supply, as well as any order cancellations or customer delivery deferrals of existing backlog. As a result of recent demand dynamics and the supply chain constraints described below, our backlog grew from $1.2 billion at the end of fiscal 2020 to $4.2 billion at the end of fiscal 2022. As supply chain conditions improve and we are able to increase shipment volumes, we expect our backlog to reduce as fiscal 2023 progresses. The timing and degree to which we make shipments to fulfill our backlog will have a significant impact on our rate of revenue growth and could cause some volatility in our results of operations. As a result of these and other factors, our backlog should not necessarily be viewed as an accurate indicator of revenue for any particular period. See the risk factor captioned “Our backlog may not be an accurate indicator of our level and timing of future revenues.” in Item 1A of Part II of this report for further discussion of risks related to our backlog.
Supply Chain Constraints
In the face of demand across a range of industries, global supply for certain raw materials and components, including, in particular, semiconductor, integrated circuits, and other electronic components used in most of our products, experienced substantial constraint and disruption in recent periods. As a result, we experienced significant component shortages, extended lead times, increased costs, and unexpected cancellation or delay of previously committed supply of key components across our supplier base. While reliability of supply has begun to improve gradually, and the majority of our suppliers have been able to deliver by their promised, though extended, lead times, we continue to experience volatility from a small group of our suppliers of integrated circuit components that represent a small fraction of our overall materials, but which are essential for delivering finished products. This volatility can result in receiving fewer components than expected in a given period, which can adversely impact our revenue. It can also result in receiving more components than expected, as was the case in during the fourth quarter of fiscal 2022 and the first quarter of fiscal 2023, and which had a positive impact on our revenue. We expect supply chain challenges will continue at least through fiscal 2023 and expect that the extended lead times and elevated supply chain costs we have experienced will persist for the reasonably foreseeable future. We expect these supply conditions to continue to impact our costs of goods sold in the near term and to adversely impact our ability to continue to reduce the cost to produce our products in a manner consistent with prior periods. It is unclear when the supply environment will become less volatile and what impacts it will have on our business and results of operations in future periods.
To mitigate the impact of these supply conditions on our business and customers, we have been placing advance orders for inventory and accumulating components that are in available supply. We believe that this approach positions us to produce finished goods more quickly when supply constraints ease for those components in shorter supply. As a result, our inventory has increased from $946.7 million at the end of fiscal 2022 to $1.2 billion at the end of the first quarter fiscal 2023. We have also implemented additional mitigation strategies, including expanding manufacturing capacity, implementing multi-sourcing activities, qualifying alternative parts, and redesigning products, and expect, over time, to realize certain benefits of these activities. Together with increased costs of supply, these mitigation strategies have impacted, and we expect them to continue to impact, our result of operations and cash from operations. See “Risk Factors” in Item 1A of Part II of this report for further discussion of risks related to our supply chain and our mitigation activities.
Strategic and Financial Initiatives
27
Strategic Acquisitions. On November 17, 2022, we acquired Benu Networks, Inc. (“Benu”) and its portfolio of cloud-native software solutions, including a virtual Broadband Network Gateway ((v)BNG), which complement our existing portfolio of broadband access solutions. On December 30, 2022, we acquired Tibit Communications, Inc. (“Tibit”), a provider of passive optical network solutions. See Note 4 to our Consolidated Financial Statements included in Item 1 of Part I of this report for more information on these acquisitions.
Financial Initiatives. On January 19, 2023, we entered into an incremental amendment to our existing Credit Agreement, dated July 15, 2014, as amended (the “Credit Agreement”), pursuant to which we incurred a new tranche of senior secured term loans in an aggregate principal amount of $500 million, maturing on January 19, 2030 (the “2030 Term Loan”). We intend to use the net proceeds of the 2030 Term Loan borrowing for general corporate purposes. On February 10, 2023, we amended our existing ABL Credit Facility (as defined below) to, among other things, extend the maturity date of the ABL Credit Facility to September 28, 2025. See Notes 16 and 23 to our Consolidated Financial Statements included in Item 1 of Part I of this report for more information relating to these financial initiatives.
For additional information regarding our business, industry, market opportunity, competitive landscape, and strategy, see our 2022 Annual Report.
Consolidated Results of Operations
Operating Segments
Our results of operations are presented based on the following operating segments: (i) Networking Platforms; (ii) Platform Software and Services; (iii) Blue Planet Automation Software and Services; and (iv) Global Services. See Note 3 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.
Revenue
Currency Fluctuations
Approximately 14.7% of our revenue was non-U.S. Dollar-denominated during the first quarter of fiscal 2023, primarily including sales in Euros, Canadian Dollars, and British Pounds. During the first quarter of fiscal 2023, as compared to the first quarter of fiscal 2022, the U.S. Dollar primarily strengthened against these currencies. Consequently, our revenue for the first quarter of fiscal 2023 reported in U.S. Dollars was adversely impacted by approximately $10.5 million, or 1.0%.
Operating Segment Revenue
The table below sets forth the changes in our operating segment revenue for the periods indicated (in thousands, except percentage data):
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| Quarter Ended | |||||||||||||||||
| January 28, 2023 | January 29, 2022 | %* | |||||||||||||||
| Revenue: | |||||||||||||||||
| Networking Platforms | |||||||||||||||||
| Converged Packet Optical | $ | 735,634 | $ | 540,936 | 36.0 | % | |||||||||||
| %** | 69.6 | % | 64.1 | % | |||||||||||||
| Routing and Switching | 119,505 | 85,710 | 39.4 | % | |||||||||||||
| %** | 11.3 | % | 10.1 | % | |||||||||||||
| Total Networking Platforms | 855,139 | 626,646 | 36.5 | % | |||||||||||||
| %** | 80.9 | % | 74.2 | % | |||||||||||||
| Platform Software and Services | 73,445 | 72,917 | 0.7 | % | |||||||||||||
| %** | 6.9 | % | 8.6 | % | |||||||||||||
| Blue Planet Automation Software and Services | 15,405 | 21,110 | (27.0) | % | |||||||||||||
| %** | 1.5 | % | 2.5 | % | |||||||||||||
| Global Services | |||||||||||||||||
| Maintenance Support and Training | 67,891 | 72,491 | (6.3) | % | |||||||||||||
| %** | 6.4 | % | 8.6 | % | |||||||||||||
| Installation and Deployment | 34,575 | 40,370 | (14.4) | % | |||||||||||||
| %** | 3.3 | % | 4.8 | % | |||||||||||||
| Consulting and Network Design | 10,066 | 10,909 | (7.7) | % | |||||||||||||
| %** | 1.0 | % | 1.3 | % | |||||||||||||
| Total Global Services | 112,532 | 123,770 | (9.1) | % | |||||||||||||
| %** | 10.7 | % | 14.7 | % | |||||||||||||
| Total revenue | $ | 1,056,521 | $ | 844,443 | 25.1 | % | |||||||||||
_____________________________
* Denotes % change from fiscal 2022 to fiscal 2023
** Denotes % of total revenue
Quarter ended January 28, 2023 as compared to the quarter ended January 29, 2022
•Networking Platforms segment revenue increased by $228.5 million, reflecting product line sales increases of $194.7 million of our Converged Packet Optical products and $33.8 million of our Routing and Switching products.
◦Converged Packet Optical sales increased, primarily reflecting sales increases of $76.8 million of our 6500
Packet-Optical Platform, primarily to communication service providers and enterprise customers, $75.9 million of our Waveserver® products, primarily to Web-scale providers and communication service providers, and $44.3 million of our 6500 Reconfigurable Line System (“RLS”) products, primarily to Web-scale providers.
•Routing and Switching sales increased, primarily reflecting sales increases of $29.9 million of our Virtualization Edge software and $6.6 million of our platform independent software to communication service providers.
•Platform Software and Services segment revenue increased by $0.5 million, reflecting sales increases of $11.3 million in our subscription software services, primarily to communication service providers, offset by a sales decrease of $10.8 million in sales of software platforms, primarily due to decreased sales of our MCP software platform.
•Blue Planet Automation Software and Services segment revenue decreased by $5.7 million, primarily reflecting a decrease of $5.0 million in software platforms sales.
•Global Services segment revenue decreased by $11.2 million, primarily reflecting sales decreases of $5.8 million of
29
our installation and deployment services and $4.6 million of our maintenance support and training services. Installation and deployment services were adversely impacted by the current constrained supply environment, which resulted in delayed delivery of certain products for which installation and deployment services were ordered by customers, as described in more detail in “Overview” above.
Revenue by Geographic Region
Our operating segments engage in business and operations across three geographic regions: the United States, Canada, the Caribbean and Latin America (“Americas”); Europe, Middle East and Africa (“EMEA”); and Asia Pacific, Japan and India (“APAC”). The geographic distribution of our revenue can fluctuate significantly from period to period, and the timing of revenue recognition for large network projects, particularly outside of the United States, can result in large variations in geographic revenue results in any particular period. The increase in our Americas region revenue for the quarter ended January 28, 2023 was primarily driven by increased sales in the United States and Canada. The increase in our APAC region revenue for the quarter ended January 28, 2023 was primarily driven by increased sales in India. The increase in our EMEA region revenue for the quarter ended January 28, 2023 was primarily driven by increased sales in the Netherlands.
The following table reflects our geographic distribution of revenue, principally based on the relevant location for our delivery of products and performance of services. The table sets forth the changes in geographic distribution of revenue for the periods indicated (in thousands, except percentage data):
| Quarter Ended | |||||||||||||||||
| January 28, 2023 | January 29, 2022 | %* | |||||||||||||||
| Americas | $ | 765,096 | $ | 595,144 | 28.6 | % | |||||||||||
| %** | 72.4 | % | 70.5 | % | |||||||||||||
| EMEA | 152,804 | 150,785 | 1.3 | % | |||||||||||||
| %** | 14.5 | % | 17.8 | % | |||||||||||||
| APAC | 138,621 | 98,514 | 40.7 | % | |||||||||||||
| %** | 13.1 | % | 11.7 | % | |||||||||||||
| Total | $ | 1,056,521 | $ | 844,443 | 25.1 | % | |||||||||||
_____________________________________
* Denotes % change from fiscal 2022 to fiscal 2023
** Denotes % of total revenue
Quarter ended January 28, 2023 as compared to the quarter ended January 29, 2022
•Americas revenue increased by $170.0 million, reflecting sales increases of $180.5 million within our Networking
Platforms segment and $1.7 million within our Platform Software and Services segment. These sales increases were partially offset by sales decreases of $7.3 million within our Global Services segment and $4.9 million within our Blue Planet Automation Software and Services segment. The increase within our Networking Platforms segment reflects product line sales increases of $147.2 million of our Converged Packet Optical products and $33.2 million of our Routing and Switching products. The increase within our Converged Packet Optical product line was primarily related to sales increases of $65.4 million of our Waveserver products, primarily to Web-scale providers and communication service providers, $45.5 million of our 6500 Packet-Optical Platform, primarily to communication service providers, and $35.8 million of our 6500 RLS products, primarily to Web-scale providers. The increase within our Routing and Switching product line was primarily related to sales increases of $29.9 million of our Virtualization Edge software and $6.6 million of our platform independent software, both primarily to communication service providers.
•EMEA revenue increased by $2.0 million, primarily reflecting a sales increase of $5.8 million within our
Networking Platforms segment, which was partially offset by sales decreases of $2.5 million within our Global Services segment and $1.5 million within our Platform Software and Services segment.
•APAC revenue increased by $40.1 million, primarily reflecting a sales increase of $42.2 million within our
Networking Platforms segment, partially offset by sales decreases of $1.4 within our Global Services segment and $1.0 million within our Blue Planet Automation Software and Services segment. The increase within our Networking Platforms segment primarily reflects product line sales increases of $41.3 million of Converged Packet Optical products, which includes sales increases of $38.8 million of our 6500 Packet-Optical Platform, primarily to communication service provider customers in India.
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Cost of Goods Sold and Gross Profit
There are a number of important factors or conditions that can adversely affect or cause our gross profit as a percentage of product or service revenue, or “gross margin,” to fluctuate on a quarterly basis. For example, early stages of new network builds also often include an increased concentration of lower margin “common” equipment, photonics sales and installation services, with the intent to improve margin as we sell channel cards and maintenance services to customers as they add capacity. The component elements that comprise our product cost of goods sold and services costs of goods sold, and certain factors that can cause gross margin to fluctuate, are described in detail in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” sections of our 2022 Annual Report.
The tables below set forth the changes in revenue, cost of goods sold and gross profit for the periods indicated (in thousands, except percentage data):
| Quarter Ended | |||||||||||||||||
| January 28, 2023 | January 29, 2022 | %* | |||||||||||||||
| Total revenue | $ | 1,056,521 | $ | 844,443 | 25.1 | % | |||||||||||
| Total cost of goods sold | 600,575 | 460,256 | 30.5 | % | |||||||||||||
| Gross profit | $ | 455,946 | $ | 384,187 | 18.7 | % | |||||||||||
| %** | 43.2 | % | 45.5 | % | |||||||||||||
_____________________________________
* Denotes % change from fiscal 2022 to fiscal 2023
** Denotes % of total revenue
| Quarter Ended | |||||||||||||||||
| January 28, 2023 | January 29, 2022 | %* | |||||||||||||||
| Product revenue | $ | 877,715 | $ | 665,007 | 32.0 | % | |||||||||||
| Product cost of goods sold | 500,337 | 372,565 | 34.3 | % | |||||||||||||
| Product gross profit | $ | 377,378 | $ | 292,442 | 29.0 | % | |||||||||||
| %** | 43.0 | % | 44.0 | % | |||||||||||||
_____________________________________
* Denotes % change from fiscal 2022 to fiscal 2023
** Denotes % of product revenue
| Quarter Ended | |||||||||||||||||
| January 28, 2023 | January 29, 2022 | %* | |||||||||||||||
| Services revenue | $ | 178,806 | $ | 179,436 | (0.4) | % | |||||||||||
| Services cost of goods sold | 100,238 | 87,691 | 14.3 | % | |||||||||||||
| Services gross profit | $ | 78,568 | $ | 91,745 | (14.4) | % | |||||||||||
| % ** | 43.9 | % | 51.1 | % | |||||||||||||
_____________________________________
* Denotes % change from fiscal 2022 to fiscal 2023
** Denotes % of services revenue
Quarter ended January 28, 2023 as compared to the quarter ended January 29, 2022
•Gross profit increased by $71.8 million. Gross margin decreased by 230 basis points, primarily due to lower services margins and increased costs of components resulting from global supply chain shortages. As supply conditions gradually improve, particularly for lower margin “common” equipment and photonics, we expect our gross margin to be adversely impacted during the remainder of fiscal 2023 as a result of a higher concentration of lower margin product mix. We also expect our gross margin to continue be adversely impacted due to the challenges and costs associated with the constrained supply environment described in “Overview” above.
31
•Gross profit on products increased by $84.9 million. Product gross margin decreased by 100 basis points, primarily due to increased costs of components resulting from global supply chain shortages, and lower sales of software platforms.
•Gross profit on services decreased by $13.2 million. Services gross margin decreased by 720 basis points, primarily due to lower maintenance support, higher deployment costs, and losses incurred on certain Blue Planet software service projects. These decreases were partially offset by an increase in Platform Software services revenue.
Operating Expense
Currency Fluctuations
Approximately 49.6% of our operating expense was non-U.S. Dollar-denominated during the first quarter of fiscal 2023, including expenses in Canadian Dollars, Indian Rupees, and Euros. During the first quarter of fiscal 2023, as compared to the first quarter of fiscal 2022, the U.S. Dollar primarily strengthened against these currencies. Consequently, our operating expense, net of hedging, reported in U.S. Dollars slightly decreased by approximately $9.8 million, or 2.6%.
The component elements that comprise each of our operating expense categories in the table below are set forth in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our 2022 Annual Report. The table below sets forth the changes in operating expense for the periods indicated (in thousands, except percentage data):
| Quarter Ended | |||||||||||||||||
| January 28, 2023 | January 29, 2022 | %* | |||||||||||||||
| Research and development | $ | 181,730 | $ | 148,409 | 22.5 | % | |||||||||||
| %** | 17.2 | % | 17.6 | % | |||||||||||||
| Selling and marketing | 123,807 | 118,881 | 4.1 | % | |||||||||||||
| %** | 11.7 | % | 14.1 | % | |||||||||||||
| General and administrative | 50,896 | 44,498 | 14.4 | % | |||||||||||||
| %** | 4.8 | % | 5.3 | % | |||||||||||||
| Significant asset impairments and restructuring costs | 4,298 | 3,409 | 26.1 | % | |||||||||||||
| %** | 0.4 | % | 0.4 | % | |||||||||||||
| Amortization of intangible assets | 7,441 | 8,918 | (16.6) | % | |||||||||||||
| %** | 0.7 | % | 1.1 | % | |||||||||||||
| Acquisition and integration costs | 2,558 | 68 | n/m | ||||||||||||||
| %** | 0.2 | % | — | % | |||||||||||||
| Total operating expenses | $ | 370,730 | $ | 324,183 | 14.4 | % | |||||||||||
| %** | 35.1 | % | 38.4 | % | |||||||||||||
_____________________________________
* Denotes % change from fiscal 2022 to fiscal 2023
** Denotes % of total revenue
n/m Denotes a non-meaningful metric for the period
Quarter ended January 28, 2023 as compared to the quarter ended January 29, 2022
•Research and development expense benefited from $6.4 million as a result of foreign exchange rates, net of hedging, primarily due to a stronger U.S. Dollar in relation to the Canadian Dollar and Indian Rupee. Including the effect of foreign exchange rates, net of hedging, research and development expenses increased by $33.3 million. This increase
primarily reflects increases in employee headcount and related compensation costs, professional services and prototype expense. The increase in employee headcount was partially due to our acquisitions of Benu and Tibit.
•Selling and marketing expense benefited from $2.7 million as a result of foreign exchange rates, primarily due to a stronger U.S. Dollar in relation to the Euro and Canadian Dollar. Including the effect of foreign exchange rates, sales and marketing expense increased by $4.9 million. This increase primarily reflects an increase in professional services and travel and entertainment costs, partially offset by a decrease in employee-related compensation costs related to sales commissions.
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•General and administrative expense increased by $6.4 million. This increase primarily reflects increases in employee headcount and related compensation costs, professional services and increased bad debt expense, partially offset by decreased legal settlement costs.
•Significant asset impairments and restructuring costs reflects actions that we have taken with respect to our operations, global workforce and facilities as part of a business optimization strategy to improve gross margin, constrain operating expense and redesign certain business processes.
•Amortization of intangible assets decreased by $1.5 million due to certain intangible assets having reached the end of their economic lives, partially offset by additional intangibles acquired in connection with our acquisitions of Benu and Tibit during the first quarter of fiscal 2023.
•Acquisition and integration costs increased by $2.5 million and primarily reflect financial, legal, and accounting advisors and employee-related costs related to our acquisitions of Benu and Tibit.
For more information on our acquisitions, see Note 4 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.
Other Items
The table below sets forth the changes in other items for the periods indicated (in thousands, except percentage data):
| Quarter Ended | |||||||||||||||||
| January 28, 2023 | January 29, 2022 | %* | |||||||||||||||
| Interest and other income, net | $ | 31,973 | $ | 3,686 | 767.4 | % | |||||||||||
| %** | 3.0 | % | 0.4 | % | |||||||||||||
| Interest expense | $ | 15,870 | $ | 8,648 | 83.5 | % | |||||||||||
| %** | 1.5 | % | 1.0 | % | |||||||||||||
| Provision for income taxes | $ | 25,078 | $ | 9,219 | 172.0 | % | |||||||||||
| %** | 2.4 | % | 1.1 | % | |||||||||||||
_____________________________________
* Denotes % change from fiscal 2022 to fiscal 2023
** Denotes % of total revenue
Quarter ended January 28, 2023 as compared to the quarter ended January 29, 2022
•Interest and other income, net increased by $28.3 million, primarily resulting from the remeasurement of our previously held investment in Tibit to fair value, which resulted in a gain on our cost method equity investment of $26.5 million, and higher interest income. These increases were partially offset by the impact of foreign exchange rates on assets and liabilities denominated in a currency other than the relevant functional currency, net of hedging activity. For more information on our acquisitions, see Note 4 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.
•Interest expense increased by $7.2 million, primarily due to higher interest rates on our floating rate debt, net of hedging activity, and additional outstanding indebtedness, including our 2030 Notes issued in the first quarter of fiscal 2022 and the 2030 Term Loan incurred in the first quarter of fiscal 2023. For more information on our short-term and long-term debt, see Note 16 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.
•Provision for income taxes increased by $15.9 million, primarily due to an increase in pre-tax income in the first quarter of fiscal 2023 as compared to the first quarter of fiscal 2022. The effective tax rate for the first quarter of fiscal 2023 was higher than the effective tax rate for the first quarter of fiscal 2022, primarily due to the mandatory capitalization of research and development expenses in the first quarter of fiscal 2023.
Segment Profit (Loss)
The table below sets forth the changes in our segment profit (loss) for the respective periods (in thousands, except percentage data):
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| Quarter Ended | |||||||||||||||||
| January 28, 2023 | January 29, 2022 | %* | |||||||||||||||
| Segment profit (loss): | |||||||||||||||||
| Networking Platforms | $ | 202,147 | $ | 134,125 | 50.7 | % | |||||||||||
| Platform Software and Services | $ | 45,650 | $ | 49,496 | (7.8) | % | |||||||||||
| Blue Planet Automation Software and Services | $ | (11,059) | $ | (1,034) | n/m | ||||||||||||
| Global Services | $ | 37,478 | $ | 53,191 | (29.5) | % | |||||||||||
_____________________________________
* Denotes % change from fiscal 2022 to fiscal 2023
n/m Denotes a non-meaningful metric for the period
Quarter ended January 28, 2023 as compared to the quarter ended January 29, 2022
•Networking Platforms segment profit increased by $68.0 million, primarily due to higher sales volume and higher gross margin as described above, partially offset by higher research and development costs.
•Platform Software and Services segment profit decreased by $3.8 million, primarily due to lower software sales volume, as described above, lower gross margin on software-related services, and higher research and development costs.
•Blue Planet Automation Software and Services segment loss increased by $10.0 million, primarily due to lower gross margin and lower sales volume, as described above, and higher research and development costs.
•Global Services segment profit decreased by $15.7 million, primarily due to lower sales volume and lower
gross margin on services as described above.
Liquidity and Capital Resources
Overview. For the three months ended January 28, 2023, we used $265.6 million of cash in operating activities as our working capital requirements of approximately $392.3 million exceeded our net income (adjusted for non-cash charges) of approximately $126.6 million. For additional details, see “Cash Used In Operating Activities” below.
Cash, cash equivalents, and investments decreased by $25.5 million during the first three months of fiscal 2023. In addition to the cash used in operations, the decrease in cash also included the following items: (i) cash used for the acquisition of businesses of $230.0 million; (ii) cash used to fund our investing activities for capital expenditures totaling $30.0 million; and (iii) stock repurchases on vesting of our stock unit awards to employees relating to tax withholding of $13.0 million. Proceeds from the issuance of the 2030 Term Loan provided $493.5 million in cash, net of paid debt issuance costs, and proceeds from the issuance of equity under our employee stock purchase plan provided $14.3 million in cash during the three months ended January 28, 2023.
See Notes 4, 16 and 18 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report for additional information on these transactions.
The following table sets forth changes in our cash and cash equivalents and investments in marketable debt securities for the respective periods (in thousands):
| January 28, 2023 | October 29, 2022 | Increase (decrease) | |||||||||||||||
| Cash and cash equivalents | $ | 1,054,549 | $ | 994,352 | $ | 60,197 | |||||||||||
| Short-term investments in marketable debt securities | 100,424 | 153,989 | (53,565) | ||||||||||||||
| Long-term investments in marketable debt securities | 3,242 | 35,385 | (32,143) | ||||||||||||||
| Total cash and cash equivalents and investments in marketable debt securities | $ | 1,158,215 | $ | 1,183,726 | $ | (25,511) | |||||||||||
Principal Sources of Liquidity. Our principal sources of liquidity on hand include our cash, cash equivalents, and investments, which, as of January 28, 2023 totaled $1.2 billion, as well as the senior secured asset-backed revolving credit facility to which we and certain of our subsidiaries are parties (the “ABL Credit Facility”). The ABL Credit Facility provides for a total commitment of $300.0 million with a maturity date of September 28, 2025, as modified on February 10, 2023. See
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Note 23 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report. We principally use the ABL Credit Facility to support the issuance of letters of credit that arise in the ordinary course of our business and thereby to reduce our use of cash required to collateralize these instruments. As of January 28, 2023, letters of credit totaling $86.1 million were collateralized by our ABL Credit Facility. There were no borrowings outstanding under the ABL Credit Facility as of January 28, 2023.
Foreign Liquidity. Cash, cash equivalents, and short-term investments held by our foreign subsidiaries was $250.4 million as of January 28, 2023. We intend to reinvest indefinitely our foreign earnings. If we were to repatriate the accumulated historical foreign earnings, the provisional amount of unrecognized deferred income tax liability related to foreign withholding taxes would be approximately $34.0 million.
Stock Repurchase Authorization. On December 9, 2021, we announced that our Board of Directors authorized a program to repurchase up to $1.0 billion of our common stock, which replaced in its entirety the previous stock repurchase program authorized in fiscal 2019. During the first three months of fiscal 2023, we did not repurchase any additional common stock under the stock repurchase program, and $500.0 million remained under the current repurchase authorization as of January 28, 2023. The amount and timing of any further repurchases under our stock repurchase program are subject to a variety of factors including liquidity, cash flow, stock price, and general business and market conditions. The program may be modified, suspended, or discontinued at any time. See Note 19 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.
Liquidity Position. Based on past performance and current expectations, we believe that cash from operations, cash, cash equivalents, investments, and other sources of liquidity, including our ABL Credit Facility, will satisfy our currently anticipated working capital needs, capital expenditures, and other liquidity requirements associated with our operations through the next 12 months and the reasonably foreseeable future. We regularly evaluate our liquidity position, debt obligations, and anticipated cash needs to fund our operating or investment plans, and will continue to consider capital raising and other market opportunities that may be available to us. We regularly evaluate alternatives to manage our capital structure and market opportunities to enhance our liquidity and provide further operational and strategic flexibility.
Cash Used In Operating Activities
The following sections set forth the components of our $265.6 million of cash used in operating activities during the first three months of fiscal 2023:
Net income (adjusted for non-cash charges)
The following table sets forth our net income (adjusted for non-cash charges) during the period (in thousands):
| Three Months Ended | |||||
| January 28, 2023 | |||||
| Net income | $ | 76,241 | |||
| Adjustments for non-cash charges: | |||||
| Depreciation of equipment, building, furniture and fixtures, and amortization of leasehold improvements | 22,208 | ||||
| Share-based compensation expenses | 30,512 | ||||
| Amortization of intangible assets | 10,325 | ||||
| Deferred taxes | (7,247) | ||||
| Provision for inventory excess and obsolescence | 5,503 | ||||
| Provision for warranty | 8,230 | ||||
| Gain on cost method equity investment | (26,455) | ||||
| Other | 7,325 | ||||
| Net income (adjusted for non-cash charges) | $ | 126,642 | |||
Working Capital
We used $392.3 million of cash for working capital during the period. The following table sets forth the major components of the cash used in working capital (in thousands):
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| Three Months Ended | |||||
| January 28, 2023 | |||||
| Cash used in accounts receivable | $ | (133,067) | |||
| Cash used in inventories | (235,059) | ||||
| Cash provided by prepaid expenses and other | 4,667 | ||||
| Cash used in accounts payable, accruals, and other obligations | (56,979) | ||||
| Cash provided by deferred revenue | 29,459 | ||||
| Cash used in operating lease assets and liabilities, net | (1,302) | ||||
| Total cash used for working capital | $ | (392,281) | |||
As compared to the end of fiscal 2022:
•The $133.1 million of cash used in accounts receivable during the first three months of fiscal 2023 reflects increased sales volume at the end of the first quarter of fiscal 2023;
•The $235.1 million of cash used in inventories during the first three months of fiscal 2023 primarily reflects increases in raw materials inventory related to the steps that we are taking to mitigate the impact of current supply chain constraints and the global market shortage of semiconductor parts described in “Overview” above;
•The $4.7 million of cash provided by prepaid expense and other during the first three months of fiscal 2023 primarily reflects decreases in contract assets, partially offset by increases in prepaid value-added tax (VAT) and other taxes and foreign currency forward contracts;
•The $57.0 million of cash used in accounts payable, accruals, and other obligations during the first three months of fiscal 2023 primarily reflects the timing of payments to employees under our annual cash incentive compensation plans and payments to suppliers;
•The $29.5 million of cash provided by deferred revenue during the first three months of fiscal 2023 represents an increase in advanced payments received from customers prior to revenue recognition; and
•The $1.3 million of cash used in operating lease assets and liabilities, net, during the first three months of fiscal 2023 represents cash paid for operating lease payments in excess of operating lease costs.
Our days sales outstanding (“DSOs”) increased from 97 for first three months of fiscal 2022 to 103 for the first three months of fiscal 2023. The calculation of DSOs includes accounts receivables, net and contract assets for unbilled receivables, net included in prepaid expenses and other. Our inventory turns decreased from 3.3 for the first three months of fiscal 2022 to 1.7 for the first three months of fiscal 2023 due to the increases in inventory as described in “Overview” above.
Cash Paid for Interest, Net
The following table sets forth the cash paid for interest, net, during the period (in thousands):
| Three Months Ended | |||||
| January 28, 2023 | |||||
Term Loan due September 28, 2025(1) | $ | 9,769 | |||
Term Loan due January 31, 2030(2) | — | ||||
Senior Notes due January 31, 2030(3) | — | ||||
Interest rate swaps(4) | (802) | ||||
ABL Credit Facility(5) | 516 | ||||
| Finance leases | 1,053 | ||||
| Cash paid during period | $ | 10,536 | |||
(1) Interest on the 2025 Term Loan is payable periodically based on the interest period selected for borrowing. The 2025 Term Loan bore interest at LIBOR for the chosen borrowing period plus a spread of 1.75% subject to a minimum LIBOR rate of 0.00% through its amendment on January 19, 2023. The 2025 Term loan now bears interest at SOFR for the chosen borrowing period plus a spread of 1.75% subject to a minimum SOFR rate of 0.00%. At the end of the first quarter of fiscal 2023, the interest rate on the 2025 Term Loan was 6.24%.
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(2) Interest on the 2030 Term Loan is payable periodically based on the interest period selected for borrowing. The 2030 Term Loan bears interest at SOFR for the chosen borrowing period plus a spread of 2.50% subject to a minimum SOFR rate of 0.00%. At the end of the first quarter of fiscal 2023, the interest rate on the 2030 Term Loan was 6.98%.
(3) The 2030 Notes bear interest at a rate of 4.00% per annum and mature on January 31, 2030. Interest is payable on the 2030 Notes in arrears on January 31 and July 31 of each year, commencing on July 31, 2022.
(4) The interest rate swaps and the basis swap fix the SOFR rate for $350.0 million of the 2025 Term Loan at 2.883% through September 2023. In addition, the 2028 interest rate swaps fix the SOFR rate for $350.0 million of the 2030 Term Loan at 3.47% through January 2028.
(5) During the first three months of fiscal 2023, we utilized the ABL Credit Facility to collateralize certain standby letters of credit and paid $0.5 million in commitment fees, interest expense and other administrative charges relating to the ABL Credit Facility.
For additional information about our debt, ABL Credit Facility and interest rate swaps, see Notes 15, 16 and 23 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.
Contractual Obligations
Our contractual obligations have not changed materially since October 29, 2022, except for the items listed below. For a summary of our contractual obligations, see Item 7 of Part II of the 2022 Annual Report.
Purchase Order Obligations. As of January 28, 2023 we had $2.4 billion in outstanding purchase order commitments to our contract manufacturers and component suppliers for inventory. In certain instances, we are permitted to cancel, reschedule, or adjust these orders. Consequently, only a portion of this amount relates to firm, non-cancelable, and unconditional obligations.
Debt. As of January 28, 2023, we had $500.0 million outstanding principal associated with our 2030 Term Loan, with $5.0 million payable within 12 months. Interest on the 2030 Term Loan and payments due under the interest rate swaps are variable and calculated using the rate in effect on the balance sheet date. Future interest payments associated with the 2030 Term Loan total $234.4 million, with $33.1 million payable within 12 months. For additional information about the 2030 Term Loan, see Note 16 to our Condensed Consolidated Financial Statements included in Item I of Part I of this report.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expense, and related disclosure of contingent assets and liabilities. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. On an ongoing basis, we reevaluate our estimates, including those related to revenue recognition, share-based compensation, bad debts, inventories, intangible and other long-lived assets, goodwill, income taxes, warranty obligations, restructuring, derivatives and hedging, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Among other things, these estimates form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions. To the extent that there are material differences between our estimates and actual results, our consolidated financial statements will be affected.
Our critical accounting policies and estimates have not changed materially since October 29, 2022. For a discussion of our critical accounting policies and estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of our 2022 Annual Report.
Effects of Recent Accounting Pronouncements
See Note 2 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report for information relating to our discussion of the effects of recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. For a discussion of quantitative and qualitative disclosures about market risk, see Item 7A of Part II of our 2022 Annual Report.
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Item 4. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth under the heading “Litigation” in Note 22 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report, is incorporated herein by reference.
Item 1A. Risk Factors
Investing in our securities involves a high degree of risk. Before investing in our securities, you should consider carefully the information contained in this report and in our 2022 Annual Report, including the risk factors identified in Item 1A of Part I thereof (Risk Factors). This report contains forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements” in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” above. Our actual results could differ materially from those contained in the forward-looking statements. Any of the risks discussed in our 2022 Annual Report, in this report, in other reports we file with the SEC, and other risks we have not anticipated or discussed, could have a material adverse impact on our business, financial condition, or results of operations. Except as set forth below, there has been no material change to our Risk Factors from those presented in our 2022 Annual Report.
Our revenue, gross margin, and operating results can fluctuate significantly and unpredictably from quarter to quarter.
Our revenue, gross margin, and results of operations can fluctuate significantly and unpredictably from quarter to quarter. Our budgeted expense levels are based on our visibility into customer spending plans and our projections of future revenue and gross margin. Visibility into customer spending levels can be uncertain, spending patterns are subject to change, and reductions in our expense levels can take significant time to implement. Historically, a significant portion of our quarterly revenue was generated from customer orders received during that same quarter (which we refer to as “book to revenue”) and therefore less predictable and subject to fluctuation due to a quarterly shortfall in orders from expectations. More recently, however, we have generated a significant backlog of customer orders, and our results can be more significantly impacted by availability of supply, as well as any order cancellations or customer delivery deferrals of existing backlog. Given their significant order levels in prior periods, during the first quarter of fiscal 2023, certain Web-scale customers rescheduled deliveries of existing orders, including in some cases until after the end of fiscal 2023. Accordingly, our results for a particular period can be difficult to predict. These dynamics, as well as a range of factors, including those set forth below, can materially adversely affect quarterly revenue, gross margin, and operating results:
•changes in spending levels or network deployment plans by customers, particularly with respect to our service provider and Web-scale provider customers;
•order timing and volume, including book to revenue orders;
•the timing of revenue recognition on sales, particularly relating to large orders;
•availability of components and manufacturing capacity;
•shipment and delivery timing;
•backlog levels;
•the level of competition and pricing pressure in our industry;
•the pace and impact of price erosion that we regularly encounter in our markets;
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•the impact of commercial concessions or unfavorable commercial terms required to maintain incumbency or secure new opportunities with key customers;
•the mix of revenue by product segment, geography and customer in any particular quarter;
•our level of success in achieving targeted cost reductions and improved efficiencies in our supply chain;
•our incurrence of start-up costs, including lower margin phases of projects required to support initial deployments, gain new customers or enter new markets;
•our level of success in accessing new markets and obtaining new customers;
•long- and short-term changing behaviors or customer needs that impact demand for our products and services or the products and services of our customers;
•technology-based price compression and our introduction of new platforms with improved price for performance;
•changing market, economic and political conditions, including the impact of tariffs and other trade restrictions or efforts to withdraw from or materially modify international trade agreements;
•factors beyond our control such as natural disasters, climate change, acts of war or terrorism, and public health emergencies, such as the COVID-19 pandemic;
•the financial stability of our customers and suppliers;
•consolidation activity among our customers, suppliers. and competitors;
•installation service availability and readiness of customer sites;
•adverse impact of foreign exchange; and
•seasonal effects in our business.
As a result of these factors and other conditions affecting our business and operating results, we believe that quarterly comparisons of our operating results are not necessarily a good indication of possible future performance. Quarterly fluctuations from the above factors may cause our revenue, gross margin, and results of operations to underperform in relation to our guidance, long-term financial targets or the expectations of financial analysts or investors, which may cause volatility or decreases in our stock price.
Our backlog may not be an accurate indicator of our level and timing of future revenues.
As a result of order volumes growth in prior periods, together with supply chain constrains, our backlog grew from $1.2 billion at the end of fiscal 2020 to $4.2 billion at the end of fiscal 2022. However, our order growth relative to revenue began to moderate in the fourth quarter of fiscal 2022. We expect order growth relative to revenue to continue to moderate over time and we do not expect the very high level of orders we experienced in fiscal 2022 to continue in the long-term. As order growth moderates and supply chain conditions improve, we expect our backlog to reduce, which was the case in the first quarter of fiscal 2023. Backlog may be fulfilled several quarters following receipt of a purchase order, either due to customer schedules or delays caused by supply chain constraints. Generally, our customers may cancel, delay delivery or change their orders with limited advance notice, or they may decide not to accept our products and services, although instances of both cancellation and non-acceptance have been rare historically. Backlog also includes certain service obligations that may relate to a multi-year support period. As a result, backlog should not necessarily be viewed as an accurate indicator of future revenue for any particular period.
Accurately matching necessary inventory levels to customer demand within the current environment is challenging, and we may incur additional costs or be required to write off significant inventory that would adversely impact our results of operations.
From the second quarter of fiscal 2021 through the third quarter of fiscal 2022, we received unprecedented orders for our products and services, and matching necessary inventory to fulfill that demand within the current supply constrained environment is challenging. We have taken and continue to take a number of steps to mitigate these challenges, including extending our purchase commitments and placing non-cancellable, advanced orders with or through suppliers, particularly for long lead time components. As of January 28, 2023 we had $2.4 billion in outstanding purchase order commitments to our contract manufacturers and component suppliers for inventory. We have also been expanding our manufacturing capacity and have been accumulating raw materials inventory of components that are available, in some cases with expanded lead times, in an effort to prepare us to be able to produce finished goods more quickly when supply constraints ease for certain common components, including integrated circuit components, for which delivery continues to be delayed. As a result of this strategy, our inventory has increased from $374.3 million at the end of fiscal 2021 to $1.2 billion at the end of the first quarter of fiscal 2023. These inventory practices, and their associated costs, have had, and we expect them to continue to have, an adverse impact on our cash from operations.
These inventory practices also further introduce obsolescence risk that can impact our results of operations and financial condition. If our customers were to cancel or delay orders as a result of increased lead times or otherwise, inventory could
39
become obsolete and we could be required to write off or write down the inventory associated with those orders. In addition, if customers were to cancel or delay existing or forecasted orders for which we have significant outstanding commitments to our contract manufacturers or suppliers, we may be required to purchase inventory under these commitments that we are unable to sell. If we are required to write off or write down a significant amount of inventory, our results of operations for the applicable period would be materially adversely affected. Our inability to effectively manage the matching of inventory with customer demand within the current environment could adversely impact our results of operations and financial condition, and could result in loss of revenue, increased costs, or delays that could adversely impact customer satisfaction.
We rely on third-party contract manufacturers, and our business and results of operations may be adversely affected by risks associated with their businesses, financial condition, and the geographies in which they operate.
We rely on third-party contract manufacturers, including those with facilities in Canada, Mexico, Thailand, and the United States, to perform a substantial portion of our supply chain activities, including component sourcing, manufacturing, product testing and quality, and fulfillment and logistics relating to the distribution and support of our products. There are a number of risks associated with our dependence on contract manufacturers, including:
•reduced control over delivery schedules and planning;
•reliance on the quality assurance procedures of third parties;
•potential uncertainty regarding manufacturing yields and costs;
•availability of manufacturing capability and capacity, particularly during periods of high demand;
•the impact of wage inflation and labor shortages on cost;
•the impact of supply chain constraints on our contract manufacturers’ costs and business models;
•risks associated with the ability of our contract manufacturers to perform to our manufacturing needs;
•risks and uncertainties associated with the locations or countries where our products are manufactured, including potential manufacturing disruptions caused by social, geopolitical, environmental, or health factors, including pandemics or widespread health epidemics such as the COVID-19 pandemic;
•risks associated with data security breaches, interdiction, or cyber-attacks targeting our third-party manufacturers, including manufacturing disruptions or unauthorized access to information;
•changes in law or policy governing tax, trade, manufacturing, development and investment in the countries where we currently manufacture our products, including the World Trade Organization Information Technology Agreement or other free trade agreements;
•inventory liability for excess and obsolete supply;
•limited warranties provided to us; and
•potential misappropriation of our intellectual property.
If our contract manufacturers are unable or unwilling to manufacture our products or components of our products, or if we experience a disruption in manufacturing, we may be required to identify and qualify alternative manufacturers, which could cause us to be delayed in or unable to meet our supply requirements to our customers. The process of qualifying a new contract manufacturer and commencing volume production is expensive and time-consuming, and if we are required to change or qualify a new contract manufacturer, we would likely experience significant business disruption and could lose revenue and damage our existing customer relationships. These and other risks associated with our contract manufacturers’ businesses, financial condition and the geographies in which they operate could impair our ability to fulfill orders, harm our sales and impact our reputation with customers in ways that adversely impact our business and results of operations.
Outstanding indebtedness under our senior secured credit facilities and senior unsecured notes may adversely affect our liquidity and results of operations and could limit our business.
We are a party to credit agreements relating to a $300.0 million senior secured asset-based revolving credit facility, an outstanding senior secured term loan with approximately $673.9 million due 2025, an outstanding senior secured term loan with approximately $500.0 million due 2030, and an outstanding senior unsecured indenture pursuant to which we issued $400.0 million in aggregate principal amount of 4.00% senior notes due 2030. The agreements governing these credit facilities contain certain covenants that limit our ability, among other things, to incur additional debt, create liens and encumbrances, pay cash dividends, redeem or repurchase stock, enter into certain acquisition transactions or transactions with affiliates, repay certain indebtedness, make investments, or dispose of assets. The agreements also include customary remedies, including the right of the lenders to take action with respect to the collateral securing the loans, that would apply should we default or otherwise be unable to satisfy our debt obligations.
Our indebtedness could have important negative consequences, including:
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•increasing our vulnerability to adverse economic and industry conditions;
•limiting our ability to obtain additional financing, particularly in unfavorable capital and credit market conditions;
•debt service and repayment obligations that may adversely impact our results of operations and reduce the availability of cash resources for other business purposes;
•limiting our flexibility in planning for, or reacting to, changes in our business and the markets; and
•placing us at a possible competitive disadvantage to competitors that have better access to capital resources.
We may also enter into additional debt transactions or credit facilities, including equipment loans, working capital lines of credit, senior notes, and other long-term debt, which may increase our indebtedness and result in additional restrictions on our business. In addition, major debt rating agencies regularly evaluate our debt based on a number of factors. There can be no assurance that we will be able to maintain our existing debt ratings, and failure to do so could adversely affect our cost of funds, liquidity and access to capital markets.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
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Item 6. Exhibits
| 3.1 | ||||||||
| 10.1 | Incremental Joiner and Amendment Agreement, dated January 19, 2023, by and among Ciena Corporation, Ciena Communications, Inc., Ciena Government Solutions, Inc., Ciena Communications International, LLC, Blue Planet Software, Inc., Bank of America, N.A., as administrative agent, and the lenders party thereto (incorporated by reference from Exhibit 10.1 to Ciena’s Current Report on Form 8-K, filed with the SEC on January 23, 2023). | |||||||
| 10.2 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| 101.INS | Inline XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Ciena Corporation | ||||||||||||||
| Date: | March 8, 2023 | By: | /s/ Gary B. Smith | |||||||||||
| Gary B. Smith | ||||||||||||||
| President, Chief Executive Officer and Director (Duly Authorized Officer) | ||||||||||||||
| Date: | March 8, 2023 | By: | /s/ James E. Moylan, Jr. | |||||||||||
| James E. Moylan, Jr. | ||||||||||||||
| Senior Vice President, Finance and Chief Financial Officer (Principal Financial Officer) | ||||||||||||||
43
CIENA CORPORATION
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Gary B. Smith, certify that:
1. I have reviewed this quarterly report of Ciena Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Dated: March 8, 2023
| /s/ Gary B. Smith | |||||
| Gary B. Smith | |||||
| President and Chief Executive Officer | |||||
CIENA CORPORATION
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, James E. Moylan, Jr., certify that:
1. I have reviewed this quarterly report of Ciena Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 8, 2023
/s/ James E. Moylan, Jr. | |||||
James E. Moylan, Jr. | |||||
Senior Vice President and Chief Financial Officer | |||||
CIENA CORPORATION
Written Statement of Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The undersigned, the Chief Executive Officer of Ciena Corporation (the “Company”), hereby certifies that, to his knowledge, on the date hereof:
(a) the Report on Form 10-Q of the Company for the quarter ended January 28, 2023 filed on the date hereof with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(b) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Gary B. Smith | ||
Gary B. Smith | ||
President and Chief Executive Officer | ||
| March 8, 2023 | ||
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Ciena Corporation and will be retained by Ciena Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
CIENA CORPORATION
Written Statement of Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The undersigned, the Chief Financial Officer of Ciena Corporation (the “Company”), hereby certifies that, to his knowledge, on the date hereof:
(a) the Report on Form 10-Q of the Company for the quarter ended January 28, 2023 filed on the date hereof with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(b) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ James E. Moylan, Jr. | ||
James E. Moylan, Jr. | ||
Senior Vice President and Chief Financial Officer | ||
| March 8, 2023 | ||
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Ciena Corporation and will be retained by Ciena Corporation and furnished to the Securities and Exchange Commission or its staff upon request.