Ciena (CIEN) Reports Fiscal Second Quarter 2013 Financial Results

Ciena^® Corporation (NASDAQ: CIEN), the network specialist, today announced unaudited financial results for its fiscal second quarter ended April 30, 2013.

For the fiscal second quarter 2013, Ciena reported revenue of $507.7 million.

On the basis of generally accepted accounting principles (GAAP), Ciena’s net loss for the fiscal second quarter 2013 was $(27.1) million, or $(0.27) per common share, which compares to a GAAP net loss of $(27.8) million, or $(0.28) per common share, for the fiscal second quarter 2012.

Ciena’s adjusted (non-GAAP) net income for the fiscal second quarter 2013 was $2.2 million, or $0.02 per common share, which compares to an adjusted (non-GAAP) net income of $3.7 million, or $0.04 per common share, for the fiscal second quarter 2012.

“We have designed Ciena to take advantage of the fundamental shift in network architecture driven by changing end-user demands, and our strong quarterly and first half of 2013 performance are a direct result of that strategy. Our unique ability to provide customers convergence, automation, openness and software intelligence positions us to lead the industry in this shift,” said Gary B. Smith, president and CEO of Ciena. “These dynamics are creating new opportunities that we believe will enable us to continue making progress toward our long-term financial goals.”

Fiscal Second Quarter 2013 Performance Summary

The tables below (in millions, except percentage data) provide comparisons of certain quarterly results to prior periods, including sequential quarterly and year-over-year changes. A reconciliation between the GAAP and adjusted (non-GAAP) measures contained in this release is included in Appendix A.

		GAAP Results
		Q2				Q1				Q2				Period Change
		FY 2013				FY 2013				FY 2012				Q-T-Q*			Y-T-Y*
Revenue		$	507.7			$	453.1			$	477.6			12.1	%		6.3	%
Gross margin		41.3		%		43.2		%		38.3		%		(1.9	)%		3.0	%
Operating expense		$	220.1			$	201.4			$	194.4			9.3	%		13.2	%
Operating margin		(2.1		)%		(1.2		)%		(2.4		)%		(0.9	)%		0.3	%

		Non-GAAP Results
		Q2				Q1				Q2				Period Change
		FY 2013				FY 2013				FY 2012				Q-T-Q*			Y-T-Y*
Revenue		$	507.7			$	453.1			$	477.6			12.1	%		6.3	%
Adj. gross margin		42.5		%		44.6		%		39.6		%		(2.1	)%		2.9	%
Adj. operating expense		$	197.4			$	176.6			$	172.9			11.8	%		14.2	%
Adj. operating margin		3.7		%		5.6		%		3.4		%		(1.9	)%		0.3	%

		Revenue by Segment
		Q2 FY 2013							Q1 FY 2013							Q2 FY 2012
		Revenue				%			Revenue				%			Revenue				%
Converged Packet Optical		$	291.4			57.4			$	240.0			53.0			$	264.6			55.4
Packet Networking		57.1				11.2			45.8				10.1			29.9				6.3
Optical Transport		57.4				11.3			57.6				12.7			84.4				17.7
Software and Services		101.8				20.1			109.7				24.2			98.7				20.6
Total		$	507.7			100.0			$	453.1			100.0			$	477.6			100.0

* Denotes % change, or in the case of margin, absolute change

Additional Performance Metrics for Fiscal Second Quarter 2013

• Non-U.S. customers contributed 43% of total revenue
• Two customers accounted for greater than 10% of revenue and represented 31.3% of total revenue
• Cash and investments totaled $456.5 million
• Cash flow from operations totaled $44.9 million
• Free cash flow totaled $35.6 million
• Average days’ sales outstanding (DSOs) were 75
• Accounts receivable balance was $421.0 million
• Inventories totaled $248.1 million, including:
  • Raw materials: $49.9 million
  • Work in process: $9.7 million
  • Finished goods: $145.1 million
  • Deferred cost of sales: $84.2 million
  • Reserve for excess and obsolescence: $(40.8) million
• Product inventory turns were 3.9
• Headcount totaled 4,546

Business Outlook for Fiscal Third Quarter 2013

Statements relating to business outlook are forward-looking in nature and actual results may differ materially. These statements should be read in the context of the Notes to Investors below.

Ciena expects fiscal third quarter 2013 financial performance to include:

• Revenue in the range of $515 to $545 million
• Adjusted (non-GAAP) gross margin in the low 40s percent range
• Adjusted (non-GAAP) operating expense in the mid $190s million range

Live Web Broadcast of Unaudited Fiscal Second Quarter 2013 Results

Ciena will host a discussion of its unaudited fiscal second quarter 2013 results with investors and financial analysts today, Thursday, June 6, 2013 at 8:30 a.m. (Eastern). The live broadcast of the discussion will be available via Ciena’s homepage at http://www.ciena.com/. To accompany its live broadcast, Ciena has posted to the Investor Relations page of its website at: www.ciena.com/investors a presentation for investors that includes certain highlighted information relating to this quarter and certain historical results of operation. An archived transcript of the discussion will be available shortly following the conclusion of the live broadcast on the Investor Relations page of Ciena’s website at: www.ciena.com/investors.

Notes to Investors

Forward-looking statements. This press release contains certain forward-looking statements that involve risks and uncertainties. These statements are based on current expectations, forecasts, assumptions and other information available to the Company as of the date hereof. Forward-looking statements include statements regarding Ciena’s expectations, beliefs, intentions or strategies regarding the future and can be identified by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will,” and “would” or similar words. Forward-looking statements in this release include Ciena’s business outlook for the fiscal third quarter of 2013 as well as: “We have designed Ciena to take advantage of the fundamental shift in network architecture driven by changing end-user demands, and our strong quarterly and first half of 2013 performance are a direct result of that strategy.”; “Our unique ability to provide customers convergence, automation, openness and software intelligence positions us to lead the industry in this shift.”; “These dynamics are creating new opportunities that we believe will enable us to continue making progress toward our long-term financial goals.”

Ciena’s actual results, performance or events may differ materially from these forward-looking statements made or implied due a number of risks and uncertainties relating to Ciena’s business, including: the effect of broader economic and market conditions on our customers and their business; changes in network spending or network strategy by large communication service providers; seasonality and the timing and size of customer orders, including our ability to recognize revenue relating to such sales; the level of competitive pressure we encounter; the product, customer and geographic mix of sales within the period; supply chain disruptions and the level of success relating to efforts to optimize Ciena’s operations; changes in foreign currency exchange rates affecting revenue and operating expense; and the other risk factors disclosed in Ciena’s Report on Form 10-Q filed with the Securities and Exchange Commission on March 13, 2013. Ciena assumes no obligation to update any forward-looking information included in this press release.

Non-GAAP Presentation of Quarterly Results. This release includes non-GAAP measures of Ciena’s gross profit, operating expense, income (loss) from operations, net income (loss) and net income (loss) per share. In evaluating the operating performance of Ciena’s business, management excludes certain charges and credits that are required by GAAP. These items share one or more of the following characteristics: they are unusual and Ciena does not expect them to recur in the ordinary course of its business; they do not involve the expenditure of cash; they are unrelated to the ongoing operation of the business in the ordinary course; or their magnitude and timing is largely outside of Ciena’s control. Management believes that the non-GAAP measures below provide management and investors useful information and meaningful insight to the operating performance of the business. The presentation of these non-GAAP financial measures should be considered in addition to Ciena’s GAAP results and these measures are not intended to be a substitute for the financial information prepared and presented in accordance with GAAP. Ciena’s non-GAAP measures and the related adjustments may differ from non-GAAP measures used by other companies and should only be used to evaluate Ciena’s results of operations in conjunction with our corresponding GAAP results. To the extent not previously disclosed in a prior Ciena financial results press release, Appendix A to this press release sets forth a complete GAAP to non-GAAP reconciliation of the non-GAAP measures contained in this release.

About Ciena

Ciena is the network specialist. We collaborate with customers worldwide to unlock the strategic potential of their networks and fundamentally change the way they perform and compete. Ciena leverages its deep expertise in packet and optical networking and distributed software automation to deliver solutions in alignment with OPⁿ, its approach for building open next-generation networks. We enable a high-scale, programmable infrastructure that can be controlled and adapted by network-level applications, and provide open interfaces to coordinate computing, storage and network resources in a unified, virtualized environment. Investors are encouraged to review the Investors section of our website at www.ciena.com/investors, where we routinely post press releases, SEC filings, recent news, financial results, other announcements and, from time to time, exclusively post material information as with the other disclosure channels that we use.

 

CIENA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
		Quarter Ended April 30,								Six Months Ended April 30,
		2012				2013				2012				2013
Revenue:
Products		$	384,726			$	413,217			$	718,399			$	766,274
Services		92,891				94,495				175,903				194,531
Total revenue		477,617				507,712				894,302				960,805
Cost of goods sold:
Products		234,372				239,441				432,124				435,962
Services		60,304				58,758				111,481				119,535
Total cost of goods sold		294,676				298,199				543,605				555,497
Gross profit		182,941				209,513				350,697				405,308
Operating expenses:
Research and development		90,399				100,787				180,063				189,912
Selling and marketing		62,517				74,475				126,928				141,063
General and administrative		26,670				30,883				56,334				59,091
Amortization of intangible assets		12,967				12,439				26,438				24,892
Restructuring costs		1,851				1,509				3,573				6,539
Total operating expenses		194,404				220,093				393,336				421,497
Loss from operations		(11,463		)		(10,580		)		(42,639		)		(16,189		)
Interest and other income (loss), net		(4,387		)		(2,716		)		(9,274		)		(2,853		)
Interest expense		(9,646		)		(11,392		)		(19,216		)		(22,124		)
Loss on extinguishment of debt		—				—				—				(28,630		)
Loss before income taxes		(25,496		)		(24,688		)		(71,129		)		(69,796		)
Provision for income taxes		2,284				2,391				4,304				4,607
Net loss		$	(27,780	)		$	(27,079	)		$	(75,433	)		$	(74,403	)
Basic net loss per common share		$	(0.28	)		$	(0.27	)		$	(0.77	)		$	(0.73	)
Diluted net loss per potential common share		$	(0.28	)		$	(0.27	)		$	(0.77	)		$	(0.73	)
Weighted average basic common shares outstanding		98,981				101,913				98,525				101,560
Weighted average dilutive potential common shares outstanding		98,981				101,913				98,525				101,560

CIENA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
		October 31,				April 30,
		2012				2013
ASSETS
Current assets:
Cash and cash equivalents		$	642,444			$	356,498
Short-term investments			50,057				99,973
Accounts receivable, net			345,496				421,014
Inventories			260,098				248,096
Prepaid expenses and other			117,595				138,577
Total current assets			1,415,690				1,264,158
Equipment, furniture and fixtures, net			123,580				117,553
Other intangible assets, net			257,137				221,476
Other long-term assets			84,736				90,157
Total assets		$	1,881,143			$	1,693,344
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$	179,704			$	198,820
Accrued liabilities			209,540				222,783
Deferred revenue			79,516				98,603
Convertible notes payable			216,210				—
Total current liabilities			684,970				520,206
Long-term deferred revenue			27,560				28,272
Other long-term obligations			31,779				32,989
Long-term convertible notes payable			1,225,806				1,209,814
Total liabilities		$	1,970,115			$	1,791,281
Commitments and contingencies
Stockholders’ equity (deficit):
Preferred stock – par value $0.01; 20,000,000 shares authorized; zero shares issued and outstanding			—				—
Common stock – par value $0.01; 290,000,000 shares authorized; 100,601,792 and 102,035,119 shares issued and outstanding			1,006				1,020
Additional paid-in capital			5,797,765				5,864,381
Accumulated other comprehensive income (loss)			(3,354	)			(4,546	)
Accumulated deficit			(5,884,389	)			(5,958,792	)
Total stockholders’ equity (deficit)			(88,972	)			(97,937	)
Total liabilities and stockholders’ equity (deficit)		$	1,881,143			$	1,693,344

CIENA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
		Six Months Ended April 30,
		2012				2013
Cash flows from operating activities:
Net loss		$	(75,433	)		$	(74,403	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Loss on extinguishment of debt		—				28,630
Depreciation of equipment, furniture and fixtures, and amortization of leasehold improvements		29,079				28,857
Share-based compensation costs		16,830				18,147
Amortization of intangible assets		37,865				35,661
Provision for inventory excess and obsolescence		13,982				9,027
Provision for warranty		16,615				11,060
Other		7,993				5,068
Changes in assets and liabilities:
Accounts receivable		19,107				(76,526		)
Inventories		(26,630		)		2,975
Prepaid expenses and other		19,597				(33,969		)
Accounts payable, accruals and other obligations		8,315				24,805
Deferred revenue		6,036				19,799
Net cash provided by (used in) operating activities		73,356				(869		)
Cash flows used in investing activities:
Payments for equipment, furniture, fixtures and intellectual property		(16,150		)		(21,496		)
Restricted cash		(17,202		)		1,679
Purchase of available for sale securities		—				(99,914		)
Proceeds from maturities of available for sale securities		—				50,000
Proceeds from sale of cost method investment		524				—
Net cash used in investing activities		(32,828		)		(69,731		)
Cash flows from financing activities:
Payment of long term debt		—				(216,210		)
Payment for debt and equity issuance costs		—				(3,661		)
Payment of capital lease obligations		(699		)		(1,427		)
Proceeds from issuance of common stock		5,715				5,955
Net cash provided by (used in) financing activities		5,016				(215,343		)
Effect of exchange rate changes on cash and cash equivalents		(1,893		)		(3		)
Net increase (decrease) in cash and cash equivalents		45,544				(285,943		)
Cash and cash equivalents at beginning of period		541,896				642,444
Cash and cash equivalents at end of period		$	585,547			$	356,498
Supplemental disclosure of cash flow information
Cash paid during the period for interest		$	16,520			$	15,720
Cash paid during the period for income taxes, net		$	5,811			$	5,136
Non-cash investing and financing activities
Purchase of equipment in accounts payable		$	4,004			$	3,006
Fixed assets acquired under capital leases		$	4,427			$	1,286

APPENDIX A – Reconciliation of Adjusted (Non- GAAP) Quarterly Measurements
		Quarter Ended
		April 30,
		2012				2013
Gross Profit Reconciliation (GAAP/non-GAAP)
GAAP gross profit		$	182,941			$	209,513
Share-based compensation-products		460					686
Share-based compensation-services		367					435
Amortization of intangible assets		5,484					5,384
Total adjustments related to gross profit		6,311					6,505
Adjusted (non-GAAP) gross profit		$	189,252			$	216,018
Adjusted (non-GAAP) gross profit percentage		39.6		%			42.5	%
Operating Expense Reconciliation (GAAP/non-GAAP)
GAAP operating expense		$	194,404			$	220,093
Share-based compensation-research and development		2,092					2,204
Share-based compensation-sales and marketing		2,820					3,382
Share-based compensation-general and administrative		2,141					3,144
Acquisition and integration costs		(410		)			—
Amortization of intangible assets		12,967					12,439
Restructuring costs		1,851					1,509
Total adjustments related to operating expense		21,461					22,678
Adjusted (non-GAAP) operating expense		$	172,943			$	197,415
Income (Loss) from Operations Reconciliation (GAAP/non-GAAP)
GAAP loss from operations		$	(11,463	)		$	(10,580	)
Total adjustments related to gross profit		6,311					6,505
Total adjustments related to operating expense		21,461					22,678
Adjusted (non-GAAP) income from operations		$	16,309			$	18,603
Adjusted (non-GAAP) operating margin percentage		3.4		%			3.7	%
Net Income (Loss) Reconciliation (GAAP/non-GAAP)
GAAP net loss		$	(27,780	)		$	(27,079	)
Total adjustments related to gross profit		6,311					6,505
Total adjustments related to operating expense		21,461					22,678
Non-cash interest expense		—					247
Change in fair value of embedded redemption feature		3,750					(120	)
Adjusted (non-GAAP) net income		$	3,742			$	2,231
Weighted average basic common shares outstanding		98,981					101,913
Weighted average dilutive potential common shares outstanding		100,715					103,165
Net Income (Loss) per Common Share
GAAP diluted net loss per common share		$	(0.28	)		$	(0.27	)
Adjusted (non-GAAP) diluted net income per common share		$	0.04			$	0.02

The adjusted (non-GAAP) measures above and their reconciliation to Ciena’s GAAP results for the periods presented reflect adjustments relating to the following items:

• Share-based compensation expense – a non-cash expense incurred in accordance with share-based compensation accounting guidance.
• Amortization of intangible assets – a non-cash expense arising from the acquisition of intangible assets, principally developed technologies and customer-related intangibles, that Ciena is required to amortize over its expected useful life.
• Acquisition and integration costs – reflects transaction expense, and consulting and third party service fees associated with the acquisition of the Nortel MEN Business and the integration of this business into Ciena’s operations.
• Restructuring costs – costs incurred as a result of restructuring activities (or in the case of recoveries, previous restructuring activities) taken to align resources with perceived market opportunities.
• Non-cash interest expense – a non-cash debt discount expense amortized as interest expense during the term of Ciena’s 4.0% senior convertible notes due December 15, 2020 relating to the required separate accounting of the equity component of these convertible notes.
• Change in fair value of embedded redemption feature – a non-cash unrealized gain or loss reflective of a mark to market fair value adjustment of an embedded derivative related to the redemption feature of Ciena’s outstanding 4.0% senior convertible notes due March 15, 2015.