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 2020, which we filed with theSEC onDecember 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 toCiena Corporation and its consolidated subsidiaries. Overview 26
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This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") 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 our 2020 Annual Report.
We are a networking systems, services and software company, providing solutions
that enable a wide range of network operators to deploy and manage
next-generation networks that deliver services to businesses and consumers. We
provide hardware, software and services that 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 for our products and services remains dynamic and continues to be impacted by the effects of the COVID-19 pandemic. For example, constrained spending in the second half of fiscal 2020 and the first quarter of fiscal 2021 contributed to lower revenue in the second quarter of fiscal 2021 as compared to the second quarter of fiscal 2020. However, during the second quarter of fiscal 2021, we experienced higher than typical orders for our products and services among a concentrated set of larger customers with which we have existing positions as a supplier. We believe some portion of these orders likely reflects certain short-term purchasing behaviors based on customer-specific considerations including possible acceleration of future orders due to the implementation of security of supply strategies as a result of the recent strain on the global supply market for semiconductor components and increased quarterly demand to address network requirements following a period of constrained spending in recent quarters. It is unclear whether the increased level of demand we experienced in the second quarter of fiscal 2021 will continue during the remainder of fiscal 2021. Over the longer term, we continue to believe that the unique and increased demands placed on network infrastructures as a result of the COVID-19 pandemic, and the related increase in remote working worldwide, have accelerated certain trends, including cloud network adoption, networking resilience and flexibility, and enhanced network automation. 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. 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 were adversely impacted during the first half of fiscal 2021. It is unclear whether these trends will continue into the second half of fiscal 2021.Canada Emergency Wage Subsidy ("CEWS"). InApril 2020 , the government ofCanada introduced the CEWS program to help employers offset a portion of their employee wages for a limited period in response to the COVID-19 outbreak, retroactive toMarch 15, 2020 . Amounts from the CEWS program positively impacted our operating expense and measures of profit in the second quarter of fiscal 2021. In the second quarter of fiscal 2021, we recorded CEWS benefits ofCAD$51.1 million ($40.4 million ), net of certain fees, related to CEWS for claim periods beginningMarch 15, 2020 , includingCAD$43.9 million ($34.7 million ) related to employee wages from fiscal 2020. The CEWS program is of a limited duration. We do not anticipate a similar proportionate impact on our financial results in future periods and may not receive any benefits from the CEWS program in the future. 27 -------------------------------------------------------------------------------- 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, such as the new outbreak inIndia , 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. Supply Chain Constraints. 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. The market shortage for semiconductor components has impacted lead times and cost of components. We believe these supply chain challenges will persist at least through the second half of fiscal 2021. In addition, some of our suppliers have indicated that as a result of this shortage they intend to cease manufacturing of certain components used in our products. In response to these dynamics, we have implemented mitigation strategies, increased our purchases of inventory for certain components and taken other steps to promote security of supply and resiliency. These dynamics and our resulting mitigating actions may also result in increased product costs of goods sold and inventory levels in the future. Supply Chain and Distribution Structure. To better accommodate the requirements of a global business, we are evaluating a plan to reorganize our global supply chain and distribution structure more substantially, which would include a legal entity reorganization and related system upgrade. We expect to adopt the plan in the third quarter of fiscal 2021. This reorganization could have a material effect on our financial position and operating results, including a significant one-time tax benefit associated with the recognition of a net deferred tax asset and potential reversal of a portion of the valuation allowance. 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 3 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.
Revenue
Currency Fluctuations Approximately 18.0% of our revenue was non-U.S. Dollar-denominated during both the second quarter and first six months of fiscal 2021, primarily including sales in Euros, Canadian Dollars, Brazilian Reais and British Pounds. During the second quarter of fiscal 2021, as compared to the second quarter of fiscal 2020, and during the first six months of fiscal 2021, as compared to the first six months of fiscal 2020, theU.S. Dollar fluctuated against these currencies. Consequently, our revenue for the second quarter and first six months of fiscal 2021 reported inU.S. Dollars was adversely impacted by approximately$6.8 million , or 0.8%, and$8.7 million or 0.6%, 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): 28 --------------------------------------------------------------------------------
Quarter Ended Six Months Ended
May 1, 2021 May 2, 2020 %* May 1, 2021 May 2, 2020 %*
Revenue:
Networking Platforms
Converged Packet Optical $ 573,657 $ 654,294 (12.3) % $ 1,085,981 $ 1,245,844 (12.8) %
%** 68.8 % 73.2 % 68.2 % 72.1 %
Routing and Switching 63,628 64,167 (0.8) % 127,934 131,675 (2.8) %
%** 7.6 % 7.2 % 8.0 % 7.6 %
Total Networking Platforms 637,285 718,461
(11.3) % 1,213,915 1,377,519 (11.9) %
%** 76.4 % 80.4 % 76.2 % 79.7 %
Platform Software and Services 56,688 44,985 26.0 % 106,527 96,873 10.0 %
%** 6.8 % 5.0 % 6.7 % 5.6 %
Blue Planet Automation Software and
Services 23,958 15,017 59.5 % 40,892 30,482 34.2 %
%** 2.9 % 1.7 % 2.6 % 1.8 %
Global Services
Maintenance Support and Training 70,418 71,479 (1.5) % 138,049 133,271 3.6 %
%** 8.4 % 8.0 % 8.7 % 7.8 %
Installation and Deployment 37,999 34,242 11.0 % 77,610 69,196 12.2 %
%** 4.6 % 3.8 % 4.9 % 4.0 %
Consulting and Network Design 7,579 9,869 (23.2) % 14,064 19,624 (28.3) %
%** 0.9 % 1.1 % 0.9 % 1.1 %
Total Global Services 115,996 115,590 0.4 % 229,723 222,091 3.4 %
%** 13.9 % 12.9 % 14.5 % 12.9 %
Consolidated revenue $ 833,927 $ 894,053 (6.7) % $ 1,591,057 $ 1,726,965 (7.9) %
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* Denotes % change from 2020 to 2021 ** Denotes % of Total Revenue Quarter endedMay 1, 2021 as compared to the quarter endedMay 2, 2020 •Networking Platforms segment revenue decreased, primarily reflecting product line sales decreases of$80.6 million of our Converged Packet Optical products. •Converged Packet Optical sales decreased, primarily reflecting a sales decrease of$91.7 million of our 6500 Packet-Optical Platform to communications service providers and Web-scale providers. This sales decrease was partially offset by a sales increase of$9.4 million of our Waveserver® products, primarily to communications service providers and Web-scale providers. •Routing and Switching sales remained relatively unchanged. •Platform Software and Services segment revenue increased by$11.7 million , reflecting increases of$8.0 million in software services and$3.7 million in sales of software platforms. •Blue Planet Automation Software and Services segment revenue increased by$8.9 million , primarily reflecting increases of$7.6 million in sales of software platforms and$1.3 million in related services. •Global Services segment revenue remained relatively unchanged.
Six months ended
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•Networking Platforms segment revenue decreased, reflecting product line sales
decreases of $159.9 million of our Converged Packet Optical products and $3.7
million of our Routing and Switching products.
•Converged Packet Optical sales decreased, primarily reflecting decreases of
$190.2 million of our 6500 Packet-Optical Platform, primarily to communications
service providers and Web-Scale providers, and $46.9 million of our 5430
Reconfigurable Switching Systems to communications service providers. These
sales decreases were partially offset by sales increases of $63.2 million of our
Waveserver products, which benefited from increased sales to communications
service providers and Web-scale providers, and $17.3 million of our 6500
Reconfigurable Line Service (RLS) primarily to communications service providers.
•Routing and Switching sales decreased, primarily reflecting sales decreases of
$7.0 million of our 6500 Packet Transport System (PTS) and $6.7 million of our
3000 and 5000 families of service delivery and aggregation switches, each to
communications service providers. These decreases were partially offset by a
sales increase of $9.1 million of our platform independent software to a
communications service provider.
•Platform Software and Services segment revenue increased by $9.7 million ,
reflecting an increase of $14.8 million in software services, offset by a
decrease of $5.1 million in sales of software platforms.
•Blue Planet Automation Software and Services segment revenue increased by $10.4
million , reflecting increases of $8.8 million in software sales and $1.6 million
in software sales.
•Global Services segment revenue increased, primarily reflecting sales increases
of $8.4 million of our installation and deployment services and $4.8 million of
our maintenance support and training, partially offset by a sales decrease of
$5.6 million of our consulting and network design services.
Revenue by
Our operating segments engage in business and operations across three geographic regions:Americas ; EMEA; and APAC. Our revenue, when considered by geographic distribution, can fluctuate significantly, 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 our EMEA region revenue for the quarter and six months endedMay 1, 2021 was primarily driven by increased sales inGreat Britain andFrance . The decrease in our APAC region revenue for the quarter and six months endedMay 1, 2021 was primarily driven by decreased sales inSingapore andJapan , partially offset by increased sales inIndia . The decrease in ourAmericas region revenue for the quarter and six months endedMay 1, 2021 was primarily driven by decreased sales inthe United States , partially offset by increased sales inBrazil . 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
May 1, 2021 May 2, 2020 %* May 1, 2021 May 2, 2020 %*
Americas $ 587,475 $ 650,381 (9.7) % $ 1,084,086 $ 1,224,385 (11.5) %
%** 70.4 % 72.7 % 68.1 % 70.9 %
EMEA 155,054 141,431 9.6 % 310,472 271,396 14.4 %
%** 18.6 % 15.8 % 19.5 % 15.7 %
APAC 91,398 102,241 (10.6) % 196,499 231,184 (15.0) %
%** 11.0 % 11.5 % 12.4 % 13.4 %
Total $ 833,927 $ 894,053 (6.7) % $ 1,591,057 $ 1,726,965 (7.9) %
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* Denotes % change from 2020 to 2021 ** Denotes % of Total Revenue
Quarter ended
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Automation Software and Services segment. The decrease within our Networking
Platforms segment reflects a product line sales decrease of $67.7 million of our
Converged Packet Optical products, primarily related to a sales decrease of
$66.6 million of our 6500 Packet-Optical Platform to communications service
providers.
•EMEA revenue increased by $13.6 million , primarily reflecting sales increases
of $4.5 million within our Blue Planet Automation Software and Services segment,
$4.0 million within our Global Services segment, $3.0 million within our
Platform Software and Services segment and $2.1 million within our Networking
Platforms segment.
•APAC revenue decreased by $10.8 million , primarily reflecting a sales decrease
of $12.5 million within our Networking Platforms segment. Our Networking
Platforms segment revenue decrease primarily reflects a decrease of $16.2
million in sales of our 6500 Packet-Optical Platform, partially offset by an
increase of $4.3 million in sales of our 3000 and 5000 families of service
delivery and aggregation switches.
Six months ended May 1, 2021 as compared to the six months ended May 2, 2020
•Americas revenue decreased by $140.3 million , primarily reflecting a sales
decrease of $149.3 million within our Networking Platforms segment, which was
partially offset by a sales increase of $7.1 million within our Blue Planet
Automation Software and Services segment. Our Networking Platforms segment
revenue decrease reflects product line sales decreases of $141.3 million of
Converged Packet Optical products and $7.9 million of Routing and Switching
products. Our Converged Packet Optical revenue decrease primarily reflects sales
decreases of $143.9 million of our 6500 Packet-Optical Platform and $31.6
million of our 5430 Reconfigurable Switching Systems, partially offset by a
sales increase of $22.5 million of our Waveserver products. Our 6500
Packet-Optical Platform revenue decrease primarily reflects decreased sales to
communications service providers.
•EMEA revenue increased by $39.1 million , reflecting increases of $21.1 million
within our Networking Platforms segment, $7.5 million within our Global Services
segment, $5.3 million within our Platform Software and Services segment and $5.2
million within our Blue Planet Automation Software and Services segment.
•APAC revenue decreased by $34.7 million , primarily reflecting decreases of
$35.4 million within our Networking Platforms segment, $1.9 million within our
Blue Planet Automation Software and Services segment and $1.8 million of our
Global Services segment. These decreases were partially offset by a sales
increase of $4.4 million within our Platform Software and Services segment. Our
Networking Platforms segment revenue decrease primarily reflects a decrease of
$43.9 million in sales of our 6500 Packet-Optical Platform to communications
service providers in Japan , partially offset by an increase of $8.3 million in
sales of our Waveserver products primarily to communications service providers
and submarine network operators.
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. CEWS benefits, recorded to the particular line item within cost of goods sold in our Condensed Consolidated Statement of Operations to which the activity relates, were$6.8 million in the second quarter and first six months of fiscal 2021, net of certain fees. For further information relating to our receipt of amounts under the CEWS program, see Note 4 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report. The tables below set forth the changes in revenue, cost of goods sold and gross profit for the periods indicated (in thousands, except percentage data): Quarter Ended Six Months Ended May 1, 2021 May 2, 2020 %* May 1, 2021 May 2, 2020 %* Total revenue$ 833,927 $ 894,053 (6.7) %$ 1,591,057 $ 1,726,965 (7.9) % Total cost of goods sold 421,508 480,727 (12.3) % 820,747 943,104 (13.0) % Gross profit$ 412,419 $ 413,326 (0.2) %$ 770,310 $ 783,861 (1.7) % %** 49.5 % 46.2 % 48.4 % 45.4 %
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* Denotes % change from 2020 to 2021
** Denotes % of Total Revenue
Quarter Ended Six Months Ended
May 1, 2021 May 2, 2020 %* May 1, 2021 May 2, 2020 %*
Product revenue $ 670,043 $ 739,892 (9.4) % $ 1,267,263 $ 1,427,107 (11.2) %
Product cost of goods sold 339,601 405,138 (16.2) % 654,699 794,151 (17.6) %
Product gross profit$ 330,442 $ 334,754 (1.3) %$ 612,564 $ 632,956 (3.2) % %** 49.3 % 45.2 % 48.3 % 44.4 %
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* Denotes % change from 2020 to 2021
** Denotes % of Product Revenue
Quarter Ended Six Months Ended
May 1, 2021 May 2, 2020 %* May 1, 2021 May 2, 2020 %*
Service revenue $ 163,884 $ 154,161 6.3 % $ 323,794 $ 299,858 8.0 %
Service cost of goods sold 81,907 75,589 8.4 % 166,048 148,953 11.5 %
Service gross profit $ 81,977 $ 78,572 4.3 % $ 157,746 $ 150,905 4.5 %
% ** 50.0 % 51.0 % 48.7 % 50.3 %
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* Denotes % change from 2020 to 2021 ** Denotes % of Service Revenue Quarter endedMay 1, 2021 as compared to the quarter endedMay 2, 2020 •Gross profit decreased by$0.9 million , partially as a result of lower revenues. Gross profit as a percentage of total revenue ("gross margin") increased by 330 basis points. Our gross margin benefited significantly from a favorable mix of customers and products, as well as a$6.8 million benefit from the CEWS program which we do not expect to continue at this level. Due to the impact of COVID-19 and related restrictions on sales and marketing activities described in "Overview" above, we continue to see a higher proportion of our revenue consisting 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 decreased by$4.3 million . Gross profit on products as a percentage of product revenue ("product gross margin") increased by 410 basis points, primarily due to a favorable mix of customers and products, as described above, continued product cost reductions and a$4.2 million benefit from the CEWS program, partially offset by market-based price compression we encountered during the period. •Gross profit on services increased by$3.4 million . Gross profit as a percentage of services revenue ("services gross margin") decreased by 100 basis points, 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 and a$2.6 million benefit from the CEWS program. Six months endedMay 1, 2021 as compared to the six months endedMay 2, 2020 •Gross profit decreased by$13.6 million largely due to lower revenues. Gross margin increased by 300 basis points, as our gross margin benefited significantly from product cost reductions, a favorable mix of customers and product lines that we believe to be a short-term effect due to COVID-19 related factors and a$6.8 million benefit from the CEWS program, partially offset by a reduction in our services gross margin. •Gross profit on products decreased by$20.4 million . Product gross margin increased by 390 basis points, primarily due to product cost reductions, a favorable mix of customers and product lines as described above and a$4.2 million benefit from the CEWS program, partially offset by market-based price compression we encountered during the period. 32 -------------------------------------------------------------------------------- •Gross profit on services increased by$6.8 million . Services gross margin decreased by 160 basis points, 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 and a$2.6 million benefit from the CEWS program. Operating Expense Currency Fluctuations Approximately 42.7% and 47.3% of our operating expense was non-U.S. Dollar-denominated during the second quarter and first six months of fiscal 2021, respectively, including expenses in Canadian Dollars, Indian Rupees and British Pounds. During the second quarter of fiscal 2021, as compared to the second quarter of fiscal 2020, and the first six months of fiscal 2021, as compared to the first six months of fiscal 2020, theU.S. Dollar fluctuated against these currencies. Consequently, our operating expense reported inU.S. Dollars slightly increased by approximately$3.4 million , or 1.2%, and$4.8 million , or 0.9%, respectively. CEWS Benefits CEWS benefits, recorded to the particular line item within operating expense in our Condensed Consolidated Statement of Operations to which the activity relates, were$33.6 million in the second quarter and first six months of fiscal 2021, net of certain fees. For further information relating to our receipt of amounts under the CEWS program, see Note 4 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report. The component elements that comprise each of our operating expense categories in the table below are set forth in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our 2020 Annual Report. The table below sets forth the changes in operating expense for the periods indicated (in thousands, except percentage data): Quarter Ended Six Months Ended May 1, 2021 May 2, 2020 %* May 1, 2021 May 2, 2020 %* Research and development$ 110,246 $ 131,530 (16.2) %$ 242,987 $ 262,430 (7.4) % %** 13.2 % 14.7 % 15.3 % 15.2 % Selling and marketing 110,387 101,214 9.1 % 207,665 208,280 (0.3) % %** 13.2 % 11.3 % 13.1 % 12.1 % General and administrative 43,635 42,030 3.8 % 83,628 84,498
(1.0) %
%** 5.2 % 4.7 % 5.3 % 4.9 %
Amortization of intangible assets 6,019 5,839 3.1 % 11,929 11,692 2.0 %
%** 0.7 % 0.7 % 0.7 % 0.7 %
Significant asset impairments and
restructuring costs 8,209 3,811 115.4 % 14,076 8,283 69.9 %
%** 1.0 % 0.4 % 0.9 % 0.4 %
Acquisition and integration costs 294 1,414 (79.2) % 601 3,233 (81.4) %
%** - % 0.2 % - % 0.2 %
Total operating expenses $ 278,790 $ 285,838 (2.5) %$ 560,886 $ 578,416 (3.0) % %** 33.4 % 32.0 % 35.3 % 33.5 %
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* Denotes % change from 2020 to 2021 ** Denotes % of Total Revenue Quarter endedMay 1, 2021 as compared to the quarter endedMay 2, 2020 •Research and development expense was adversely affected by$0.8 million as a result of foreign exchange rates, primarily due to fluctuations in theU.S. Dollar in relation to the Canadian Dollar. Including the effect of foreign exchange rates, net of hedging, research and development expense decreased by$21.3 million . This decrease primarily 33 -------------------------------------------------------------------------------- reflects$28.9 million received for CEWS, partially offset by increases in compensation costs primarily driven by increases in headcount. •Selling and marketing expense was adversely affected by$2.2 million as a result of foreign exchange rates, primarily due to fluctuations in theU.S. Dollar in relation to the Euro. Including the effect of foreign exchange rates, sales and marketing expenses increased by$9.2 million . This increase reflects increases in compensation costs primarily driven by increases in headcount, and professional services, partially offset by decreases in travel and entertainment costs due to restrictions on travel as a result of COVID-19 and$2.6 million received for CEWS. •General and administrative expense was adversely affected by$0.5 million as a result of foreign exchange rates, primarily due to fluctuations in theU.S. Dollar in relation to the Euro. Including the effect of foreign exchange rates, general and administrative expense increased by$1.6 million primarily as a result of legal fees, partially offset by$2.2 million received for CEWS and reduced bad debt expense. •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 certain business processes. •Acquisition and integration costs primarily reflect reduced acquisition compensation associated with a three-year earn-out arrangement related to the acquisition ofDonRiver Holdings, LLC ("Don River ") in fiscal 2018. Six months endedMay 1, 2021 as compared to the six months endedMay 2, 2020 •Research and development expense was adversely affected by$0.5 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. Including the effect of foreign exchange rates, net of hedging, research and development expenses decreased by$19.4 million . This decrease primarily reflects$28.9 million received for CEWS, partially offset by increases in compensation costs primarily driven by increases in headcount. •Selling and marketing expense was adversely affected by$3.6 million as a result of foreign exchange rates, primarily due to fluctuations in theU.S. Dollar in relation to the Euro. Including the effect of foreign exchange rates, sales and marketing expense decreased by$0.6 million . This decrease primarily reflects decreases in travel and entertainment costs due to restrictions on travel as a result of COVID-19 and$2.6 million received for CEWS, partially offset by increases in compensation costs primarily driven by increases in headcount. •General and administrative expense was adversely affected by$0.7 million as a result of foreign exchange rates, primarily due to a weakerU.S. Dollar in relation to the Euro. Including the effect of foreign exchange rates, general and administrative expenses decreased by$0.9 million . This decrease primarily reflects reduced bad debt expense, decreases in travel and entertainment costs due to restrictions on travel as a result of COVID-19 and$2.2 million received for CEWS, partially offset by increased legal fees. •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 in fiscal 2018 and other fees related to the acquisition ofCentina 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): 34 --------------------------------------------------------------------------------
Quarter Ended Six Months Ended
May 1, 2021 May 2, 2020 %* May 1, 2021 May 2, 2020 %*
Interest and other income (loss),
net $ (1,274) $ (2,665) (52.2) % $ (2,395) $ 981 (344.1) %
%** (0.2) % (0.3) % (0.2) % 0.1 %
Interest expense $ 7,785 $ 7,860 (1.0) % $ 15,145 $ 16,675 (9.2) %
%** 0.9 % 0.9 % 1.0 % 1.0 %
Loss on extinguishment and
modification of debt $ - $ - - % $ - $ 646 (100.0) %
%** - % - % - % - %
Provision for income taxes $ 21,453 $ 25,308 (15.2) % $ 33,419 $ 35,122 (4.8) %
%** 2.6 % 2.8 % 2.1 % 2.0 %
_____________________________________
* Denotes % change from 2020 to 2021 ** Denotes % of Total Revenue Quarter endedMay 1, 2021 as compared to the quarter endedMay 2, 2020 •Interest and other income (loss), net increased by$1.4 million , primarily reflecting 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 remained relatively unchanged. •Provision for income taxes decreased by$3.9 million , primarily due to an increased deduction for foreign-derived intangible income for the second quarter of fiscal 2021. The effective tax rate for the second quarter of 2021 was lower as compared to the second quarter of fiscal 2020, primarily due to an increased deduction for foreign-derived intangible income and a decrease in the foreign effective tax rate. Six months endedMay 1, 2021 as compared to the six months endedMay 2, 2020 •Interest and other income, net decreased by$3.4 million , 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 by$1.5 million , 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. •Provision for income taxes decreased by$1.7 million , primarily due to an increased deduction for foreign-derived intangible income for the first six months of fiscal 2021. The effective tax rate for the first six months of fiscal 2021 was lower as compared to the first six months of fiscal 2020, primarily due to an increased deduction for foreign-derived intangible income and a decrease in the foreign effective tax rate.
Segment Profit (Loss)
The table below sets forth the changes in our segment profit (loss) for the respective periods (in thousands, except percentage data):
35
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Quarter Ended Six Months Ended
May 1, 2021 May 2, 2020 %* May 1, 2021 May 2, 2020 %*
Segment profit (loss):
Networking Platforms $ 211,412 $ 210,987 0.2 % $ 367,843 $ 379,256 (3.0) %
Platform Software and Services $ 36,506 $ 21,668 68.5 % $ 64,166 $ 50,619 26.8 %
Blue Planet Automation Software
and Services $ 5,688 $ (4,399) 229.3 % $ 3,254 $ (7,512) 143.3 %
Global Services $ 48,567 $ 53,540 (9.3) % $ 92,060 $ 99,068 (7.1) %
_____________________________________
* Denotes % change from 2020 to 2021
Segment profit (loss) includes CEWS benefits of
Quarter ended
•Networking Platforms segment profit increased by$0.4 million , primarily due to CEWS benefit of$29.7 million and improved gross margin, offset by lower sales volume as described above and higher research and development costs. •Platform Software and Services segment profit increased by$14.8 million , primarily due to higher sales volume, services margin and a CEWS benefit of$2.5 million . •Blue Planet Automation Software and Services segment profit increased by$10.1 million , primarily due to higher sales volume, higher gross margin on product sales and a CEWS benefit of$1.2 million , partially offset by lower gross margin on software-related services. •Global Services segment profit decreased by$5.0 million , primarily due to reduced gross margin, as described above, partially offset by a CEWS benefit of$2.3 million .
Six months ended
•Networking Platforms segment profit decreased by$11.4 million , primarily due to lower sales volume as described above and higher research and development costs, partially offset by a CEWS benefit of$29.7 million and improved gross margin. •Platform Software and Services segment profit increased by$13.5 million , primarily due to higher sales volume, a CEWS benefit of$2.5 million and improved gross margin as described above. •Blue Planet Automation Software and Services segment profit increased by$10.8 million , primarily due to higher sales volume, higher gross margin on product sales and a CEWS benefit of$1.2 million , partially offset by lower gross margin on software-related services. •Global Services segment profit decreased by$7.0 million , primarily due to reduced gross margin as described above, partially offset by higher sales volume and a CEWS benefit of$2.3 million . Liquidity and Capital Resources Overview. For the six months endedMay 1, 2021 , we generated$217.7 million of cash in operating activities, which included$36.5 million of cash from a CEWS benefit. Our net income (adjusted for non-cash charges) of$279.4 million exceeded our working capital requirements of$61.7 million . For additional details, see "Cash Provided By Operating Activities" below. For further information relating to our receipt of amounts under the CEWS program, see Note 4 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report. Cash, cash equivalents and investments increased by$125.0 million during the first six months of fiscal 2021. The cash from operations above was partially offset by the following items: (i) cash used to fund our investing activities for capital expenditures totaling$51.7 million ; (ii) cash used for stock repurchases under our stock repurchase program of$38.5 million ; and (iii) stock repurchases on vesting of our stock unit awards to employees relating to tax withholding of$27.9 million . 36 --------------------------------------------------------------------------------
Proceeds from the issuance of equity under our employee stock purchase plan
provided
May 1, October 31, Increase
2021 2020 (decrease)
Cash and cash equivalents $ 1,202,974 $ 1,088,624 $ 114,350
Short-term investments in marketable debt securities 151,816 150,667 1,149
Long-term investments in marketable debt securities 91,715 82,226 9,489
Total cash and cash equivalents and investments in
marketable debt securities $ 1,446,505 $ 1,321,517 $ 124,988
Principal Sources of Liquidity. Our principal sources of liquidity on hand
include our cash, cash equivalents and investments, which as of May 1, 2021
totaled $1.4 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 May 1, 2021 , letters of
credit totaling $84.0 million were collateralized by our ABL Credit Facility.
There were no borrowings outstanding under the ABL Credit Facility as of May 1,
2021 .
Foreign Liquidity. The amount of cash, cash equivalents, and short-term
investments held by our foreign subsidiaries was $120.4 million as of May 1,
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 $39.4
million under this program during the first six months of fiscal 2021, and had
$236.0 million remaining under the current authorization as of May 1, 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 Provided By Operating Activities
The following sections set forth the components of our $217.7 million of cash
provided by operating activities during the first six 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):
37
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Six Months Ended
May 1, 2021
Net income $ 158,465
Adjustments for non-cash charges:
Depreciation of equipment, building, furniture and fixtures, and amortization of leasehold improvements
47,295
Share-based compensation costs 40,499
Amortization of intangible assets 18,517
Deferred taxes (9,606)
Provision for inventory excess and obsolescence 10,402
Provision for warranty 7,937
Other 5,928
Net income (adjusted for non-cash charges) $ 279,437
Working Capital
We used $61.7 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
May 1, 2021
Cash used in accounts receivable $ (180)
Cash used in inventories (66,934)
Cash used in prepaid expenses and other
(8,565)
Cash used in accounts payable, accruals and other obligations
(30,108)
Cash provided by deferred revenue
45,482
Cash used in operating lease assets and liabilities, net
(1,473)
Total cash used for working capital
$ (61,778)
As compared to the end of fiscal 2020:
•Cash used in accounts receivable was not material during the first six months of fiscal 2021; •The$66.9 million of cash used in inventories during the first six 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$8.6 million of cash used in prepaid expense and other during the first six months of fiscal 2021 primarily reflects increases in foreign currency forward contracts and CEWS receivable of$3.9 million , partially offset by a reduction in contract assets and other receivables; •The$30.1 million of cash used in accounts payable, accruals and other obligations during the first six 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$45.5 million of cash provided by deferred revenue during the first six months of fiscal 2021 represents an increase in advanced payments received from customers prior to revenue recognition; and •The$1.5 million of cash used in operating lease assets and liabilities, net, during the first six months of fiscal 2021 represents cash paid for operating lease payments in excess of operating lease costs. For more details, see Note 15 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report. Our days sales outstanding ("DSOs") for the first six months of fiscal 2021 were 90 days, and our inventory turns for the first six months of fiscal 2021 were 3.3. The calculation of DSOs includes accounts receivables, net and contract assets for unbilled receivables, net included in prepaid expenses and other. 38 -------------------------------------------------------------------------------- Cash Paid for Interest The following table sets forth the cash paid for interest during the period (in thousands): Six Months Ended May 1, 2021 Term Loan due September 28, 2025(1) $ 6,547 Interest rate swaps(2) 4,995 ABL Credit Facility(3) 979 Finance leases 2,428 Cash paid during period $ 14,949 (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 2021, the interest rate on the 2025 Term Loan was 1.86%. (2) The interest rate swaps fix the LIBOR rate for$350.0 million of the 2025 Term Loan at 2.957% throughSeptember 2023 . (3) During the first six months of fiscal 2021, we utilized the ABL Credit Facility to collateralize certain standby letters of credit and paid$1.0 million in commitment fees, interest expense and other administrative charges relating to the ABL Credit Facility. Contractual Obligations There have been no material changes to our contractual obligations sinceOctober 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 sinceOctober 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
39
--------------------------------------------------------------------------------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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