CC transcript:
seekingalpha.com
At $175.9 million our fiscal first quarter came in relatively flat which was somewhat lower then we’d previously anticipated. The primary reason for the lower reported sales was revenue recognition delays associated with initial deployments of new platforms with certain customers. Despite that, our strong order flow in Q1 continues to give us confidence that the market environment is in fact improving. Our Q1 adjusted gross margin was within our mid to high 40’s target range of 46.4% and our non-GAAP operating expense remained essentially flat with our fiscal fourth quarter.
We also generated $4.5 million in cash from operations during the quarter. In fact, if we excluded the $11.4 million of cash spent on acquisition and integration related costs, we would have generated nearly $16 million in cash from operations during the quarter.
I’d like to talk briefly about our current view of the macro economic environment and provide an update on our integration planning related to the Nortel transaction. We’re thinking about the current market environment essentially in three ways:
While global market conditions still indicate some uncertainty, we see signs of improvement, particularly in North America. This improvement has manifested itself in the form of more positive sentiment amongst our customer base, an increase in overall levels of activity, and a growing pipeline of opportunities.
As you’ve heard me say before, and as validated in public statements by a number of our customers, the fundamental demand drivers of our business remain in tact. Demand for network optimization is strong and we appear to be in the early stages of an industry wide optical upgrade cycle. Our customers are facing new service demands on their networks and traffic growth continues to pressure existing infrastructure, something that can no longer be ignored. The growth of data traffic on wireless networks alone is a clear evidence of this trend. As a result, we’re starting to see increased spending in selected areas to address these challenges. We’re encouraged by recent announcements from service providers that they plan to increase their CapEx budgets somewhat this year.
This is a view clearly more specific to the current Ciena stand alone business, we’re bringing several new solutions to market, including new switching platforms, carrier ethernet service delivery platforms, and carrier managed service solutions. By continuing to invest in our portfolio during the recent challenging market conditions, we’re able to bring new solutions to market in the near term to more quickly address the areas of concern in our customer’s networks. We will continue that balanced and disciplined approach to investing in the months ahead.
While the reality is that a recovery will not happen overnight, and we’re likely to experience some turbulence as we come out of a global recession, we believe that we are well positioned to be among the beneficiaries of an improving environment.
As a stand alone company, Ciena has enjoyed a unique position to service customers with the solutions and support required to enable true next generation network models. Following the close of the Nortel transaction, Ciena becomes the leading global equipment provider, exclusively focused on the foundations of these networks, converged optical ethernet.
That leads me to our pending acquisition of the Nortel assets, a topic I know people want to hear more about. I can tell you that we remain on track to close the Nortel transaction later this month. We’re working diligently to ensure a smooth transition of the business for the benefit of both our customers and employees. We’re pleased with the progress of our integration planning efforts which have been driven by a team comprised of dedicated internal resources from both companies and third party experts.
As we’ve said before, the Nortel assets allow us to accelerate the execution of our strategy and increase our ability to compete more effectively. In particular, the combination results in greater scale in both R&D and customer breadth and gives us stronger operating leverage. However, we’re realistic about the challenges and risks associated with such a complex integration process but we’re confident in our ability to achieve success and are highly motivated and excited, particularly given the continued endorsements from our customers and our employees.
With that in mind, I’d like to update you on the milestones we outlined last quarter and they include: establishing the leadership structure of the combined enterprise, determining our combined product portfolio, establishing our go to market strategy and field alignment, and describing our revised target operating model.
With the caveat that this is all subject to the closing of the transaction, I’ll start with the organization and leadership of the combined company. I’m pleased to tell you that we’ve chosen our senior management and extended leadership teams and defined their areas of responsibility and accountability. And we have already identified, confirmed, and aligned substantially all of the entire organizational structure. Much of what remains to be completed in the organization is the result of our need to comply with local legal requirements, particularly in Europe. We expect to have resolution on the remainder of the organization shortly after the deal close.
We’ve structured the company around two elements that are essential to our success; quite simply the product portfolio and our customers. Firstly on the product side, Philippe Morin, President of Nortel’s MEN business will serve as our Senior Vice President of our Global Product’s Group. In this role he will drive all aspects of Ciena’s products and will report directly to me as a member of the executive team.
Philippe will build on the combined company’s history of innovation and quality to lead the end to end development and delivery of products, software, and solutions. Working closely with Steve Alexander, our Chief Technology Officer, Philippe will own a number of functions including R&D and product management and product introduction. Philippe will also oversee supply chain management.
On the customer side, Mike Aquino, currently Head of our Global Field Organization will continue serving in his role to drive clarity, accountability, and agility in satisfying our global customer’s requirements. Essentially this group is aligned around the end to end responsibility for the customer’s experience, including account management, channel sales, field systems engineering, and industry channel and field marketing as well as customer service.
We’ve been diligent in our process to fill key positions and retain critical talent to ensure that we assemble a world class team comprised of employees from both companies to lead us forward. I think we’re succeeding at this goal. To date, virtually 100% of the employment offers we’ve extended to Nortel employees have been accepted. With the leadership in place, and the resources of both organization aligned to this structure, we’re ready to execute once the transaction closes.
I might just mention, the product portfolio is one of the key elements of the combined organization. We’re bringing together two complementary technology bases to build a portfolio with greater depth and we think customer relevance. To that end, we’ve made excellent progress defining the combined solution set and we’ll be ready to announce our portfolio when the transaction actually closes.
Our progress in defining the portfolio ensures that at deal close our engineering and field teams can move forward with clarity and our customers are afforded the assurance they seek in Ciena as a strategic partner. We understand that our customer’s and partner’s want Ciena to be decisive and swift in this critical piece of integration planning.
We’ve already gathered critical input and validation through consultation with customer’s of both companies. I have to say that response to our portfolio vision has been overwhelmingly positive. We also have clear plans for ensuring continuity of supply at deal close; in fact, we’ve already successfully managed the transition of the vast majority of Nortel supply contracts. You’ll hear more about the specifics of our combined portfolio once the deal closes.
For now, I can tell you that Ciena will be the only company exclusively focused on converged optical ethernet, which really rests on three key areas of expertise: maximizing the capacity, scalability, and reliability of our customer’s networks essentially through optical technology, and maximizing the flexibility, efficiency and economics of their networks through ubiquitous ethernet technology, and pulling and uniting those capabilities together with the industry leading control playing and management software.
This leads me to the second element of our combined company, our customers. We’ve aligned our field operations to fit the capabilities and strengths of the combined company. In simple terms, the go to market strategy of the combined company is framed around five major regions: the US, Canada, EMEA, CALA, and Asia/Pacific. Within these markets the global field organization will be focused on driving sales into Tier 1, Tier 2 wireline, wireless, and MSO service providers, as well as government and enterprise markets. And we will leverage the combined strength of our partner relationships to enhance that market coverage where appropriate.
We’ve built our organization to ensure tight alignment between Ciena’s global functions and those local and regional teams to better facilitate rapid customer response. With the exception of certain regions such as EMEA, Central Europe, which remains subject to information and consultation processes, the leadership and organization structure of the combined global field operations team has already been established around this model and is ready to move forward at the time of closing.
We’re firmly committed to ensuring a seamless transition for our customer’s and for our partner’s and to this end we’ve established a dedicated customer experience team focused on facilitating effective customer engagement throughout the transition process. In addition, to ensure Nortel customer’s will be able to do business with Ciena immediately after the deal closes, we are well along in the process of successfully managing the transition of the majority of Nortel’s customer contracts.
Given our progress to date in these three critical areas, organizational structure, product portfolio, and the go to market strategy, combined with some resource alignment that is already undertaken at Nortel and separately at Ciena in preparation of the close, we’re very pleased with where things stand on the transaction and the integration planning, including the ability to secure operational efficiencies moving forward.
While we recognize the scale of this integration and the scope of work we face in the coming months, we remain confident in our ability to implement and execute our integration plan decisively and with transparency and deliver on the operating leverage and value of the combination.
With that I’d like to hand over to Jim, who will take you through the details of our Q1 results.
Jim Moylan
As Gary said earlier we reported first quarter revenue of $175.9 million representing a 5% improvement over the same period a year ago. Sequentially, Q1 revenue was roughly flat with Q4 $176.3 million. We had one 10% plus customer in the quarter that represented 24% of total sales. This customer is North American based and was also a 10% customer in Q4. Sales from international customers represented 30% of total revenue in the quarter, roughly flat with Q4.
Turning to our three major product groups, the first, Optical Service Delivery which includes transport and switching platforms as well as legacy data networking products and related software, accounted for $108.6 million in revenue representing 62% of total revenue for the quarter. Within Optical Service Delivery our CN4200 platform was again the largest contributor in the quarter at $55 million. Core Switching contributed $23.4 million and Long Haul Transport added $23 million in the quarter.
Our second product group, Carrier Ethernet Service Delivery or CESD includes our service delivery and aggregation switches, broadband access products, and related software. CESD had another strong quarter increasing more than 33% sequentially from Q4, contributed $40.4 million or 23% of total revenue in the first quarter. As with last quarter a large majority of Q1 CESD revenue came from our Ethernet service delivery aggregation and access platforms. We remain very pleased with the prospects for continued future growth of this product set, which as you know, stems from our acquisition of World Wide Packets.
Finally, our Ciena Specialist Services Group which includes all of our services related offerings reported $26.8 million in revenue in Q1 essentially flat with $27 million in Q4.
In the remainder of my comments today I’ll speak both to the GAAP results and to what the results would have been if we excluded those items which we detail in our press release. On gross margin Q1 GAAP gross margin was 45.6%, adjusted for share based compensation and amortization of intangibles, Q1 non-GAAP gross margin was 46.4%.
Q1 non-GAAP gross margin included a $3.3 million benefit as a result of an out of period adjustment to our accrued warranty liability. Our GAAP product gross margin for the quarter was 48.6% and our GAAP services gross margin was 29% once again better than our target mid 20’s range as a result of the mix of services revenue in the quarter.
On a GAAP basis, Q1 operating expenses totaled $130 million. This total includes acquisition and integration related costs of $27 million, stock based compensation of $7.4 million, and $6 million in amortization of intangibles. Excluding those items, Q1 adjusted operating expenses totaled $89.6 million roughly flat with Q4 and aligned to our guidance.
Our Q1 GAAP net loss was $53.3 million a loss of $0.58 per share. Adjusted for the unusual and/or non-operating items detailed in our press release, our first quarter net loss would have been $11.4 million a loss of $0.12 per share.
With respect to cash flow and the balance sheet, we continue to be pleased with our working capital management and we continue to be cash flow positive. We generated $4.5 million in cash from operations during the quarter, a sequential increase from the $1.9 million we generated in Q4. That takes into account $11.4 million of cash expended on acquisition and integration related costs during the quarter.
At January 31, 2010, we had approximately $1 billion in cash, short term, and long term investments. During Q1 we paid a cash deposit of $38 million for the Nortel acquisition. When we close, as a result of the aggregate consideration to be paid on the Nortel transaction, we’ll be reducing our cash position by approximately another $492 million and we will be issuing $239 million in convertible notes to Nortel.
I should note that the purchase agreement provides for a reduction of the cash consideration to be paid based on the amount of working capital which will be transferred to us at closing. The actual cash paid at closing will likely be less than the $492 million which I quoted earlier.
As we previously disclosed, Ciena may elect to replace some or all of those convertible notes with cash equal to 102% of the face amount for the notes if replaced prior to the closing of the transaction.
For Q1 our accounts receivable balance was $105 million down from $118 million in Q4. Day sales outstanding were 54 down from 60 days in Q4 as a result of good collection work. Inventories totaled $95.4 million in Q1 up slightly from $88 million in Q4. Product inventory turns were 3.4 times for the quarter slightly down from 3.7 times for Q4. Inventory breakdown for the quarter was roughly aligned to that in Q4. Raw materials totaled $18.3 million, work in progress $2.2 million, finished goods $98.2 million, finally we have accrued reserve for excess an obsolescence of $23.3 million. On headcount as of January 31, 2010, our worldwide headcount was 2,197 people.
Before I talk about Q2 guidance, let me add some additional color to Gary’s comments on the Nortel integration planning. I’m sure you can appreciate that because we’ve not yet closed the deal our ability to provide detail on the combined company’s financial metrics is limited. However, as we move forward, we are committed to giving you the information you need to evaluate the performance of the combined company. It is our goal to provide additional detail on that at our analyst day in April, if not before.
At this early stage I can tell you that our current thinking is to describe the business in the following broad areas; transport, switching, carrier ethernet service delivery, and software and services. We plan to be aligned to your interested in giving you enough detail to understand our performance on an as adjusted basis before any acquisition and integration related costs and before the typical items we adjust for that are described in our press release.
We also plan to report separately on deal related costs so you can follow the progress of the back office integration. We also plan to describe our target operating model and our timeline for achievement of certain milestones including expected operational synergies. Also, for the next several quarters, we’ll describe separately the revenue contribution for the Ciena and Nortel product sets so you can track their individual performances.
I’ll close our prepared remarks today by talking to our guidance for Q2 2010. As noted in the press release, our guidance comments today and likely in the answers to any questions about forward looking results will be limited to our expectations of Ciena’s performance as a stand alone company. They will not reflect the addition of any revenue, margin, or expense associated with the acquisition of Nortel.
We currently anticipate fiscal second quarter revenue to be in the range of $185 to $195 million. Based on current expectations and product mix we also believe that adjusted gross margin will be within our target range of mid to high 40’s. We believe Q2 non-GAAP operating expenses will be roughly flat with Q1. We expect other income and expense net in the second quarter will be an expense of roughly $2 million. As for taxes, we expect our tax obligation for Q2 will be related to foreign taxes.
Depending upon your assumptions you may need either our diluted share count or our basic share count. We estimate Q2 basic share count at approximately 93 million total shares. We estimate Q2 diluted share count at approximately 114 million total shares.
We’ll now take questions from sell side analysts... |
