CIENA CORP - Quarter Report: 2021 January (Form 10-Q)
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 30, 2021
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
Ciena Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
7035 Ridge Road, Hanover, MD
(Address of principal executive offices)
23-2725311
(IRS Employer Identification No.)
21076
(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 | Name of each exchange on which registered | ||||||
| Common Stock, $0.01 par value | CIEN | New York Stock Exchange | ||||||
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 and post 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.
| Large accelerated filer | ☑ | 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 determined 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 at March 5, 2021 | |||||||
| common stock, $0.01 par value | 155,003,312 | |||||||
CIENA CORPORATION
INDEX
FORM 10-Q
| PAGE NUMBER | |||||
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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 30, | February 1, | ||||||||||
| 2021 | 2020 | ||||||||||
| Revenue: | |||||||||||
| Products | $ | 597,220 | $ | 687,215 | |||||||
| Services | 159,910 | 145,697 | |||||||||
| Total revenue | 757,130 | 832,912 | |||||||||
| Cost of goods sold: | |||||||||||
| Products | 315,098 | 389,013 | |||||||||
| Services | 84,141 | 73,364 | |||||||||
| Total cost of goods sold | 399,239 | 462,377 | |||||||||
| Gross profit | 357,891 | 370,535 | |||||||||
| Operating expenses: | |||||||||||
| Research and development | 132,741 | 130,900 | |||||||||
| Selling and marketing | 97,278 | 107,066 | |||||||||
| General and administrative | 39,993 | 42,468 | |||||||||
| Amortization of intangible assets | 5,910 | 5,853 | |||||||||
| Significant asset impairments and restructuring costs | 5,867 | 4,472 | |||||||||
| Acquisition and integration costs | 307 | 1,819 | |||||||||
| Total operating expenses | 282,096 | 292,578 | |||||||||
| Income from operations | 75,795 | 77,957 | |||||||||
| Interest and other income (loss), net | (1,121) | 3,646 | |||||||||
| Interest expense | (7,360) | (8,815) | |||||||||
| Loss on extinguishment and modification of debt | — | (646) | |||||||||
| Income before income taxes | 67,314 | 72,142 | |||||||||
| Provision for income taxes | 11,966 | 9,814 | |||||||||
| Net income | $ | 55,348 | $ | 62,328 | |||||||
| Basic net income per common share | $ | 0.36 | $ | 0.40 | |||||||
| Diluted net income per potential common share | $ | 0.35 | $ | 0.40 | |||||||
| Weighted average basic common shares outstanding | 155,174 | 154,334 | |||||||||
| Weighted average dilutive potential common shares outstanding | 156,583 | 155,738 | |||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
CIENA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME GAIN (LOSS)
(in thousands)
(unaudited)
| Quarter Ended | |||||||||||
| January 30, | February 1, | ||||||||||
| 2021 | 2020 | ||||||||||
| Net income | $ | 55,348 | $ | 62,328 | |||||||
| Change in unrealized loss on available-for-sale securities, net of tax | (49) | (86) | |||||||||
| Change in unrealized gain (loss) on foreign currency forward contracts, net of tax | 6,617 | (1,079) | |||||||||
| Change in unrealized gain (loss) on forward starting interest rate swaps, net of tax | 1,382 | (1,480) | |||||||||
| Change in cumulative translation adjustments | 15,861 | (2,982) | |||||||||
| Other comprehensive gain (loss) | 23,811 | (5,627) | |||||||||
| Total comprehensive income | $ | 79,159 | $ | 56,701 | |||||||
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 30, 2021 | October 31, 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 1,029,237 | $ | 1,088,624 | |||||||
| Short-term investments | 151,434 | 150,667 | |||||||||
Accounts receivable, net of allowance for credit losses of $11.1 million and $10.6 million as of January 30, 2021 and October 31, 2020, respectively. | 700,025 | 719,405 | |||||||||
| Inventories, net | 389,733 | 344,379 | |||||||||
| Prepaid expenses and other | 326,110 | 308,084 | |||||||||
| Total current assets | 2,596,539 | 2,611,159 | |||||||||
| Long-term investments | 102,364 | 82,226 | |||||||||
| Equipment, building, furniture and fixtures, net | 281,228 | 272,377 | |||||||||
| Operating right-of-use assets | 54,244 | 57,026 | |||||||||
| Goodwill | 311,294 | 310,847 | |||||||||
| Other intangible assets, net | 91,516 | 96,647 | |||||||||
| Deferred tax asset, net | 647,232 | 647,805 | |||||||||
| Other long-term assets | 102,480 | 102,830 | |||||||||
| Total assets | $ | 4,186,897 | $ | 4,180,917 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 247,241 | $ | 291,904 | |||||||
| Accrued liabilities and other short-term obligations | 275,003 | 334,132 | |||||||||
| Deferred revenue | 136,229 | 108,700 | |||||||||
| Operating lease liabilities | 19,364 | 19,035 | |||||||||
| Current portion of long-term debt | 6,930 | 6,930 | |||||||||
| Total current liabilities | 684,767 | 760,701 | |||||||||
| Long-term deferred revenue | 54,371 | 49,663 | |||||||||
| Other long-term obligations | 128,764 | 123,185 | |||||||||
| Long-term operating lease liabilities | 57,626 | 61,415 | |||||||||
| Long-term debt, net | 674,856 | 676,356 | |||||||||
| Total liabilities | $ | 1,600,384 | $ | 1,671,320 | |||||||
Commitments and contingencies (Note 20) | |||||||||||
| Stockholders’ equity: | |||||||||||
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; 155,187,945 and 154,563,005 shares issued and outstanding | 1,552 | 1,546 | |||||||||
| Additional paid-in capital | 6,826,488 | 6,826,531 | |||||||||
| Accumulated other comprehensive loss | (11,547) | (35,358) | |||||||||
| Accumulated deficit | (4,229,980) | (4,283,122) | |||||||||
| Total stockholders’ equity | 2,586,513 | 2,509,597 | |||||||||
| Total liabilities and stockholders’ equity | $ | 4,186,897 | $ | 4,180,917 | |||||||
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 30, | February 1, | ||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows provided by (used in) operating activities: | |||||||||||
| Net income | $ | 55,348 | $ | 62,328 | |||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation of equipment, building, furniture and fixtures, and amortization of leasehold improvements | 23,188 | 25,782 | |||||||||
| Share-based compensation costs | 18,964 | 15,602 | |||||||||
| Amortization of intangible assets | 9,642 | 9,687 | |||||||||
| Deferred taxes | (905) | 10,788 | |||||||||
| Provision for inventory excess and obsolescence | 5,905 | 6,699 | |||||||||
| Provision for warranty | 3,239 | 7,898 | |||||||||
| Other | 4,277 | 4,540 | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | 18,862 | 64,938 | |||||||||
| Inventories | (51,020) | (4,481) | |||||||||
| Prepaid expenses and other | (13,835) | (29,792) | |||||||||
| Operating lease right-of-use assets | 4,103 | 4,176 | |||||||||
| Accounts payable, accruals and other obligations | (112,170) | (142,229) | |||||||||
| Deferred revenue | 31,917 | 8,926 | |||||||||
| Short- and long-term operating lease liabilities | (4,834) | (5,098) | |||||||||
| Net cash provided by (used in) operating activities | (7,319) | 39,764 | |||||||||
| Cash flows used in investing activities: | |||||||||||
| Payments for equipment, furniture, fixtures and intellectual property | (20,868) | (26,820) | |||||||||
| Purchase of available for sale securities | (71,756) | (29,733) | |||||||||
| Proceeds from maturities of available for sale securities | 51,266 | 30,000 | |||||||||
| Settlement of foreign currency forward contracts, net | 2,357 | (73) | |||||||||
| Acquisition of business, net of cash acquired | — | (28,300) | |||||||||
| Proceeds from sale of equity investment | 4,678 | — | |||||||||
| Net cash used in investing activities | (34,323) | (54,926) | |||||||||
| Cash flows used in financing activities: | |||||||||||
| Payment of long-term debt | (1,732) | — | |||||||||
| Payment of debt issuance costs | — | (382) | |||||||||
| Payment of finance lease obligations | (702) | (722) | |||||||||
| Shares repurchased for tax withholdings on vesting of stock unit awards | (19,242) | (12,572) | |||||||||
| Repurchases of common stock - repurchase program | (12,406) | (49,203) | |||||||||
| Proceeds from issuance of common stock | 13,447 | 11,862 | |||||||||
| Net cash used in financing activities | (20,635) | (51,017) | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 2,879 | (643) | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | (59,398) | (66,822) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 1,088,708 | 904,161 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 1,029,310 | $ | 837,339 | |||||||
| Supplemental disclosure of cash flow information | |||||||||||
| Cash paid during the period for interest | $ | 7,566 | $ | 9,325 | |||||||
| Cash paid during the period for income taxes, net | $ | 8,798 | $ | 8,325 | |||||||
| Operating lease payments | $ | 5,387 | $ | 5,642 | |||||||
| Non-cash investing and financing activities | |||||||||||
| Purchase of equipment in accounts payable | $ | 5,935 | $ | 5,905 | |||||||
| Repurchase of common stock in accrued liabilities from repurchase program | $ | 800 | $ | 1,501 | |||||||
| Operating lease right-of-use assets subject to lease liability | $ | 555 | $ | 1,157 | |||||||
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 Loss | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||
| Balance at October 31, 2020 | 154,563,005 | $ | 1,546 | $ | 6,826,531 | $ | (35,358) | $ | (4,283,122) | $ | 2,509,597 | ||||||||||||||||||||||||
| Net income | — | — | — | — | 55,348 | 55,348 | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | 23,811 | — | 23,811 | |||||||||||||||||||||||||||||
| Repurchase of common stock - repurchase program | (251,578) | (3) | (13,203) | — | — | (13,206) | |||||||||||||||||||||||||||||
| Issuance of shares from employee equity plans | 1,252,120 | 12 | 13,435 | — | — | 13,447 | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | 18,964 | — | — | 18,964 | |||||||||||||||||||||||||||||
| Shares repurchased for tax withholdings on vesting of stock unit awards | (375,602) | (3) | (19,239) | — | — | (19,242) | |||||||||||||||||||||||||||||
| — | — | — | — | (2,206) | (2,206) | ||||||||||||||||||||||||||||||
| Balance at January 30, 2021 | 155,187,945 | $ | 1,552 | $ | 6,826,488 | $ | (11,547) | $ | (4,229,980) | $ | 2,586,513 | ||||||||||||||||||||||||
| Common Stock Shares | Par Value | Additional Paid-in-Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||
| Balance at November 2, 2019 | 154,403,850 | $ | 1,544 | $ | 6,837,714 | $ | (22,084) | $ | (4,644,413) | $ | 2,172,761 | ||||||||||||||||||||||||
| Net income | — | — | — | — | 62,328 | 62,328 | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | (5,627) | — | (5,627) | |||||||||||||||||||||||||||||
| Repurchase of common stock - repurchase program | (1,288,111) | (13) | (50,691) | — | — | (50,704) | |||||||||||||||||||||||||||||
| Issuance of shares from employee equity plans | 1,128,096 | 11 | 11,851 | — | — | 11,862 | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | 15,602 | — | — | 15,602 | |||||||||||||||||||||||||||||
| Shares repurchased for tax withholdings on vesting of stock unit awards | (297,002) | (3) | (12,569) | — | — | (12,572) | |||||||||||||||||||||||||||||
| Balance at February 1, 2020 | 153,946,833 | $ | 1,539 | $ | 6,801,907 | $ | (27,711) | $ | (4,582,085) | $ | 2,193,650 | ||||||||||||||||||||||||
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. The inputs into certain of Ciena’s judgments, assumptions, and estimates reflect, among other things, the information available to Ciena regarding the economic implications of the COVID-19 pandemic, and expectations as to its impact on Ciena’s business. 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 addition, including because the duration and severity of COVID-19 pandemic are uncertain, certain of such estimates could require further judgment or modification and therefore carry a higher degree of variability and volatility. As events continue to evolve, Ciena’s estimates may change materially in future periods.
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 31, 2020 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 2020 (the “2020 Annual Report”).
Ciena has a 52 or 53-week fiscal year, with quarters ending on the Saturday nearest to the last day of January, April, July and October, respectively, of each year. Fiscal 2021 and 2020 are 52-week fiscal years.
(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 2020 Annual Report.
Newly Issued Accounting Standards - Effective
In June 2016, the Financial Accounting Standards Board (”FASB”) issued Accounting Standards Update No. 2016-13 (“ASU 2016-13”), Financial Instruments - Credit Losses, which requires measurement and recognition of expected credit losses for financial assets held based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Ciena adopted ASU 2016-13 on a modified retrospective basis in the first quarter of fiscal year 2021 through a cumulative-effect adjustment at the beginning of the period of adoption and did not restate prior periods. The standard primarily impacts the value of Ciena’s accounts receivable, net and contract assets, net. Adoption of ASU 2016-13 did not have a material effect on Ciena’s financial position or results of operations.
Ciena’s significant accounting policies updated as a result of adopting this standard are as follows:
Allowance for Credit Losses for Accounts Receivable and Contract Assets
Ciena estimates its allowances for credit losses using relevant available information from internal and external sources, related to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. When assessing for credit losses, Ciena determines collectability by pooling assets with similar characteristics. The allowances for credit losses are each measured on a collective basis when similar risk characteristics exist. The allowances for credit losses are each measured by multiplying the exposure probability of default, the
8
probability the asset will default within a given time frame, by the loss given default rate, the percentage of the asset not expected to be collected due to default, based on the pool of assets.
Probability of default rates are published by third-party credit rating agencies. Adjustments to Ciena’s exposure probability may take into account including, but not limited to, various customer-specific factors, the potential sovereign risk of the geographic locations in which the customer is operating and macroeconomic conditions. These factors are updated regularly or when facts and circumstances indicate that an update is deemed necessary.
Newly Issued Accounting Standards - Not Yet Effective
In March 2020, the FASB issued ASU No. 2020-04 (“ASU 2020-04”), Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides temporary optional guidance on contract modifications and hedging accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate (“LIBOR”) to alternative reference rates. In January 2021, the FASB issued ASU 2021-01, which refines the scope of Topic 848 and clarifies some of its guidance as part of the FASB’s monitoring of global reference rate activities. The new guidance was effective upon issuance, and Ciena is allowed to elect to apply the amendments prospectively through December 31, 2022. Ciena is currently evaluating the impact of this accounting standard update on its consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU No. 2019-12 (“ASU 2019-12”), Income Taxes (ASC 740): Simplifying the Accounting for Income Taxes, which enhances and simplifies various aspects related to accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of ASC 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for Ciena beginning in the first quarter of fiscal year 2022, and early adoption is permitted. Most amendments within this standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. Ciena is currently evaluating the impact of this accounting standard update on its consolidated financial statements and related disclosures.
(3)REVENUE
Disaggregation of Revenue
Ciena’s disaggregated revenue represents similar groups that depict the nature, amount, and timing of revenue and cash flows for Ciena’s various offerings. The sales cycle, contractual obligations, customer requirements, and go-to-market strategies may differ for each of its product lines, resulting in different economic risk profiles for each line. Effective as of the beginning of fiscal 2021, Ciena renamed its “Packet Networking” product line to “Routing and Switching.” This change, affecting only the presentation of such information, was made on a prospective basis and does not impact comparability of previous financial results. References to prior reported “Packet Networking” product line have been changed to“Routing and Switching” for this product line reported herein.
The tables below set forth Ciena’s disaggregated revenue for the respective period (in thousands):
9
| Quarter Ended January 30, 2021 | |||||||||||||||||||||||||||||
| Networking Platforms | Platform Software and Services | Blue Planet Automation Software and Services | Global Services | Total | |||||||||||||||||||||||||
| Product lines: | |||||||||||||||||||||||||||||
Converged Packet Optical | $ | 512,324 | $ | — | $ | — | $ | — | $ | 512,324 | |||||||||||||||||||
| Routing and Switching | 64,307 | — | — | — | 64,307 | ||||||||||||||||||||||||
Platform Software and Services | — | 49,839 | — | — | 49,839 | ||||||||||||||||||||||||
Blue Planet Automation Software and Services | — | — | 16,934 | — | 16,934 | ||||||||||||||||||||||||
Maintenance Support and Training | — | — | — | 67,630 | 67,630 | ||||||||||||||||||||||||
Installation and Deployment | — | — | — | 39,611 | 39,611 | ||||||||||||||||||||||||
Consulting and Network Design | — | — | — | 6,485 | 6,485 | ||||||||||||||||||||||||
Total revenue by product line | $ | 576,631 | $ | 49,839 | $ | 16,934 | $ | 113,726 | $ | 757,130 | |||||||||||||||||||
| Timing of revenue recognition: | |||||||||||||||||||||||||||||
Products and services at a point in time | $ | 576,631 | $ | 16,062 | $ | 5,173 | $ | 1,857 | $ | 599,723 | |||||||||||||||||||
Services transferred over time | — | 33,777 | 11,761 | 111,869 | 157,407 | ||||||||||||||||||||||||
Total revenue by timing of revenue recognition | $ | 576,631 | $ | 49,839 | $ | 16,934 | $ | 113,726 | $ | 757,130 | |||||||||||||||||||
| Quarter Ended February 1, 2020 | |||||||||||||||||||||||||||||
| Networking Platforms | Platform Software and Services | Blue Planet Automation Software and Services | Global Services | Total | |||||||||||||||||||||||||
| Product lines: | |||||||||||||||||||||||||||||
Converged Packet Optical | $ | 591,549 | $ | — | $ | — | $ | — | $ | 591,549 | |||||||||||||||||||
| Routing and Switching | 67,508 | — | — | — | 67,508 | ||||||||||||||||||||||||
Platform Software and Services | — | 51,888 | — | — | 51,888 | ||||||||||||||||||||||||
Blue Planet Automation Software and Services | — | — | 15,466 | — | 15,466 | ||||||||||||||||||||||||
Maintenance Support and Training | — | — | — | 61,793 | 61,793 | ||||||||||||||||||||||||
Installation and Deployment | — | — | — | 34,954 | 34,954 | ||||||||||||||||||||||||
Consulting and Network Design | — | — | — | 9,754 | 9,754 | ||||||||||||||||||||||||
Total revenue by product line | $ | 659,057 | $ | 51,888 | $ | 15,466 | $ | 106,501 | $ | 832,912 | |||||||||||||||||||
| Timing of revenue recognition: | |||||||||||||||||||||||||||||
Products and services at a point in time | $ | 659,057 | $ | 13,114 | $ | 3,736 | $ | 4,197 | $ | 680,104 | |||||||||||||||||||
Services transferred over time | — | 38,774 | 11,730 | 102,304 | 152,808 | ||||||||||||||||||||||||
Total revenue by timing of revenue recognition | $ | 659,057 | $ | 51,888 | $ | 15,466 | $ | 106,501 | $ | 832,912 | |||||||||||||||||||
Ciena reflects its sales geographically around the following markets: (i) Americas; (ii) Europe, Middle East and Africa (“EMEA”); and (iii) Asia Pacific, Japan and India (“APAC”). Americas includes activities in North America and South America. 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 principally based on the relevant location for Ciena’s delivery of products and performance of services.
For the periods below, Ciena’s geographic distribution of revenue was as follows (in thousands):
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| Quarter Ended | ||||||||||||||
| January 30, | February 1, | |||||||||||||
| 2021 | 2020 | |||||||||||||
| Geographic distribution: | ||||||||||||||
Americas | $ | 496,611 | $ | 574,004 | ||||||||||
EMEA | 155,418 | 129,965 | ||||||||||||
APAC | 105,101 | 128,943 | ||||||||||||
Total revenue by geographic distribution | $ | 757,130 | $ | 832,912 | ||||||||||
Ciena’s revenue includes $439.4 million and $524.3 million of United States revenue for the first quarter of fiscal 2021 and 2020, respectively. No other country accounted for 10% or more of total revenue for the periods presented above.
For the first quarter of fiscal 2021, there were no customers that accounted for at least 10% of Ciena’s revenue. The table below shows the customers that accounted for at least 10% of Ciena’s revenue for the first quarter of fiscal 2020: (in thousands):
| Quarter Ended | |||||||||||
| January 30, | February 1, | ||||||||||
| 2021 | 2020 | ||||||||||
| AT&T | n/a | $ | 84,010 | ||||||||
| Verizon | n/a | 114,548 | |||||||||
| Total | n/a | $ | 198,558 | ||||||||
| n/a | Denotes revenue representing less than 10% of total revenue for the period | ||||
The customers identified above for the first quarter of fiscal 2020 purchased products and services from each of Ciena’s operating segments.
•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, Waveserver® stackable interconnect system, the 6500 Reconfigurable Line System (RLS) and the 5400 family of Packet-Optical Platforms. This product line also includes sales of the Z-Series Packet-Optical Platform.
◦Routing and Switching - includes the 3000 family of service delivery switches and service aggregation switches and the 5000 family of service aggregation switches. This product line also includes the 8700 Packetwave Platform, the Ethernet packet configuration for the 5410 Service Aggregation Switch, and the 6500 Packet Transport System (PTS), which combines packet switching, control plane operation, and integrated optics.
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 provides analytics, data, and planning tools to assist customers in managing Ciena’s Networking Platforms products in their networks. Ciena’s platform software includes its Manage, Control and Plan (MCP) domain controller solution, OneControl Unified Management System, as well as planning tools and a number of legacy software solutions that support our installed base of network solutions. 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, micro-services, standards-based open software suite, together with related services, that enables customers to implement large-scale software and IT-led operations support system (OSS) transformations by transforming legacy networks into “service ready” networks, accelerating the
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creation, delivery and lifecycle management of new, cloud-based services. 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 a distinct performance obligation where revenue is generally recognized upfront at a point in time upon transfer of control. Revenue from software subscription and support are 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 are 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 where 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 are 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
The following table provides information about receivables, contract assets and contract liabilities (deferred revenue) from contracts with customers (in thousands):
| Balance at January 30, 2021 | Balance at October 31, 2020 | |||||||||||||
| Accounts receivable, net | $ | 700,025 | $ | 719,405 | ||||||||||
| Contract assets for unbilled accounts receivable, net | $ | 85,461 | $ | 85,843 | ||||||||||
| Deferred revenue | $ | 190,600 | $ | 158,363 | ||||||||||
Our 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 current assets in the Condensed Consolidated Balance Sheets. See Note 10 below.
Contract liabilities consist of deferred revenue and represent advanced payments against non-cancelable customer orders received prior to revenue recognition. Ciena recognized approximately $46.4 million and $49.0 million of revenue during the first three months of fiscal 2021 and 2020 that was included in the deferred revenue balance at October 31, 2020 and November 2, 2019, 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 30, 2021 and February 1, 2020.
Capitalized Contract Acquisition Costs
Capitalized contract acquisition costs consist of deferred sales commissions, were $15.7 million and $15.3 million as of January 30, 2021 and October 31, 2020, respectively, and were included in prepaid expenses and other and other long-term assets. The amortization expense associated with these costs was $5.5 million and $5.6 million during the first three months of fiscal 2021 and 2020, respectively, and was included in sales and marketing expense.
Remaining Performance Obligations
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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 30, 2021, the aggregate amount of RPO was $1.1 billion. As of January 30, 2021, Ciena expects approximately 80% of the RPO to be recognized as revenue within the next twelve months.
(4) RESTRUCTURING COSTS
Ciena has undertaken a number of restructuring activities intended to reduce expense and to better 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 Ciena’s Condensed Consolidated Balance Sheets, for the three months ended January 30, 2021 (in thousands):
| Workforce reduction | Consolidation of excess facilities and other restructuring activities | Total | |||||||||||||||
| Balance at October 31, 2020 | $ | 2,915 | $ | — | $ | 2,915 | |||||||||||
| Charges | 1,990 | (1) | 3,877 | (2) | 5,867 | ||||||||||||
| Cash payments | (2,994) | (3,877) | (6,871) | ||||||||||||||
| Balance at January 30, 2021 | $ | 1,911 | $ | — | $ | 1,911 | |||||||||||
| Current restructuring liabilities | $ | 1,911 | $ | — | $ | 1,911 | |||||||||||
(1) Reflects a global workforce reduction of 50 employees during the three months ended January 30, 2021 as part of a business optimization strategy to improve gross margin, constrain operating expense and redesign certain business processes.
(2) Primarily represents costs and imputed interest expense related to restructured facilities and the redesign of certain business processes.
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 Ciena’s Condensed Consolidated Balance Sheets for the three months ended February 1, 2020 (in thousands):
| Workforce reduction | Consolidation of excess facilities | Total | |||||||||||||||
| Balance at November 2, 2019 | $ | 3,983 | $ | 11,160 | $ | 15,143 | |||||||||||
| Charges | 1,204 | (1) | 3,268 | (2) | 4,472 | ||||||||||||
| Adjustments related to ASC 842 | — | (11,160) | (3) | (11,160) | |||||||||||||
| Cash payments | (2,955) | (3,268) | (6,223) | ||||||||||||||
| Balance at February 1, 2020 | $ | 2,232 | $ | — | $ | 2,232 | |||||||||||
| Current restructuring liabilities | $ | 2,232 | $ | — | $ | 2,232 | |||||||||||
(1) Reflects a global workforce reduction of approximately 22 employees during the three months ended February 1, 2020 as part of a business optimization strategy to improve gross margin, constrain operating expense and redesign certain business processes.
(2) Primarily represents variable costs and imputed interest expense related to restructured facilities.
(3) Represents restructuring reserve liability recognized as a reduction to Operating right-of-use (“ROU”) assets, net in relation to adoption of ASC 842.
(5) INTEREST AND OTHER INCOME (LOSS), NET
The components of interest and other income (loss), net, are as follows (in thousands):
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| Quarter Ended | |||||||||||
| January 30, | February 1, | ||||||||||
| 2021 | 2020 | ||||||||||
| Interest income | $ | 534 | $ | 3,390 | |||||||
| Gains on non-hedge designated foreign currency forward contracts | 4,530 | 637 | |||||||||
| Foreign currency exchange losses | (6,918) | (771) | |||||||||
| Other | 733 | 390 | |||||||||
| Interest and other income (loss), net | $ | (1,121) | $ | 3,646 | |||||||
Ciena Corporation, as the U.S. parent entity, uses the U.S. Dollar as its functional currency; however, some of its foreign branch offices and subsidiaries use local currencies as their functional currencies. Ciena recorded $6.9 million and $0.8 million in foreign currency exchange rate losses during the first three months of fiscal 2021 and 2020, respectively, as a result of monetary assets and liabilities that were transacted in a currency other than the entity’s functional currency, and the related remeasurement adjustments were recorded in interest and other income (loss), net, on the Condensed Consolidated Statements of Operations. From time to time, Ciena uses foreign currency forwards to hedge this type of balance sheet exposure. These forwards are not designated as hedges for accounting purposes, and any net gain or loss associated with these derivatives is reported in interest and other income (loss), net, on the Condensed Consolidated Statements of Operations. During the first three months of fiscal 2021 and 2020, respectively, Ciena recorded gains of $4.5 million and $0.6 million from non-hedge designated foreign currency forward contracts.
(6) INCOME TAXES
On December 2, 2019, the U.S. Department of the Treasury released final regulations and proposed regulations under Section 59A of the Internal Revenue Code, the Base Erosion and Anti-Abuse Tax (“BEAT”). BEAT, which requires certain U.S. corporations to pay a minimum tax associated with deductible payments to non-U.S. related parties, was enacted as part of the Tax Cuts and Jobs Act (the “Tax Act”). Also, on December 2, 2019, the U.S. Department of the Treasury released final regulations that provide additional guidance with respect to the foreign tax credit regime under the Tax Act.
The effective tax rate for the three months ended January 30, 2021 was higher than the effective tax rate for the three months ended February 1, 2020, primarily due to the BEAT reduction in fiscal 2020 and the effect of the final regulations released on December 2, 2019.
Our future income tax provisions and deferred tax balances may be affected by the amount of pre-tax income, the jurisdictions where it is earned, the existence and utilizability of tax attributes and changes in tax laws and business reorganizations. Ciena continues to monitor these items and will adopt strategies to address their impact as appropriate.
(7) SHORT-TERM AND LONG-TERM INVESTMENTS
As of the dates indicated, investments are comprised of the following (in thousands):
| January 30, 2021 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||
| U.S. government obligations: | |||||||||||||||||||||||
| Included in short-term investments | $ | 151,420 | $ | 14 | $ | — | $ | 151,434 | |||||||||||||||
| Included in long-term investments | 102,360 | 4 | — | 102,364 | |||||||||||||||||||
| $ | 253,780 | $ | 18 | $ | — | $ | 253,798 | ||||||||||||||||
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| October 31, 2020 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||
| U.S. government obligations: | |||||||||||||||||||||||
| Included in short-term investments | $ | 150,559 | $ | 109 | $ | (1) | $ | 150,667 | |||||||||||||||
| Included in long-term investments | 82,252 | — | (26) | 82,226 | |||||||||||||||||||
| $ | 232,811 | $ | 109 | $ | (27) | $ | 232,893 | ||||||||||||||||
The following table summarizes the final legal maturities of debt investments at January 30, 2021 (in thousands):
| Amortized Cost | Estimated Fair Value | ||||||||||
| Less than one year | $ | 151,420 | $ | 151,434 | |||||||
| Due in 1-2 years | 102,360 | 102,364 | |||||||||
| $ | 253,780 | $ | 253,798 | ||||||||
(8) FAIR VALUE MEASUREMENTS
As of the date indicated, the following table summarizes the assets and liabilities that are recorded at fair value on a recurring basis (in thousands):
| January 30, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Money market funds | $ | 810,289 | $ | — | $ | — | $ | 810,289 | |||||||||||||||
| Bond mutual fund | 50,348 | — | — | 50,348 | |||||||||||||||||||
| Time deposits | 35,014 | — | — | 35,014 | |||||||||||||||||||
| Deferred compensation plan assets | 10,669 | — | — | 10,669 | |||||||||||||||||||
| U.S. government obligations | — | 253,798 | — | 253,798 | |||||||||||||||||||
| Foreign currency forward contracts | — | 8,397 | — | 8,397 | |||||||||||||||||||
| Total assets measured at fair value | $ | 906,320 | $ | 262,195 | $ | — | $ | 1,168,515 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Foreign currency forward contracts | $ | — | $ | 417 | $ | — | $ | 417 | |||||||||||||||
| Forward starting interest rate swaps | — | 26,248 | — | 26,248 | |||||||||||||||||||
| Total liabilities measured at fair value | $ | — | $ | 26,665 | $ | — | $ | 26,665 | |||||||||||||||
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| October 31, 2020 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Money market funds | $ | 889,293 | $ | — | $ | — | $ | 889,293 | |||||||||||||||
| Bond mutual fund | 50,361 | — | — | 50,361 | |||||||||||||||||||
| Deferred compensation plan assets | 8,213 | — | — | 8,213 | |||||||||||||||||||
| U.S. government obligations | — | 232,893 | — | 232,893 | |||||||||||||||||||
| Foreign currency forward contracts | — | 82 | — | 82 | |||||||||||||||||||
| Total assets measured at fair value | $ | 947,867 | $ | 232,975 | $ | — | $ | 1,180,842 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Foreign currency forward contracts | $ | — | $ | 681 | $ | — | $ | 681 | |||||||||||||||
| Forward starting interest rate swaps | — | 28,513 | — | 28,513 | |||||||||||||||||||
| Total liabilities measured at fair value | $ | — | $ | 29,194 | $ | — | $ | 29,194 | |||||||||||||||
As of the date indicated, the assets and liabilities above are presented on Ciena’s Condensed Consolidated Balance Sheets as follows (in thousands):
| January 30, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cash equivalents | $ | 895,651 | $ | — | $ | — | $ | 895,651 | |||||||||||||||
| Short-term investments | — | 151,434 | — | 151,434 | |||||||||||||||||||
| Prepaid expenses and other | — | 8,397 | — | 8,397 | |||||||||||||||||||
| Other long-term assets | 10,669 | 102,364 | — | 113,033 | |||||||||||||||||||
| Total assets measured at fair value | $ | 906,320 | $ | 262,195 | $ | — | $ | 1,168,515 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Accrued liabilities and other short-term obligations | $ | — | $ | 417 | $ | — | $ | 417 | |||||||||||||||
| Other long-term obligations | — | 26,248 | — | 26,248 | |||||||||||||||||||
| Total liabilities measured at fair value | $ | — | $ | 26,665 | $ | — | $ | 26,665 | |||||||||||||||
| October 31, 2020 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cash equivalents | $ | 939,654 | $ | — | $ | — | $ | 939,654 | |||||||||||||||
| Short-term investments | — | 150,667 | — | 150,667 | |||||||||||||||||||
| Prepaid expenses and other | — | 82 | — | 82 | |||||||||||||||||||
| Other long-term assets | 8,213 | 82,226 | — | 90,439 | |||||||||||||||||||
| Total assets measured at fair value | $ | 947,867 | $ | 232,975 | $ | — | $ | 1,180,842 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Accrued liabilities and other short-term obligations | $ | — | $ | 681 | $ | — | $ | 681 | |||||||||||||||
| Other long-term obligations | — | 28,513 | — | 28,513 | |||||||||||||||||||
| Total liabilities measured at fair value | $ | — | $ | 29,194 | $ | — | $ | 29,194 | |||||||||||||||
Ciena did not have any transfers between Level 1 and Level 2 fair value measurements during the periods presented.
(9) INVENTORIES
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As of the dates indicated, inventories are comprised of the following (in thousands):
| January 30, 2021 | October 31, 2020 | ||||||||||
| Raw materials | $ | 123,388 | $ | 119,481 | |||||||
| Work-in-process | 11,353 | 13,738 | |||||||||
| Finished goods | 257,048 | 210,050 | |||||||||
| Deferred cost of goods sold | 38,920 | 40,747 | |||||||||
| Gross inventories | 430,709 | 384,016 | |||||||||
| Provision for excess and obsolescence | (40,976) | (39,637) | |||||||||
| Inventories, net | $ | 389,733 | $ | 344,379 | |||||||
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 2021, Ciena recorded a provision for excess and obsolescence of $5.9 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.
(10) PREPAID EXPENSES AND OTHER
As of the dates indicated, prepaid expenses and other are comprised of the following (in thousands):
| January 30, 2021 | October 31, 2020 | ||||||||||
| Contract assets for unbilled accounts receivable, net | $ | 85,461 | $ | 85,843 | |||||||
| Prepaid expenses | 76,462 | 70,647 | |||||||||
| Prepaid VAT and other taxes | 73,767 | 72,838 | |||||||||
| Product demonstration equipment, net | 44,707 | 44,793 | |||||||||
| Other non-trade receivables | 26,099 | 21,981 | |||||||||
| Capitalized contract acquisition costs | 10,712 | 11,296 | |||||||||
| Derivative assets | 8,397 | 82 | |||||||||
| Deferred deployment expense | 505 | 604 | |||||||||
| $ | 326,110 | $ | 308,084 | ||||||||
Depreciation of product demonstration equipment was $2.6 million during the first three months of fiscal 2021 and $2.2 million during the first three months of fiscal 2020.
For further discussion on contract assets and capitalized contract acquisition costs, see Note 3 above.
(11) OTHER BALANCE SHEET DETAILS
As of the dates indicated, accrued liabilities and other short-term obligations are comprised of the following (in thousands):
| January 30, 2021 | October 31, 2020 | ||||||||||
Compensation, payroll related tax and benefits (1) | $ | 76,477 | $ | 135,462 | |||||||
| Warranty | 48,184 | 49,868 | |||||||||
| Vacation | 28,414 | 26,945 | |||||||||
| Finance lease obligations | 3,011 | 2,836 | |||||||||
| Interest payable | 605 | 672 | |||||||||
| Other | 118,312 | 118,349 | |||||||||
| $ | 275,003 | $ | 334,132 | ||||||||
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(1) Reduction is primarily due to the timing of bonus payments to employees under Ciena’s annual cash incentive compensation plan.
The following table summarizes the activity in Ciena’s accrued warranty for the fiscal periods indicated (in thousands):
| Beginning Balance | Current Period Provisions | Settlements | Ending Balance | |||||||||||||||||||||||
| Three Months Ended February 1, 2020 | $ | 48,498 | 7,898 | (5,206) | $ | 51,190 | ||||||||||||||||||||
| Three Months Ended January 30, 2021 | $ | 49,868 | 3,239 | (4,923) | $ | 48,184 | ||||||||||||||||||||
As of the dates indicated, deferred revenue is comprised of the following (in thousands):
| January 30, 2021 | October 31, 2020 | ||||||||||
| Products | $ | 15,374 | $ | 17,534 | |||||||
| Services | 175,226 | 140,829 | |||||||||
| 190,600 | 158,363 | ||||||||||
| Less current portion | (136,229) | (108,700) | |||||||||
| Long-term deferred revenue | $ | 54,371 | $ | 49,663 | |||||||
(12) DERIVATIVE INSTRUMENTS
Foreign Currency Derivatives
Ciena conducts business globally in numerous currencies, thus is exposed to adverse movements in foreign currency exchange rates. To limit the exposure related to foreign currency changes, Ciena enters into foreign currency contracts. Ciena does not enter into such contracts for speculative purposes.
As of January 30, 2021 and October 31, 2020, Ciena had forward contracts to hedge its foreign exchange exposure in order to reduce variability principally related to research and development activities. The notional amount of these contracts was approximately $248.3 million and $254.9 million as of January 30, 2021 and October 31, 2020, respectively. These foreign exchange contracts have maturities of 24 months or less and have been designated as cash flow hedges.
As of January 30, 2021 and October 31, 2020, 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 $210.4 million and $212.0 million as of January 30, 2021 and October 31, 2020, 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 LIBOR interest on its term loan borrowings (see Note 15 below) and has hedged such 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 (as defined in Note 15 below) at 2.957% through September 2023. The total notional amount of interest rate swaps in effect was $350.0 million as of January 30, 2021 and October 31, 2020.
Ciena expects the variable rate payments to be received under the terms of the interest rate swaps to offset exactly the forecasted variable rate payments on the equivalent notional amounts of the 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 5 and Note 8 above.
(13) 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 30, 2021 (in thousands):
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| 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 31, 2020 | $ | 45 | $ | (219) | $ | (21,535) | $ | (13,649) | $ | (35,358) | |||||||||||||||||||
| Other comprehensive gain (loss) before reclassifications | (49) | 7,848 | (659) | 15,861 | 23,001 | ||||||||||||||||||||||||
| Amounts reclassified from AOCI | — | (1,231) | 2,041 | — | 810 | ||||||||||||||||||||||||
| Balance at January 30, 2021 | $ | (4) | $ | 6,398 | $ | (20,153) | $ | 2,212 | $ | (11,547) | |||||||||||||||||||
The following table summarizes the changes in AOCI, net of tax, for the three months ended February 1, 2020 (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 November 2, 2019 | $ | 152 | $ | 925 | $ | (13,686) | $ | (9,475) | $ | (22,084) | |||||||||||||||||||
| Other comprehensive loss before reclassifications | (86) | (921) | (1,718) | (2,982) | (5,707) | ||||||||||||||||||||||||
| Amounts reclassified from AOCI | — | (158) | 238 | — | 80 | ||||||||||||||||||||||||
| Balance at February 1, 2020 | $ | 66 | $ | (154) | $ | (15,166) | $ | (12,457) | $ | (27,711) | |||||||||||||||||||
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 (loss), net, on the Condensed Consolidated Statements of Operations.
(14) LEASES
Ciena leases over 1.3 million square feet of facilities globally related to the ongoing operations of its business segments and related functions. Ciena’s principal executive offices are located in Hanover, Maryland. Ciena’s largest facilities are research and development centers located in Ottawa, Canada and Gurgaon, India. Ciena also has engineering and/or service delivery facilities located in San Jose, California; Alpharetta, Georgia; Quebec, Canada; Austin, Texas; and Pune and Bangalore, India. In addition, Ciena leases various smaller offices in regions throughout the world to support sales and services operations. Office facilities are leased under various non-cancelable operating or finance leases. Ciena's current leases have remaining terms that vary up to 11 years. Certain leases provide for options to extend up to 10 years and/or options to terminate within five years.
Leases included in the Condensed Consolidated Balance Sheets were as follows (in thousands):
| Classification | As of January 30, 2021 | As of October 31, 2020 | ||||||||||||
| Operating leases: | ||||||||||||||
| Operating ROU assets | Operating right-of-use assets | $ | 54,244 | $ | 57,026 | |||||||||
Operating lease liabilities | Operating lease liabilities and Long-term operating lease liabilities | 76,990 | 80,450 | |||||||||||
| Finance leases: | ||||||||||||||
Buildings, gross | Equipment, building, furniture and fixtures, net | $ | 73,776 | $ | 70,791 | |||||||||
Less: accumulated depreciation | Equipment, building, furniture and fixtures, net | (19,764) | (17,837) | |||||||||||
Buildings, net | $ | 54,012 | $ | 52,954 | ||||||||||
Finance lease liabilities | Accrued liabilities and other short-term obligations and other long-term obligations | $ | 66,409 | $ | 64,401 | |||||||||
ROU assets that involve subleased or vacant space aggregate $4.7 million as of January 30, 2021. These assets may become impaired if tenants are unable to service their obligations under the sublease, and/or if the estimates as to occupancy are not realized, either of which may be more likely as COVID-19 impacts evolve.
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The components of lease expense included in the Condensed Consolidated Statement of Operations were as follows (in thousands):
| Three Months Ended | Three Months Ended | |||||||||||||
| Classification | January 30, 2021 | February 1, 2020 | ||||||||||||
| Operating lease costs | Operating expense | $ | 4,229 | $ | 4,457 | |||||||||
| Finance lease cost: | ||||||||||||||
Amortization of finance ROU asset | Operating expense | 1,165 | 1,140 | |||||||||||
Interest on finance lease liabilities | Interest expense | 1,221 | 1,244 | |||||||||||
| Total finance lease cost | 2,386 | 2,384 | ||||||||||||
| Non-capitalized lease cost | Operating expense | 293 | 621 | |||||||||||
Variable lease cost(1) | Operating expense | 1,599 | 1,311 | |||||||||||
Net lease cost(2) | $ | 8,507 | $ | 8,773 | ||||||||||
(1) Variable lease costs include expenses relating to insurance, taxes, maintenance and other costs required by the applicable operating lease. Variable lease costs are determined by whether they are to be included in base rent and if amounts are based on a consumer price index.
(2) Excludes other operating expense of $2.3 million and $4.3 million for the three months ended January 30, 2021 and February 1, 2020, respectively, related to amortization of leasehold improvements.
Future minimum lease payments and the present value of minimum lease payments related to operating and finance leases as of January 30, 2021 were as follows (in thousands):
| Operating Leases | Finance Leases | Total | |||||||||||||||
| Remaining fiscal 2021 | $ | 16,077 | $ | 7,759 | $ | 23,836 | |||||||||||
| 2022 | 19,112 | 8,215 | 27,327 | ||||||||||||||
| 2023 | 15,747 | 8,294 | 24,041 | ||||||||||||||
| 2024 | 13,237 | 8,310 | 21,547 | ||||||||||||||
| 2025 | 8,900 | 8,494 | 17,394 | ||||||||||||||
| Thereafter | 9,367 | 58,427 | 67,794 | ||||||||||||||
| Total lease payments | 82,440 | 99,499 | 181,939 | ||||||||||||||
Less: Imputed interest | (5,450) | (33,090) | (38,540) | ||||||||||||||
| Present value of lease liabilities | 76,990 | 66,409 | 143,399 | ||||||||||||||
| Less: Current portion of present value of minimum lease payments | (19,364) | (3,011) | (22,375) | ||||||||||||||
| Long-term portion of present value of minimum lease payments | $ | 57,626 | $ | 63,398 | $ | 121,024 | |||||||||||
The weighted average remaining lease terms and weighted average discount rates for operating and finance leases were as follows:
As of January 30, 2021 | As of October 31, 2020 | |||||||
| Weighted-average remaining lease term in years: | ||||||||
Operating leases | 4.68 | 4.87 | ||||||
Finance leases | 11.46 | 11.71 | ||||||
| Weighted-average discount rates: | ||||||||
Operating leases | 2.82 | % | 2.82 | % | ||||
Finance leases | 7.56 | % | 7.56 | % | ||||
(15) SHORT-TERM AND LONG-TERM DEBT
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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”).
The net carrying value of Ciena’s term loan was comprised of the following for the fiscal periods indicated (in thousands):
| January 30, 2021 | October 31, 2020 | |||||||||||||||||||||||||||||||
| Principal Balance | Unamortized Discount | Deferred Debt Issuance Costs | Net Carrying Value | Net Carrying Value | ||||||||||||||||||||||||||||
| 2025 Term Loan | $ | 686,070 | $ | (1,495) | $ | (2,789) | $ | 681,786 | $ | 683,286 | ||||||||||||||||||||||
Deferred debt issuance costs that were deducted from the carrying amounts of the term loan totaled $2.8 million at January 30, 2021 and $2.9 million at October 31, 2020. 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 term loan. The amortization of deferred debt issuance costs for this term loan is included in interest expense, and was $0.2 million during the first three months of each of fiscal 2021 and fiscal 2020. The carrying value of the term loan listed above is also net of any unamortized debt discounts.
As of January 30, 2021, the estimated fair value of the 2025 Term Loan was $686.1 million. Ciena’s term loan is categorized as Level 2 in the fair value hierarchy. Ciena estimated the fair value of its term loan using a market approach based on observable inputs, such as current market transactions involving comparable securities.
(16) EARNINGS PER SHARE CALCULATION
The following tables (in thousands, except per share amounts) reconcile basic net income per common share (“Basic EPS”) and diluted net income per potential common share (“Diluted EPS”). Basic EPS is computed using the weighted average number of common shares outstanding. Diluted EPS is computed using the weighted average number of the following, in each case, to the extent 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.
| Quarter Ended | |||||||||||
| January 30, | February 1, | ||||||||||
| Numerator | 2021 | 2020 | |||||||||
| Net income used to calculate Basic and Diluted EPS | $ | 55,348 | $ | 62,328 | |||||||
| Quarter Ended | |||||||||||
| January 30, | February 1, | ||||||||||
| Denominator | 2021 | 2020 | |||||||||
| Basic weighted average shares outstanding | 155,174 | 154,334 | |||||||||
| Add: Shares underlying outstanding stock options and stock unit awards and issuable under employee stock purchase plan | 1,409 | 1,404 | |||||||||
| Dilutive weighted average shares outstanding | 156,583 | 155,738 | |||||||||
| Quarter Ended | |||||||||||
| January 30, | February 1, | ||||||||||
| EPS | 2021 | 2020 | |||||||||
| Basic EPS | $ | 0.36 | $ | 0.40 | |||||||
| Diluted EPS | $ | 0.35 | $ | 0.40 | |||||||
The following table summarizes the weighted average shares excluded from the calculation of the denominator for Diluted EPS due to their anti-dilutive effect for the periods indicated (in thousands):
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| Quarter Ended | |||||||||||
| January 30, | February 1, | ||||||||||
| 2021 | 2020 | ||||||||||
| Shares underlying stock options and stock unit awards | 135 | 731 | |||||||||
| Total shares excluded due to anti-dilutive effect | 135 | 731 | |||||||||
(17) STOCKHOLDERS’ EQUITY
Stock Repurchase Program
On December 13, 2018, Ciena announced that its Board of Directors authorized a program to repurchase up to $500 million of Ciena’s common stock. After temporarily suspending repurchases of Ciena’s common stock during fiscal 2020, Ciena reinstituted its stock repurchase program in the first quarter of 2021. The amount and timing of repurchases 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.
The following table summarizes activity of the stock repurchase program, reported based on trade date:
| Shares Repurchased | Weighted-Average Price per Share | Amount Repurchased (in thousands) | |||||||||||||||
| Cumulative balance at October 31, 2020 | 5,710,912 | $ | 39.33 | $ | 224,611 | ||||||||||||
| Repurchase of common stock under the stock repurchase program | 251,578 | 52.49 | 13,206 | ||||||||||||||
| Cumulative balance at January 30, 2021 | 5,962,490 | $ | 39.89 | $ | 237,817 | ||||||||||||
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 common stock to satisfy employee tax withholding obligations due on vesting of stock unit awards. The purchase price of $19.2 million for the shares of Ciena’s stock repurchased during the first three months of fiscal 2021 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.
(18) SHARE-BASED COMPENSATION EXPENSE
The following table summarizes share-based compensation expense for the periods indicated (in thousands):
| Quarter Ended | |||||||||||
| January 30, | February 1, | ||||||||||
| 2021 | 2020 | ||||||||||
| Product costs | $ | 953 | $ | 671 | |||||||
| Service costs | 1,205 | 842 | |||||||||
| Share-based compensation expense included in cost of goods sold | 2,158 | 1,513 | |||||||||
| Research and development | 4,794 | 3,849 | |||||||||
| Sales and marketing | 5,816 | 4,613 | |||||||||
| General and administrative | 6,358 | 5,527 | |||||||||
| Share-based compensation expense included in operating expense | 16,968 | 13,989 | |||||||||
| Share-based compensation expense capitalized in inventory, net | (162) | 100 | |||||||||
| Total share-based compensation | $ | 18,964 | $ | 15,602 | |||||||
As of January 30, 2021, total unrecognized share-based compensation expense was approximately $169.0 million, which relates to unvested stock unit awards and is expected to be recognized over a weighted-average period of 1.68 years.
(19) SEGMENTS AND ENTITY-WIDE DISCLOSURES
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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, 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 30, 2021, equipment, building, furniture and fixtures, net, totaled $281.2 million, and operating ROU assets totaled $54.2 million both of which support asset groups within Ciena’s four operating segments and unallocated selling and general and administrative activities. As of January 30, 2021, finite-lived intangible assets, goodwill and maintenance spares are assigned to asset groups within the following segments (in thousands):
| January 30, 2021 | |||||||||||||||||||||||||||||
| Networking Platforms | Platform Software and Services | Blue Planet Automation Software and Services | Global Services | Total | |||||||||||||||||||||||||
| Other intangible assets, net | $ | 12,924 | $ | — | $ | 78,592 | $ | — | $ | 91,516 | |||||||||||||||||||
| Goodwill | $ | 66,054 | $ | 156,191 | $ | 89,049 | $ | — | $ | 311,294 | |||||||||||||||||||
| Maintenance spares, net | $ | — | $ | — | $ | — | $ | 63,008 | $ | 63,008 | |||||||||||||||||||
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; amortization of intangible assets; significant asset impairments and restructuring costs; acquisition and integration costs; interest and other income (loss), net; interest expense; loss on extinguishment and modification of debt and provision for income taxes.
The table below sets forth Ciena’s segment profit (loss) and the reconciliation to consolidated net income during the respective periods indicated (in thousands):
| Quarter Ended | |||||||||||
| January 30, | February 1, | ||||||||||
| 2021 | 2020 | ||||||||||
| Segment profit (loss): | |||||||||||
| Networking Platforms | $ | 156,431 | $ | 168,270 | |||||||
| Platform Software and Services | 27,660 | 28,951 | |||||||||
| Blue Planet Automation Software and Services | (2,434) | (3,113) | |||||||||
| Global Services | 43,493 | 45,527 | |||||||||
| Total segment profit | 225,150 | 239,635 | |||||||||
| Less: Non-performance operating expenses | |||||||||||
| Selling and marketing | 97,278 | 107,066 | |||||||||
| General and administrative | 39,993 | 42,468 | |||||||||
| Amortization of intangible assets | 5,910 | 5,853 | |||||||||
| Significant asset impairments and restructuring costs | 5,867 | 4,472 | |||||||||
| Acquisition and integration costs | 307 | 1,819 | |||||||||
| Add: Other non-performance financial items | |||||||||||
| Interest expense and other income (loss), net | (8,481) | (5,169) | |||||||||
| Loss on extinguishment and modification of debt | — | (646) | |||||||||
| Less: Provision for income taxes | 11,966 | 9,814 | |||||||||
| Consolidated net income | $ | 55,348 | $ | 62,328 | |||||||
Entity-Wide Reporting
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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 U.S. 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 30, 2021 | October 31, 2020 | ||||||||||
| Canada | $ | 226,331 | $ | 214,188 | |||||||
| United States | 62,980 | 65,321 | |||||||||
| Other International | 46,161 | 49,894 | |||||||||
| Total | $ | 335,472 | $ | 329,403 | |||||||
(20) COMMITMENTS AND CONTINGENCIES
Canadian Grant
During fiscal 2018, Ciena entered into agreements related to the Evolution of Networking Services through a Corridor in Quebec and Ontario for Research and Innovation (“ENCQOR”) project with the Canadian federal government, the government of the province of Ontario and the government of the province of Quebec to develop a 5G technology corridor between Quebec and Ontario to promote research and development, small business enterprises and entrepreneurs in Canada. Under these agreements, Ciena can receive up to an aggregate CAD$57.6 million (approximately $45.1 million) in reimbursement from the three Canadian government entities for eligible costs over a period commencing on February 20, 2017 and ending on March 31, 2022. Ciena anticipates receiving recurring disbursements over this period. Amounts received under the agreements are subject to recoupment in the event that Ciena fails to achieve certain minimum investment, employment and project milestones. As of January 30, 2021, Ciena has recorded CAD$44.2 million (approximately $34.6 million) in cumulative benefits as a reduction in research and development expense of which CAD$3.6 million ($2.8 million) was recorded in the first three months of fiscal 2021. As of January 30, 2021, amounts receivable from this grant were CAD$3.2 million ($2.5 million).
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.
(21) SUBSEQUENT EVENTS
Stock Repurchase Program
From the end of the first quarter of fiscal 2021 through March 5, 2021, Ciena repurchased an additional 188,169 shares of its common stock, for an aggregate purchase price of $10.1 million at an average price of $53.69 per share, inclusive of repurchases pending settlement. As of March 5, 2021, Ciena has repurchased an aggregate of 6,150,659 shares and has an aggregate of $252.1 million of authorized funds remaining under its stock repurchase program.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Statements
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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, 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,” “can,” “should,” “could,” “expects,” “future,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “projects,” “targets,” 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 2020, which we filed with the SEC on December 18, 2020 (our “2020 Annual Report”). However, we operate in a very competitive and rapidly changing environment and new risks and uncertainties emerge, are identified or become apparent from time to time. We cannot predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this report, and 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
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided as a supplement to, and should be read in conjunction with, our 2020 Annual Report and our Condensed Consolidated Financial Statements and the accompanying notes thereto included in Item 1 of Part I of this 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 enable the transport, routing, switching, aggregation, service delivery and management of video, data and voice traffic on communications networks. 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 and adapt dynamically to changing end-user service demands. To complement these solutions, we offer Platform Software, which provides management, domain control and specialized applications that automate network lifecycle operations, including provisioning equipment and services, network data, analytics and policy-based assurance to achieve closed loop automation across multi-vendor and multi-domain network environments. Through our Blue Planet® Software suite, we enable customers to transform their business and operations support systems through software-based automation of their network and IT infrastructures. To complement our hardware and software products, we offer a broad range of services that help our customers build, operate and improve their networks and associated operational environments, including network optimization and migration offerings.
Impact of the COVID-19 Pandemic
Demand for Products & Services. The demand environment continues to be adversely impacted by the COVID-19 pandemic, resulting in lower order volumes and revenue in the first quarter of fiscal 2021 as compared to the first quarter of fiscal 2020. We expect this more cautious spending environment to continue through at least the second quarter of fiscal 2021 and expect these conditions to adversely affect order volumes and revenue in the short term, as compared to our first half of fiscal 2020.
Services and Customer Fulfillment. We continue to experience some disruption in our ability to provide installation, professional and fulfillment services to customers due to site readiness and access limitations, limited customer availability, project delays or re-prioritization by customers, and travel bans or restrictions on movement or gatherings. We expect these conditions to persist in the short term and, as a result, to continue to adversely impact our revenue and results of operations.
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Sales & Marketing. Restrictions on travel due to COVID-19 and limitations on interactions with customers, such as field and lab trials, have continued to negatively impact our ability to carry out certain sales and marketing activities, including our ability to secure new customers, to qualify and sell new products, and to grow sales with customers. Delays in customers operationalizing new network projects that we anticipated occurring on their original timelines continue to adversely affect our revenue. Conversely, our recent gross margin performance has benefited from these dynamics, with a larger percentage of our revenue comprised of existing business, as compared to new design wins and early in life projects, which tend to have lower margins.
Market Growth & Conditions. As a result of the impact of the COVID-19 pandemic on market dynamics, particularly in the enterprise business segments of our communications service provider customers, the growth rates in our addressable markets have been adversely impacted. We expect these market dynamics, including constrained customer spending and the decreased velocity of new business execution, to persist through at least the first half of fiscal 2021.
The COVID-19 pandemic and countermeasures taken to contain its spread have caused economic and financial disruptions globally. We continue to monitor the situation and actively assess further implications to our business, supply chain, fulfillment operations and customer demand. However, the COVID-19 situation remains dynamic, and the duration and severity of its impact on our business and results of operations in future periods remains uncertain. If the COVID-19 pandemic or its adverse effects become more severe or prevalent or are prolonged in the locations where we, our customers, suppliers or manufacturers conduct business, or we experience more pronounced disruptions in our business or operations, or in economic activity and demand for our products and services generally, our business and results of operations in future periods could be materially adversely affected.
For additional information regarding our business, industry, market opportunity, competitive landscape, and strategy, see our 2020 Annual Report, including the discussion in that report of the impact of the COVID-19 pandemic on our business, supply chain, and market conditions.
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. Effective as of the beginning of fiscal 2021, we renamed our “Packet Networking” product line “Routing and Switching.” This change was made on a prospective basis and does not impact comparability of previous financial results or the composition of this product line. References to our “Packet Networking” product line in prior periods have been changed to “Routing and Switching” in this report. See Note 19 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.
Quarter ended January 30, 2021 as compared to the quarter ended February 1, 2020
Revenue
During the first quarter of fiscal 2021, approximately 17.9% of our revenue was non-U.S. Dollar-denominated, primarily including sales in Euros, Canadian Dollars, Japanese Yen, British Pounds, and Brazilian Reais. During the first quarter of fiscal 2021, as compared to the first quarter of fiscal 2020, the U.S. Dollar fluctuated against these currencies. Consequently, our revenue reported in U.S. Dollars slightly increased by approximately $2.6 million, or 0.4%, as compared to the first quarter of fiscal 2020. 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 30, 2021 | %* | February 1, 2020 | %* | Increase (decrease) | %** | ||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||
| Networking Platforms | |||||||||||||||||||||||||||||||||||
| Converged Packet Optical | $ | 512,324 | 67.7 | $ | 591,549 | 71.0 | $ | (79,225) | (13.4) | ||||||||||||||||||||||||||
| Routing and Switching | 64,307 | 8.5 | 67,508 | 8.1 | (3,201) | (4.7) | |||||||||||||||||||||||||||||
| Total Networking Platforms | 576,631 | 76.2 | 659,057 | 79.1 | (82,426) | (12.5) | |||||||||||||||||||||||||||||
| Platform Software and Services | 49,839 | 6.6 | 51,888 | 6.2 | (2,049) | (3.9) | |||||||||||||||||||||||||||||
| Blue Planet Automation Software and Services | 16,934 | 2.2 | 15,466 | 1.9 | 1,468 | 9.5 | |||||||||||||||||||||||||||||
| Global Services | |||||||||||||||||||||||||||||||||||
| Maintenance Support and Training | 67,630 | 8.9 | 61,793 | 7.4 | 5,837 | 9.4 | |||||||||||||||||||||||||||||
| Installation and Deployment | 39,611 | 5.2 | 34,954 | 4.2 | 4,657 | 13.3 | |||||||||||||||||||||||||||||
| Consulting and Network Design | 6,485 | 0.9 | 9,754 | 1.2 | (3,269) | (33.5) | |||||||||||||||||||||||||||||
| Total Global Services | 113,726 | 15.0 | 106,501 | 12.8 | 7,225 | 6.8 | |||||||||||||||||||||||||||||
| Consolidated revenue | $ | 757,130 | 100.0 | $ | 832,912 | 100.0 | $ | (75,782) | (9.1) | ||||||||||||||||||||||||||
_____________________________
* Denotes % of total revenue
** Denotes % change from 2020 to 2021
•Networking Platforms segment revenue decreased, reflecting product line sales decreases of $79.2 million of our Converged Packet Optical products and $3.2 million of our Routing and Switching products.
◦Converged Packet Optical sales decreased, primarily reflecting sales decreases of $98.4 million of our 6500 Packet-Optical Platform, primarily to communications service providers and cable and multiservice operators, and $41.9 million of our 5400 family of Packet-Optical Platforms primarily to communication service providers. These sales decreases were partially offset by a sales increase of $53.8 million of our Waveserver® products, primarily to communications service providers and Web-scale providers.
◦Routing and Switching sales decreased, primarily reflecting sales decreases of $5.8 million of our 8700 Packetwave Platform to enterprise and government customers and $4.0 million of our 3000 and 5000 families of service delivery and aggregation switches to communication service providers. These decreases were offset by a sales increase of $7.3 million of our platform independent software to a communication service provider.
•Platform Software and Services segment revenue decreased, reflecting a decrease of $8.8 million in software sales. offset by an increase of $6.8 million related to services.
•Blue Planet Automation Software and Services segment revenue increased, primarily reflecting an increase of $1.2 million in sales of software platforms. Our entrance into the software automation market is in the early stages and, as such, revenue from our Blue Planet Automation Software platform has not been significant to date and may fluctuate.
•Global Services segment revenue increased, reflecting sales increases of $5.8 million of our maintenance support and training services and $4.7 million of our installation and deployment services, offset by a sales decrease of $3.3 million of our consulting and network design services, in part due to impacts of COVID-19 as described above.
Our operating segments engage in business and operations across three geographic regions: Americas; EMEA; and APAC. The increase in our EMEA region for the quarter ended January 30, 2021 was primarily driven by increased sales in the Netherlands and France. The decrease in our APAC region for the quarter ended January 30, 2021 was primarily driven by decreased sales in Japan. The decrease in our Americas region for the quarter ended January 30, 2021 was primarily driven by decreased sales in the United States.The following table reflects our geographic distribution of revenue principally based on the relevant location for our delivery of products and performance of services. Our revenue, when considered by geographic
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distribution, can fluctuate significantly, 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 table below sets forth the changes in geographic distribution of revenue for the periods indicated (in thousands, except percentage data):
| Quarter Ended | |||||||||||||||||||||||||||||||||||
| January 30, 2021 | %* | February 1, 2020 | %* | Increase (decrease) | %** | ||||||||||||||||||||||||||||||
| Americas | $ | 496,611 | 65.6 | $ | 574,004 | 68.9 | $ | (77,393) | (13.5) | ||||||||||||||||||||||||||
| EMEA | 155,418 | 20.5 | 129,965 | 15.6 | 25,453 | 19.6 | |||||||||||||||||||||||||||||
| APAC | 105,101 | 13.9 | 128,943 | 15.5 | (23,842) | (18.5) | |||||||||||||||||||||||||||||
| Total | $ | 757,130 | 100.0 | $ | 832,912 | 100.0 | $ | (75,782) | (9.1) | ||||||||||||||||||||||||||
_____________________________________
* Denotes % of total revenue
** Denotes % change from 2020 to 2021
•Americas revenue decreased, primarily reflecting sales decreases of $78.5 million within our Networking Platforms segment and $5.7 million within our Platform Software and Services segment, offset by sales increases of $5.1 million within our Global Services segment and $1.7 million within our Blue Planet Automation Software and Services segment. The decrease within our Networking Platforms segment primarily reflects a product line sales decrease of $73.6 million of our Converged Packet Optical products, primarily related to a sales decrease of $77.3 million of our 6500 Packet-Optical Platform to communication service providers.
•EMEA revenue increased, primarily reflecting sales increases of $19.0 million within our Networking Platforms segment, $3.5 million within our Global Services segment and $2.2 million within our Platform Software and Services segment. The revenue increase within our Networking Platforms segment reflects a product line sales increase of $17.7 million of Converged Packet Optical products, primarily related to a sales increase of $19.9 million of our Waveserver products to communication service providers and Web-scale providers.
•APAC revenue decreased, primarily reflecting a sales decrease of $22.9 million within our Networking Platforms segment. Our Networking Platforms segment revenue decrease primarily reflects a decrease of $27.6 million in sales of our 6500 Packet-Optical Platform to communications service providers in Japan, partially offset by an increase of 7.6 million in sales of our Waveserver products, primarily to communication service providers.
Cost of Goods Sold and Gross Profit
The component elements that comprise our product cost of goods and services costs of goods sold are set forth in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our 2020 Annual Report. 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. These are similarly described in detail in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” sections of our 2020 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 30, 2021 | %* | February 1, 2020 | %* | Increase (decrease) | %** | ||||||||||||||||||||||||||||||
| Total revenue | $ | 757,130 | 100.0 | $ | 832,912 | 100.0 | $ | (75,782) | (9.1) | ||||||||||||||||||||||||||
| Total cost of goods sold | 399,239 | 52.7 | 462,377 | 55.5 | (63,138) | (13.7) | |||||||||||||||||||||||||||||
| Gross profit | $ | 357,891 | 47.3 | $ | 370,535 | 44.5 | $ | (12,644) | (3.4) | ||||||||||||||||||||||||||
_____________________________________
* Denotes % of total revenue
** Denotes % change from 2020 to 2021
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| Quarter Ended | |||||||||||||||||||||||||||||||||||
| January 30, 2021 | %* | February 1, 2020 | %* | Increase (decrease) | %** | ||||||||||||||||||||||||||||||
| Product revenue | $ | 597,220 | 100.0 | $ | 687,215 | 100.0 | $ | (89,995) | (13.1) | ||||||||||||||||||||||||||
| Product cost of goods sold | 315,098 | 52.8 | 389,013 | 56.6 | (73,915) | (19.0) | |||||||||||||||||||||||||||||
| Product gross profit | $ | 282,122 | 47.2 | $ | 298,202 | 43.4 | $ | (16,080) | (5.4) | ||||||||||||||||||||||||||
_____________________________________
* Denotes % of product revenue
** Denotes % change from 2020 to 2021
| Quarter Ended | |||||||||||||||||||||||||||||||||||
| January 30, 2021 | %* | February 1, 2020 | %* | Increase (decrease) | %** | ||||||||||||||||||||||||||||||
| Service revenue | $ | 159,910 | 100.0 | $ | 145,697 | 100.0 | $ | 14,213 | 9.8 | ||||||||||||||||||||||||||
| Service cost of goods sold | 84,141 | 52.6 | 73,364 | 50.4 | 10,777 | 14.7 | |||||||||||||||||||||||||||||
| Service gross profit | $ | 75,769 | 47.4 | $ | 72,333 | 49.6 | $ | 3,436 | 4.8 | ||||||||||||||||||||||||||
_____________________________________
* Denotes % of services revenue
** Denotes % change from 2020 to 2021
•Gross profit as a percentage of revenue increased, as our gross margin benefited significantly from a favorable mix of customers and products that we believe to be a short-term effect due to COVID-19 related factors. Due to the impact of COVID-19 and related restrictions on sales and marketing activities described in “Overview” above, during the first quarter of fiscal 2021, a higher proportion of our revenue consisted of sales of existing technology offerings deployed in the networks of existing customers, as compared to sales to new customers, early stage network deployments for recent design wins, or the introduction of new platforms, which tend to carry lower margins. We expect our gross margins to reduce from these elevated short-term levels as the adverse impact of the pandemic on new business lessens and our overall revenue resumes a more typical composition of revenue from existing and new business.
•Gross profit on products as a percentage of product revenue increased, primarily due to a favorable mix of customers and products, as described above, and continued product cost reductions, partially offset by market-based price compression we encountered during the period.
•Gross profit on services as a percentage of services revenue decreased, primarily due to lower installation and deployment margins and a lower mix of higher margin consulting and network design services. The lower margins on installation and deployment services were primarily due to certain customer site readiness delays that caused cost inefficiencies. These lower margins were partially offset by increased higher margin maintenance revenues.
Operating Expense
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 2020 Annual Report.
During the first quarter of fiscal 2021, approximately 51.9% of our operating expense was non-U.S. Dollar-denominated, including expenses in Canadian Dollars, Indian Rupees and British Pounds. During the first quarter of fiscal 2021 as compared to the first quarter of fiscal 2020, the U.S. Dollar fluctuated against these currencies. Consequently, our operating expense reported in U.S. Dollars slightly increased by approximately $1.4 million, or 0.5%, as compared to the first quarter of fiscal 2020, due to fluctuations in foreign currency. The table below sets forth the changes in operating expense for the periods indicated (in thousands, except percentage data):
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| Quarter Ended | |||||||||||||||||||||||||||||||||||
| January 30, 2021 | %* | February 1, 2020 | %* | Increase (decrease) | %** | ||||||||||||||||||||||||||||||
| Research and development | $ | 132,741 | 17.5 | $ | 130,900 | 15.7 | $ | 1,841 | 1.4 | ||||||||||||||||||||||||||
| Selling and marketing | 97,278 | 12.8 | 107,066 | 12.9 | (9,788) | (9.1) | |||||||||||||||||||||||||||||
| General and administrative | 39,993 | 5.3 | 42,468 | 5.1 | (2,475) | (5.8) | |||||||||||||||||||||||||||||
| Amortization of intangible assets | 5,910 | 0.8 | 5,853 | 0.7 | 57 | 1.0 | |||||||||||||||||||||||||||||
| Significant asset impairments and restructuring costs | 5,867 | 0.8 | 4,472 | 0.5 | 1,395 | 31.2 | |||||||||||||||||||||||||||||
| Acquisition and integration costs | 307 | — | 1,819 | 0.2 | (1,512) | (83.1) | |||||||||||||||||||||||||||||
| Total operating expenses | $ | 282,096 | 37.3 | $ | 292,578 | 35.1 | $ | (10,482) | (3.6) | ||||||||||||||||||||||||||
_____________________________________
* Denotes % of total revenue
** Denotes % change from 2020 to 2021
•Research and development expense increased by $1.8 million. This increase primarily reflects increases in employee and compensation costs and technology-related costs, partially offset by decreases in professional services costs.
•Selling and marketing expense was adversely affected by $1.4 million as a result of foreign exchange rates, primarily due to fluctuations of the U.S. Dollar in relation to the Euro. Including the effect of foreign exchange rates, sales and marketing expenses decreased by $9.8 million. This decrease primarily reflects decreases in travel and entertainment costs due to restrictions on travel as a result of COVID-19, and professional services, partially offset by an increase in employee and compensation costs.
•General and administrative expense decreased by $2.5 million primarily as a result of the recovery of bad debt, partially offset by an increase in employee and compensation costs.
•Amortization of intangible assets remained relatively unchanged.
•Significant asset impairments and restructuring costs reflect global workforce reductions as part of a business optimization strategy to improve gross margin and constrain operating expense, and redesign of certain business processes.
•Acquisition and integration costs primarily reflect reduced acquisition compensation associated with a three-year earn-out arrangement related to the acquisition of DonRiver Holdings, LLC in fiscal 2018 and other fees related to the acquisition of Centina Systems, Inc. in the first quarter of fiscal 2020.
Other Items
The table below sets forth the changes in other items for the periods indicated (in thousands, except percentage data):
| Quarter Ended | |||||||||||||||||||||||||||||||||||
| January 30, 2021 | %* | February 1, 2020 | %* | Increase (decrease) | %** | ||||||||||||||||||||||||||||||
| Interest and other income (loss), net | $ | (1,121) | (0.1) | $ | 3,646 | 0.4 | $ | (4,767) | (130.7) | ||||||||||||||||||||||||||
| Interest expense | $ | 7,360 | 1.0 | $ | 8,815 | 1.1 | $ | (1,455) | (16.5) | ||||||||||||||||||||||||||
| Loss on extinguishment and modification of debt | $ | — | 0.0 | $ | 646 | 0.0 | $ | (646) | — | ||||||||||||||||||||||||||
| Provision for income taxes | $ | 11,966 | 1.6 | $ | 9,814 | 1.2 | $ | 2,152 | 21.9 | ||||||||||||||||||||||||||
_____________________________________
* Denotes % of total revenue
** Denotes % change from 2020 to 2021
•Interest and other income (loss), net decreased, primarily reflecting lower interest income due to reduced interest rates on our investments and the impact of foreign exchange rates on assets and liabilities denominated in a currency other than the relevant functional currency, net of hedging activity.
•Interest expense decreased, primarily due to a reduction of LIBOR rates impacting our 2025 Term Loan.
•Loss on extinguishment and modification of debt reflects the refinance of our 2025 Term Loan in the first quarter of fiscal 2020.
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•Provision for income taxes increased, primarily due to the BEAT reduction in fiscal 2020 and the effect of the final regulations released on December 2, 2019. Consequently, the effective tax rate for the first quarter of fiscal 2021 increased as compared to the first quarter of fiscal 2020.
Segment Profit (Loss)
The table below sets forth the changes in our segment profit (loss) for the respective periods (in thousands, except percentage data):
| Quarter Ended | |||||||||||||||||||||||
| January 30, 2021 | February 1, 2020 | Increase (decrease) | %* | ||||||||||||||||||||
| Segment profit (loss): | |||||||||||||||||||||||
| Networking Platforms | $ | 156,431 | $ | 168,270 | $ | (11,839) | (7.0) | ||||||||||||||||
| Platform Software and Services | $ | 27,660 | $ | 28,951 | $ | (1,291) | (4.5) | ||||||||||||||||
| Blue Planet Automation Software and Services | $ | (2,434) | $ | (3,113) | $ | 679 | (21.8) | ||||||||||||||||
| Global Services | $ | 43,493 | $ | 45,527 | $ | (2,034) | (4.5) | ||||||||||||||||
_____________________________________
* Denotes % change from 2020 to 2021
•Networking Platforms segment profit decreased, primarily due to lower sales volume as described above and higher research and development costs, offset by improved gross margin.
•Platform Software and Services segment profit decreased, primarily due to lower sales volume as described above, offset by lower research and development costs.
•Blue Planet Automation Software and Services segment loss decreased, primarily due to higher sales volume and lower research and development costs.
•Global Services segment profit decreased, primarily due to reduced gross margin, as described above.
Liquidity and Capital Resources
Overview. For the three months ended January 30, 2021, we used $7.3 million of cash in operating activities, as our working capital requirements of $127.0 million exceeded our net income (adjusted for non-cash charges) of $119.7 million. For additional details, see “Cash Used In Operating Activities” below.
Cash, cash equivalents and investments decreased by $38.5 million during the first three months of fiscal 2021. In addition to the cash used in operations, the decrease in cash also included the following items: (i) cash used to fund our investing activities for capital expenditures totaling $20.9 million; (ii) cash used for stock repurchases under our stock repurchase program of $12.4 million; and (iii) stock repurchases on vesting of our stock unit awards to employees relating to tax withholding of $19.2 million. Partially offsetting these decreases in cash were proceeds from the issuance of equity under our employee stock purchase plan, which provided $13.4 million in cash during the three months ended January 30, 2021.
| January 30, 2021 | October 31, 2020 | Increase (decrease) | |||||||||||||||
| Cash and cash equivalents | $ | 1,029,237 | $ | 1,088,624 | $ | (59,387) | |||||||||||
| Short-term investments in marketable debt securities | 151,434 | 150,667 | 767 | ||||||||||||||
| Long-term investments in marketable debt securities | 102,364 | 82,226 | 20,138 | ||||||||||||||
| Total cash and cash equivalents and investments in marketable debt securities | $ | 1,283,035 | $ | 1,321,517 | $ | (38,482) | |||||||||||
Principal Sources of Liquidity. Our principal sources of liquidity on hand include our cash, cash equivalents and investments, which as of January 30, 2021 totaled $1.3 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 October 28, 2024. 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
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required to collateralize these instruments. As of January 30, 2021, letters of credit totaling $81.7 million were collateralized by our ABL Credit Facility. There were no borrowings outstanding under the ABL Credit Facility as of January 30, 2021.
Foreign Liquidity. The amount of cash, cash equivalents, and short-term investments held by our foreign subsidiaries was $94.8 million as of January 30, 2021. We intend to reinvest indefinitely our foreign earnings. If we were to repatriate the accumulated historical foreign earnings, the estimated amount of unrecognized deferred income tax liability related to foreign withholding taxes would be approximately $25.0 million.
Stock Repurchase Authorization. On December 13, 2018, we announced that the Board of Directors authorized a program to repurchase up to $500.0 million of its common stock. After temporarily suspending repurchases of our common stock during fiscal 2020, we reinstituted our stock repurchase program in the first quarter of 2021 and are currently targeting repurchases in the range of $150 million of our common stock during fiscal 2021. We repurchased $13.2 million under this program during the first three months of fiscal 2021, and had $262.2 million remaining under the current authorization as of January 30, 2021. The amount and timing of repurchases are subject to a variety of factors including liquidity, cash flow, stock price and general business and market conditions. The program may be reinstated, modified, suspended, or discontinued at any time.
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 working capital needs, capital expenditures, and other liquidity requirements associated with our operations through at least the next 12 months. 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. While the COVID-19 pandemic has not materially impacted our liquidity and capital resources to date, it has led to disruptions and volatility in capital markets and credit markets. The duration and severity of any further economic or market impact of the COVID-19 pandemic remains uncertain and there can be no assurance that it will not have an adverse effect on our liquidity and capital resources, including our ability to access capital markets, in the future.
Cash Used In Operating Activities
The following sections set forth the components of our $7.3 million of cash used in operating activities during the first three months of fiscal 2021:
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 30, 2021 | |||||
| Net income | $ | 55,348 | |||
| Adjustments for non-cash charges: | |||||
| Depreciation of equipment, building, furniture and fixtures, and amortization of leasehold improvements | 23,188 | ||||
| Share-based compensation costs | 18,964 | ||||
| Amortization of intangible assets | 9,642 | ||||
| Deferred taxes | (905) | ||||
| Provision for inventory excess and obsolescence | 5,905 | ||||
| Provision for warranty | 3,239 | ||||
| Other | 4,277 | ||||
| Net income (adjusted for non-cash charges) | $ | 119,658 | |||
Working Capital
We used $127.0 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 30, 2021 | |||||
| Cash provided by accounts receivable | $ | 18,862 | |||
| Cash used in inventories | (51,020) | ||||
| Cash used in prepaid expenses and other | (13,835) | ||||
| Cash used in accounts payable, accruals and other obligations | (112,170) | ||||
| Cash provided by deferred revenue | 31,917 | ||||
| Cash used in operating lease assets and liabilities, net | (731) | ||||
| Total cash used for working capital | $ | (126,977) | |||
As compared to the end of fiscal 2020:
•The $18.9 million of cash provided by accounts receivable during the first three months of fiscal 2021 reflects increased cash collections;
•The $51.0 million of cash used in inventories during the first three months of fiscal 2021 primarily reflects increases in finished goods to meet customer delivery schedules and related to some of the actions that we have taken since early fiscal 2020 to mitigate the risk of adverse supply chain impact on our business and operations due to COVID-19 related disruptions;
•The $13.8 million of cash used in prepaid expense and other during the first three months of fiscal 2021 primarily reflects increases in foreign currency forward contracts and higher non-customer receivables;
•The $112.2 million of cash used in accounts payable, accruals and other obligations during the first three months of fiscal 2021 primarily reflects the payment to employees under our annual cash incentive compensation plan in the first quarter, as well as inventory purchases;
•The $31.9 million of cash provided by deferred revenue during the first three months of fiscal 2021 represents an increase in advanced payments received from customers prior to revenue recognition; and
•The $0.7 million of cash used in operating lease assets and liabilities, net, during the first three months of fiscal 2021 represents cash paid for operating leases. For more details, see Note 14 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.
Our days sales outstanding (“DSOs”) for the first three months of fiscal 2021 were 93 days, and our inventory turns for the first three months of fiscal 2021 were 3.2. The calculation of DSOs includes accounts receivables, net and contract assets for unbilled receivables, net included in prepaid expenses and other.
Cash Paid for Interest
The following table sets forth the cash paid for interest during the period (in thousands):
| Three Months Ended | |||||
| January 30, 2021 | |||||
Term Loan due September 28, 2025(1) | 3,341 | ||||
Interest rate swaps(2) | 2,511 | ||||
ABL Credit Facility(3) | 494 | ||||
| Finance leases | 1,220 | ||||
| Cash paid during period | $ | 7,566 | |||
(1) Interest on the 2025 Term Loan is payable periodically based on the interest period selected for borrowing. The 2025 Term Loan bears interest at LIBOR for the chosen borrowing period plus a spread of 1.75% subject to a minimum LIBOR rate of 0.00%. At the end of the first quarter of fiscal 2021, the interest rate on the 2025 Term Loan was 1.88%.
(2) The interest rate swaps fix the LIBOR rate for $350.0 million of the 2025 Term Loan at 2.957% through September 2023.
(3) During the first three months of fiscal 2021, 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.
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Contractual Obligations
There have been no material changes to our contractual obligations since October 31, 2020. For a summary of our contractual obligations, see Item 7 of Part II of our 2020 Annual Report.
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet financing arrangements. In particular, we do not have any equity interests in so-called limited purpose entities, which include special purpose entities (SPEs) and structured finance entities.
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. The inputs into certain of our judgments, assumptions, and estimates reflect, among other things, the information available to us regarding the economic implications of the COVID-19 pandemic, and expectations as to its impact on our business and on our critical and significant accounting estimates. 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. In addition, because the duration, severity, and impact of the COVID-19 pandemic remain uncertain, certain of our estimates could require further judgment or modification, and therefore carry a higher degree of variability and volatility. As events continue to evolve, our estimates may change materially in future periods.
Except for items listed below, our critical accounting policies and estimates have not changed materially since October 31, 2020. 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 2020 Annual Report.
Allowance for Credit Losses for Accounts Receivable and Contract Assets
See Note 2 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report for information regarding the change in our allowance for credit losses for accounts receivable and contract assets accounting policies as a result of our adoption of ASU 2016-13, Financial Instruments - Credit Losses.
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 2020 Annual Report.
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
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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. We have not experienced any significant impact to our internal control over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. The design of our processes and controls allow for remote execution with secure accessibility to data. We are continually monitoring and assessing the COVID-19 situation to minimize the impact, if any, on the design and operating effectiveness on our internal controls.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth under the heading “Litigation” in Note 20, Commitments and Contingencies, 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 2020 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 2020 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 2020 Annual Report.
Our reliance on third-party component suppliers, including sole and limited source suppliers, exposes our business to additional risk and could limit our sales, increase our costs and harm our customer relationships.
We maintain a global sourcing strategy and depend on a diverse set of third-party suppliers in international markets that comprise our supply chain. We rely on these third parties for activities relating to product design, development and support, and in the sourcing of products, components, subcomponents and related raw materials. Our products include optical and electronic components for which reliable, high-volume supply is often available only from sole or limited sources. We do not have any guarantees of supply from our third-party suppliers, and in certain cases we have limited contractual arrangements or are relying on standard purchase orders. As a result, there is no assurance that we will be able to secure the components or subsystems that we require, in sufficient quantity and quality, and on reasonable terms.
The loss of a source of supply, or lack of sufficient availability of key components, could require that we locate an alternate source or redesign our products, either of which could result in business interruption and increased costs and could negatively affect our product gross margin and results of operations. There are a number of significant technology trends or developments underway or emerging – including the Internet of Things, autonomous vehicles, and advances in mobile communications such as the emergence of 5G – that have previously resulted in, and can be expected in the future to result in, increased market demand for key raw materials or components upon which we rely. By way of example, due to increased demand across a range of industries, the global supply market for semiconductor components, which we use in most of our products, has experienced significant strain in recent periods. Partly in response to these dynamics, in February 2021, the Biden Administration issued an executive order on U.S. supply chains, implementing a 100-day review of certain supply chain risks, including with respect to semiconductor manufacturing and advanced packaging supply chains. Increases in market demand or scarcity of raw materials or components have resulted, and may in the future result, in shortages in availability of important components for our solutions, product allocation challenges, deployment delays and increased cost, lead times and delivery cycle time lines. These and other industry, market and regulatory disruptions and challenges affecting our suppliers could expose our business to increased costs, loss or lack of supply, or discontinuation of components, lost revenue, increased lead times and deployment delays that could harm our business, results of operations and customer relationships.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table provides a summary of repurchases of our common stock during the first quarter of fiscal 2021:
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| Period | Total Number of Shares Purchase (1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) | ||||||||||||||||||||||
| November 1, 2020 to November 28, 2020 | — | $ | — | — | $ | 275,388 | ||||||||||||||||||||
| November 29, 2020 to December 26, 2020 | 73,430 | $ | 50.42 | 73,430 | $ | 271,686 | ||||||||||||||||||||
| December 27, 2020 to January 30, 2021 | 178,148 | $ | 53.34 | 178,148 | $ | 262,183 | ||||||||||||||||||||
| 251,578 | $ | 52.49 | 251,578 | |||||||||||||||||||||||
(1) On December 13, 2018, we announced that our Board of Directors authorized a program to repurchase up to $500.0 million of our common stock. After temporarily suspending repurchases of our common stock during fiscal 2020, we reinstituted our stock repurchase program in the first quarter of 2021. The amount and timing of repurchases 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.
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
| 10.1 | |||||
| 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) | ||||
| * | Represents management contract or compensatory plan or arrangement. | ||||
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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 10, 2021 | By: | /s/ Gary B. Smith | |||||||||||
| Gary B. Smith | ||||||||||||||
| President, Chief Executive Officer and Director (Duly Authorized Officer) | ||||||||||||||
| Date: | March 10, 2021 | By: | /s/ James E. Moylan, Jr. | |||||||||||
| James E. Moylan, Jr. | ||||||||||||||
| Senior Vice President, Finance and Chief Financial Officer (Principal Financial Officer) | ||||||||||||||
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