Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

76K characters. Original on sec.gov · Markdown

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, operational matters including the expansion of manufacturing capacity and accumulation of inventory, 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,” “would,” “can,” “should,” “could,” “expects,” “future,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “projects,” “targets,” “prepare,” 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 2022, which we filed with the Securities and Exchange Commission (the “SEC”) on December 16, 2022 (our “2022 Annual Report”). However, we operate in a very competitive and dynamic environment and new risks and uncertainties emerge, are identified or become apparent from time to time and therefore may not be identified in this report. We cannot predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this report. You should be aware that the forward-looking statements contained in this report are based on our current views and assumptions. We undertake no obligation to revise or to update any forward-looking statements made in this report to reflect events or circumstances after the date hereof or to reflect new information or the occurrence of unanticipated events, except as required by law. The forward-looking statements in this report are intended to be subject to protection afforded by the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Unless the context requires otherwise, references in this report to “Ciena,” the “Company,” “we,” “us,” and “our” refer to Ciena Corporation and its consolidated subsidiaries.

Overview

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 in Item 8 of Part II of our 2022 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 support the delivery of video, data, and voice traffic over core, metro, aggregation, and

access communications networks. Our solutions are used globally by communications service providers, cable and multiservice operators, Web-scale providers, submarine network operators, governments, and enterprises across multiple industry verticals. Our portfolio is designed to enable the Adaptive Network, which is our vision for a network end state that leverages a programmable and scalable network infrastructure, driven by software control and automation capabilities, that are informed by analytics and intelligence. 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 our Manage, Control and Plan (“MCP”) applications that deliver advanced multi-layer domain control and operations. Through our Blue Planet Software we also enable complete service lifecycle management automation with productized open source software (OSS) and service assurance solutions that help our customers to achieve closed loop automation across multi-vendor and multi-domain environments.

Order Volumes

From the second quarter of fiscal 2021 through the third quarter of fiscal 2022, we received an unprecedented volume of orders for our products and services. Our quarterly order volumes during this period significantly exceeded our revenue and historical order volumes, with concentration of orders among certain existing Web-scale and North America-based service provider customers. We believe some portion of these orders reflected customer acceleration of future orders due to lengthened lead times or the implementation of security of supply strategies to address the supply constraints described below. We also believe some portion of these orders reflected pre-pandemic design wins for which orders were delayed due to the dynamics of the COVID-19 pandemic. Our order volumes began to moderate in the fourth quarter of fiscal 2022. We have continued to experience reduced orders relative to revenue in the first nine months of fiscal 2023 and order volumes lower than those received during the second quarter of fiscal 2021 through the third quarter of fiscal 2022. We believe this reduction has been in part due to customers no longer needing to place significant advanced orders as supply chain conditions and lead times have improved. However, over the longer term, we continue to believe that certain trends and shifts in business and consumer behaviors, including enterprise and consumer cloud network adoption, 5G, high-definition video, generative AI, and network operator focus on resilience and automation, represent positive, long-term opportunities for our business.

Backlog and Order Delivery Timing

Historically, a meaningful portion of our quarterly revenue was generated from customer orders received during that same quarter (which we refer to as “book to revenue”) and was therefore less predictable and subject to fluctuation. As a result of elevated order volumes in recent prior periods and the supply chain constraints described below, however, we generated a significant backlog of customer orders, and, more recently, our revenue has been more significantly impacted by availability of supply, as well as customer delivery deferrals of existing backlog. Our backlog grew from $1.2 billion at the end of fiscal 2020 to $4.2 billion at the end of fiscal 2022. As supply chain conditions have begun to improve and we have been able to increase shipment volumes and reduce lead times, our backlog has decreased during the first nine months of fiscal 2023. We expect our backlog to continue to reduce during the remainder of fiscal 2023 as supply chain conditions improve and customers place fewer advanced orders. As that happens, we expect our reliance upon securing quarterly book to revenue orders to grow and those orders to represent a more typical composition of our quarterly revenue over time.

The timing and degree to which we fulfill our backlog will have a significant impact on our rate of revenue growth and can be affected by factors outside of our control, including the supply chain conditions and availability of components described below, and customer readiness and willingness to receive shipment against existing orders. During the first nine months of fiscal 2023, certain customers, including communications service providers and cable and multiservice operators in North America and Web-scale providers, that had earlier placed significant advanced orders, rescheduled deliveries for a portion of such orders, including in some cases until after the end of fiscal 2023. We believe that this was the result of a number of factors, including their significant order levels during a period of supply chain constraints, the recent, rapid improvement in our delivery lead times, and their inventory levels. Accordingly, our results for a particular period can be difficult to predict. As a result of these and other factors, the timing of our fulfillment of backlog could cause some volatility in our results of operations and our backlog should not necessarily be viewed as an accurate indicator of revenue for any particular period. See the risk factors captioned “Our backlog may not be an accurate indicator of our level and timing of future revenues.” and “Our revenue, gross margin, and operating results can fluctuate significantly and unpredictably from quarter to quarter.” in Item 1A of Part II of this report for further discussion of risks related to our backlog and order delivery timing.

Supply Chain Constraints

In the face of 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, experienced

substantial constraint and disruption in recent prior periods. As a result, we experienced significant component shortages, extended lead times, increased costs, and unexpected cancellation or delay of previously committed supply of key components across our supplier base. While reliability of supply has improved, and the majority of our suppliers have been able to deliver by their promised, though extended, lead times, we have in the past experienced and could in the future experience volatility from suppliers of integrated circuit components that represent a small fraction of our overall materials, but which are essential for delivering finished products. This volatility can result in receiving fewer components than expected in a given period, which can adversely impact our revenue. We expect that the extended lead times and elevated supply chain costs we have experienced will persist at least through the first half of fiscal 2024. We expect these supply conditions to continue to impact 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. It is unclear when the supply environment will become less volatile and what impacts it will have on our business and results of operations in future periods.

To mitigate the impact of these supply conditions on our business and customers, we have placed advanced orders for inventory and accumulating components that are in available supply. We believe that this approach positions us to produce finished goods more quickly when supply constraints ease for those components in shorter supply. As a result of these measures, as well as the rescheduling of deliveries by some of our customers as discussed above, our inventory increased from $946.7 million at the end of fiscal 2022 to $1.2 billion at the end of the third quarter of fiscal 2023. We have also implemented additional mitigation strategies, including expanding manufacturing capacity, implementing multi-sourcing activities, qualifying alternative parts, and redesigning products, and expect, over time, to realize certain benefits of these activities. Together with increased costs of supply, these mitigation strategies have impacted, and we expect them to continue to impact, our result of operations and cash from operations. See “Risk Factors” in Item 1A of Part II of this report for further discussion of risks related to our supply chain and our mitigation activities.

For additional information regarding our business, industry, market opportunity, competitive landscape, and strategy, see our 2022 Annual Report.

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. See Note 3 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.

Revenue

Currency Fluctuations

During the third quarter and first nine months of fiscal 2023, approximately 14.2% and 15.0% of our revenue was non-U.S. Dollar-denominated, respectively, primarily including sales in Euros, Canadian Dollars, and British Pounds. During the third quarter of fiscal 2023 as compared to the third quarter of fiscal 2022, and the first nine months of fiscal 2023 as compared to the first nine months of fiscal 2022, the U.S. Dollar fluctuated against these currencies. Consequently, our revenue reported in U.S. Dollars slightly increased by approximately $1.1 million, or 0.1%, as compared to the third quarter of fiscal 2022, and our revenue reported in U.S. Dollars was adversely impacted by approximately $5.6 million, or 0.2%, as compared to the first nine months of fiscal 2022.

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								Nine Months Ended
	July 29, 2023			July 30, 2022			%*		July 29, 2023			July 30, 2022			%*
Revenue:
Networking Platforms
Converged Packet Optical	$	718,997		$	563,837		27.5	%	$	2,239,180		$	1,730,066		29.4	%
%**	67.3		%	65.0		%			68.7		%	65.0		%
Routing and Switching	127,563			100,741			26.6	%	377,378			295,638			27.6	%
%**	12.0		%	11.6		%			11.6		%	11.1		%
Total Networking Platforms	846,560			664,578			27.4	%	2,616,558			2,025,704			29.2	%
%**	79.3		%	76.6		%			80.3		%	76.1		%

Platform Software and Services	78,880			63,483			24.3	%	221,768			205,557			7.9	%
%**	7.4		%	7.3		%			6.8		%	7.7		%

Blue Planet Automation Software and Services	13,167			17,342			(24.1)	%	49,139			55,334			(11.2)	%
%**	1.2		%	2.0		%			1.5		%	2.1		%

Global Services
Maintenance Support and Training	72,887			72,760			0.2	%	213,938			219,270			(2.4)	%
%**	6.8		%	8.4		%			6.6		%	8.3		%
Installation and Deployment	46,840			38,704			21.0	%	120,901			120,504			0.3	%
%**	4.4		%	4.4		%			3.7		%	4.5		%
Consulting and Network Design	9,552			11,114			(14.1)	%	34,758			35,282			(1.5)	%
%**	0.9		%	1.3		%			1.1		%	1.3		%
Total Global Services	129,279			122,578			5.5	%	369,597			375,056			(1.5)	%
%**	12.1		%	14.1		%			11.4		%	14.1		%

Total revenue	$	1,067,886		$	867,981		23.0	%	$	3,257,062		$	2,661,651		22.4	%

Denotes % change from fiscal 2022 to fiscal 2023

** Denotes % of total revenue

Quarter ended July 29, 2023 as compared to the quarter ended July 30, 2022

Networking Platforms segment revenue** increased by $182.0 million, reflecting product line sales increases of $155.2 million of our Converged Packet Optical products and $26.8 million of our Routing and Switching products.

◦Converged Packet Optical sales increased, primarily reflecting sales increases of $120.0 million of our 6500 Reconfigurable Line System (RLS) products, primarily to Web-scale providers and $61.8 million of our 6500 Packet-Optical Platform, primarily to enterprise customers and communications service providers, partially offset by a sales decrease of $27.4 million of our Waveserver® products, primarily to Web-scale providers.

Routing and Switching sales increased, primarily reflecting sales increases of $29.6 million of our 3000 and 5000 families of service delivery and aggregation switches, primarily to cable and multiservice operators, enterprise customers and communications service providers, and $6.8 million of our 8100 Coherent IP networking platforms, primarily to communications service providers, partially offset by a sales decrease of $16.5 million of our virtualization software primarily to communications service providers.
Platform Software and Services segment revenue** increased by $15.4 million, primarily reflecting a sales increase of $14.8 million in our software maintenance services, primarily for our MCP software platform, to communications service providers.
Blue Planet Automation Software and Services** segment revenue decreased by $4.2 million reflecting sales decreases of $2.5 million in professional software services and $1.7 million in software platforms, both primarily to communications service providers.
Global Services** segment revenue increased by $6.7 million, primarily reflecting a sales increase of $8.1 million of our installation and deployment services, partially offset by a sales decrease of $1.6 million of our consulting and network design services.

Nine months ended July 29, 2023 as compared to the nine months ended July 30, 2022

Networking Platforms segment revenue** increased by $590.8 million, reflecting product line sales increases of $509.1 million of our Converged Packet Optical products and $81.7 million of our Routing and Switching products.

◦Converged Packet Optical sales increased, primarily reflecting sales increases of $245.5 million of our 6500

Packet-Optical Platform, primarily to communications service providers and enterprise customers, $240.3 million of our 6500 RLS products, primarily to Web-scale providers, and $19.7 million of our Waveserver® products, primarily to enterprise customers and communications service providers, partially offset by decreased sales to cable and multiservice operators.

◦Routing and Switching sales increased, primarily reflecting sales increases of $42.6 million of our 3000 and 5000 families of service delivery and aggregation switches, primarily to cable and multiservice operators and enterprise customers, $16.0 million of our virtualization software and $14.3 million of our 8100 Coherent IP networking platforms, both primarily to communications service providers.

Platform Software and Services segment revenue** increased by $16.2 million, primarily reflecting a sales increase of $34.8 million in our software maintenance services, primarily for our MCP software platform, to communications service providers, partially offset by a sales decrease of $18.6 million in sales of software platforms, primarily due to decreased sales of our MCP software platform.
Blue Planet Automation Software and Services** segment revenue decreased by $6.2 million, primarily reflecting sales decreases of $3.3 million in software platform sales and $2.9 million in professional software services.
Global Services segment revenue** decreased by $5.5 million, primarily reflecting a sales decrease of $5.3 million of our maintenance support and training.

Revenue by Geographic Region

Our operating segments engage in business and operations across three geographic regions: the United States, Canada, the Caribbean and Latin America (“Americas”); Europe, Middle East and Africa (“EMEA”); and Asia Pacific, Japan and India (“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 of the United States, can result in large variations in geographic revenue results in any particular period. The increase in our Americas region revenue for the quarter and nine months ended July 29, 2023 was primarily driven by increased sales in the United States. The increase in our APAC region revenue for the quarter and nine months ended July 29, 2023 was primarily driven by increased sales in India and Australia. The increase in our EMEA region revenue for the quarter and nine months ended July 29, 2023 was primarily driven by increased sales in the Netherlands.

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								Nine Months Ended
	July 29, 2023			July 30, 2022			%*		July 29, 2023			July 30, 2022			%*
Americas	$	749,479		$	617,366		21.4	%	$	2,308,934		$	1,913,350		20.7	%
%**	70.2		%	71.1		%			70.9		%	71.9		%
EMEA	152,834			124,185			23.1	%	479,053			420,075			14.0	%
%**	14.3		%	14.3		%			14.7		%	15.8		%
APAC	165,573			126,430			31.0	%	469,075			328,226			42.9	%
%**	15.5		%	14.6		%			14.4		%	12.3		%
Total	$	1,067,886		$	867,981		23.0	%	$	3,257,062		$	2,661,651		22.4	%

Denotes % change from fiscal 2022 to fiscal 2023

** Denotes % of total revenue

Quarter ended July 29, 2023 as compared to the quarter ended July 30, 2022

Americas revenue increased by $132.1 million, primarily reflecting sales increases of $124.1 million within our Networking Platforms segment and $10.6 million within our Platform Software and Services segment. These sales increases were partially offset by a sales decrease of $3.6 million within our Blue Planet Automation Software and Services segment. The increase within our Networking Platforms segment reflects product line sales increases of $115.8 million of our Converged Packet Optical products and $8.3 million of our Routing and Switching products. The increase within our Converged Packet Optical product line was primarily related to sales increases of $97.7 million of our 6500 RLS products, primarily to Web-scale providers, and $36.0 million of our 6500 Packet-Optical Platform primarily to communications service providers. These increases were offset by a sales decrease of $16.1 million of our Waveserver® products, primarily to Web-scale providers. The increase within our Routing and Switching product line reflected sales increases of $14.6 million of our 3000 and 5000 families of service delivery and aggregation switches, primarily to enterprise customers and cable and multiservice operators, and $6.6 million of our 8100 Coherent IP networking platforms, primarily to communications service providers. These increases were partially offset by a sales decrease of $16.5 million of our virtualization software, primarily to communications service providers.
EMEA revenue increased by $28.6 million, reflecting sales increases of $19.3 million within our

Networking Platforms segment, $4.3 million within our Global Services segment, $3.7 million within our Platform Software and Services segment, and $1.3 million within our Blue Planet Automation Software and Services segment. The increase within our Networking Platforms segment primarily reflects product line sales increases of $14.9 million of our Routing and Switching product line, primarily related to a sales increase of $13.8 million of our 3000 and 5000 families of service delivery and aggregation switches, primarily to communications service providers.

APAC revenue increased by $39.1 million, primarily reflecting a sales increase of $38.6 million within our

Networking Platforms segment. The increase within our Networking Platforms segment primarily reflects a product line sales increase of $35.0 million of Converged Packet Optical products, which includes a sales increase of $27.5 million of our 6500 Packet-Optical Platform, primarily to enterprise customers.

Nine months ended July 29, 2023 as compared to the nine months ended July 30, 2022

Americas revenue increased by $395.6 million, primarily reflecting sales increases of $400.4 million within our Networking Platforms segment and $10.4 million within our Platform Software and Services segment. These sales increases were partially offset by sales decreases of $9.9 million within our Blue Planet Automation Software and Services segment and $5.4 million within our Global Services segment. Our Networking Platforms segment revenue increase reflects product line sales increases of $344.4 million of Converged Packet Optical products and $56.0 million of Routing and Switching products. Our Converged Packet Optical revenue primarily reflects sales increases of $192.9 million of our 6500 RLS products, primarily to Web-scale providers and $138.9 million of our 6500 Packet-Optical Platform, primarily to communications service providers and enterprise customers. Routing and Switching product line sales primarily reflect sales increases of $22.3 million of our 3000 and 5000 families of service delivery and aggregation switches, primarily to cable and multiservice operators and enterprise customers, $16.0 million of our virtualization software, and $13.1 million of our 8100 Coherent IP networking platforms, both primarily to communications service providers.
EMEA revenue increased by $59.0 million, primarily reflecting sales increases of $45.1 million within our Networking Platforms segment, $8.2 million within our Blue Planet Automation Software and Services segment, and $5.2 million within our Platform Software and Services segment. Our Networking Platforms segment revenue increase primarily reflects product line sales increases of $25.7 million of Converged Packet Optical products and $19.4 million of our Routing and Switching products. Converged Packet Optical revenue primarily reflects a sales increase of $42.9 million of our 6500 RLS products, primarily to Web-scale providers, partially offset by a sales decrease of $15.6 million of our Waveserver® products, primarily to Web-scale providers. Routing and Switching product line sales primarily reflect a sales increase of $16.7 million of our 3000 and 5000 families of service delivery and aggregation switches, primarily to communications service providers.
APAC revenue increased by $140.8 million, primarily reflecting a sales increase of $145.4 million within our

Networking Platforms segment. This sales increase was partially offset by a sales decrease of $4.5 million within our Blue Planet Automation Software and Services segment. Our Networking Platforms segment revenue increase primarily reflects a product line sales increase of $139.1 million of Converged Packet Optical products, including a sales increase of $108.0 million of our 6500 Packet-Optical Platform, primarily to communications service providers and enterprise customers.

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. For example, early stages of new network builds also often include an increased concentration of lower margin “common” equipment, photonics sales and installation services, with the intent to improve margin as we sell channel cards and maintenance services to customers as they add capacity. 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 2022 Annual Report.

The tables below set forth the changes in revenue, cost of goods sold and gross profit for the periods indicated (in thousands, except percentage data):


	Quarter Ended								Nine Months Ended
	July 29, 2023			July 30, 2022			%*		July 29, 2023			July 30, 2022			%*
Total revenue	$	1,067,886		$	867,981		23.0	%	$	3,257,062		$	2,661,651		22.4	%
Total cost of goods sold	618,945			527,202			17.4	%	1,864,492			1,534,904			21.5	%

Gross profit	$	448,941		$	340,779		31.7	%	$	1,392,570		$	1,126,747		23.6	%
%**	42.0		%	39.3		%			42.8		%	42.3		%

Denotes % change from fiscal 2022 to fiscal 2023

** Denotes % of total revenue


	Quarter Ended								Nine Months Ended
	July 29, 2023			July 30, 2022			%*		July 29, 2023			July 30, 2022			%*
Product revenue	$	865,197		$	684,284		26.4	%	$	2,678,242		$	2,109,239		27.0	%
Product cost of goods sold	516,900			434,756			18.9	%	1,559,120			1,259,378			23.8	%

Product gross profit	$	348,297		$	249,528		39.6	%	$	1,119,122		$	849,861		31.7	%
%**	40.3		%	36.5		%			41.8		%	40.3		%

Denotes % change from fiscal 2022 to fiscal 2023

** Denotes % of product revenue


	Quarter Ended								Nine Months Ended
	July 29, 2023			July 30, 2022			%*		July 29, 2023			July 30, 2022			%*
Services revenue	$	202,689		$	183,697		10.3	%	$	578,820		$	552,412		4.8	%
Services cost of goods sold	102,045			92,446			10.4	%	305,372			275,526			10.8	%

Services gross profit	$	100,644		$	91,251		10.3	%	$	273,448		$	276,886		(1.2)	%
% **	49.7		%	49.7		%			47.2		%	50.1		%

Denotes % change from fiscal 2022 to fiscal 2023

** Denotes % of services revenue

Quarter ended July 29, 2023 as compared to the quarter ended July 30, 2022

Gross profit increased by $108.2 million. Gross margin increased by 270 basis points, primarily due to improved manufacturing efficiencies and lower product costs, partially offset by a higher concentration of lower margin “common” equipment and photonics sales.
Gross profit on products increased by $98.8 million. Product gross margin increased by 380 basis points, primarily due to improved manufacturing efficiencies and lower product costs, partially offset by a higher concentration of lower margin product mix as described above.
Gross profit on services** increased by $9.4 million. Services gross margin remained relatively unchanged.

Nine months ended July 29, 2023 as compared to the nine months ended July 30, 2022

Gross profit increased by $265.8 million. Gross margin slightly increased by 50 basis points, primarily due to improved manufacturing efficiencies and lower product costs, partially offset by a higher concentration of lower margin “common” equipment and photonics sales, and lower services margins.
Gross profit on products increased by $269.3 million. Product gross margin increased by 150 basis points, primarily due to improved manufacturing efficiencies and lower product costs, partially offset by a higher concentration of lower margin product mix as described above.
Gross profit on services** decreased by $3.4 million. Services gross margin decreased by 290 basis points, primarily due to lower maintenance support and training revenue, lower margin on certain installation and deployment projects, and losses incurred on certain Blue Planet software service projects. These decreases were partially offset by increased Platform Software services revenue.

Operating Expense

Currency Fluctuations

Approximately 51.8% and 50.1% of our operating expense was non-U.S. Dollar-denominated during the third quarter and first nine months of fiscal 2023, respectively, including expenses in Canadian Dollars, Indian Rupees, and Euros. During the third quarter of fiscal 2023, as compared to the third quarter of fiscal 2022, and during the first nine months of fiscal 2023, as compared to the first nine months of fiscal 2022, the U.S. Dollar primarily strengthened against these currencies. Consequently, our operating expense, net of hedging, reported in U.S. Dollars slightly decreased by approximately $2.8 million, or 0.8%, and $24.6 million, or 2.2%, respectively.

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 2022 Annual Report. The table below sets forth the changes in operating expense for the periods indicated (in thousands, except percentage data):


	Quarter Ended								Nine Months Ended
	July 29, 2023			July 30, 2022			%*		July 29, 2023			July 30, 2022			%*
Research and development	$	189,392		$	150,025		26.2	%	$	561,115		$	457,758		22.6	%
%**	17.7		%	17.3		%			17.2		%	17.2		%
Selling and marketing	118,266			105,880			11.7	%	367,156			344,700			6.5	%
%**	11.1		%	12.2		%			11.4		%	13.0		%
General and administrative	49,349			41,121			20.0	%	151,184			131,191			15.2	%
%**	4.6		%	4.7		%			4.6		%	4.9		%
Significant asset impairments and restructuring costs	4,174			7,692			(45.7)	%	16,625			20,203			(17.7)	%
%**	0.4		%	0.9		%			0.5		%	0.8		%
Amortization of intangible assets	9,487			8,919			6.4	%	26,773			26,757			0.1	%
%**	0.9		%	1.0		%			0.8		%	1.0		%
Acquisition and integration costs	59			35			68.6	%	3,474			598			480.9	%
%**	—		%	—		%			0.1		%	—		%
Total operating expenses	$	370,727		$	313,672		18.2	%	$	1,126,327		$	981,207		14.8	%
%**	34.7		%	36.1		%			34.6		%	36.9		%

Denotes % change from fiscal 2022 to fiscal 2023

** Denotes % of total revenue

Quarter ended July 29, 2023 as compared to the quarter ended July 30, 2022

Research and development expense benefited from $2.9 million as a result of foreign exchange rates, net of hedging, primarily due to a stronger U.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 $39.4 million. This increase

primarily reflects increases in employee headcount and related compensation costs, professional services and technology and related costs. The increase in employee headcount was partially due to our acquisitions of Benu Networks, Inc. (“Benu”) and Tibit Communications, Inc. (“Tibit”).

Selling and marketing expense increased by $12.4 million. This increase primarily reflects increases in employee headcount and related compensation costs.
General and administrative expense increased by $8.2 million. This increase primarily reflects increases in employee headcount and related compensation costs.
Significant asset impairments and restructuring costs** reflects actions that we have taken with respect to our operations, global workforce, and facilities as part of a business optimization strategy to improve gross margin, constrain operating expense, redesign certain business processes, and restructure real estate facilities.
Amortization of intangible assets reflects certain intangible assets having reached the end of their economic lives, partially offset by additional intangibles acquired in connection with our acquisitions of Benu and Tibit during the first quarter of fiscal 2023.
Acquisition and integration costs remained relatively unchanged.

Nine months ended July 29, 2023 as compared to the nine months ended July 30, 2022

Research and development expense benefited from $16.6 million as a result of foreign exchange rates, net of hedging, primarily due to a stronger U.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 $103.4 million. This increase primarily reflects increases in employee headcount and related compensation costs, professional services, and technology and related costs. The increase in employee headcount was partially due to our acquisitions of Benu and Tibit. This increase also reflects the effect of a $4.4 million decrease in benefit from the Evolution of Networking Services through a Corridor in Quebec and Ontario for Research and Innovation (ENCQOR) project grant reimbursement program.
Selling and marketing expense benefited from $6.2 million as a result of foreign exchange rates, primarily due to a stronger U.S. Dollar in relation to the Euro and Canadian Dollar. Including the effect of foreign exchange rates, sales and marketing expense increased by $22.5 million. This increase primarily reflects an increase in professional services, employee headcount and related compensation costs, and travel and entertainment costs.
General and administrative expense benefited from $1.9 million as a result of foreign exchange rates, primarily due

to a stronger U.S. Dollar in relation to the Canadian Dollar and Euro. Including the effect of foreign exchange rates, general and administrative expense increased by $20.0 million. This increase primarily reflects increases in employee headcount and related compensation costs, professional services, and bad debt expense.

Significant asset impairments and restructuring costs reflects actions that we have taken with respect to our operations, global workforce, and facilities as part of a business optimization strategy to improve gross margin, constrain operating expense, redesign certain business processes, and restructure real estate facilities.
Amortization of intangible assets reflects certain intangible assets having reached the end of their economic lives, partially offset by additional intangibles acquired in connection with our acquisitions of Benu and Tibit during the first quarter of fiscal 2023.
Acquisition and integration costs increased by $2.9 million and primarily reflect financial, legal, and accounting advisors and employee-related costs related to our acquisitions of Benu and Tibit.

For more information on our acquisitions, see Note 4 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.

Other Items

The table below sets forth the changes in other items for the periods indicated (in thousands, except percentage data):


	Quarter Ended								Nine Months Ended
	July 29, 2023			July 30, 2022			%*		July 29, 2023			July 30, 2022			%*
Interest and other income, net	$	10,187		$	366		2,683.3	%	$	50,711		$	4,860		943.4	%
%**	1.0		%	—		%			1.6		%	0.2		%
Interest expense	$	24,060		$	12,642		90.3	%	$	63,819		$	33,275		91.8	%
%**	2.3		%	1.5		%			2.0		%	1.3		%


Provision for income taxes	$	34,608		$	4,319		701.3	%	$	89,507		$	21,868		309.3	%
%**	3.2		%	0.5		%			2.7		%	0.8		%

Denotes % change from fiscal 2022 to fiscal 2023

** Denotes % of total revenue

Quarter ended July 29, 2023 as compared to the quarter ended July 30, 2022

Interest and other income, net increased by $9.8 million, primarily resulting from higher interest income on our investments.
Interest expense increased by $11.4 million, primarily due to higher interest rates on our floating rate debt, net of hedging activity, and additional outstanding indebtedness, including the 2030 Term Loan incurred in the first quarter of fiscal 2023. For more information on our short-term and long-term debt, see Note 16 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.
Provision for income taxes** increased by $30.3 million, and the effective tax rate for the third quarter of fiscal 2023 was higher than the effective tax rate for the third quarter of fiscal 2022, both primarily due to the mandatory capitalization of research and development expenses in the third quarter of fiscal 2023, in response to changes in U.S. tax policy.

Nine months ended July 29, 2023 as compared to the nine months ended July 30, 2022

Interest and other income, net increased by $45.9 million, primarily resulting from the remeasurement of our previously held investment in Tibit to fair value, which resulted in a gain on our cost method equity investment of $26.5 million, and higher interest income on our investments. These increases were partially offset by the impact of foreign exchange rates on assets and liabilities denominated in a currency other than the relevant functional currency, net of hedging activity. For more information on our acquisitions, see Note 4 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.
Interest expense increased by $30.5 million, primarily due to higher interest rates on our floating rate debt, net of hedging activity, and additional outstanding indebtedness, including our 2030 Notes issued in the first quarter of fiscal 2022 and the 2030 Term Loan incurred in the first quarter of fiscal 2023. For more information on our short-term and long-term debt, see Note 16 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.
Provision for income taxes** increased by $67.6 million, and the effective tax rate for the first nine months of fiscal 2023 was higher than the effective tax rate for the first nine months of fiscal 2022, both primarily due to the mandatory capitalization of research and development expenses in the first nine months of fiscal 2023, in response to changes in U.S. tax policy.

Segment Profit (Loss)

The table below sets forth the changes in our segment profit (loss) for the periods indicated (in thousands, except percentage data):


	Quarter Ended						Nine Months Ended
	July 29, 2023		July 30, 2022		%*		July 29, 2023		July 30, 2022		%*
Segment profit (loss):
Networking Platforms	$	171,380	$	108,282	58.3	%	$	588,281	$	395,176	48.9	%
Platform Software and Services	$	49,691	$	39,646	25.3	%	$	136,028	$	132,698	2.5	%
Blue Planet Automation Software and Services	$	(12,072)	$	(10,139)	(19.1)	%	$	(30,044)	$	(17,693)	(69.8)	%
Global Services	$	50,550	$	52,965	(4.6)	%	$	137,190	$	158,808	(13.6)	%

Denotes % change from fiscal 2022 to fiscal 2023

Quarter ended July 29, 2023 as compared to the quarter ended July 30, 2022

Networking Platforms segment profit increased by $63.1 million, primarily due to higher sales volume and higher gross margin as described above, partially offset by increased research and development costs.
Platform Software and Services segment profit increased by $10.0 million, primarily due to higher sales volume as described above, partially offset by increased research and development costs.
Blue Planet Automation Software and Services segment loss increased by $1.9 million, primarily due to lower sales volume as described above and increased research and development costs.
Global Services segment profit decreased by $2.4 million, primarily due to lower gross margin, partially offset by higher sales volume as described above.

Nine months ended July 29, 2023 as compared to the nine months ended July 30, 2022

Networking Platforms segment profit increased by $193.1 million, primarily due to higher sales volume and higher gross margin as described above, partially offset by increased research and development costs.
Platform Software and Services segment profit increased by $3.3 million, primarily due to higher software-related services sales volume as described above, partially offset by lower software sales volume, increased research and development costs, and lower gross margin on software-related services.
Blue Planet Automation Software and Services segment loss increased by $12.4 million, primarily due to lower gross margin on software-related services, lower sales volume, and increased research and development costs.
Global Services segment profit decreased by $21.6 million, primarily due to lower maintenance support and training revenue and lower gross margin on certain installation and deployment projects as described above.

Liquidity and Capital Resources

Overview. For the nine months ended July 29, 2023, we used $27.1 million of cash in operating activities as our working capital requirements of approximately $352.6 million exceeded our net income (adjusted for non-cash charges) of approximately $325.5 million. For additional details, see “Cash Used In Operating Activities” below.

Despite our cash used in operations, our total cash, cash equivalents, and investments increased by $97.1 million during the first nine months of fiscal 2023. This increase principally reflects proceeds from the issuance of the 2030 Term Loan, which provided $492.5 million in cash, net of paid debt issuance costs, and proceeds from the issuance of equity under our employee stock purchase plan which provided $31.3 million in cash during the nine months ended July 29, 2023. In addition to the cash used in operations, uses of cash also included the following items: (i) cash used for the acquisition of businesses of $230.0 million; (ii) cash used to fund our investing activities for capital expenditures totaling $83.4 million; (iii) cash used for stock repurchases under our stock repurchase program of $57.7 million; and (iv) stock repurchases on vesting of our stock unit awards to employees relating to tax withholding of $29.8 million.

See Notes 4, 16 and 20 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, cash equivalents and investments in marketable debt securities for the periods indicated (in thousands):


	July 29, 2023		October 29, 2022		Increase (decrease)
Cash and cash equivalents	$	1,117,922	$	994,352	$	123,570
Short-term investments in marketable debt securities	141,843		153,989		(12,146)
Long-term investments in marketable debt securities	21,098		35,385		(14,287)
Total cash, cash equivalents, and investments in marketable debt securities	$	1,280,863	$	1,183,726	$	97,137

Principal Sources of Liquidity. Our principal sources of liquidity on hand include our cash, cash equivalents, and investments, which, as of July 29, 2023 totaled $1.3 billion, as well as the senior secured asset-backed revolving credit facility to which we and certain of our subsidiaries are parties (the “ABL Credit Facility”). The ABL Credit Facility provides for a total commitment of $300.0 million with a maturity date of September 28, 2025, as modified on February 10, 2023. See Note 17 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report. 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 July 29, 2023, letters of credit totaling $68.2 million were collateralized by our ABL Credit Facility. There were no borrowings outstanding under the ABL Credit Facility as of July 29, 2023.

Foreign Liquidity. Cash, cash equivalents, and short-term investments held by our foreign subsidiaries was $287.8 million as of July 29, 2023. 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 $36.0 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. During the third quarter of fiscal 2023, we repurchased an additional $61.2 million of our common stock under the stock repurchase program, and $438.8 million remained under the current repurchase authorization as of July 29, 2023. 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 20 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 opportunities to enhance our liquidity and provide further operational and strategic flexibility.

Cash Used In Operating Activities

The following sections set forth the components of our $27.1 million of cash used in operating activities during the first nine months of fiscal 2023:

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):


	Nine Months Ended
	July 29, 2023
Net income	$	163,628
Adjustments for non-cash charges:


Depreciation of equipment, building, furniture and fixtures, and amortization of leasehold improvements	69,213
Share-based compensation expenses	95,405
Amortization of intangible assets	36,274
Deferred taxes	(64,005)
Provision for inventory excess and obsolescence	18,767
Provision for warranty	18,860
Gain on cost method equity investments, net	(26,368)
Other	13,694
Net income (adjusted for non-cash charges)	$	325,468

Working Capital

We used $352.6 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):


	Nine Months Ended
	July 29, 2023
Cash used in accounts receivable	$	(80,399)
Cash used in inventories	(262,345)
Cash provided by prepaid expenses and other	72,062
Cash used in accounts payable, accruals, and other obligations	(133,880)
Cash provided by deferred revenue	57,547
Cash used in operating lease assets and liabilities, net	(5,593)
Total cash used for working capital	$	(352,608)

As compared to the end of fiscal 2022:

The $80.4 million of cash used in accounts receivable during the first nine months of fiscal 2023 reflects increased sales volume at the end of the third quarter of fiscal 2023;

*•*The $262.3 million of cash used in inventories during the first nine months of fiscal 2023 primarily related to increases in (i) raw materials to mitigate the impact on our business and customers from supply chain constraints in recent prior periods and a global market shortage of semiconductor components and (ii) finished goods inventories from planned fulfillment of customer advance orders for which some deliveries have since been rescheduled as described in “Overview” above;

The $72.1 million of cash provided by prepaid expense and other during the first nine months of fiscal 2023 primarily reflects lower contract assets for unbilled receivables, lower capitalized contract acquisition costs, and other non-trade receivables;
The $133.9 million of cash used in accounts payable, accruals, and other obligations during the first nine months of fiscal 2023 primarily reflects the timing of payments to suppliers;
The $57.5 million of cash provided by deferred revenue during the first nine months of fiscal 2023 represents an increase in advanced payments received on multi-year maintenance contracts from customers prior to revenue recognition; and
The $5.6 million of cash used in operating lease assets and liabilities, net, during the first nine months of fiscal 2023 represents cash paid for operating lease payments in excess of operating lease costs.

Our days sales outstanding (“DSOs”) decreased from 97 for the first nine months of fiscal 2022 to 94 for the first nine months of fiscal 2023. The calculation of DSOs includes accounts receivables, net and contract assets for unbilled receivables, net included in prepaid expenses and other. Our inventory turns decreased from 2.0 for the first nine months of fiscal 2022 to 1.7 for the first nine months of fiscal 2023 due to the increases in inventory as described in “Overview” above.

Cash Paid for Interest, Net

The following table sets forth the cash paid for interest, net, during the period (in thousands):


	Nine Months Ended
	July 29, 2023

Term Loan due September 28, 2025(1)	$	31,913
Term Loan due January 31, 2030(2)	18,448
Senior Notes due January 31, 2030(3)	8,000
Interest rate swaps(4)	(6,266)
ABL Credit Facility(5)	1,532
Finance leases	3,082
Cash paid during period	$	56,709

(1) Interest on the 2025 Term Loan is payable periodically based on the interest period selected for borrowing. The 2025 Term Loan bore interest at LIBOR for the chosen borrowing period plus a spread of 1.75% subject to a minimum LIBOR rate of 0.00% through its amendment on January 19, 2023. The 2025 Term loan now bears interest at SOFR for the chosen borrowing

period plus a spread of 1.75% subject to a minimum SOFR rate of 0.00%. At the end of the third quarter of fiscal 2023, the interest rate on the 2025 Term Loan was 7.00%.

(2) Interest on the 2030 Term Loan is payable periodically based on the interest period selected for borrowing. The 2030 Term Loan bears interest at SOFR for the chosen borrowing period plus a spread of 2.50% subject to a minimum SOFR rate of 0.00%. At the end of the third quarter of fiscal 2023, the interest rate on the 2030 Term Loan was 7.75%.

(3) The 2030 Notes bear interest at a rate of 4.00% per annum and mature on January 31, 2030. Interest is payable on the 2030 Notes in arrears on January 31 and July 31 of each year.

(4) The interest rate swaps and the basis swap fix the SOFR rate for $350.0 million of the 2025 Term Loan at 2.883% through September 2023. In addition, the 2028 interest rate swaps fix the SOFR rate for $350.0 million of the 2030 Term Loan at 3.47% through January 2028.

(5) During the first nine months of fiscal 2023, we utilized the ABL Credit Facility to collateralize certain standby letters of credit and paid $1.5 million in commitment fees, interest expense, and other administrative charges relating to the ABL Credit Facility.

For additional information about our debt, ABL Credit Facility and interest rate swaps, see Notes 15, 16 and 17 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.

Contractual Obligations

Our contractual obligations have not changed materially since October 29, 2022, except for the items listed below. For a summary of our contractual obligations, see Item 7 of Part II of the 2022 Annual Report.

Purchase Order Obligations. As of July 29, 2023 we had $1.7 billion in outstanding purchase order commitments to our contract manufacturers and component suppliers for inventory. In certain instances, we are permitted to cancel, reschedule, or adjust these orders. Consequently, only a portion of this amount relates to firm, non-cancelable, and unconditional obligations.

Debt. As of July 29, 2023, we had $498.8 million outstanding principal associated with our 2030 Term Loan, with $5.0 million payable within 12 months. Interest on the 2030 Term Loan and payments due under the interest rate swaps are variable and calculated using the rate in effect on the balance sheet date. Future interest payments associated with the 2030 Term Loan total $246.8 million, with $39.3 million payable within 12 months. For additional information about the 2030 Term Loan, see Note 16 to our Condensed Consolidated Financial Statements included in Item I of Part I of this report.

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. 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.

Our critical accounting policies and estimates have not changed materially since October 29, 2022. 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 2022 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.

Previous: Item 1. Financial Statements · Next: Item 3. Quantitative and Qualitative Disclosures About Market Risk