CIENA CORPORATION Cautionary Note Regarding Forward-Looking Statements
This report contains statements that discuss future events or expectations, projections of results of operations or financial condition, changes in the markets for our products and services, trends in our business, 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 2021, which we filed with theSecurities and Exchange Commission onDecember 17, 2021 (our "2021 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," "we," "us" and "our" refer toCiena Corporation and its consolidated subsidiaries.
Overview
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with our Condensed Consolidated
Financial Statements and the accompanying notes thereto included in Item 1 of
Part I of this report and of our 2021 Annual Report.
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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 are used by communications
service providers, cable and multiservice operators, Web-scale providers,
submarine network operators, governments, enterprises, research and education
institutions and emerging network operators. Our portfolio is designed to enable
what we refer to as the Adaptive Network™, our vision for a network end state
that emphasizes a programmable and scalable network infrastructure, software
control and automation capabilities, network analytics and intelligence, and
related advanced services. Our solutions include Networking Platforms, including
our Converged Packet Optical and Routing and Switching portfolios, which can be
applied from the network core to end-user access points, and which allow network
operators to scale capacity, increase transmission speeds, allocate traffic
efficiently and adapt dynamically to changing end-user service demands. To
complement our Networking Platforms, we offer Platform Software , which includes
a wide array of software solutions that deliver operations, administration,
maintenance, and provisioning (OAM&P) functionality, as well as domain control,
orchestration, operational support systems (OSS) and service assurance to
achieve closed loop automation across multi-vendor and multi-domain network
environments. Through our Blue Planet® Software suite, we enable customers to
accelerate the digital transformation of their networks through service
lifecycle automation.
Demand Environment
Since the second quarter of fiscal 2021, we have experienced unprecedented demand for our products and services. Our quarterly order volumes during this period have significantly exceeded our quarterly revenue and historical order volumes, with some concentration of orders among certain existing Webscale andNorth America -based service provider customers. As a result of order volume growth in recent periods, our backlog has grown from$2.2 billion at the end of fiscal 2021 to$4.1 billion at the end of the second quarter of fiscal 2022. We believe that we are benefiting from certain shifts in business and consumer behaviors, in part accelerated by the COVID-19 pandemic, which represent positive, long-term trends for our business. These include enterprise and consumer cloud network adoption, increasing demands on the network edge, and network operator focus on resilience and automation. We believe that some portion of our increased order volumes in recent periods also reflects customer acceleration of future orders due to the implementation of security of supply strategies, or spending that was delayed or deferred in prior years due to COVID-19 related impacts. We believe that many of the drivers of the recent increase in network operator demand are durable and represent long-term opportunities for our business. However, we do not expect the rate of orders growth experienced in recent periods to be sustainable in the long term and expect it to moderate over time, and backlog should not necessarily be viewed as an accurate indicator of revenue for any particular period. See "Risk Factors" in Item 1A of Part II of this report for further discussion of risks related to the demand environment. Supply Chain Constraints In the face of extraordinary demand across a range of industries, global supply for certain raw materials and components, including, in particular, semiconductor, integrated circuits and other electronic components used in most of our products, has experienced substantial constraint and disruption in recent periods. As a result, we have experienced significant component shortages, extended lead times, increased costs, and unexpected cancellation or delay of previously committed supply of key components. These conditions worsened for our business during the second quarter of fiscal 2022, in particular in relation to unexpected cancellation or delay of previously committed supply in two primary areas. First, several key optical suppliers were unable to meet their previous supply commitments due to constrained access to semiconductors. Second, several integrated circuit providers experienced a lack of supply for certain lower value, commodity parts, which we believe was exacerbated by government-mandated lockdowns in several cities inChina in response to COVID-19. These supply constraints are impacting our ability to meet customer demand and our anticipated level of revenue and growth in fiscal 2022. At the same time, increased costs associated with procuring and transporting our equipment, including supply premiums, expediting fees and freight and logistics have impacted our gross margin and profitability. We expect these constrained supply conditions to increase our costs of goods sold in the near term and to adversely impact our ability to continue to reduce the cost to produce our products in a manner consistent with prior periods. We believe these supply chain challenges and their adverse impact on our business and financial results will persist for the foreseeable future, and specifically, we expect these conditions to adversely impact both our revenue and our profitability during the remainder of fiscal 2022. In response to these supply constraints, we have implemented mitigation strategies and increased our inventory purchases. In some cases, we have incurred higher costs to secure available component inventory, have extended the duration of our purchase commitments, or placed non-cancellable, advanced orders with or through suppliers, particularly for long lead time components. Beginning in the second half of fiscal 2021, we started placing significant, advanced orders for supply of certain long lead time components to address our expected strong customer demand for fiscal 2022 and the then emerging supply chain 28 -------------------------------------------------------------------------------- challenges. As ofApril 30, 2022 we had$1.8 billion in outstanding purchase order commitments to our contract manufacturers and component suppliers for inventory, including approximately$1.2 billion in advance orders made to address supply shortages. We have also been expanding our manufacturing capacity and have been accumulating raw materials inventory of components that are not as scarce, so we are prepared to produce finished goods more quickly when supply constraints ease. These mitigation steps introduce additional costs and risk. See "Risk Factors" in Item 1A of Part II of this report for further discussion of risks related to our supply chain.
Impact of Global Events on our Business and Operations
COVID-19 Pandemic. The impact of the COVID-19 pandemic and countermeasures taken to contain its spread remain dynamic. We continue to monitor the situation and actively assess further implications for our business, supply chain, fulfillment operations and customer demand. For example, we have reopened a significant number of our offices globally as of the end of the second quarter of fiscal 2022. We continue to take meaningful precautions in accordance with relevant guidelines to protect the health and safety of our employees. Variants continue to emerge, efforts to mitigate or contain the impacts of the pandemic continue to evolve, and the duration and severity of the impact of the pandemic on our business and results of operations in future periods remain uncertain. If the COVID-19 pandemic or its adverse effects, including the effects of recent government-mandated lockdowns in several cities inChina , 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 on the impact of COVID-19 upon our business, operations and financial results, and the steps that we have taken in response, see our 2021 Annual Report.Russia and Ukraine Conflict. InFebruary 2022 , armed conflict escalated betweenRussia andUkraine .The United States and certain other countries have imposed sanctions onRussia and could impose further sanctions, which could damage or disrupt international commerce and the global economy. We are complying with a broad range ofUnited States and international sanctions and export control requirements imposed onRussia and, onMarch 7, 2022 , we announced our decision to immediately suspend our business operations inRussia . Due to the limited amount of business that we have conducted inRussia historically, this decision has not materially impacted our results of operations for the second quarter of fiscal 2022 and we do not expect it to materially impact our results of operations going forward. See Note 6 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report for more information on the impact of suspending our business operations inRussia .
Strategic and Financial Initiatives
Xelic Acquisition. OnMarch 9, 2022 , we acquiredXelic, Inc. ("Xelic"), a provider and developer of field-programmable gate array (FPGA) and application-specific integrated circuit (ASIC) technology and optical networking IP cores, to enhance development of our WaveLogic® coherent modem technology. See Note 4 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report for more information on this acquisition and the related accounting. Stock Repurchase Program and Accelerated Share Repurchase Agreement. OnDecember 9, 2021 , we announced that our Board of Directors had authorized a program to repurchase up to$1.0 billion of our common stock, which replaced in its entirety our previous stock repurchase program authorized in fiscal 2019. OnDecember 13, 2021 , in connection with this repurchase program, we entered into an accelerated share repurchase agreement (the "ASR Agreement") for the repurchase of$250.0 million of our common stock. We made an upfront payment of$250.0 million under the ASR Agreement during the first quarter of fiscal 2022, and the repurchases contemplated by the ASR Agreement were completed onFebruary 15, 2022 . During the second quarter of fiscal 2022, we repurchased$87.0 million of our common stock under the stock repurchase program, and we had$663.0 million remaining under the current repurchase authorization as ofApril 30, 2022 . The amount and timing of any further repurchases under our stock purchase program are subject to a variety of factors, including liquidity, cash flow, stock price and general business and market conditions. The program may be modified, suspended, or discontinued at any time. See Notes 19 and 23 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report for more information on our stock repurchase program.
For additional information regarding our business, industry, market opportunity, competitive landscape, and strategy, see our 2021 Annual Report.
Consolidated Results of Operations
Operating Segments
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Our results of operations are presented based on the following operating
segments: (i) Networking Platforms; (ii) Platform Software and Services; (iii)
Blue Planet Automation Software and Services; and (iv) Global Services . See Note
3 to our Condensed Consolidated Financial Statements included in Item 1 of Part
I of this report.
Revenue
Currency Fluctuations
Approximately 14.0% of our revenue was non-U.S. Dollar-denominated during both
the second quarter and first six months of fiscal 2022, primarily including
sales in Euros, Canadian Dollars and British Pounds. During the second quarter
of fiscal 2022, as compared to the second quarter of fiscal 2021, and during the
first six months of fiscal 2022, as compared to the first six months of fiscal
2021, the U.S. Dollar primarily strengthened against these currencies.
Consequently, our revenue for the second quarter and first six months of fiscal
2022 reported in U.S. Dollars was adversely impacted by approximately
$5.0 million , or 0.5%, and $8.2 million , or 0.5%, respectively.
Operating Segment Revenue
The table below sets forth the changes in our operating segment revenue for the periods indicated (in thousands, except percentage data):
Quarter Ended Six Months Ended
April 30, 2022 May 1, 2021 %* April 30, 2022 May 1, 2021 %*
Revenue:
Networking Platforms
Converged Packet Optical $ 625,294 $ 573,657 9.0 % $ 1,166,230 $ 1,085,981 7.4 %
%** 65.8 % 68.8 % 65.0 % 68.2 %
Routing and Switching 109,186 63,628 71.6 % 194,896 127,934 52.3 %
%** 11.5 % 7.6 % 10.9 % 8.0 %
Total Networking Platforms 734,480 637,285 15.3 % 1,361,126 1,213,915 12.1 %
%** 77.3 % 76.4 % 75.9 % 76.2 %
Platform Software and Services 69,157 56,688 22.0 % 142,074 106,527 33.4 %
%** 7.3 % 6.8 % 7.9 % 6.7 %
Blue Planet Automation Software
and Services 16,881 23,958 (29.5) % 37,992 40,892 (7.1) %
%** 1.8 % 2.9 % 2.1 % 2.6 %
Global Services
Maintenance Support and Training 74,019 70,418 5.1 % 146,509 138,049 6.1 %
%** 7.8 % 8.4 % 8.2 % 8.7 %
Installation and Deployment 41,430 37,999 9.0 % 81,800 77,610 5.4 %
%** 4.4 % 4.6 % 4.6 % 4.9 %
Consulting and Network Design 13,260 7,579 75.0 % 24,169 14,064 71.9 %
%** 1.4 % 0.9 % 1.3 % 0.9 %
Total Global Services 128,709 115,996 11.0 % 252,478 229,723 9.9 %
%** 13.6 % 13.9 % 14.1 % 14.5 %
Total revenue $ 949,227 $ 833,927 13.8 % $ 1,793,670 $ 1,591,057 12.7 %
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* Denotes % change from 2021 to 2022 ** Denotes % of Total Revenue
Quarter ended
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•Networking Platforms segment revenue increased by $97.2 million , reflecting
product line sales increases of $51.6 million of our Converged Packet Optical
products and $45.6 million of our Routing and Switching products.
•Converged Packet Optical sales increased, primarily reflecting sales increases
of $44.4 million of our Waveserver® products to communication service providers
and $23.2 million of our 6500 Reconfigurable Line System (RLS) products,
primarily to Web-scale providers. These sales increases were partially offset
primarily by a sales decrease of $8.8 million of our 6500 Packet-Optical
Platform, primarily to cable and multiservice operators and communication
service providers.
•Routing and Switching sales increased, primarily reflecting a sales increase of
$22.6 million of our 3000 and 5000 families of service delivery and aggregation
switches to communication service providers. Sales also include $25.4 million of
our Virtualization Edge software, which was acquired in the acquisition of the
Vyatta Software Technology ("Vyatta") and its virtual routing and switching
technology in the first quarter of fiscal 2022. These sales increases were
partially offset by a sales decrease of $7.0 million of our 8700 Packetwave
Platform, primarily to communication service providers.
•Platform Software and Services segment revenue increased by $12.5 million ,
reflecting sales increases of $11.2 million in software services, primarily to
communication service providers, and $1.3 million in sales of software
platforms.
•Blue Planet Automation Software and Services segment revenue decreased by $7.1
million , primarily reflecting a sales decrease of $8.6 million of our automation
software platforms due to extended project completion timeframes, partially
offset by a sales increase of $1.5 million in software-related services.
•Global Services segment revenue increased by $12.7 million , primarily
reflecting sales increases of $5.7 million of our consulting and network design
services, $3.6 million of our maintenance support and training services and $3.4
million of our installation and deployment services.
Six months ended
•Networking Platforms segment revenue increased by$147.2 million , reflecting product line sales increases of$80.2 million of our Converged Packet Optical products and$67.0 million of our Routing and Switching products. •Converged Packet Optical sales increased, primarily reflecting increases of$56.5 million of our 6500 Packet-Optical Platform, primarily to communication service providers and Web-scale providers, and$41.3 million of our 6500 RLS products, primarily to Web-scale providers. These sales increases were partially offset by sales decreases of$9.0 million of our 5430 Reconfigurable Switching Systems and$8.8 million of our Z-Series Packet-Optical Platform, each primarily to communications service providers. •Routing and Switching sales increased, primarily reflecting a sales increase of$36.6 million of our 3000 and 5000 families of service delivery and aggregation switches to communication service providers. Sales also include$37.6 million of our Virtualization Edge software, which was acquired in the acquisition of Vyatta's virtual routing and switching technology in the first quarter of fiscal 2022. These sales increases were partially offset by a sales decrease of$8.9 million of our 8700 Packetwave Platform primarily to communication service providers. •Platform Software and Services segment revenue increased by$35.5 million , reflecting increases of$20.4 million in software services and$15.1 million in sales of software platforms. •Blue Planet Automation Software and Services segment revenue decreased by$2.9 million , reflecting a decrease of$4.7 million in sales of automation software platforms due to extended project completion timeframes, offset by a sales increase of$1.8 million in software-related services. •Global Services segment revenue increased by$22.8 million , primarily reflecting sales increases of$10.1 million of our consulting and network design services,$8.5 million of our maintenance support and training and$4.2 million of our installation and deployment services.
Revenue by
Our operating segments engage in business and operations across three geographic regions:Americas ;Europe ,Middle East andAfrica ("EMEA"); andAsia Pacific ,Japan andIndia ("APAC"). The geographic distribution of our revenue can fluctuate significantly from period to period, and the timing of revenue recognition for large network projects, particularly outside ofthe United States , can result in large variations in geographic revenue results in any particular period. The increase in ourAmericas region revenue for the quarter and six months endedApril 30, 2022 was primarily driven by increased sales inthe United States . The increase in our APAC region revenue for the quarter and six months endedApril 30, 2022 was primarily driven by 31 -------------------------------------------------------------------------------- increased sales inAustralia and New Zealand , partially offset by decreased sales inIndia . The decrease in our EMEA region revenue for the quarter endedApril 30, 2022 was primarily driven by decreased sales in theUnited Kingdom andRussia , partially offset by increased sales inthe Netherlands . The decrease in our EMEA region revenue for the six months endedApril 30, 2022 was primarily driven by decreased sales inthe Netherlands andRussia . OurRussia operations were suspended inMarch 2022 . The following table reflects our geographic distribution of revenue, principally based on the relevant location for our delivery of products and performance of services. The table sets forth the changes in geographic distribution of revenue for the periods indicated (in thousands, except percentage data): Quarter Ended
Six Months Ended
April 30, 2022 May 1, 2021 %* April 30, 2022 May 1, 2021 %*
Americas $ 700,840 $ 587,475 19.3 % $ 1,295,984 $ 1,084,086 19.5 %
%** 73.8 % 70.4 % 72.3 % 68.1 %
EMEA 145,106 155,054 (6.4) % 295,891 310,472 (4.7) %
%** 15.3 % 18.6 % 16.5 % 19.5 %
APAC 103,281 91,398 13.0 % 201,795 196,499 2.7 %
%** 10.9 % 11.0 % 11.2 % 12.4 %
Total $ 949,227 $ 833,927 13.8 % $ 1,793,670 $ 1,591,057 12.7 %
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* Denotes % change from 2021 to 2022 ** Denotes % of Total Revenue
Quarter ended
•Americas revenue increased by$113.4 million , reflecting sales increases of$94.2 million within our Networking Platforms segment,$12.3 million within ourGlobal Services segment, and$8.9 million within ourPlatform Software and Services segment. These sale increases were offset by a sales decrease of$1.9 million within ourBlue Planet Automation Software and Services segment. The increase within our Networking Platforms segment reflects product line sales increases of$48.4 million of our Routing and Switching products and$45.8 million of our Converged Packet Optical products. The increase within our Routing and Switching product line primarily reflects a sales increase of$24.5 million of our 3000 and 5000 families of service delivery and aggregation switches, primarily to communication service providers. Also included in the Routing and Switching product line were sales of$25.4 million of our Virtualization Edge software, which was acquired in the acquisition of Vyatta's virtual routing and switching technology in the first quarter of fiscal 2022. The increase within our Converged Packet Optical product line was primarily related to a sales increase of$51.3 million of our Waveserver® products primarily to communication service providers. •EMEA revenue decreased by$9.9 million , reflecting sales decreases of$5.4 million within our Networking Platforms segment,$4.9 million within ourBlue Planet Automation Software and Services segment, and$1.6 million within ourGlobal Services segment. These sales decreases were offset by a sales increase of$2.0 million within ourPlatform Software and Services segment. Sales decreased by$4.0 million from customers inRussia . •APAC revenue increased by$11.9 million , primarily reflecting sales increases of$8.5 million within our Networking Platforms segment,$2.0 million within ourGlobal Services segment and$1.7 million within ourPlatform Software and Services segment.
Six months ended
•Americas revenue increased by$211.9 million , reflecting sales increases of$160.8 million within our Networking Platforms segment,$26.7 million within ourPlatform Software and Services segment,$21.4 million within ourGlobal Services segment, and$3.0 million within ourBlue Planet Automation Software and Services segment. Our Networking Platforms segment revenue increase reflects product line sales increases of$90.0 million of Converged Packet Optical products and$70.8 million of Routing and Switching products. Our Converged Packet Optical revenue increase primarily reflects sales increases of$52.0 million of our 6500 Packet-Optical Platform,$30.7 million of our Waveserver® products, and$23.6 million of our 6500 Reconfigurable Line System (RLS) products, partially offset by a sales decrease of$10.6 million of our 5430 Reconfigurable Switching Systems. Included in the Routing and Switching product line were sales of$37.6 million of our Virtualization Edge software, which was acquired in the 32 -------------------------------------------------------------------------------- acquisition of Vyatta's virtual routing and switching technology in the first quarter of fiscal 2022, and a sales increase of$38.1 million of our 3000 and 5000 families of service delivery and aggregation switches. •EMEA revenue decreased by$14.6 million , reflecting decreases of$13.6 million within our Networking Platforms segment,$4.1 million within ourBlue Planet Automation Software and Services segment and$3.0 million within ourGlobal Services segment. These sales decreases were offset by a sales increase of$6.1 million within ourPlatform Software and Services segment. Sales decreased by$6.8 million from customers inRussia . •APAC revenue increased by$5.3 million , primarily reflecting increases of$4.3 million within ourGlobal Services segment, and$2.8 million within ourPlatform Software and Services segment. These sales increases were offset by a sales decrease of$1.8 million within ourBlue Planet Automation Software and Services segment. Sales within our Networking Platforms segment remained relatively unchanged.
Cost of Goods Sold and Gross Profit
There are a number of important factors or conditions that can adversely affect or cause our gross profit as a percentage of product or service revenue, or "gross margin," to fluctuate on a quarterly basis. The component elements that comprise our product cost of goods sold and services costs of goods sold, and certain factors that can cause gross margin to fluctuate, are described in detail in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" sections of our 2021 Annual Report.Canada Emergency Wage Subsidy ("CEWS") benefits, recorded in the particular line item within cost of goods sold in our Condensed Consolidated Statement of Operations to which the grant activity relates, were$6.8 million in the first six months of fiscal 2021, net of certain fees. The CEWS program expired in fiscal 2021. For further information relating to our receipt of amounts under the CEWS program, see Note 5 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report. The tables below set forth the changes in revenue, cost of goods sold and gross profit for the periods indicated (in thousands, except percentage data): Quarter Ended Six Months Ended April 30, 2022 May 1, 2021 %* April 30, 2022 May 1, 2021 %* Total revenue$ 949,227 $ 833,927 13.8 %$ 1,793,670 $ 1,591,057 12.7 % Total cost of goods sold 547,446 421,508 29.9 % 1,007,702 820,747 22.8 % Gross profit$ 401,781 $ 412,419 (2.6) %$ 785,968 $ 770,310 2.0 % %** 42.3 % 49.5 % 43.8 % 48.4 %
_____________________________________
* Denotes % change from 2021 to 2022
** Denotes % of total revenue
Quarter Ended Six Months Ended
April 30, 2022 May 1, 2021 %* April 30, 2022 May 1, 2021 %*
Product revenue $ 759,948 $ 670,043 13.4 % $ 1,424,955 $ 1,267,263 12.4 %
Product cost of goods sold 452,057 339,601 33.1 % 824,622 654,699 26.0 %
Product gross profit $ 307,891 $ 330,442 (6.8) % $ 600,333 $ 612,564 (2.0) %
%** 40.5 % 49.3 % 42.1 % 48.3 %
_____________________________________
* Denotes % change from 2021 to 2022
** Denotes % of product revenue
Quarter Ended Six Months Ended
April 30, 2022 May 1, 2021 %* April 30, 2022 May 1, 2021 %*
Services revenue $ 189,279 $ 163,884 15.5 % $ 368,715 $ 323,794 13.9 %
Services cost of goods sold 95,389 81,907 16.5 % 183,080 166,048 10.3 %
Services gross profit $ 93,890 $ 81,977 14.5 % $ 185,635 $ 157,746 17.7 %
% ** 49.6 % 50.0 % 50.3 % 48.7 %
_____________________________________
* Denotes % change from 2021 to 2022
33
--------------------------------------------------------------------------------** Denotes % of services revenue
Quarter ended
•Gross profit decreased by$10.6 million . Gross margin decreased by 720 basis points, primarily due to increased costs of components resulting from global supply chain shortages and market-based price compression. The decrease also reflects the effect of a$6.8 million benefit received in the second quarter of fiscal 2021 from the now-expired CEWS program. As described in "Overview" above, we expect the current constrained supply environment, including increased component and logistics costs, to increase our costs of goods sold and to adversely impact our gross margin during fiscal 2022. We believe that these supply chain challenges and their adverse impact on our business and financial results will persist for the foreseeable future and at least through the remainder of fiscal 2022. •Gross profit on products decreased by$22.6 million . Product gross margin decreased by 880 basis points, primarily due to the increased costs of components resulting from global supply chain shortages and market-based price compression. The decrease also reflects the effect of a$4.2 million benefit received in the second quarter of fiscal 2021 from the now-expired CEWS program. •Gross profit on services increased by$11.9 million . Services gross margin decreased by 40 basis points, reflecting the effect of a$2.6 million benefit recorded in the second quarter of fiscal 2021 from the now-expired CEWS program. Excluding the effect of the CEWS program, services margin improved due to higher margin on consulting and professional services and installation and deployment services.
Six months ended
•Gross profit increased by$15.7 million . Gross margin decreased by 460 basis points, primarily due to increased costs of components resulting from global supply chain shortages and market-based price compression. The decrease also reflects the effect of a$6.8 million benefit received in the second quarter of fiscal 2021 from the now-expired CEWS program. As described in "Overview" above, we expect the current market shortage for semiconductor components and constrained supply environment to increase our costs of goods sold and to adversely impact our gross margin during fiscal 2022. We believe that these supply chain challenges and their adverse impact on our business and financial results will persist for the foreseeable future and at least through the remainder of fiscal 2022. •Gross profit on products decreased by$12.2 million . Product gross margin decreased by 620 basis points, primarily due to increased costs of components resulting from global supply chain shortages and market-based price compression. The decrease also reflects the effect of a$4.2 million benefit received in the second quarter of fiscal 2021 from the now-expired CEWS program. •Gross profit on services increased by$27.9 million . Services gross margin increased by 160 basis points, due to higher margin on consulting and professional services and installation and deployment services. This increase offset the effect of a$2.6 million benefit from the now-expired CEWS program recorded in the second quarter of fiscal 2021.
Operating Expense
Currency Fluctuations
Approximately 51.0% of our operating expense was non-U.S. Dollar-denominated during the second quarter and first six months of fiscal 2022, including expenses in Canadian Dollars, Indian Rupees, and Euros. During the second quarter of fiscal 2022, as compared to the second quarter of fiscal 2021, and the first six months of fiscal 2022, as compared to the first six months of fiscal 2021, theU.S. Dollar primarily strengthened against these currencies. Consequently, our operating expense, net of hedging, reported inU.S. Dollars slightly decreased by approximately$4.1 million , or 1.2%, and$5.5 million , or 0.8%, respectively. CEWS Program Benefits In the first six months of fiscal 2021, we recorded CEWS benefits of$33.6 million , net of certain fees, related to the particular line item within operating expense in our Condensed Consolidated Statement of Operations to which the grant activity related. The CEWS program expired in fiscal 2021. For further information relating to our receipt of amounts under the CEWS program, see Note 5 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report. 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 2021 Annual Report. The table below sets forth the changes in operating expense for the periods indicated (in thousands, except percentage data): 34 --------------------------------------------------------------------------------
Quarter Ended Six Months Ended
April 30, 2022 May 1, 2021 %* April 30, 2022 May 1, 2021 %*
Research and development $ 159,324 $ 110,246 44.5 % $ 307,733 $ 242,987 26.6 %
%** 16.8 % 13.2 % 17.2 % 15.3 %
Selling and marketing 119,939 110,387 8.7 % 238,820 207,665 15.0 %
%** 12.6 % 13.2 % 13.3 % 13.1 %
General and administrative 45,572 43,635 4.4 % 90,070 83,628 7.7 %
%** 4.8 % 5.2 % 5.0 % 5.3 %
Significant asset impairments and
restructuring costs 9,102 8,209 10.9 % 12,511 14,076 (11.1) %
%** 1.0 % 1.0 % 0.7 % 0.9 %
Amortization of intangible assets 8,920 6,019 48.2 % 17,838 11,929 49.5 %
%** 0.9 % 0.7 % 1.0 % 0.7 %
Acquisition and integration costs 495 294 68.4 % 563 601 (6.3) %
%** 0.1 % - % - % - %
Total operating expenses $ 343,352 $ 278,790 23.2 % $ 667,535 $ 560,886 19.0 %
%** 36.2 % 33.4 % 37.2 % 35.3 %
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* Denotes % change from 2021 to 2022 ** Denotes % of Total Revenue
Quarter ended
•Research and development expense benefited from$2.2 million as a result of foreign exchange rates, net of hedging, primarily due to a strongerU.S. Dollar in relation to the Indian Rupee and Canadian Dollar. Including the effect of foreign exchange rates, net of hedging, research and development expenses increased by$49.1 million . This increase primarily reflects a$28.9 million benefit from the now-expired CEWS program recorded in the second quarter of fiscal 2021 and increases in employee headcount and related compensation costs, professional services and technology and related costs. •Selling and marketing expense benefited from$1.6 million as a result of foreign exchange rates, primarily due to a strongerU.S. Dollar in relation to the Euro. Including the effect of foreign exchange rates, sales and marketing expense increased by$9.6 million . This increase primarily reflects an increase in employee headcount and related compensation costs, travel and entertainment costs and a$2.6 million benefit from the now-expired CEWS program recorded in the second quarter of fiscal 2021. •General and administrative expense increased by$1.9 million . This increase primarily reflects increases in employee headcount and related compensation costs and professional services and a$2.2 million benefit from the now-expired CEWS program recorded in the second quarter of fiscal 2021, partially offset by reduced legal costs. •Significant asset impairments and restructuring costs slightly increased by$0.9 million , reflecting an impairment charge of$4.1 million due to our suspended operations inRussia partially offset by reduced costs associated with actions that we have taken to redesign certain business processes and align our global workforce and facilities as part of a business optimization strategy to improve gross margin and constrain operating expense. •Amortization of intangible assets increased by$2.9 million due to additional intangibles acquired in connection with our acquisition of Vyatta during the first quarter of fiscal 2022 and our acquisition ofXelic in the second quarter of fiscal 2022.
•Acquisition and integration costs remained relatively unchanged.
Six months ended
•Research and development expense benefited from$2.3 million as a result of foreign exchange rates, net of hedging, primarily due to fluctuations in theU.S. Dollar in relation to the Canadian Dollar and Indian Rupee. Including the effect of foreign exchange rates, net of hedging, research and development expenses increased by$64.7 million . This increase primarily reflects the effect of a$28.9 million benefit received from the now-expired CEWS program 35 --------------------------------------------------------------------------------
recorded in the second quarter of fiscal 2021 and increases in employee headcount and related compensation costs, professional services and technology and related costs.
•Selling and marketing expense benefited from$2.6 million as a result of foreign exchange rates, primarily due to a strongerU.S. Dollar in relation to the Euro. Including the effect of foreign exchange rates, sales and marketing expense increased by$31.2 million . This increase primarily reflects an increase in compensation costs and travel and entertainment costs and the effect of a$2.6 million benefit received from the now-expired CEWS program recorded in the second quarter of fiscal 2021. •General and administrative expense increased by$6.4 million . This increase primarily reflects increases in employee headcount and related compensation costs and professional services and the effect of a$2.2 million benefit received from the now-expired CEWS program recorded in the second quarter of fiscal 2021, partially offset by reduced legal costs. •Significant asset impairments and restructuring costs decreased by$1.6 million , reflecting reduced costs associated with actions that we have taken to redesign certain business processes and align our global workforce and facilities as part of a business optimization strategy to improve gross margin and constrain operating expense, offset by a$4.1 million impairment charge due to our suspended operations inRussia . •Amortization of intangible assets increased by$5.9 million due to additional intangibles acquired in connection with our acquisition of Vyatta during the first quarter of fiscal 2022 and our acquisition ofXelic during the second quarter of fiscal 2022.
•Acquisition and integration costs remained relatively unchanged.
Other Items
The table below sets forth the changes in other items for the periods indicated (in thousands, except percentage data):
Quarter Ended Six Months Ended
April 30, 2022 May 1, 2021 %* April 30, 2022 May 1, 2021 %*
Interest and other income
(loss), net $ 808 $ (1,274) 163.4 % $ 4,494 $ (2,395) 287.6 %
%** 0.1 % (0.2) % 0.3 % (0.2) %
Interest expense $ 11,985 $ 7,785 53.9 % $ 20,633 $ 15,145 36.2 %
%** 1.3 % 0.9 % 1.2 % 1.0 %
Provision for income taxes $ 8,330 $ 21,453 (61.2) % $ 17,549 $ 33,419 (47.5) %
%** 0.9 % 2.6 % 1.0 % 2.1 %
_____________________________________
* Denotes % change from 2021 to 2022 ** Denotes % of Total Revenue
Quarter ended
•Interest and other income (loss), net primarily reflects 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 increased primarily due to additional outstanding indebtedness, including our 4.00% senior notes due 2030 (the "2030 Notes") issued in the first quarter of fiscal 2022.
•Provision for income taxes decreased by$13.1 million due to a decrease in pre-tax income for the second quarter of fiscal 2022. The effective tax rate for the second quarter of fiscal 2022 was higher compared to the second quarter of fiscal 2021, primarily due to a higher foreign tax rate.
Six months ended
•Interest and other income (loss), net primarily reflects a favorable adjustment to the carrying value of a cost method equity investment 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 increased primarily due to additional outstanding indebtedness, including the 2030 Notes.
36
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•Provision for income taxes decreased by $15.9 million due to a decrease in
pre-tax income for the first six months of fiscal 2022. The effective tax rate
for the first six months of fiscal 2022 was lower compared to the first six
months of fiscal 2021, primarily due to a lower foreign tax rate in fiscal 2022.
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 Six Months Ended
April 30, 2022 May 1, 2021 %* April 30, 2022 May 1, 2021 %*
Segment profit (loss):
Networking Platforms $ 152,769 $ 211,412 (27.7) % $ 286,894 $ 367,843 (22.0) %19.3 %$ 93,052 $ 64,166 45.0 %Blue Planet Automation Software and Services$ (6,520) $ 5,688 (214.6) %$ (7,554) $ 3,254 (332.1) % Global Services$ 52,652 $ 48,567 8.4 %$ 105,843 $ 92,060 15.0 %
_____________________________________
* Denotes % change from 2021 to 2022
Segment profit (loss) includes CEWS benefits of$35.7 million in the first six months of fiscal 2021, net of certain fees. For further discussion of benefits from the CEWS program, see Note 5 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.
Quarter ended
•Networking Platforms segment profit decreased by$58.6 million , primarily due to lower gross margin as described above and higher research and development costs including the effect of a$29.7 million benefit received from the now-expired CEWS program in the second quarter of fiscal 2021, partially offset by higher sales volume. •Platform Software and Services segment profit increased by$7.1 million , primarily due to higher sales volume, offset by lower gross margin, and higher research and development costs including the effect of a$2.5 million benefit received from the now-expired CEWS program in the second quarter of fiscal 2021. •Blue Planet Automation Software and Services segment reflects lower sales volume, lower gross margin, and higher research and development costs, including the effect of a$1.2 million benefit received from the now-expired CEWS program in the second quarter of fiscal 2021. •Global Services segment profit increased by$4.1 million , primarily due to higher sales volume, offset by lower gross margin on services as described above and the effect of a$2.3 million benefit received from the now-expired CEWS program in the second quarter of fiscal 2021.
Six months ended
•Networking Platforms segment profit decreased by$80.9 million , primarily due to lower gross margin as described above, and higher research and development costs, including the effect of a$29.7 million benefit received from the now-expired CEWS program in the second quarter of fiscal 2021, partially offset by higher sales volume. •Platform Software and Services segment profit increased by$28.9 million , primarily due to higher sales volume, offset by slightly lower gross margin and higher research and development costs including the effect of a$2.5 million benefit received from the now-expired CEWS program in the second quarter of fiscal 2021. •Blue Planet Automation Software and Services segment reflects reduced gross margin, lower sales volume and higher research and development costs including the effect of a$1.2 million benefit received from the now-expired CEWS program in the second quarter of fiscal 2021. •Global Services segment profit increased by$13.8 million , primarily due to higher sales volume and higher gross margin on services as described above, offset by the effect of a$2.3 million benefit received from the now-expired CEWS program in the second quarter of fiscal 2021. 37 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Overview. For the six months endedApril 30, 2022 ,$52.1 million of cash was provided by operating activities as our net income (adjusted for non-cash charges) of$202.6 million exceeded our working capital requirements of$150.5 million . For additional details, see "Cash Provided By Operating Activities" below. Despite the cash provided by operating activities, cash, cash equivalents and investments decreased by$37.5 million during the first six months of fiscal 2022 due to the following items: (i) cash used to fund our investing activities for capital expenditures totaling$45.2 million ; (ii) cash used for acquisition of businesses of$62.0 million ; (iii) cash used for stock repurchases under our stock repurchase program of$332.8 million ; (iv) stock repurchases on vesting of our stock unit awards to employees relating to tax withholding of$35.0 million ; (v) purchase of a cost method equity investment of$8.0 million ; and (vi) net decreases due to the impact of exchange rate changes on cash and cash equivalents of$8.8 million . Proceeds from the issuance of the 2030 Notes provided$394.9 million in cash, net of paid debt issuance costs, and proceeds from the issuance of equity under our employee stock purchase plan provided$15.2 million in cash during the six months endedApril 30, 2022 .
See Notes 4, 16 and 19 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report for additional information on these transactions.
The following table sets forth changes in our cash and cash equivalents and
investments in marketable debt securities for the respective periods (in
thousands):
April 30, October 30, Increase
2022 2021 (decrease)
Cash and cash equivalents $ 1,019,863 $ 1,422,546 $ (402,683)
Short-term investments in marketable debt securities 529,552 181,483 348,069
Long-term investments in marketable debt securities 87,142 70,038 17,104
Total cash and cash equivalents and investments in
marketable debt securities $ 1,636,557 $ 1,674,067 $ (37,510)
Principal Sources of Liquidity. Our principal sources of liquidity on hand
include our cash, cash equivalents and investments, which, as of April 30, 2022
totaled $1.6 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
required to collateralize these instruments. As of April 30, 2022 , letters of
credit totaling $84.2 million were collateralized by our ABL Credit Facility.
There were no borrowings outstanding under the ABL Credit Facility as of
April 30, 2022 .
Foreign Liquidity. Cash, cash equivalents, and short-term investments held by
our foreign subsidiaries was $269.1 million as of April 30, 2022 . We intend to
reinvest indefinitely our foreign earnings. If we were to repatriate the
accumulated historical foreign earnings, the provisional amount of unrecognized
deferred income tax liability related to foreign withholding taxes would be
approximately $33.0 million .
Stock Repurchase Authorization. On December 9, 2021 , we announced that our Board
of Directors authorized a program to repurchase up to $1.0 billion of our common
stock, which replaced in its entirety the previous stock repurchase program
authorized in fiscal 2019. On December 13, 2021 , in connection with this
repurchase program, we entered into an accelerated share repurchase agreement
for the repurchase of $250.0 million of our common stock. We made an upfront
payment of $250.0 million under the ASR Agreement during the first quarter of
fiscal 2022, and the repurchases contemplated by the ASR Agreement were
completed on February 15, 2022 . During the second quarter of fiscal 2022, we
repurchased an additional $87.0 million of our common stock under the stock
repurchase program, and we had $663.0 million remaining under the current
repurchase authorization as of April 30, 2022 . The amount and timing of any
further repurchases under our stock repurchase program are subject to a variety
of factors including liquidity, cash flow, stock price and general business and
market conditions. The program may be modified, suspended, or discontinued at
any time. See Note 19 to our Condensed Consolidated Financial Statements
included in Item 1 of Part I of this report.
Liquidity Position. Based on past performance and current expectations, we
believe that cash from operations, cash, cash equivalents, investments, and
other sources of liquidity, including our ABL Credit Facility, will satisfy our
currently anticipated working capital needs, capital expenditures, and other
liquidity requirements associated with our operations through the next 12 months
and the reasonably foreseeable future. We regularly evaluate our liquidity
position, debt obligations, and anticipated cash needs to fund our operating or
investment plans, and will continue to consider capital raising and other market
opportunities that may be available to us. We regularly evaluate alternatives to
manage our capital structure and market
38
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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 Provided By Operating Activities
The following sections set forth the components of our
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):
Six Months Ended
April 30, 2022
Net income $ 84,745
Adjustments for non-cash charges:
Depreciation of equipment, building, furniture and fixtures, and amortization of leasehold improvements
46,030
Share-based compensation expenses 50,970
Amortization of intangible assets 24,463
Provision for inventory excess and obsolescence 8,487
Provision for warranty 7,228
Deferred taxes (13,474)
Other (5,833)
Net income (adjusted for non-cash charges) $ 202,616
Working Capital
We used $150.5 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):
Six Months Ended
April 30, 2022
Cash provided by accounts receivable $ 104,455
Cash used in inventories (171,056)
Cash used in prepaid expenses and other
(36,673)
Cash used in accounts payable, accruals and other obligations
(88,960)
Cash provided by deferred revenue
43,753
Cash used in operating lease assets and liabilities, net
(1,994)
Total cash used for working capital
As compared to the end of fiscal 2021:
•The
•The$171.1 million of cash used in inventories during the first six months of fiscal 2022 primarily reflects increases in raw materials inventory related to the steps that we are taking to mitigate the impact of current supply chain constraints and the global market shortage of semiconductor parts described in "Overview" above; •The$36.7 million of cash used in prepaid expense and other during the first six months of fiscal 2022 primarily reflects increases in contract assets and product demonstration equipment, partially offset by decreases in prepaid foreign currency forward contracts; 39 --------------------------------------------------------------------------------
•The
•The$43.8 million of cash provided by deferred revenue during the first six months of fiscal 2022 represents an increase in advanced payments received from customers prior to revenue recognition; and •The$2.0 million of cash used in operating lease assets and liabilities, net, during the first six months of fiscal 2022 represents cash paid for operating lease payments in excess of operating lease costs. The days sales outstanding ("DSOs") for the first six months of fiscal 2022 were 86 days, and the inventory turns for the first six months of fiscal 2022 were 3.1. 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):
Six Months Ended
April 30, 2022
Term Loan due September 28, 2025(1) $ 8,316
Senior Notes due January 31, 2030(2) -
Interest rate swaps(3) 4,940
ABL Credit Facility(4) 1,211
Finance leases 2,342
Cash paid during period $ 16,809
(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 second quarter of fiscal 2022, the interest
rate on the 2025 Term Loan was 2.34%.
(2) The 2030 Notes bear interest at a rate of 4.00% per annum and mature on
(3) The interest rate swaps fix the LIBOR rate for
(4) During the first six months of fiscal 2022, we utilized the ABL Credit
Facility to collateralize certain standby letters of credit and paid
Contractual Obligations
Our contractual obligations have not changed materially sinceOctober 30, 2021 , except for the items listed below. For a summary of our contractual obligations, see Item 7 of Part II of the 2021 Annual Report. Debt. As ofApril 30, 2022 , we had$400.0 million outstanding principal associated with the 2030 Notes payableJanuary 31, 2030 . Future interest payments associated with the 2030 Notes total$128.6 million , with$16.6 million payable within 12 months. For additional information about the 2030 Notes, see Note 16 to our Condensed Consolidated Financial Statements included in Item I of Part I of this report. Purchase Order Obligations. Beginning in the second half of fiscal 2021, we started placing significant advance orders for supply of certain components to address our expected strong customer demand for fiscal 2022 and the corresponding long lead times resulting from the emerging supply chain challenges at that time. As ofOctober 30, 2021 , we had$430.7 million in outstanding purchase order commitments to our contract manufacturers and component suppliers for inventory, which did not include approximately$624.4 million in longer-term, cancellable advance orders that we did not consider to be firm commitments. As ofApril 30, 2022 we had$1.8 billion in outstanding purchase order commitments to our contract manufacturers and component suppliers for inventory, including approximately$1.2 billion in such advance orders that, due to the ongoing nature of the supply chain shortage, we now consider to be firm commitments that are unlikely to be cancelled. In certain instances, we are permitted to cancel, reschedule or adjust these orders. Consequently, only a portion of this amount relates to firm, non-cancellable and unconditional obligations. 40 --------------------------------------------------------------------------------
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 the armed conflict betweenRussia andUkraine , and expectations as to their impacts 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. Our critical accounting policies and estimates have not changed materially sinceOctober 30, 2021 . 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 2021 Annual Report.
Effects of Recent Accounting Pronouncements
See Note 2 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report for information relating to our discussion of the effects of recent accounting pronouncements.
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