2006 annual report
listening
expanding
focusing
leading
achieving
moving forward
moving forward
Ciena’s team continues to be committed to delivering long-term shareholder value as we work to further leverage
our technology leadership in an increasingly receptive market.
We see new and exciting opportunities to help our customers align their network architectures with the business
values of their customers. At the same time, our market continues to be very dynamic, and we’re keenly aware of the
importance of staying nimble and innovative to maintain momentum and continue driving growth.
The momentum we have generated, both in our business performance and with customers, combined with encouraging
market dynamics, is affording us an increased ability to capitalize on these opportunities. We pledge to remain focused
on the execution of our strategy.
solid revenue growth
)
s
d
n
a
s
u
o
h
t
n
i
$
(
$180,000
$160,000
$140,000
$120,000
$100,000
$ 80,000
$ 60,000
$ 40,000
$ 20,000
$ 0
$160
$152
$131
$118 $120
$110
$104
$95
$82
Q4’04 Q1’05 Q2’05 Q3’05 Q4’05 Q1’06 Q2’06 Q3’06 Q4’06
fellow shareholders,
Gary B. Smith
President and Chief Executive Officer
Persistent execution of a focused
strategy, continued investment in market-
leading innovation and an improving
market environment driven by strong
underlying demand: all of these factors
combined in Ciena Corporation’s fiscal
year 2006 to generate measurable
progress on a number of fronts. We
are proud to report these results to
you, our shareholders.
For the year ended October 31, 2006,
revenue increased 32 percent to
$564 million, as our position as the
network specialist continued to enable
us to grow faster than our overall market
sector. We improved gross margin from
31.9 percent in fiscal year 2005 to
45.7 percent in fiscal year 2006 due
to our success in bringing high-value
products to market, increasing
efficiencies across our business, and
leveraging global sourcing opportunities.
Additionally, our ongoing attention to
cost control resulted in a significant
reduction in operating expenses. These
efforts meant a return to profitability for
the year, a significant accomplishment.
In fiscal 2006, we earned $0.6 million,
or $0.01 per diluted share, in contrast
to the net loss we recorded in fiscal
2005 of $435.7 million, or, on a per
share basis, a net loss of $5.30.
We consider profitability an important
milestone, but it is just one marker along
the road of achievement for us. Achieving
profitability is essential to our long-term
success for many reasons, not the least
of which is that it allows us to focus
even more on solving our customers’
critical challenges, and less on our
own immediate business challenges.
One significant advantage it affords
us is the capacity to attack the market
from a position of strength—moving
to an offensive game plan, rather
than playing defense. It is a position
from which we are eager to operate,
as we see many opportunities in our
market this year and the years ahead.
Innovation
The cornerstone of our strategy to
rebuild Ciena has been our ongoing
commitment to innovation—a long-
term investment approach that has
enabled us to grow our business back
to profitability while positioning us
for sustained growth, rather than
cost-cutting our way to breakeven. This
continued focus and innovation has
enabled Ciena to offer an extensive
suite of products and solutions, giving
us the ability to sell to a broader
customer and market base. We continue
to develop our offerings, which allows
us to extend our customer reach and
further increase our addressable market.
As I look back over the direction we’ve
taken in the development of our products
during the past few years and the
market validation we’ve seen, I’m
confident we are on the right track
and that Ciena’s proven ability to
translate customer needs into practical
network solutions will continue to
serve us well.
Our FlexSelect™ Architecture is a prime
example of our ability to serve customer
needs. A set of technologies integrated
across multiple platforms, FlexSelect
is specifically designed to help our
customers transition to converged, high-
performance networks at a pace that
aligns directly with their business
opportunities. It enables a software-
defined network with the flexibility,
adaptability, manageability and
assuredness that new-generation
applications require.
These network characteristics are
desirable to both Ciena’s traditional
customers and new buyers in our
market who demand better network
economics, performance and a migration
path to successfully execute on their
business objectives. Indeed, FlexSelect’s
value proposition has generated many
recent customer successes and is the
key driver behind the continued
momentum for our CN 4200™ FlexSelect
Advanced Services Platform.
volume of bandwidth-intensive services
like video and storage.
In 2007, as we introduce new Ethernet
elements to the architecture, Ciena
brings its expertise in these critical
performance qualities to Ethernet, an
economical transport technology for
the common delivery and management
of all services. The economics of Ethernet
combined with the high-performance
qualities of our FlexSelect Architecture
create a value proposition unique
to Ciena.
gross margin improvement
50%
40%
30%
20%
10%
0%
46%
32%
24%
FY’04
FY’05
FY’06
Market Dynamics
As we look ahead, we are also encour-
aged by the improving strength of the
markets we serve. The telecommuni-
cations industry learned an important
lesson about building capacity in
anticipation of future demand in
recent years. As a result, we are now
seeing success-based spending for
network upgrades to meet actual
demand. New sources of capacity
demand include increasing mobility
and access needs as well as a growing
We see the demand for next-generation
technologies continuing to rise as our
customers are expected to support a
growing number of these advanced
services and applications. These demands
are most obvious at traditional telecom-
munications service providers, who own
and operate fundamental voice networks
that were not designed to support
more advanced services, and who
are challenged by significant legacy
network investment. In response,
these service providers are beginning
to re-prioritize their investments and
reset their business goals to increase
their probability for long-term success.
In addition to those traditional telecom-
munications carriers, other market
segments are growing in importance
to Ciena, as they are affected by
the same dynamics. We see further
demand from enterprise customers
needing high-performance WAN
upgrades and government agencies,
where we have had strong initial
success in providing defense-related
and research and education networks,
in particular.
Consolidation in the telecommunications
space is certainly a trend we continue to
monitor closely. Many of our customers,
including traditional wireline telecom-
munications providers, along with
wireless and cable providers, have
undergone tremendous change in the
past several years, and we’ve stood ready
to help them transition effectively and
retain the flexibility to remain nimble
in serving their customers.
Overall, we expect that end-user
dynamics will continue to create
increasing market demand for both
service provider and enterprise networks.
As a result, a practical transition
formula to assist both customer
segments to build more efficient and
flexible networks is vitally needed
growth through focus
2005 vs. 2006
H
T
W
O
R
G
%
Y
o
Y
40%
30%
20%
10%
0%
Targeting
market share
34%
Targeting
growth
markets
7%
14%
Global
Wireline
Capex
Ciena
Product
Addressable
Markets
Ciena
*
Product
Revenue
*Ciena product revenue reflects fiscal 2005 vs. fiscal 2006 growth.
now and in the years ahead, and this
is a demand that Ciena is uniquely
prepared to address directly.
We believe our innovative palette of
technologies, unique product offerings
and our role in the market as the specialist
in network transition are critical advan-
tages that will enable us to continue
serving as a key partner to an already
strong base of customers, as well as to
new market entrants that may emerge.
Building On Our Success
From a financial standpoint, fiscal year
2006 was pivotal in many ways, not
the least of which was strong revenue
growth and a return to profitability.
So where will we focus our efforts
going forward?
Achieving substantial annual revenue
growth clearly enables us to improve
all aspects of our financial performance.
For one thing, it allows us to better
leverage virtually every investment and
expense we incur as a corporation. And,
even from our position of renewed
strength, we are keenly aware of the
fine line between fueling the growth
in our business and continuing to gain
incremental efficiencies to make Ciena
more globally competitive. Given the
measurable progress we’ve already
made, we are confident in our ability
to continue managing this allocation
nimbly and generating annual
revenue growth.
We also remain committed to focusing
our investment dollars on the oppor-
tunities where we’re most confident in
our ability to execute successfully—and
to ensuring we fully optimize every
dollar spent. A good example of this
focus is the progress we’ve made in
raising our R&D capacity. Utilizing the
efficiencies we’ve implemented,
particularly through the ongoing
growth of our India design center,
we’ve been able to continue our
accelerated pace of innovation at
minimal incremental cost.
Although we continue to see validation
that our strategy is working, we
acknowledge there are many challenges
ahead. Competition is intense and the
markets in which we participate are
dynamic. We must remain focused
and agile in executing our corporate
strategy with the same commitment
that has enabled us to achieve our
current reputation in the marketplace.
Our established relationships with
some of the premiere carriers in
the world as well as our continued
investment in technology innovation,
and the efficacy of our operational
and fiscal management gives us
confidence and optimism about our
ability in the years ahead to meet
these directly and successfully.
Going forward, Ciena’s team continues
to be committed to delivering long-term
shareholder value. Their tireless execu-
tion of the corporate strategy has
been the difference between Ciena
being just a survivor and Ciena being
well-positioned for long-term growth
ahead. And their proven commitment
to excellence, time and time again,
adds to our base of confidence.
In closing, I recognize that Ciena’s
strategy to invest in our business while
navigating unprecedented industry
turbulence has been very challenging
and somewhat contrarian. With that
said, I’d like to thank our customers,
our shareholders and our partners for
believing in us and supporting this
bold approach and helping build a
stronger company.
Gary B. Smith
President and Chief Executive Officer
building
delivering
progressing
a valuable role in the marketplace
As the network specialist, Ciena is the authority on helping customers transition to next-generation
converged networks. We offer tools and technologies that tailor a migration path to more efficient
networks that capitalize on unique business opportunities.
specialist
Instead of generalist
solutions, Ciena provides
focused expertise.
In what?
network
transition
Our FlexSelect Architec-
ture is a practical vehicle
for transition.
How?
ethernet
Next, we’re expanding
FlexSelect Architecture
with high-performance
Ethernet.
2006 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
form 10-K
Annual Report
Pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended October 31, 2006
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _________ to __________
Commission file number 0–21969
Ciena Corporation (Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization)
23–2725311 (I.R.S. Employer Identification No.)
1201 Winterson Road, Linthicum, MD (Address of principal executive offices)
21090–2205 (Zip Code)
(410) 865–8500 (Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Common Stock, $.01 par value
Name of Each Exchange of Which Registered The NASDAQ Stock Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES [ X ] NO [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES [ ] NO [ X ]
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “acceler-
ated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ X ] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES [ ] NO [ X ]
The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant was $2,035,851,758, based on the closing
price of the Common Stock on the NASDAQ Global Select Market on April 28, 2006.
The number of shares of Registrant’s Common Stock outstanding as of December 15, 2006 was 84,939,780.
Documents Incorporated by Reference
Part III of the Form 10-K incorporates by reference certain portions of the Registrant’s proxy statement for its 2007 Annual Meeting of Shareholders
to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this report.
CIENA C O RPO RATI ON 10- K
CIENA CORPORAT ION 10-K
PART I
The information in this annual report contains certain forward-looking statements, including statements related to
markets for our products and services and trends in our business that involve risks and uncertainties. Our actual
results may differ materially from the results discussed in these forward-looking statements. Factors that might cause
such a difference include those discussed in “Risk Factors,” “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” “Business” and elsewhere in this annual report.
Item 1. BusIness
overview
Ciena Corporation is a supplier of communications networking equipment, software and services that support the
delivery and transport of voice, video and data services. Our products are used in communications networks operated
by telecommunications service providers, cable operators, governments and enterprises across the globe. We specialize
in transitioning legacy communications networks to converged, next-generation architectures, capable of efficiently
delivering a broader mix of high-bandwidth services. By improving network productivity, reducing costs and enabling
integrated service offerings, our optical, data and broadband access platforms create business and operational value
for our customers.
During the past several years, we have taken a number of significant steps to position Ciena to take advantage of
market opportunities we see arising from increased demand for a broader mix of high-bandwidth services and new
communications applications. Consumer demand for high-speed voice, video and data services and enterprise demand
for reliable and secure connectivity are driving network transition to more efficient, simplified network infrastructures,
better suited to handle higher bandwidth, multiservice traffic. To pursue these opportunities, we have expanded our
product portfolio and enhanced product functionality through internal development, acquisition and partnerships. We
have sought to build upon our historical expertise in core optical networking by adding complementary products in the
metro and access portions of communications networks. This strategy has enabled us to increase penetration of our
historical telecommunications service provider customers with additional products, and allowed us to broaden our
addressable markets to include customers in the cable, government and enterprise markets.
Financial Overview—Fiscal 2006
We had revenue of $564.1 million for our fiscal year ended October 31, 2006, an increase of 32.0% from fiscal
2005 revenue of $427.3 million. We manage our business in one operating segment. The matters discussed in this
“Business” section should be read in conjunction with the Consolidated Financial Statements found under Item 8 of
Part II of this annual report, which includes additional financial information about our total assets, revenue, measures
of profits and loss and financial information about geographic areas.
Corporate Information and Access to SEC Reports
Ciena Corporation was incorporated in Delaware in November 1992, and completed its initial public offering on
February 7, 1997. Our principal executive offices are located at 1201 Winterson Road, Linthicum, Maryland 21090.
Our telephone number is (410) 865-8500, and our web site address is www.ciena.com. We make our annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, avail-
able free of charge on the Investor Relations page of our web site as soon as reasonably practicable after we file these
reports with the Securities and Exchange Commission. Information contained on our web site is not a part of this
annual report.
Industry Background
The markets for communications networking equipment have been subject to dynamic changes in recent years, affect-
ing the revenue and profitability of equipment providers like Ciena. Following a period of expansive growth, the
telecommunications market was significantly affected by a tightening of capital markets that began in late 2000.
PA G E 8
CIENA C O RPO RATI ON 10- K
Aggressive network builds by communications service providers in anticipation of rapid traffic growth resulted in over-
capacity. In response, communications service providers curtailed network build-outs and dramatically reduced their
overall capital spending. As a result, Ciena experienced significant revenue declines from 2001 to 2003.
At the same time, a number of competitive threats emerged dramatically affecting communications service providers.
Service providers faced new competitors, new technologies and intense price competition. In North America, the entry
of the regional bell operating companies into the long-distance market led to deteriorating business models and
uncertain futures for traditional long-distance carriers. At the same time, wireless displacement of traditional voice
revenue and increased availability of broadband access from cable operators threatened the business model of the
regional bell operating companies. Similar trends were also occurring outside of the United States, with increasing
competition among traditional voice, wireless and satellite carriers to provide similar or overlapping services.
As competition among communications service providers increased, the needs of some of their largest customers
were changing. Increased reliance on information technology combined with world events, such as natural disasters
and security issues, brought concerns of network reliability and business continuity to the forefront. In addition, com-
petition among communications networking equipment providers and reduced demand for their products provided
opportunities to purchase communications equipment and services at reduced costs. As a result, many large enter-
prises and government agencies decided to build their own, secure private networks, some on a global scale.
Industry Trends
While the industry dynamics and market forces described above have had a significant effect on the competitive land-
scape and business prospects of our customers and our competitors alike, overall traffic on service provider networks
has continued to grow. Expanding consumer and enterprise reliance upon voice, video and data communications has
increased demand for network bandwidth, absorbing previous excess capacity. In addition, communications service
providers have sought to augment or replace traditional revenue by offering a broader mix of new revenue-generating
services. As a result of improving conditions in the markets where we sell our communications network equipment and
our efforts to restructure our operations in recent years, we were able to improve our financial performance and grow
our revenue from $298.7 million in fiscal 2004, to $427.3 million in fiscal 2005 and $564.1 million in fiscal 2006. We
believe the current industry trends below are driving growth of our business and demand for our products:
z
z
z
z
End user demand for a single service provider, capable of delivering multiple voice, video and data services;
Network operators’ transition toward simplified, converged network infrastructures capable of more efficiently
and cost-effectively supporting a broader mix of high-bandwidth traffic;
Growth in broadband applications and service “bundles” driving higher capacity requirements and fueling band-
width demand in legacy and existing network infrastructures; and
Enterprises and governments building and operating their own communication networks.
Consolidation
In addition to the trends highlighted above, our customer base has undergone a period of increased consolidation,
particularly among telecommunications service providers. In the United States, SBC acquired AT&T in November 2005.
In December 2006, the combined company, known as AT&T, acquired BellSouth. In January 2006, Verizon acquired MCI.
We have seen similar trends abroad with increased consolidation activity in recent years involving international carriers.
Mergers of large carriers are likely to have a major impact in shaping the future of the telecommunications industry.
These mergers also have the effect of further reducing the number of potential communications service provider cus-
tomers seeking to purchase networking equipment from vendors, thereby concentrating customer purchasing power.
We have also seen consolidation among our competitors. In November 2006, Alcatel completed its acquisition of
Lucent. In June 2006, Nokia and Siemens agreed to combine their communications service provider businesses to
create a new joint venture, and in January 2006, Ericsson completed its acquisition of certain key assets of Marconi
Corporation plc’s telecommunications business. These mergers may adversely affect our competitive position by caus-
ing our competitors to grow larger, thereby increasing their resources.
PA G E 9
CIENA C O RPO RATI ON 10- K
CIENA CORPORAT ION 10-K
strategy
Growing demand for a broader offering of higher bandwidth services, and the desire among service providers to
provide these services through cost-effective and efficient networks are driving the shift from legacy networks that
support distinct voice, video or data services, to converged, multiservice communications networks. While the belief
that disparate communications networks will converge into simplified, multiservice infrastructures is widely shared,
there are differing views regarding how this convergence will be achieved. Some envision that the converged network
will be based on a completely new network infrastructure. We believe, however, that the transition to a converged,
all-service network will be an evolutionary process, one in which service providers will seek to maximize the value of
their existing network investment.
In response to these market dynamics, we introduced the FlexSelect™ Architecture, our standards-based, service-
oriented network architecture that facilitates our customers’ transition to next-generation networks. Our FlexSelect™
Architecture combines programmable hardware with service-oriented management functionality, automating delivery
and management of a broad mix of services including SONET/SDH, Ethernet, storage and video. The products and fea-
tures we have introduced under our FlexSelect™ Architecture enable enhanced network flexibility, adaptability and
management. This allows the delivery of a broader mix of services and the addition of new services through networks
that are more cost-effective to deploy, scale and manage. Our FlexSelect™ Architecture enables the transition of legacy
network infrastructures to an on-demand, service-selectable network that enables cost-effective delivery of services,
while preserving the value of customer investment in legacy and existing architectures.
We are pursuing the following strategic initiatives, relationships and investments to implement the network vision
behind our FlexSelect™ Architecture and capitalize on our customers’ transition to higher capacity, converged net-
work infrastructures:
z
Establish technology leadership in the transition from legacy network infrastructures to Ethernet-
based infrastructures. Through our research and development investments, we seek to enable our customers
to transition their traditional circuit-switched networks to support a broader mix of higher bandwidth services,
while maximizing the value of their existing network investment. Through these investments, we seek to provide
customers a cost-effective means to support new applications and deliver service bundles over a single network
infrastructure. Our current research and development initiatives include:
Adding advanced Ethernet capabilities across our product portfolio;
Enabling broadband and Ethernet access through various means, including copper and fiber access lines; and
Implementing our FlexSelect™ Architecture by focusing on cross-product integration and driving a common set
of features and network management functionality across our portfolio.
y
y
y
z
Expand our market opportunity. Through expansion of our geographic reach and our addressable markets,
we seek to grow and diversify our customer base. Through this expansion we seek to further penetrate customer
segments beyond telecommunication service providers; including cable, government, and enterprise. Our current
sales and marketing initiatives include:
y
y
y
y
Increasing our use of channel partners to expand our geographic reach and penetrate additional market segments;
Increasing market awareness and acceptance of our Ethernet products and technologies;
Leveraging our incumbency to sell our expanded product portfolio to current customers; and
Pursuing technology partnerships to offer products that complement our existing product portfolio.
In addition to the strategic initiatives above, we are also taking steps to improve the efficiency of our operations:
z
Improve our cost base and promote operational efficiencies. Through our efforts to consolidate our use of
component suppliers and contract manufacturers, and align our resources with market opportunities, we were
able to improve gross margin and reduce operating expense during fiscal 2006. We also undertook initiatives to
improve our operating efficiency, particularly in research and development. We seek to drive further operational
efficiencies and improve our cost base. Our current operational initiatives include:
y
Achieving further product cost reductions by emphasizing global sourcing of components and manufactur-
ing resources;
PA G E 10
PAGE 11
C I EN A C O RPO RATI ON 1 0-K
CIENA C O RPO RATI ON 10- K
y
y
y
Maximizing effectiveness of our research and development resources through the restructuring of our develop-
ment resources along technology sets, rather than product or location;
Continuing to grow our development facility in India; and
Streamlining internal processes and structures to drive increased productivity and cost savings from our exist-
ing infrastructure.
Customers and markets
Our customer base and the markets in which we sell our equipment, software and services have expanded in recent
years as new markets for communications networking equipment have emerged and our product portfolio has grown.
The networking equipment needs of our customers vary; often depending upon their size, location, the make up of
their end users and the applications that they support. During fiscal 2006, Sprint, Verizon and AT&T, each represented
more than 10% of our total revenue and 40.2% in the aggregate. Revenue from customers within the United States
was approximately 75.1% of total revenue in fiscal 2006 and 79.8% in fiscal 2005. Information regarding 10% cus-
tomers over our last three fiscal years can be found in Note 19 to the Consolidated Financial Statements in Item 8 of
Part II of this annual report. We sell our products and services through our direct sales force and third party channel
partners in the following markets:
Telecommunications Service Providers
Our telecommunications service provider customers include regional, national and international telecommunications
carriers, both wireline and wireless. Telecommunications service providers, our historical customer base and largest
contributor to revenue, are under increasing competitive pressure, primarily from non-traditional competitors that offer
overlapping or similar services. Our products, software and services enable telecommunications service providers to
transition their legacy or existing network infrastructures to deliver a broader mix of higher bandwidth consumer and
enterprise services. We provide products that enable telecommunications service providers to support consumer
demand for video delivery, broadband data and wireless broadband services, while continuing to support legacy voice
services. Our products also enable telecommunications carriers to support private line networks and applications for
enterprise users, including demand for inter-site connectivity, storage and Ethernet services.
Cable Operators/ Multiservice Operators (MSOs)
Our customers include leading cable and multiservice operators in the U.S. and internationally. Our cable and multiser-
vice operator customers rely upon us for carrier-grade, optical Ethernet transport and switching equipment. Our
communications networking platforms allow our cable operator customers to integrate voice, video and data appli-
cations over a converged infrastructure. This enables our customers to grow bandwidth capacity and lower the
operational expense of supporting disparate networks. By enabling this network convergence, cable operators can
expand their end user offerings to include high-value service bundles. Our products support key cable applications
including broadcast video, voice over IP, video on demand, broadband data services and services for enterprises.
Enterprise
Our enterprise customers include large, multi-site commercial organizations, including end users in the healthcare,
financial and retail industries. We offer equipment, software and services focused on key enterprise applications
including data center connectivity, wide area network consolidation, and storage extension for business continuance
and disaster recovery. Our products enable inter-site connectivity between data centers, sales offices, manufacturing
plants, and research and development centers, using an owned or leased private fiber network, or a carrier-provided
service. Our products also enable our enterprise customers to prevent unexpected system downtime and ensure the
safety, security and availability of their data.
PA G E 10
PA G E 11
CIENA C O RPO RATI ON 10- K
CIENA CORPORAT ION 10-K
Government
Our government customers include federal and state agencies in the U.S. and international government bodies. Our
customers also include domestic and international research and education institutions. Our products, software and ser-
vices enable these customers to improve network performance, security, reliability and flexibility. Our products also
enable government agencies and research and education institutions to take on the challenge of building their own,
secure private networks.
Product Portfolio
Our product portfolio includes a range of communications networking equipment that is located from the core of
communications networks to the edge, where end users gain access to voice, video and data communications. Our
products include:
z
z
z
z
Optical Networking Products
Broadband Networking Products
Data Networking Products
Network and Services Management Software
Optical Networking Products
Our optical networking product portfolio includes metro transport and switching products, core transport and switch-
ing products and multiservice optical access products.
Metro Transport & Switching. Our metro transport and switching products enable service providers to increase the
efficiency of their metropolitan communications networks, allowing them to service more customers, more cost effec-
tively. Our products accomplish this by more efficiently using fiber optic networks and enabling communications
networks to increase fiber optic capacity. Our metro transport and switching products also enable service providers to
transition and converge their metropolitan communications infrastructures to support multiple service traffic types on
a cost-effective basis. Our metro transport and switching products include:
z
z
z
CN 4200™ FlexSelect™ Advanced Services Platform Family
ONLINE Metro™ Multiservice DWDM Platform
CN 3600™ Intelligent Optical Multiservice Switch
Core Transport and Switching. New high-bandwidth service bundles at the network edge are creating increased
demand on the core networks maintained by telecommunications service providers, cable operators, government
agencies and enterprises. Our core transport products scale optical bandwidth and increase capacity to cost-effectively
support high-bandwidth applications and traffic. Our core transport and switching products enable our customers to
transition and converge their existing network infrastructures and deploy multiservice networks that can support
emerging data and video services. By converging disparate service networks to a multiservice network, our core trans-
port and switching products enable service providers to reduce network capital costs and operational costs through
equipment reductions, process automation and network simplification. These products include:
z
z
CoreStream® Agility Optical Transport System
CoreDirector® Multiservice Switch
Multiservice Optical Access. Our multiservice optical access products support storage extension, interconnection of
data centers and aggregation of enterprise data services. These products also enable our customers to transition their
networks to provide cost-effective Ethernet services. Our multiservice optical access products enable customers to max-
imize network efficiency associated with transporting, storing, retrieving and sharing data. These products act as on
and off ramps, connecting geographically-dispersed enterprise locations over privately owned or leased networks, as
well as networks maintained by service providers. Our multiservice optical access products also address business conti-
nuity and disaster recovery needs of enterprises, ensuring the safety, security and availability of their data. These
products include:
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CN 2000® Storage and LAN Extension Platform
CN 2200™ Managed Optical Ethernet Multiplexer
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CN 2300™ Managed Optical Services Multiplexer
CN 2600™ Multiservice Edge Aggregator
Broadband Networking Products
Our broadband networking products allow telecommunications service providers to transition their legacy voice net-
works to support next-generation services such as Internet-based (IP) telephony, video services and DSL. These
products, which enable telecommunications service providers to offer broadband services over existing copper and
fiber access lines, facilitate broader service offerings to compete with cable operators. These products enable telecom-
munications service providers to leverage their investment in existing or legacy voice network equipment to provide
the broadband services sought by end users, while maximizing the use of their existing network. Our broadband net-
working products include:
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CNX-5™ Broadband DSL System
CNX-5Plus™ Modular Broadband Loop Carrier
Data Networking Products
Our data networking offering includes our multiservice edge switching and routing products. These products enable
telecommunications service providers and multiservice operators to transition their communications networks from
legacy technologies, such as ATM and Frame Relay, to next-generation technologies, such as Ethernet and IP/MPLS.
These technologies more cost-effectively support the delivery of multiple service types, including voice, video and
data services, from service providers to end users. Our data networking products enhance bandwidth efficiency, provi-
sioning, and scalability, by converging traditional and emerging data services in carrier metropolitan networks. These
products include our:
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DN 7000® Series Multiservice Edge Switching and Aggregation Platform
CN 4350™ Ethernet Services Provisioning Switch
Network and Service Management Software
We offer integrated network and service management software products across our product lines. Our ON-Center®
Network & Service Management Suite is designed to increase network automation and simplify network management
and operation. Our network and service management products are also designed to facilitate rapid and simplified pro-
visioning of new or modified service connections and the efficient allocation of bandwidth required to deliver such
services. By increasing network automation, minimizing network downtime, and monitoring network performance and
service metrics, our network and service management software enables customers to improve the cost effectiveness of
their network operations.
Global network services
To complement our product portfolio, we offer a broad range of consulting and support services. We provide these
services through our own internal Global Network Service resources and through service partners. Our service offer-
ing includes:
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Network analysis, planning and design;
Operations and network management;
Network optimization and tuning;
Deployment, product installation, testing and commissioning;
Program or project management for complex, end-to-end communications network projects, including the
deployment of multi-vendor/multi-technology solutions;
Maintenance and support services, including, managed services for helpdesk and technical assistance, spares and
logistics management, software updates, engineering dispatch, advanced technical support, and hardware and
software warranty extensions; and
Product training, service partner certification and documentation services.
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Product Development
The industry in which we compete is subject to rapid technological developments, evolving standards and protocols
and shifts in customer demand. To remain competitive, we must continue to introduce new products and enhance
existing products by adding new features and functionality. As the markets in which we sell our products and the
technologies that support these products have evolved, our research and development strategy has been to pursue
technology and product convergence. This convergence allows us to consolidate multiple technologies and functional-
ities on a single platform, ultimately creating more robust and cost-effective products. Over the last year, we have
reorganized our development efforts along technology skill sets that are applicable across multiple products. Prior to
this change, our development resources were structured along specific product lines. We believe that this change will
help drive the development of a common set of features across our portfolio and allow us to offer a more integrated
product portfolio to our customers.
Our product development investments are driven by market demand and involve close collaboration among our mar-
keting, sales and product development organizations. We also incorporate feedback from customers in our product
development process. In some cases, we work with and make strategic investments in technology partners to develop
new or modify existing products. In addition, we participate in industry and standards organizations where appropriate
and incorporate information from these affiliations throughout the product development process. We continually
review our existing products and development projects to determine their fit within our portfolio. We assess the mar-
ket demand and growth opportunities, as well as the costs and resources necessary to support and enhance our
products. During 2006, our product development initiatives focused on adding advanced Ethernet capabilities across
our product portfolio and implementing our FlexSelect™ Architecture.
Our research and development expense (including stock compensation cost of $5.1 million, $4.4 million and
$6.5 million, respectively) were $111.1 million, $137.2 million and $205.4 million for fiscal 2006, 2005 and 2004,
respectively. For more information regarding our research and development expenses, see Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
sales and marketing
We sell our communications networking equipment, software and services through our direct sales efforts and channel
relationships. In addition to securing new customers, our sales strategy has focused on building long-term relationships
with existing customers that allow us to leverage our incumbency by extending existing platforms and selling addi-
tional products to support new applications.
We maintain a direct sales presence in locations throughout North America, Europe and Asia. Through these offices
we sell and support our product and service offerings into each of our customer markets. In support of our sales
efforts, we engage in marketing activities intended to position and promote our brand, and our product, software
and service offering.
We also maintain a channel program that works with resellers, systems integrators and service providers to market and
sell our products, software and services. Our third party channel sales and other distribution arrangements enable us to
leverage our direct sales resources and reach additional geographic regions and customer segments, including govern-
ment and enterprise customers. Our channel sales strategy also enables us to couple our products with complementary
technologies sold by our channel partners. We believe this channel strategy affords us expanded market opportunities
and reduces the financial risk of entering new markets and pursuing new customer segments.
manufacturing
We rely on contract manufacturers to perform the majority of the manufacturing operations for our products and
components, and are increasingly utilizing overseas suppliers in lower cost regions such as Asia. We believe that using
contract manufacturers allows us to conserve capital, operate without dedicating significant resources to manufactur-
ing and utilize a direct order fulfillment model for certain products. Direct order fulfillment allows us to rely on our
contract manufacturers to perform final system integration and test, prior to direct shipment of products from their
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facilities to our customers. For certain product lines, we continue to perform a significant portion of the module
assembly, final system integration and testing. We work closely with our contract manufacturers to manage material,
quality, cost and delivery times and we continually evaluate their services to ensure performance on a reliable and cost-
effective basis. In recent years we have consolidated our base of suppliers and increasingly utilized a global sourcing
strategy in an effort to reduce product costs. We utilize an operations center in Shenzhen, China to address materials
sourcing, manufacturing resources and management of our contract manufacturers in Asia.
Our products include some components that are proprietary in nature and only available from a single source, as well
as some components that are generally available from a number of suppliers. In some cases, significant time would be
required to establish relationships with alternate suppliers or providers of proprietary components. We do not have
long-term contracts with any contract manufacturers that guarantee supply of components or their manufacturing ser-
vices and our contract manufacturers are not obligated to accept our purchase orders for components. If we encounter
difficulty continuing our relationship with a supplier, or if a supplier is unable to meet our needs, we may encounter
manufacturing delays that could adversely affect our business. In an effort to limit our exposure to such delays and to
satisfy customer needs for shorter delivery terms, we rely upon a build-to-forecast model across our product portfolio.
Competition
Competition is intense among providers of communications networking equipment, software and services, particularly
for sales to telecommunications service providers, which have undergone a period of consolidation in recent years. The
markets for our products, software and services are characterized by rapidly changing and converging technologies.
Competition in these markets is based on any one or a combination of the following factors: price, functionality, manu-
facturing capability, installation, services, existing business and customer relationships, scalability and the ability of
products and services to meet customers’ immediate and future network requirements. Competition is dominated by a
small number of very large, multi-national, vertically integrated companies. Each of these competitors has substantially
greater financial, technical, operational and marketing resources than Ciena. Merger activity in recent years among
some of our larger competitors may intensify their advantages and affect the competitive landscape. Our industry has
also experienced increased competition from low-cost producers in Asia, which can give rise to pricing pressure. Our
competitors include Alcatel-Lucent, Cisco, Ericsson, Fujitsu, Huawei, Nortel, Siemens, Tellabs, and ZTE.
There are also several smaller, but established, companies that offer one or more products that compete directly or
indirectly with our offerings. In addition, there are a variety of earlier-stage companies with products targeted at the
communications networking market. These competitors, particularly those that are privately-held, often employ
aggressive competitive and business tactics as they seek to gain entry with certain customers or markets. Due to these
practices and the narrower focus of their development efforts, which may allow introduction of products more quickly,
these competitors may be more attractive to customers.
Patents, trademarks and other Intellectual Property rights
We seek to establish and maintain proprietary rights in our technology, products and software through the use of pat-
ents, copyrights, trademarks, and trade secret laws. We have a significant number of trademarks and patents in the
United States and foreign countries where we do business. We also rely on contractual rights to establish proprietary
rights in our products and protect trade secrets and confidential information. Our practice is to require employees and
consultants to execute non-disclosure and proprietary rights agreements upon commencement of employment or con-
sulting arrangements with us. These agreements acknowledge our exclusive ownership of all intellectual property
developed by the individual during the course of the employee’s work with us. The agreements also require that each
person maintain the confidentiality of all proprietary information disclosed to them.
There can be no assurance that our proprietary rights will not be challenged, invalidated or infringed upon. Monitoring
unauthorized use of our technology is difficult, and we cannot be certain that the steps that we are taking will detect
or prevent unauthorized use, particularly as we expand our operations and product development into countries that
may not provide the same level of intellectual property protection as the United States. In recent years, we have filed
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suit to enforce our intellectual property rights and have been subject to several claims related to patent infringement.
In some cases, these claims have required us to pay the patent holders substantial sums or enter into license agree-
ments requiring ongoing royalty payments. We believe that the frequency of patent infringement claims is increasing
as patent holders use such claims as a competitive tactic and source of additional revenue. Such actions can be costly
and may require us to take patent licenses or to redesign or stop selling products that allegedly infringe patents
belonging to others.
Our network and service management software and other products incorporate software and components licensed
from third parties. We may be required to license additional technology from third parties in order to develop new
products or product enhancements. There can be no assurance that the necessary licenses would be available on
acceptable commercial terms. Failure to obtain such licenses or other rights could affect our development efforts and
harm our business, financial condition and operating results.
employees
As of October 31, 2006, we had 1,485 employees. We consider the relationships with our employees to be good. We
are not a party to any collective bargaining agreement.
Directors and executive officers
The table below sets forth certain information concerning our directors and executive officers:
name
Patrick H. Nettles, Ph.D.(1)
Gary B. Smith(1)
Stephen B. Alexander
Michael G. Aquino
Joseph R. Chinnici
Andrew C. Petrik
Arthur D. Smith, Ph.D.
Russell B. Stevenson, Jr.
Stephen P. Bradley, Ph.D.(1)(3)(4)
Harvey B. Cash(1)(2)(4)
Bruce L. Claflin(1)(3)
Lawton W. Fitt(1)(3)
Judith M. O’Brien(1)(2)(4)
Michael J. Rowny(1)(3)
Gerald H. Taylor(1)(2)
Age
63
46
47
50
52
43
40
65
65
68
55
53
56
56
65
Position
Executive Chairman of the Board of Directors
President, Chief Executive Officer and Director
Senior Vice President, Products & Technology and Chief Technology Officer
Senior Vice President, World Wide Sales
Senior Vice President, Finance and Chief Financial Officer
Vice President, Controller and Treasurer
Chief Operating Officer
Senior Vice President, General Counsel and Secretary
Director
Director
Director
Director
Director
Director
Director
(1) Ciena’s Directors hold staggered terms of office, expiring as follows: Ms. Fitt, Dr. Nettles and Mr. Rowny in 2007; Ms. O’Brien and Messrs. Cash and
Smith in 2008; and Messrs. Bradley, Claflin and Taylor in 2009. In accordance with Ciena’s Principles of Corporate Governance, ratification of the
election of Mr. Claflin to the class above will be considered by shareholders at the 2007 annual meeting.
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
(4) Member of the Governance and Nominations Committee
Patrick H. Nettles, Ph.D. has served as a Director of Ciena since April 1994 and as Executive Chairman of the Board
of Directors since May 2001. From October 2000 to May 2001, Dr. Nettles was Chairman of the Board and Chief
Executive Officer of Ciena, and he was President and Chief Executive Officer from April 1994 to October 2000.
Dr. Nettles serves as a Trustee for the California Institute of Technology and serves on the board of directors of Axcelis
Technologies, Inc. and The Progressive Corporation. Dr. Nettles also serves on the board of directors of Carrius
Technologies, Inc., a privately held company.
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Gary B. Smith has served as President and Chief Executive Officer since May 2001 and has served on Ciena’s
Board of Directors since October 2000. Mr. Smith serves on the board of directors for CommVault Systems, Inc.
and the American Electronics Association. Mr. Smith also serves as a member of the Global Information
Infrastructure Commission.
Stephen B. Alexander joined Ciena in 1994 and has served as Chief Technology Officer since September 1998 and
as a Senior Vice President of Ciena since January 2000. Mr. Alexander currently serves as Senior Vice President of
Products & Technology, a position he has held since October 2005. During 2004 and 2005, Mr. Alexander served as
General Manager of Products & Technology and General Manager of Transport and Switching and Data Networking.
Mr. Alexander serves on the Federal Communications Commission Technology Advisory Council.
Michael G. Aquino has served as Ciena’s Senior Vice President, Worldwide Sales since April 2006. Mr. Aquino joined
Ciena in June 2002 and has previously held positions as Ciena’s Vice President of Americas, with responsibility for sales
activities in the region, and Vice President of Government Solutions, where he focused on supporting Ciena’s relation-
ships with the U.S. and Canadian government. Prior to joining Ciena, from August 2001 to May 2002, Mr. Aquino
served as Vice President, Eastern Americas Sales for ONI Systems, which was acquired by Ciena in 2002.
Joseph R. Chinnici joined Ciena in 1994 and has served as Ciena’s Senior Vice President, Finance and Chief Financial
Officer since August 1997. Mr. Chinnici serves on the board of directors for Brix Networks, Inc. and Sourcefire, Inc.,
both privately held companies.
Andrew C. Petrik joined Ciena in 1996 and has served as Vice President, Controller and Treasurer of Ciena since
August 1997.
Arthur D. Smith, Ph.D. joined Ciena in May 1997 and has served as Chief Operating Officer since October 2005.
Dr. Smith served as Senior Vice President, Global Operations from September 2003 to October 2005. Previously,
Dr. Smith served as Senior Vice President, Worldwide Customer Services and Support from June 2002 to
September 2003 and as Senior Vice President, Core Transport Division, from May 2001 through June 2002.
Russell B. Stevenson, Jr. has served as Senior Vice President, General Counsel and Secretary since joining Ciena in
August 2001.
Stephen P. Bradley, Ph.D. has served as a Director of Ciena since April 1998. Professor Bradley is the William Ziegler
Professor of Business Administration and teaches Competitive and Corporate Strategy in the Advanced Management
Program at the Harvard Business School. A member of the Harvard faculty since 1968, Professor Bradley is also
Chairman of Harvard’s Executive Program in Competition and Strategy: Building and Sustaining Competitive Advantage.
Professor Bradley serves on the board of directors of the Risk Management Foundation of the Harvard Medical
Institutions and i2 Technologies, Inc.
Harvey B. Cash has served as a Director of Ciena since April 1994. Mr. Cash is a general partner of InterWest
Partners, a venture capital firm in Menlo Park, California, that he joined in 1985. Mr. Cash serves on the board of
directors of First Acceptance Corp., i2 Technologies, Inc., Silicon Laboratories, Inc., Argonaut Group, Inc. and Staktek
Holdings, Inc. Mr. Cash also serves on the board of directors of Voyence Inc., a privately held company.
Bruce L. Claflin has served as a director of Ciena since August 2006. Mr. Claflin served as president and Chief
Executive Officer of 3Com Corporation, from January 2001 until his retirement in February 2006. Mr. Claflin joined
3Com as President and Chief Operating Officer in August 1998. Prior to 3Com, Mr. Claflin served as Senior Vice
President and General Manager, Sales and Marketing, for Digital Equipment Corporation. Mr. Claflin also worked for
22 years at IBM, where he held various sales, marketing and management positions, including general manager of IBM
PC Company’s worldwide research and development, product and brand management, as well as president of IBM PC
Company Americas. Mr. Claflin also serves on the board of directors of Advanced Micro Devices (AMD).
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Lawton W. Fitt has served as a Director of Ciena since November 2000. Since October 2006, Ms. Fitt has served
as a senior advisor to GSC Group, Inc., an alternative asset investment management firm. From October 2002 to
March 2005, Ms. Fitt served as Director of the Royal Academy of Arts in London. From 1979 to October 2002, Ms. Fitt
was an investment banker with Goldman Sachs & Co., where she was a partner from 1994, and a managing director
from 1996 to October 2002. Ms. Fitt is a director of Reuters PLC and Citizens Communications Company.
Judith M. O’Brien has served as a Director of Ciena since July 2000. Since November 2006, Ms. O’Brien has served
as executive vice president of Obopay, Inc., a provider of a comprehensive U.S. mobile payment service. From February
2001 until October 2006, Ms. O’Brien served as a Managing Director at Incubic Venture Fund, a venture capital firm.
From February 1984 until February 2001, Ms. O’Brien was a partner with Wilson Sonsini Goodrich & Rosati, where she
specialized in corporate finance, mergers and acquisitions and general corporate matters. Ms. O’Brien serves on the
board of directors of Adaptec, Inc. Ms. O’Brien also serves on the board of directors of AviaraDx, Inc., GeoVector
Corporation, Grandis Inc., Mistletoe Technologies, Inc. and Spectragenics, Inc., all of which are privately held companies.
Michael J. Rowny has served as a Director of Ciena since August 2004. Mr. Rowny has been Chairman of Rowny
Capital, a private equity firm, since 1999. From 1994 to 1999, and previously from 1983 to 1986, Mr. Rowny was
with MCI Communications in positions including President and Chief Executive Officer of MCI’s International Ventures,
Alliances and Correspondent group, acting Chief Financial Officer, Senior Vice President of Finance, and Treasurer.
Mr. Rowny serves on the board of directors of Neustar, Inc. Mr. Rowny also serves on the board of directors of
Llamagraphics, Inc., a privately held company.
Gerald H. Taylor has served as a Director of Ciena since January 2000. Mr. Taylor has served as a Managing Member
of mortonsgroup, LLC, a venture partnership specializing in telecommunications and information technology, since
January 2000. From 1996 to 1998, Mr. Taylor was Chief Executive Officer of MCI Communications Corporation.
Item 1A. rIsK fACtors
Investing in our securities involves a high degree of risk. In addition to the other information contained in this report,
you should consider the following risk factors before investing in our securities.
We face intense competition that could hurt our sales and our ability to achieve and maintain profitability.
The markets in which we compete for sales of networking equipment, software and services are extremely competi-
tive, particularly the market for sales to telecommunications service providers. Competition in these markets is based
on any one or a combination of the following factors: price, functionality, manufacturing capability, installation, ser-
vices, existing business and customer relationships, scalability and the ability of products and services to meet the
immediate and future network requirements of customers. A small number of very large companies have historically
dominated the communications networking equipment industry. Many of our competitors have substantially greater
financial, technical and marketing resources, greater manufacturing capacity and better established relationships with
telecommunications carriers and other potential customers than we. Recent consolidation activity among large net-
working equipment providers has the effect of causing our competitors to grow even larger and more powerful,
magnifying their strategic advantages. On November 30, 2006, Alcatel completed its acquisition of Lucent. In June
2006, Nokia and Siemens agreed to combine their communications service provider businesses to create a new joint
venture, and in January 2006, Ericsson completed its acquisition of certain key assets of Marconi Corporation plc’s tele-
communications business. These mergers may adversely affect our competitive position by causing our competitors to
grow larger and increasing their resources. We also compete with low-cost producers that can influence pricing pres-
sure and a number of smaller companies that provide significant competition for a specific product, customer segment
or geographic market. These competitors often base their products on the latest available technologies. Due to the
narrower focus of their efforts, these competitors may achieve commercial availability of their products more quickly
and may be more attractive to customers.
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Increased competition in our markets has resulted in aggressive business tactics, including:
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intense price competition, particularly from competitors in Asia;
early announcements of competing products and extensive marketing efforts;
“one-stop shopping” options;
competitors offering to repurchase our equipment from existing customers;
customer financing assistance;
marketing and advertising assistance; and
intellectual property assertions and disputes.
The tactics described above can be particularly effective in an increasingly concentrated base of potential customers
such as telecommunications service providers. Our inability to compete successfully in our markets would harm our
sales and our ability to maintain profitability.
our revenue and operating results can fluctuate unpredictably from quarter to quarter.
Our revenue can fluctuate unpredictably from quarter to quarter. Fluctuations in our revenue can lead to even greater
fluctuations in our operating results. Our budgeted expense levels depend in part on our expectations of future reve-
nue. Any substantial adjustment to expenses to account for lower levels of revenue is difficult and takes time.
Consequently, if our revenue declines, our levels of inventory, operating expense and general overhead would be high
relative to revenue, resulting in additional operating losses.
Other factors contribute to fluctuations in our revenue and operating results, including:
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the level of demand for our products and the timing and size of customer orders, particularly from telecommuni-
cations service provider customers;
satisfaction of contractual customer acceptance criteria and related revenue recognition requirements;
delays, changes to or cancellation of orders from customers;
the availability of an adequate supply of components and sufficient manufacturing capacity;
the introduction of new products by us or our competitors;
readiness of customer sites for installation; and
changes in general economic conditions as well as those specific to our market segments.
Many of these factors are beyond our control, particularly in the case of large carrier orders and multi-vendor or multi-
technology network builds where the achievement of certain performance thresholds for acceptance is subject to the
readiness and performance of the customer or other providers and changes in customer requirements or installation
plans. Any one or a combination of the factors above may cause our revenue and operating results to fluctuate from
quarter to quarter. As a consequence, our revenue and operating results for a particular quarter may be difficult to
predict and our prior results are not necessarily indicative of results likely in future periods.
our gross margin may fluctuate from quarter to quarter and our product gross margin may be adversely
affected by a number of factors, some of which are beyond our control.
Our gross margin fluctuates from period to period and our product gross margin may be adversely affected by numer-
ous factors, including:
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increased price competition;
the mix in any period of higher and lower margin products and services;
sales volume during the period;
charges for excess or obsolete inventory;
changes in the price or availability of components for our products;
our ability to continue to reduce product manufacturing costs;
introduction of new products, with initial sales at relatively small volumes with resulting higher production costs; and
increased warranty or repair costs.
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The factors discussed above regarding fluctuations in revenue and operating results can also affect gross margin. We
expect product gross margin to continue to fluctuate from quarter to quarter. As a consequence, our gross margin for
a particular quarter may be difficult to predict and our prior results are not necessarily indicative of results likely in
future periods.
A small number of our telecommunication service provider customers accounted for a significant portion of
our revenue in fiscal 2006. the loss of one or more of these customers, reductions in spending or changes
affecting the market for telecommunications service providers generally, could negatively affect our busi-
ness, financial condition and results of operations.
During fiscal 2006, Sprint, Verizon and AT&T accounted for 40.2% of our revenue in the aggregate. Our concentration
in revenue increased during fiscal 2006 largely due to the effect of mergers among some of our significant customers.
The industry has experienced substantial consolidation recently, including the merger of Verizon and MCI, and the
combination of SBC, AT&T and BellSouth, all of which have been significant customers during prior periods. These
mergers have the effect of further reducing the number of potential communications service provider customers seek-
ing to purchase networking equipment from vendors, thereby concentrating customer purchasing power. Moreover,
these mergers may result in delays in, or the curtailment of, network investments. If consolidation among telecommu-
nications carriers continues to increase, we may be subject to additional concentration of revenue, pricing pressure and
quarterly fluctuation in revenue.
While we continue to diversify into new customer markets, a significant majority of our revenue is concentrated in our
traditional customer market of telecommunications service providers. Our concentration of revenue in this customer
market exposes us to significant risks associated with a market wide change in business prospects, competitive pres-
sures or other conditions affecting telecommunications carriers. The telecommunications industry has undergone
significant changes in recent years and service providers have experienced increased competition from within and
outside their market. These pressures are likely to continue to cause telecommunications service providers to seek
to minimize the costs of the equipment that they buy and may cause static or reduced capital expenditures. These
competitive pressures may also result in pricing becoming a more important factor in customer purchasing decisions.
Increased focus on pricing may favor low-cost vendors and larger competitors that can spread the effect of price dis-
counts across a broader offering of products and services and across a larger customer base. The loss of one or more
large customers, a significant reduction in spending by such customers, or a change negatively affecting the business
prospects of the telecommunications industry, could have a material adverse affect on our business, financial condition
and results of operations.
network equipment sales to large communications service providers often involve lengthy sales cycles and
protracted contract negotiations and may require us to assume terms or conditions that negatively affect
our pricing, payment and timing of revenue recognition.
In recent years we have sought to add large communication service providers as customers for our products, software
and services. Our future success will depend on our ability to maintain and expand our sales to existing customers and
add new customers. Many of our competitors have long-standing relationships with communications service providers,
which can pose significant obstacles to our sales efforts. Sales to large communications service providers typically
involve lengthy sales cycles, protracted or difficult contract negotiations, and extensive product testing and network
certification. We are sometimes required to assume terms or conditions that negatively affect pricing, payment and
the timing of revenue recognition in order to consummate a sale. This may negatively affect the timing of revenue
recognition, which would, in turn, negatively affect our results of operations. Communications service providers may
ultimately insist upon terms and conditions that we deem too onerous or not in our best interest. Moreover, our cus-
tomers are typically not contractually obligated to purchase a certain amount of products or services from us and often
have the right to reduce, delay or even cancel previous orders. As a result, we may incur substantial expenses and
devote time and resources to potential relationships that never materialize or result in lower than anticipated sales.
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We may invest development resources in products or technologies for which market demand is lower
than anticipated.
The market for communications networking equipment is characterized by rapidly evolving technologies and changes
in market demand. To succeed in this market, we must continue to invest in research and development to enhance our
existing products and create new ones. There is often a significant time between beginning a new development initia-
tive and bringing the new or revised product to market, and during this time technology or the market may move in
directions we did not anticipate. There is a significant probability, therefore, that at least some of our development
decisions will not turn out as anticipated, and that our investment in a project will be unprofitable. Changes in the
market may also cause us to discontinue previously planned investments in products, which can have a disruptive
effect on relationships with customers that were anticipating the availability of a new product or feature. Product
development investment decisions are difficult and there is no assurance that we will be successful. If we fail to make
prudent research and development investments, our competitive position may suffer and the growth of our business
and revenues could be harmed.
Product performance problems could damage our business reputation and negatively affect our results
of operations.
The development and production of new products, and enhancements to existing products, are complicated and often
involve problems with software, components and manufacturing methods. Due to the complexity of these products,
some of them can be fully tested only when deployed in communications networks or with other equipment. We have
introduced new or upgraded products in recent quarters and expect to continue to enhance and extend our product
portfolio. Product performance problems are often more acute for initial deployments of new products and product
enhancements. Modifying our products to enable customers to integrate them into a new type of network architecture
entails similar risks. If significant reliability, quality, or network monitoring problems develop as a result of our product
development, manufacturing or integration, a number of negative effects on our business could result, including:
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increased costs associated with addressing software or hardware defects, including service and warranty expenses;
payment of liquidated damages for performance failures or delays;
high inventory obsolescence expense;
delays in collecting accounts receivable;
cancellation or reduction in orders from customers; and
damage to our reputation or legal actions by customers or end users.
Because we outsource manufacturing to contract manufacturers and use a direct order fulfillment model for certain of
our products, we may be subject to product performance problems resulting from the acts or omissions of these third
parties. These product performance problems could damage our business reputation and negatively affect our results
of operations.
We may be required to write off significant amounts of inventory.
In recent years, we have placed the majority of our orders to manufacture components or complete assemblies for
many of our products only when we have firm orders from our customers. Because this practice can result in delays
in the delivery of products to customers and place us at a competitive disadvantage, we now order equipment and
components from our contract manufacturers and suppliers based on forecasts of customer demand across all of our
products. We believe this change is necessary in response to increased customer insistence upon shortened delivery
terms. This change in our inventory purchases exposes us to the risk that our customers will not order those products
for which we have forecasted sales, or will purchase fewer than the number of products we have forecasted. Our pur-
chase agreements generally do not require that a customer guarantee any minimum purchase level and customers
often may modify, reduce or cancel purchase quantities. As a result we may purchase inventory based on forecasted
sales and in anticipation of purchases that never come to fruition. In such cases, we may be required to write off
inventory. We may also be required to write off inventory as a result of the effect of environmental regulations such
as the Restriction of the Use of Certain Hazardous Substances (RoHS), adopted by the European Union. As a result
of previous component purchases that we based on forecasted sales, we currently hold inventory that includes non-
compliant components. If we are unable to locate alternate demand for these non-compliant components outside of
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the European Union, we may be required to write off or write down this inventory. If we are required to write off, or
write down inventory, it may result in an accounting charge that could materially affect our results of operations for
the quarter in which such charge occurs.
Continued shortages in component supply or manufacturing capacity could increase our costs, adversely
affect our results of operations and constrain our ability to grow our business.
As we have expanded our product portfolio, increased our use of contract manufacturers and increased our product
sales in recent years manufacturing capacity and supply constraints related to components and subsystems have
become increasingly significant issues for us. We have encountered and continue to experience component shortages
that have affected our operations and ability to deliver products to customers in a timely manner. Growth in customer
demand for the communications networking products supplied by us, our competitors and other third parties, has
resulted in supply constraints among providers of some components used in our products. In addition, environmental
regulations, such as the Restriction of the Use of Certain Hazardous Substances (RoHS) adopted by the European
Union, have resulted in increased demand for compliant components from suppliers. As a result, we may experience
delays or difficulty obtaining compliant components from suppliers. Component shortages and manufacturing capacity
constraints may also arise, or be exacerbated by difficulties with our suppliers or contract manufacturers, or our failure
to adequately forecast our component or manufacturing needs. If shortages or delays persist or worsen, the price of
required components may increase, or the components may not be available at all. If we are unable to secure the com-
ponents or subsystems that we require at reasonable prices, or are unable to secure manufacturing capacity adequate
to meet our needs, we may experience delivery delays and may be unable to satisfy our contractual obligations to cus-
tomers. These delays may cause us to incur liquidated damages to customers and negatively affect our revenue and
gross margin. Shortages in component supply or manufacturing capacity could also limit our opportunities to pursue
additional growth or revenue opportunities and could harm our business reputation and customer relationships.
We may not be successful in selling our products into new markets and developing and managing new
sales channels.
We continue to take steps to sell our expanded product portfolio into new geographic markets and to a broader cus-
tomer base, including enterprises, cable operators, and federal, state and local governments. We have less experience
in these markets and believe, in order to succeed in these markets, we must develop and manage new sales channels
and distribution arrangements. We expect these relationships to be an increasingly important part of the growth of
our business and our efforts to increase revenue. Because we have only limited experience in developing and managing
such channels, we may not be successful in reaching additional customer segments, expanding into new geographic
regions, or reducing the financial risks of entering new markets and pursuing new customer segments. We may
expend time, money and other resources on channel relationships that are ultimately unsuccessful. In addition, sales
to federal, state and local governments require compliance with complex procurement regulations with which we have
little experience. We may be unable to increase our sales to government contractors if we determine that we cannot
comply with applicable regulations. Our failure to comply with regulations for existing contracts could result in civil,
criminal or administrative proceedings involving fines and suspension or debarment from federal government con-
tracts. Failure to manage additional sales channels effectively would limit our ability to succeed in these new markets
and could adversely affect our ability to grow our customer base and revenue.
We may experience delays in the development and enhancement of our products that may negatively
affect our competitive position and business.
Because our products are based on complex technology, we can experience unanticipated delays in developing,
improving, manufacturing or deploying them. Each step in the development life cycle of our products presents serious
risks of failure, rework or delay, any one of which could decrease the timing and cost-effective development of such
product and could affect customer acceptance of the product. Unexpected intellectual property disputes, failure of
critical design elements, and a host of other execution risks may delay or even prevent the introduction of these
products. Our development efforts may also be affected, particularly in the near term, by our decision to restructure
development functions around technology sets rather than product lines or location-specific development. In addition,
we expect to increase hiring of personnel for our development facility in India and expand research and development
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activity. Modification of research and development strategies and changes in allocation of resources could be disruptive
to our development efforts. If we do not develop and successfully introduce products in a timely manner, our competi-
tive position may suffer and our business, financial condition and results of operations would be harmed.
We must manage our relationships with contract manufacturers to ensure that our product requirements
are met timely and effectively.
We rely on contract manufacturers to perform the majority of the manufacturing operations for our products and
components and we are increasingly utilizing overseas suppliers, particularly in Asia. The qualification of our contract
manufacturers is a costly and time-consuming process, and these manufacturers build product for other companies,
including our competitors. We are constantly reviewing our manufacturing capability, including the work of our con-
tract manufacturers to ensure that our production requirements are met in terms of cost, capacity, quality and reliability.
From time to time, we may decide to transfer the manufacturing of a product from one contract manufacturer to
another, to better meet our production needs. Efforts to transfer to a new contract manufacturer or consolidate our use
of suppliers may result in temporary increases in inventory volumes purchased in order to ensure continued supply. It is
possible that we may not effectively manage these contract manufacturer transitions. Moreover, new contract manufac-
turers may not perform as well as expected. As a result, we experience risks associated with lead times, on time delivery
and quality assurance that could harm our business. In addition, we do not have contracts in place with some of these
providers and do not have guaranteed supply of components or manufacturing capacity. Our inability to effectively
manage our relationships with our contract manufacturers, particularly overseas, could negatively affect our business
and results of operations.
We depend on a limited number of suppliers, and for some items we do not have a substitute supplier.
We depend on a limited number of suppliers for our product components and subsystems, as well as for equipment
used to manufacture and test our products. Our products include several components for which reliable, high-volume
suppliers are particularly limited. Some key optical and electronic components we use in our products are currently
available only from sole or limited sources, and in some cases, that source also is a competitor. As a result of this con-
centration in our supply chain, particularly for optical components, our business and operations would be negatively
affected if our suppliers were to experience any significant disruption affecting the price, quality, availability or timely
delivery of components. The loss of a source of key components could require us to re-engineer products that use
those components, which would increase our costs and negatively affect our product gross margin. The partial or com-
plete loss of a sole or limited source supplier could result in lost revenue, added costs and deployment delays that
could harm our business and customer relationships.
our failure to manage our relationships with service delivery partners effectively could adversely impact
our financial results and relationship with customers.
We rely on a number of service delivery partners, both domestic and international, to complement our global service
and support resources. We expect to increasingly rely upon third party service delivery partners for the installation of
our equipment in larger network builds, which often include more onerous installation, testing and acceptance terms.
In order to ensure that we timely install our products and satisfy obligations to our customers, we must identify, train
and certify additional appropriate partners. The certification of these partners can be costly and time-consuming, and
these partners service products for other companies, including our competitors. We may not be able to effectively
manage our relationships with our partners and we cannot be certain that they will be able to deliver our services in
the manner or time required. If our service partners are unsuccessful in delivering services:
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we may suffer delays in recognizing revenue in cases where revenue recognition is dependent upon product
installation, testing and acceptance;
our services revenue may be adversely affected; and
our relationship with customers could suffer.
We may incur significant costs and our competitive position may suffer as a result of our efforts to protect
and enforce our intellectual property rights or respond to claims of infringement from others.
Despite efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use
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our products or technology. This is likely to become an increasingly important issue as we expand our product develop-
ment into India and the manufacture of products and components to contract manufacturers in Asia. These and other
international operations could expose us to a lower level of intellectual property protection than in the United States.
Monitoring unauthorized use of our products is difficult, and we cannot be certain that the steps that we are taking
will prevent unauthorized use of our technology. If competitors are able to use our technology, our ability to compete
effectively could be harmed.
In recent years, we have filed suit to enforce our intellectual property rights. From time to time we have also been
subject to litigation and other third party intellectual property claims, including as a result of our indemnification obli-
gations to customers or resellers that purchase our products. The frequency of these assertions is increasing as patent
holders, including entities that are not in our industry and that purchase patents as an investment or to monetize such
rights by obtaining royalties, use infringement assertions as a competitive tactic and a source of additional revenue.
Intellectual property claims can significantly divert the time and attention of our personnel and result in costly litigation.
Intellectual property infringement claims can also require us to pay substantial royalties, enter into license agreements
and/or develop non-infringing technology. Accordingly, the costs associated with third party intellectual property claims
could adversely affect our business, results of operations and financial condition.
our international operations could expose us to additional risks and result in increased operating expense.
We market, sell and service our products globally. We have established offices around the world, including in North
America, Europe, Latin America and the Asia Pacific region. We have also established a development operation in India
to pursue offshore development resources and are increasingly relying upon overseas suppliers, particularly in Asia, for
materials sourcing of components and contract manufacturing of our products. We expect that our international activ-
ities will be dynamic during fiscal 2007, and we may enter new markets and withdraw from or reduce operations in
others. These changes to our international operations will require significant management attention and financial
resources. In some countries, our success will depend in part on our ability to form relationships with local partners.
Our inability to identify appropriate partners or reach mutually satisfactory arrangements for international sales of our
products could impact our ability to maintain or increase international market demand for our products.
International operations are subject to inherent risks, and our future results could be adversely affected by a number of
factors, including:
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greater difficulty in collecting accounts receivable and longer collection periods;
difficulties and costs of staffing and managing foreign operations;
the impact of recessions in economies outside the United States;
reduced protection for intellectual property rights in some countries;
adverse tax consequences;
social, political and economic instability;
trade protection measures, export compliance, qualification to transact business and other regulatory requirements;
effects of changes in currency exchange rates; and
natural disasters and epidemics.
our efforts to offshore certain development resources and operations to India may not be successful and
may expose us to unanticipated costs or liabilities.
We have established a development operation in India and expect to increase hiring of personnel for this facility during
fiscal 2007. We have limited experience in offshoring our business functions, particularly development operations, and
there is no assurance that our plan will enable us to achieve meaningful cost reductions or greater resource efficiency.
Further, offshoring to India involves significant risks, including:
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difficulty hiring and retaining appropriate engineering resources due to increased competition for such resources;
the knowledge transfer related to our technology and exposure to misappropriation of intellectual property or
confidential information, including information that is proprietary to us, our customers and other third parties;
heightened exposure to changes in the economic, security and political conditions of India;
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currency exchange and tax risks associated with offshore operations; and
development efforts that do not meet our requirements because of language, cultural or other differences associ-
ated with international operations, resulting in errors or delays.
Difficulties resulting from the factors above and other risks associated with offshoring could expose us to increased
expense, impair our development efforts, harm our competitive position and damage our reputation. Our efforts to
offshore certain development resources to India could be disruptive to our business and may cause us to incur substan-
tial unanticipated costs or expose us to unforeseen liabilities.
our exposure to the credit risks of our customers and resellers may make it difficult to collect receivables
and could adversely affect our operating results and financial condition.
Industry and economic conditions have weakened the financial position of some of our customers. To sell to some of
these customers, we may be required to take risks of uncollectible accounts. We may be exposed to similar risks relat-
ing to third party resellers and other sales channel partners, as we intend to increasingly utilize such parties as we enter
into new geographies, particularly in Europe. While we monitor these situations carefully and attempt to take appro-
priate measures to protect ourselves, it is possible that we may have to write down or write off doubtful accounts.
Such write-downs or write-offs would negatively affect our operating results for the period in which they occur, and,
if large, could have a material adverse effect on our operating results and financial condition.
efforts to restructure our operations and align our resources with market opportunities could disrupt our
business and affect our results of operations.
We have taken several steps, including reductions in force, office closures, and internal reorganizations to reduce the
size and cost of our operations and to better match our resources with our market opportunities. We continue to
make changes to our operations and allocation of resources in order to improve efficiency and match our resources
with market opportunities. These changes could be disruptive to our business. In addition, our efforts in prior periods
to reduce cost and improve efficiency have resulted in the recording of accounting charges. These include inventory
and technology-related write-offs, workforce reduction costs and charges relating to consolidation of excess facilities.
If we are required to take a substantial charge related to restructuring efforts, our results of operations would be
adversely affected in such period.
If we are unable to attract and retain qualified personnel, we may be unable to manage our
business effectively.
Competition to attract and retain highly skilled technical and other personnel with experience in our industry is increas-
ing in intensity and our employees have been the subject of targeted hiring by our competitors. We may experience
difficulty retaining and motivating existing employees and attracting qualified personnel to fill key positions. It may be
difficult to replace members of our management team or other key personnel, and the loss of such individuals could
be disruptive to our business. Because we generally do not have employment contracts with our employees, we must
rely upon providing competitive compensation packages and a high-quality work environment in order to retain and
motivate employees. We have informed employees that we will not be issuing equity awards as broadly or at the same
level as historical stock option grants. If we are unable to attract and retain qualified personnel, we may be unable to
manage our business effectively.
We may be required to assume warranty, service, development and other unexpected obligations in con-
nection with our resale of complementary products of other companies.
We have entered into agreements with strategic partners that permit us to distribute the products of other companies.
As part of our strategy to diversify our product portfolio and customer base, we may enter into additional resale and
original equipment manufacturer agreements in the future. To the extent we succeed in reselling the products of these
companies, we may be required by customers to assume certain warranty, service and development obligations. While
our suppliers often agree to support us with respect to these obligations, we may be required to extend greater pro-
tection in order to effect a sale. Moreover, some of the companies whose products we resell are relatively small
companies with limited financial resources. If they are unable to satisfy these obligations, we may have to expend our
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own resources to do so. This risk is amplified because the equipment that we are selling has been designed and man-
ufactured by other third parties and may be subject to warranty claims, the magnitude of which we are unable to
evaluate fully. We may be required to assume warranty, service, development and other unexpected obligations in
connection with our resale of complementary products of other companies.
strategic acquisitions and investments may expose us to increased costs and unexpected liabilities.
We may acquire or make strategic investments in other companies to add or expand the markets we address and
diversify our customer base. We may also engage in these transactions to acquire or accelerate the development of
products incorporating new technologies sought after by our customers. To do so, we may use cash, issue equity that
would dilute our current shareholders’ ownership, incur debt or assume indebtedness. Strategic investments and
acquisitions involve numerous risks, including:
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difficulties in integrating the operations, technologies and products of the acquired companies;
diversion of management’s attention;
potential difficulties in completing projects of the acquired company and costs related to in-process projects;
the potential loss of key employees of the acquired company;
subsequent amortization expenses related to intangible assets and charges associated with impairment of goodwill;
ineffective internal controls over financial reporting for purposes of Section 404 of the Sarbanes-Oxley Act;
dependence on unfamiliar supply partners; and
exposure to unanticipated liabilities, including intellectual property infringement claims.
As a result of these and other risks, any acquisitions or strategic investments may not reap the intended benefits and
may ultimately have a negative impact on our business, results of operation and financial condition.
We may be required to take further write-downs of goodwill and other intangible assets.
As of October 31, 2006, we had $232.0 million of goodwill on our balance sheet. This amount primarily represents
the remaining excess of the total purchase price of our acquisitions over the fair value of the net assets acquired. At
October 31, 2006, we had $91.3 million of other intangible assets on our balance sheet. The amount primarily reflects
purchased technology from our acquisitions. At October 31, 2006, goodwill and other intangible assets represented
approximately 17.6% of our total assets. During the fourth quarter of 2005, we incurred a goodwill impairment
charge of approximately $176.6 million and an impairment of other intangibles of $45.7 million. If we are required
to record additional impairment charges related to goodwill and other intangible assets, such charges would have the
effect of decreasing our earnings or increasing our losses in such period. If we are required to take a substantial impair-
ment charge, our earnings per share or net loss per share could be materially adversely affected in such period.
We may be adversely affected by fluctuations in currency exchange rates.
Historically, our primary exposure to currency exchange rates has been related to non-U.S. dollar denominated operat-
ing expenses in Europe, Asia and Canada where we sell primarily in U.S. dollars. As we increase our international sales
and utilization of international suppliers, we expect to transact additional business in currencies other than the U.S. dol-
lar. As a result, we will be subject to the possibility of greater effects of foreign exchange translation on our financial
statements. For those countries outside the United States where we have significant sales, a devaluation in the local cur-
rency would result in reduced revenue and operating profit and reduce the value of our local inventory presented in our
financial statements. In addition, fluctuations in foreign currency exchange rates may make our products more expen-
sive for customers to purchase or increase our operating costs, thereby adversely affecting our competitiveness. To date,
we have not significantly hedged against foreign currency fluctuations; however, we may pursue hedging alternatives in
the future. Although exposure to currency fluctuations to date has not had an adverse effect on our business, there can
be no assurance that exchange rate fluctuations in the future will not have a material adverse effect on our revenue
from international sales and, consequently, our business, operating results and financial condition.
failure to maintain effective internal controls over financial reporting could have a material adverse effect
on our business, operating results and stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that we include in our annual report, a report containing man-
agement’s assessment of the effectiveness of our internal controls over financial reporting as of the end of our fiscal
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year and a statement as to whether or not such internal controls are effective. Such report must also contain a state-
ment that our independent registered public accounting firm has issued an attestation report on management’s
assessment of such internal controls.
We initially became subject to these requirements for our fiscal year ended October 31, 2005. Compliance with these
requirements has resulted in, and is likely to continue to result in, significant costs and the commitment of time and
operational resources. Growth of our business, including our broader product portfolio and increased transaction vol-
ume, will necessitate ongoing changes to our internal control systems, processes and infrastructure, including our
information systems. Our increasingly global operations, including our development facility in India and offices abroad,
will pose additional challenges to our internal control systems as their operations become more significant. We cannot
be certain that our current design for internal control over financial reporting, and any modifications necessary to
reflect changes in our business, will be sufficient to enable management or our independent registered public account-
ing firm to determine that our internal controls are effective for any period, or on an ongoing basis. If we are unable to
assert that our internal controls over financial reporting are effective (or if our independent registered public account-
ing firm is unable to attest that our management’s report is fairly stated or they are unable to express an opinion on
our management’s assessment of the effectiveness of internal controls over financial reporting), our business may be
harmed. Market perception of our financial condition and the trading price of our stock may be adversely affected and
customer perception of our business may suffer.
our business is dependent upon the proper functioning of our information systems and upgrading these
systems may result in disruption to our operating processes and internal controls.
The efficient operation of our business is dependent on the successful operation of our information systems. In partic-
ular, we rely on our information systems to process financial information, manage inventory and administer our sales
transactions. In an effort to improve the efficiency of our operations, achieve greater automation and support the
growth of our business, we are in the process of upgrading certain information systems and expect to implement a
new version of our Oracle management information system during fiscal 2007. As a result of these changes, we antici-
pate that we will have to modify a number of our operational processes and internal control procedures to conform to
the work-flows of new or upgraded information systems. We will also have to undergo a process of validating the
data in any new system to ensure its integrity and will need to train our personnel. We cannot assure you that these
changes to our information systems will occur without some level of disruption of our operating processes and con-
trols. Any material disruption, malfunction or similar problems with our information systems could negatively impact
our business operations.
obligations associated with our outstanding indebtedness on our convertible notes may adversely affect
our business.
At October 31, 2006, indebtedness on our outstanding 3.75% Convertible Notes, due February 1, 2008 and 0.25%
Convertible Senior Notes due May 1, 2013 totaled $842.3 million in aggregate principal. Our indebtedness and repay-
ment obligations could have important negative consequences, including:
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increasing our vulnerability to general adverse economic and industry conditions;
limiting our ability to obtain additional financing;
reducing the availability of cash resources available for other purposes, including capital expenditures;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we com-
pete; and
placing us at a possible competitive disadvantage to competitors that have better access to capital resources.
We may also add additional indebtedness such as equipment loans, working capital lines of credit and other long term
debt. Our repayment obligations associated with our convertible notes may adversely affect our business.
our stock price is volatile.
Our common stock price has experienced substantial volatility in the past, and may remain volatile in the future.
Volatility can arise as a result of a number of the factors discussed in this “Risk Factors” section, as well as divergence
between our actual or anticipated financial results and published expectations of analysts, and announcements that
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we, our competitors, or our customers may make. Volatility in our common stock price and liquidity in our common
stock may also be negatively affected by the one-for-seven reverse stock split of our common stock completed on
September 22, 2006.
Item 1B. unresolveD stAff Comments
Not applicable.
Item 2. ProPertIes
As of October 31, 2006, all of our properties are leased. Our principal executive offices are located in Linthicum,
Maryland. We lease twenty-four facilities related to our ongoing operations. These include four buildings located at
various sites near Linthicum, Maryland, including an engineering facility, two manufacturing facilities, and one admin-
istrative and sales facility. We also have engineering and/or service facilities located in Alpharetta, Georgia; Acton,
Massachusetts; and Kanata, Canada. During fiscal 2006, we commenced operations of our development facility in
Gurgaon, India and a manufacturing support office in Shenzhen, Peoples Republic of China. We also lease various
small offices in the United States and abroad to support our sales and services. We believe the facilities we are now
using are adequate and suitable for our business requirements.
We lease a number of properties that we no longer occupy. As part of our restructuring costs, we provide for the esti-
mated cost of the net lease expense for these facilities. The cost is based on the fair value of future minimum lease
payments under contractual obligations offset by the fair value of the estimated future sublease payments that we
may receive. As of October 31, 2006, our accrued restructuring liability related to these properties was $35.6 million.
If actual market conditions relating to the use of these facilities are less favorable than those projected by management,
additional restructuring costs associated with these facilities may be required. For additional information regarding our
lease obligations, See Item 8. “Financial Statements and Supplementary Data.”
Item 3. leGAl ProCeeDInGs
On October 3, 2000, Stanford University and Litton Systems filed a complaint in the United States District Court for the
Central District of California against Ciena and several other defendants, alleging that optical fiber amplifiers incorpo-
rated into certain of those parties’ products infringe U.S. Patent No. 4,859,016 (the “‘016 Patent”). The complaint
seeks injunctive relief, royalties and damages. On October 10, 2003, the court stayed the case pending final resolution
of matters before the U.S. Patent and Trademark Office (the “PTO”), including a request for and disposition of a reex-
amination of the ‘016 Patent. On October 16, 2003 and November 2, 2004, the PTO granted reexaminations of the
‘016 Patent, resulting in a continuation of the stay of the case. On September 11, 2006, the PTO issued a Notice of
Intent to Issue a Reexamination Certificate and Statement of Reasons for Patentability/Confirmation, stating its intent
to confirm certain claims of the ‘016 Patent. Thereafter, on September 19, 2006, Litton Systems filed a status report in
which it requested that the district court lift the stay of the case, which request was denied by the district court on
October 13, 2006. We believe that we have valid defenses to the lawsuit and intend to defend it vigorously in the
event the stay of the case is lifted.
As a result of our merger with ONI Systems Corp. in June 2002, we became a defendant in a securities class action
lawsuit. Beginning in August 2001, a number of substantially identical class action complaints alleging violations of the
federal securities laws were filed in the United States District Court for the Southern District of New York. These com-
plaints name ONI, Hugh C. Martin, ONI’s former chairman, president and chief executive officer; Chris A. Davis, ONI’s
former executive vice president, chief financial officer and administrative officer; and certain underwriters of ONI’s ini-
tial public offering as defendants. The complaints were consolidated into a single action, and a consolidated amended
complaint was filed on April 24, 2002. The amended complaint alleges, among other things, that the underwriter
defendants violated the securities laws by failing to disclose alleged compensation arrangements (such as undisclosed
commissions or stock stabilization practices) in the initial public offering’s registration statement and by engaging in
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manipulative practices to artificially inflate the price of ONI’s common stock after the initial public offering. The
amended complaint also alleges that ONI and the named former officers violated the securities laws on the basis of an
alleged failure to disclose the underwriters’ alleged compensation arrangements and manipulative practices. No spe-
cific amount of damages has been claimed. Similar complaints have been filed against more than 300 other issuers
that have had initial public offerings since 1998, and all of these actions have been included in a single coordinated
proceeding. Mr. Martin and Ms. Davis have been dismissed from the action without prejudice pursuant to a tolling
agreement. In July 2004, following mediated settlement negotiations, the plaintiffs, the issuer defendants (including
Ciena), and their insurers entered into a settlement agreement, whereby, if approved, the plaintiffs’ cases against the
issuers would be dismissed, the insurers would agree to guarantee a recovery by the plaintiffs from the underwriter
defendants of at least $1 billion, and the issuer defendants would agree to assign or surrender to the plaintiffs certain
claims the issuers may have against the underwriters. The settlement agreement does not require Ciena to pay any
amount toward the settlement or to make any other payments. In October 2004, the district court certified a class
with respect to the Section 10(b) claims in six “focus cases” selected out of all of the consolidated cases, which cases
did not include Ciena, and which decision was appealed by the underwriter defendants to the U.S. Court of Appeals
for the Second Circuit. On February 15, 2005, the district court granted the motion filed by the plaintiffs and issuer
defendants for preliminary approval of the settlement agreement, subject to certain modifications to the proposed bar
order, and directed the parties to submit a revised settlement agreement reflecting its opinion. On August 31, 2005,
the district court issued a preliminary order approving the revised stipulated settlement agreement, and approving and
setting dates for notice of the settlement to all class members. A fairness hearing was held on April 24, 2006, at which
time the court took the matter under advisement. If the court determines that the settlement is fair to the class mem-
bers, the settlement will be approved. On December 5, 2006, the U.S. Court of Appeals for the Second Circuit vacated
the district court’s grant of class certification in the six focus cases. Because the settlement agreement involves certifi-
cation of a settlement class as part of the approval process, the impact of the Second Circuit’s decision on the
settlement remains unclear.
In addition to the matters described above, we are subject to various legal proceedings, claims and litigation arising in
the ordinary course of business. While the outcome of these matters is currently not determinable, we do not expect
that the ultimate costs to resolve these matters will have a material effect on our results of operations, financial posi-
tion or cash flows.
Item 4. suBmIssIon of mAtters to A vote of seCurIty HolDers
No matters were submitted to a vote of security holders in the fourth quarter of fiscal 2006.
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CIENA C O RPO RATI ON 10- K
CIENA CORPORAT ION 10-K
PART II
Item 5.
mArKet for reGIstrAnt’s Common stoCK AnD relAteD
stoCKHolDer mAtters
(a) Ciena’s common stock is traded on the NASDAQ Global Select Market under the symbol “CIEN.” The following
table sets forth the high and low sales prices of Ciena common stock, as reported on the NASDAQ Global Select
Market, for the fiscal periods indicated. The sales prices below have been adjusted to reflect the one-for-seven
reverse stock split of Ciena’s authorized and outstanding common stock effected on September 22, 2006.
Fiscal Year 2005
First Quarter ended January 31
Second Quarter ended April 30
Third Quarter ended July 31
Fourth Quarter ended October 31
Fiscal Year 2006
First Quarter ended January 31
Second Quarter ended April 30
Third Quarter ended July 31
Fourth Quarter ended October 31
Price range of Common stock
High
low
$24.50
$20.65
$18.55
$20.30
$28.77
$39.34
$33.67
$30.87
$15.40
$11.48
$14.35
$14.28
$16.31
$26.04
$23.38
$23.08
As of December 15, 2006, there were approximately 1,958 holders of record of Ciena’s common stock and
84,939,780 shares of common stock outstanding.
Ciena has never paid cash dividends on its capital stock. We intend to retain earnings for use in our business and we
do not anticipate paying any cash dividends in the foreseeable future.
In connection with the reverse stock split of its common shares described above, through its transfer agent, Ciena sold
1,011 shares of its common stock on October 9, 2006. The sale resulted in proceeds of approximately $27,500, which
were used to fund the payment to shareholders of record of cash in lieu of fractional shares resulting from the reverse
stock split. The sale of these shares was exempt from registration pursuant to Rule 236 of the Securities Act of 1933,
as amended.
(b) Not applicable.
(c) Not applicable.
Item 6. seleCteD ConsolIDAteD fInAnCIAl DAtA
The following selected consolidated financial data should be read in conjunction with Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements
and the notes thereto included in Item 8, “Financial Statements and Supplementary Data.” Ciena has a 52 or 53 week
fiscal year, which ends on the Saturday nearest to the last day of October in each year. For purposes of financial state-
ment presentation, each fiscal year is described as having ended on October 31. Each fiscal year in the tables below
comprised 52 weeks.
On September 22, 2006, we effected a one-for-seven reverse stock split of our authorized and outstanding common
stock. Pursuant to the reverse stock split, each seven shares of authorized and outstanding common stock was reclassi-
fied and combined into one share of new common stock. All references to share and per-share data for all periods
presented have been adjusted to give effect to the reverse stock split.
PA G E 30
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CIENA C O RPO RATI ON 10- K
Balance sheet Data:
(in thousands)
Cash, cash equivalents, short-
and long-term investments
Total assets
Long-term obligations, excluding
current portion
Stockholders’ equity
statement of operations Data:
2002
2003
2004
2005
2006
As of october 31,
$2,069,812
2,751,022
$1,611,467
2,378,165
$1,268,823
2,137,054
$1,093,487 $1,199,964
1,839,713
1,675,229
999,935
$1,527,269
861,149
$1,330,817
824,053
$1,154,422
761,398
924,484
$ 735,367 $ 753,626
year ended october 31,
2002
$ 361,155
596,034
(234,879)
2003
$ 283,136
210,091
73,045
2004
$ 298,707
226,954
71,753
2005
$ 427,257
291,067
136,190
2006
$564,056
306,275
257,781
(in thousands, except per share data)
Revenue
Cost of goods sold
Gross profit (loss)
Operating expenses:
Research and development
Selling and marketing
General and administrative
Amortization of intangible assets
In-process research and development
Restructuring costs
Goodwill impairment
Long-lived asset impairment
Gain on lease settlement
Recovery of sale, export, use tax
255,291
133,836
53,704
8,972
—
98,093
557,286
127,336
—
liabilities and payments
Total operating expenses
Provision (benefit) for doubtful accounts
—
14,813
1,249,331
(1,484,210)
Loss from operations
64,173
Interest and other income, net
(48,367)
Interest expense
(15,677)
Gain (loss) on equity investments, net
(2,683)
Gain (loss) on extinguishment of debt
(1,486,764)
Gain (loss) before income taxes
110,735
Provision for income taxes
Net income (loss)
$(1,597,499)
Basic net income (loss) per common share $ (30.62)
Diluted net income (loss) per dilutive
potential common share
Weighted average basic common shares
Weighted average dilutive
potential common shares
$ (30.62)
52,172
52,172
212,523
105,921
39,703
17,870
2,800
13,575
—
47,176
—
—
—
439,568
(366,523)
45,987
(39,359)
(4,760)
(20,606)
(385,261)
1,256
$(386,517)
$ (6.06)
205,364
112,310
28,592
30,839
30,200
57,107
371,712
15,926
—
(5,388)
(2,794)
843,868
(772,115)
25,936
(29,841)
(4,107)
(8,216)
(788,343)
1,121
$(789,464)
$ (10.60)
137,245
115,022
33,715
38,782
—
18,018
176,600
45,862
—
—
2,602
567,846
(431,656)
31,294
(28,413)
(9,486)
3,882
(434,379)
1,320
$(435,699)
$ (5.30)
111,069
104,434
47,476
25,181
—
15,671
—
—
(11,648)
—
(3,031)
289,152
(31,371)
50,245
(24,165)
215
7,052
1,976
1,381
$ 595
$ 0.01
$ (6.06)
63,814
$ (10.60)
74,493
$ (5.30)
82,170
$ 0.01
83,840
63,814
74,493
82,170
85,011
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CIENA C O RPO RATI ON 10- K
CIENA CORPORAT ION 10-K
Item 7.
mAnAGement’s DIsCussIon AnD AnAlysIs of fInAnCIAl
ConDItIon AnD results of oPerAtIons
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that
discuss future events or expectations, contain projections of results of operations or financial condition, changes in
the markets for our products and services, or state other “forward-looking” information. Ciena’s “forward-looking”
information is based on various factors and was derived using numerous assumptions. In some cases, you can identify
these “forward-looking statements” by words like “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential” or “continue” or the negative of those words and other comparable words. You
should be aware that these statements only reflect our current predictions and beliefs. These statements are subject
to known and unknown risks, uncertainties and other factors, and actual events or results may differ materially.
Important factors that could cause our actual results to be materially different from the forward-looking statements
are disclosed throughout this report, particularly under the heading “Risk Factors” in Item 1A of Part I of this annual
report. You should review these risk factors for a more complete understanding of the risks associated with an
investment in Ciena’s securities. Ciena undertakes no obligation to revise or update any forward-looking statements.
The following discussion and analysis should be read in conjunction with “Selected Consolidated Financial Data” and
Ciena’s consolidated financial statements and notes thereto included elsewhere in this annual report.
overview
Ciena Corporation is a supplier of communications networking equipment, software and services that support the
delivery and transport of voice, video and data services. Our products are used in communications networks operated
by telecommunications service providers, cable operators, governments and enterprises across the globe. We specialize
in transitioning legacy communications networks to converged, next-generation architectures, capable of efficiently
delivering a broader mix of high-bandwidth services. By improving network productivity, reducing costs and enabling
integrated services offerings, our optical, data and broadband access platforms create business and operational value
for our customers.
Over the past fiscal year, Ciena generated significant revenue growth. We also improved our gross margin and reduced
our operating costs over the prior fiscal year. Our steady progress along these fronts has resulted in an important mile-
stone for our business and financial results. For the fourth quarter of fiscal 2006, Ciena had net income of $13.1 million,
or $0.14 per diluted share, representing the achievement of quarterly profitability on a GAAP basis for the first time
since the third quarter of 2001. These quarterly results enabled us to achieve net income of $0.6 million, or $0.01 per
diluted share for fiscal 2006.
Revenue was $160.0 million for the fourth quarter of fiscal 2006, representing our eleventh consecutive sequential
quarterly increase. Revenue increased 32.0% from $427.3 million in fiscal 2005 to $564.1 million in fiscal 2006.
Revenue growth continues to be driven, in substantial part, by customers’ transitioning legacy networks to next-
generation networks better able to address a broader mix of traffic types and services. In addition, increased
broadband usage by end users continues to fuel demand for our products as service providers address network
capacity requirements. We expect that current market conditions will enable further growth of our business, including
opportunities for sales of our metro transport and switching products, particularly for Ethernet-driven applications.
Our percentage of international revenue increased from $86.5 million, or 20.2% of total revenue in fiscal 2005,
to $140.4 million, or 24.9% of total revenue in fiscal 2006. As a result of our participation in BT network builds,
including their 21st Century Network project, or 21CN, and other international network projects, we expect our inter-
national sales to continue to increase in fiscal 2007 and be a significant contributor to our growth. While we believe
that current market conditions will enable us to continue to grow our revenue during fiscal 2007, our business remains
susceptible to fluctuation from quarter to quarter due to the timing and size of equipment orders, our ability to deliver
products to fulfill those orders, and the timing of product acceptance for revenue recognition.
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CIENA C O RPO RATI ON 10- K
Sprint, Verizon and AT&T each accounted for greater than 10% of our fiscal 2006 revenue, and 40.2% in the aggre-
gate. BellSouth, Verizon and SAIC each accounted for greater than 10% of our fiscal 2005 revenue, and 31.3% in the
aggregate. Our concentration in revenue increased during fiscal 2006 largely due to the effect of mergers involving
some of our largest customers. The telecommunications industry has experienced substantial consolidation, including
the mergers of Verizon and MCI, and SBC and AT&T during our fiscal 2006. Each of these companies has been a sig-
nificant customer during prior periods. In addition, AT&T completed its acquisition of BellSouth in December 2006. As
a result, AT&T is likely to represent a greater percentage of our revenue in fiscal 2007.
Improving gross margin was a significant focus for us during fiscal 2006. Gross margin for fiscal 2006 was 45.7%,
up from 31.9% in fiscal 2005. Increased gross margin during fiscal 2006 reflects favorable product mix, product cost
reductions and improved manufacturing efficiencies. To the extent we encounter increased pricing pressure during
fiscal 2007, achieving further product cost improvements will be important for us to maintain the gross margin levels
attained during fiscal 2006. To continue to drive these product cost reductions, we are emphasizing a global approach
to sourcing components and manufacturing our products, and are increasingly utilizing overseas suppliers in lower cost
regions, particularly in Asia. While we experienced improved gross margin stability during fiscal 2006, gross margin
may be susceptible to fluctuation in fiscal 2007 due to product and customer mix, our ability to drive further product
cost reductions and pricing pressure.
Operating expense decreased from $301.8 million in the fourth quarter of fiscal 2005 to $68.9 million in the fourth
quarter of fiscal 2006. Operating expense decreased from $567.8 million in fiscal 2005 to $289.2 million in fiscal
2006. During the fourth quarter of fiscal 2005, we incurred aggregate charges of $222.3 million associated with
impairment of goodwill and long-lived assets. Exclusive of these impairment charges, the steps we have taken to
improve operational efficiencies enabled us to reduce our operating expense during fiscal 2006. We expect quarterly
operating expense to increase from the fourth quarter of fiscal 2006 during fiscal 2007 as we fund the growth of our
business through research and development initiatives, increased hiring and the expansion of our development opera-
tions in India. While we expect operating expense to increase, reducing these expenses as a percentage of revenue will
be critical if we are to maintain and build upon the profitable operating results achieved in fiscal 2006.
During fiscal 2006, we completed a public offering of 0.25% Convertible Senior Notes due May 1, 2013, in aggregate
principal amount of $300.0 million. This offering resulted in proceeds of $263.6 million, net of offering expenses,
underwriting discounts and the $28.5 million cost of a call spread option purchased by Ciena. During fiscal 2006, we
also repurchased $106.5 million of our outstanding 3.75% convertible notes, due February 1, 2008, in open market
transactions for $98.4 million. We recorded a gain on the extinguishment of debt in the amount of $7.1 million, which
consists of the $8.1 million gain from the repurchase of the notes less a write-off of $1.0 million of associated debt
issuance costs. At October 31, 2006, the remaining principal balance on our outstanding 3.75% convertible notes was
$542.3 million. Additional information regarding our outstanding convertible notes can be found in Note 12 to the
Consolidated Financial Statements under Item 8 of Part II of this annual report.
During fiscal 2006, we eliminated our former business units and discontinued reporting our results of operations on a
historical operating segment basis. Ciena’s financial results for fiscal 2006 are reported in this annual report as a single
business segment. Financial results for fiscal 2006 also represent our first full fiscal year reflecting the effect of our
adoption of Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment.” SFAS 123(R)
requires that we recognize compensation expense on our consolidated statement of operations for all share-based
awards made to employees and directors based on estimated fair values. We adopted SFAS 123(R) using the modified
prospective application transition method, and accordingly have not restated financial statements for prior periods to
include the impact of SFAS 123(R). Share-based compensation was $14.0 million during fiscal 2006, of which $0.3 mil-
lion was capitalized as part of inventory. Additional information regarding our adoption of SFAS 123(R) is set forth in
the Note 16 to the Consolidated Financial Statements under Item 8 of Part II of this annual report and in “Critical
Accounting Policies and Estimates” below.
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CIENA C O RPO RATI ON 10- K
CIENA CORPORAT ION 10-K
results of operations
Fiscal 2005 compared to Fiscal 2006
Revenue, cost of goods sold and gross profit
Cost of goods sold consists of component costs, direct compensation costs, warranty and other contractual obliga-
tions, royalties, license fees, direct technical support costs, cost of excess and obsolete inventory and overhead related
to manufacturing, technical support and engineering, furnishing and installation (“EF&I”) operations.
The table below (in thousands, except percentage data) sets forth the changes in revenue, cost of goods sold and
gross profit from fiscal 2005 to fiscal 2006.
2005
%*
2006
%*
fiscal year
Revenue:
Products
Services
Total revenue
Costs:
Products
Services
Total cost of goods sold
Gross profit
$374,275
52,982
427,257
248,931
42,136
291,067
$136,190
* Denotes % of total revenue
** Denotes % change from 2005 to 2006
87.6
12.4
100.0
58.2
9.9
68.1
31.9
$502,427
61,629
564,056
263,667
42,608
306,275
$257,781
89.1
10.9
100.0
46.7
7.6
54.3
45.7
Increase
(decrease)
$128,152
8,647
136,799
14,736
472
15,208
$121,591
%**
34.2
16.3
32.0
5.9
1.1
5.2
89.3
The table below (in thousands, except percentage data) sets forth the changes in product revenue, product cost of
goods sold and product gross profit from fiscal 2005 to fiscal 2006.
Product revenue
Product cost of goods sold
Product gross profit
2005
$374,275
248,931
$125,344
* Denotes % of product revenue
** Denotes % change from 2005 to 2006
fiscal year
%*
100.0
66.5
33.5
2006
$502,427
263,667
$238,760
%*
100.0
52.5
47.5
Increase
(decrease)
$128,152
14,736
$113,416
%**
34.2
5.9
90.5
The table below (in thousands, except percentage data) sets forth the changes in service revenue, service cost of goods
sold and service gross profit from fiscal 2005 to fiscal 2006.
Service revenue
Service cost of goods sold
Service gross profit
fiscal year
2005
$52,982
42,136
$10,846
%*
100.0
79.5
20.5
2006
$61,629
42,608
$19,021
%*
100.0
69.1
30.9
Increase
(decrease)
$8,647
472
$8,175
%**
16.3
1.1
75.4
* Denotes % of service revenue
** Denotes % change from 2005 to 2006
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C I EN A C O RPO RATI ON 1 0-K
CIENA C O RPO RATI ON 10- K
Revenue from sales to customers outside of the United States is reflected as International in the geographic distribu-
tion of revenue below. The table below (in thousands, except percentage data) sets forth the changes in geographic
distribution of revenue from fiscal 2005 to fiscal 2006.
United States
International
Total
2005
$340,774
86,483
$427,257
fiscal year
%*
79.8
20.2
100.0
2006
$423,687
140,369
$564,056
%*
75.1
24.9
100.0
Increase
(decrease)
$ 82,913
53,886
$136,799
%**
24.3
62.3
32.0
* Denotes % of total revenue
** Denotes % change from 2005 to 2006
During fiscal 2005 and fiscal 2006, certain customers accounted for 10% or more of our revenue during the respective
periods as follows (in thousands, except percentage data):
Verizon
BellSouth
SAIC
Sprint
AT&T
Total
2005
$ 43,673
43,946
46,058
N/A
N/A
$133,677
fiscal year
%*
10.2
10.3
10.8
—
—
31.3
2006
$ 70,225
N/A
N/A
89,793
66,926
$226,944
%*
12.4
—
—
15.9
11.9
40.2
N/A Denotes revenue representing less than 10% of total revenue for the period
*
Denotes % of total revenue
Revenue
z
z
z
z
Product revenue increased from fiscal 2005 to fiscal 2006, primarily due to a $48.3 million increase in sales
from our CN 4200™ FlexSelect™ Advanced Services Platform introduced in the third quarter of fiscal 2005, a
$43.7 million increase in sales from our core transport products and a $35.0 million increase in sales from our
CoreDirector® Multiservice Switch.
service revenue increased from fiscal 2005 to fiscal 2006, primarily due to a $4.6 million increase in sales of
maintenance and support services, a $2.2 million increase in sales of deployment services, and a $1.2 million
increase in sales of product training services.
united states revenue increased from fiscal 2005 to fiscal 2006, primarily due to a $38.1 million increase in
sales from our core transport products, a $30.7 million increase in sales from our CoreDirector® Multiservice
Switch, and a $15.9 million increase from sales of our CN 4200™ FlexSelect™ Advanced Services Platform.
International revenue increased from fiscal 2005 to fiscal 2006, primarily due to a $32.4 million increase in
sales from our CN 4200™ FlexSelect™ Advanced Services Platform and a $10.9 million increase in sales from our
multiservice optical access products.
Gross profit
z
z
z
Gross profit as a percentage of revenue increased from fiscal 2005 to fiscal 2006 largely due to increased
sales volume, sales of higher margin products and cost improvements resulting from our efforts to employ a
global approach to sourcing components and manufacturing our products.
Gross profit on products as a percentage of product revenue increased from fiscal 2005 to the fiscal 2006,
primarily due to cost reductions and higher margin product mix.
Gross profit on services as a percentage of services revenue increased from fiscal 2005 to fiscal 2006, pri-
marily due to service rate stability in connection with our deployment services and reduced service overhead and
deployment costs.
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CIENA C O RPO RATI ON 10- K
CIENA CORPORAT ION 10-K
Operating expenses
The table below (in thousands, except percentage data) sets forth the changes in operating expenses from fiscal 2005
to fiscal 2006.
2005
$137,245
115,022
33,715
38,782
18,018
176,600
45,862
2,602
—
$567,846
fiscal year
%*
32.1
26.9
7.9
9.1
4.2
41.3
10.7
2006
$111,069
104,434
47,476
25,181
15,671
—
—
0.6
—
132.8
(3,031)
(11,648)
$289,152
%*
19.7
18.5
8.4
4.5
2.8
—
—
(0.5)
(2.1)
51.3
Increase
(decrease)
$ (26,176)
(10,588)
13,761
(13,601)
(2,347)
(176,600)
(45,862)
(5,633)
(11,648)
$(278,694)
%**
(19.1)
(9.2)
40.8
(35.1)
(13.0)
(100.0)
(100.0)
(216.5)
N/A
(49.1)
Research and development
Selling and marketing
General and administrative
Amortization of intangible assets
Restructuring costs
Goodwill impairment
Long-lived asset impairment
Provision for (recovery of)
doubtful accounts, net
Gain on lease settlement
Total operating expenses
* Denotes % of total revenue
** Denotes % change from 2005 to 2006
z
z
z
z
z
z
z
research and development expense decreased from fiscal 2005 to fiscal 2006, primarily due to reductions of
$12.3 million in employee compensation, $6.9 million in prototype expense and $6.3 million in depreciation
expense. The reduction in employee compensation was driven by headcount reductions. We expect research and
development expense to increase during fiscal 2007 as a result of increased development activity, offset to some
extent by cost efficiencies from our India development operations.
selling and marketing expense decreased from fiscal 2005 to fiscal 2006 due to reductions of $7.3 million in
depreciation costs, $2.2 million in product introduction and marketing activities, $2.0 million in facility and
information systems expense, $1.7 million in temporary import costs and $0.8 million in travel. These reductions
were slightly offset by increases of $2.3 million in employee compensation. Salaries, bonuses and commissions
increased by $3.3 million during fiscal 2006, offset by a reduction of $1.1 million in share-based compensation
expense. We also expect sales and marketing expense to increase during fiscal 2007 as we continue to grow
our revenue.
General and administrative expense increased from fiscal 2005 to fiscal 2006 due to an increase of $6.5 mil-
lion in legal expense, primarily related to our patent litigation with Nortel Networks, $5.9 million in employee
compensation and $1.5 million in audit fees partially offset by a decrease of $0.5 million in directors and officers
insurance expense. Included in the legal expenses were $5.7 million in contingent fees paid to outside counsel
and advisors connected with the settlement of the Nortel litigation. The increase in employee compensation
included an increase of $2.7 million in share-based compensation expense.
Amortization of intangible assets costs decreased from fiscal 2005 to fiscal 2006 due to the write-off of
intangible assets recorded in the fourth quarter of fiscal 2005.
restructuring costs incurred during fiscal 2006 were primarily related to a $10.0 million charge associated with
previously restructured unused facilities located in San Jose, CA, and $6.3 million in charges related to workforce
reductions of approximately 155 employees and costs associated with the closure of facilities located in Kanata,
Canada; Shrewsbury, NJ and Beijing, China.
Provision for (recovery of) doubtful accounts, net for fiscal 2006 was related to the receipt of amounts due
from customers from whom payment was previously deemed doubtful due to the customers’ financial condition.
Gain on lease settlement for fiscal 2006 was related to the termination of our obligations under the leases for
our former Fremont, CA and Cupertino, CA facilities.
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CIENA C O RPO RATI ON 10- K
Other items
The table below (in thousands, except percentage data) sets forth the changes in other items from fiscal 2005 to
fiscal 2006.
Interest and other income, net
Interest expense
Gain (loss) on equity investments, net
Gain on extinguishment of debt
Provision for income taxes
* Denotes % of total revenue
** Denotes % change from 2005 to 2006
fiscal year
2005
$31,294
$28,413
$ (9,486)
$ 3,882
$ 1,320
%*
7.3
6.7
(2.2)
0.9
0.3
2006
$50,245
$24,165
$ 215
$ 7,052
$ 1,381
%*
8.9
4.3
—
1.3
0.2
Increase
(decrease)
$18,951
$ (4,248)
$ 9,701
$ 3,170
$ 61
%**
60.6
(15.0)
(102.3)
81.7
4.6
z
z
z
z
z
Interest and other income, net increased from fiscal 2005 to fiscal 2006 primarily due to higher interest rates.
Interest expense decreased from fiscal 2005 to fiscal 2006 due to the repurchase of a portion of our outstand-
ing 3.75% convertible notes during fiscal 2005 and fiscal 2006.
Gain (loss) on equity investments, net in fiscal 2005 was due to a decline in the value of our investments in
privately held technology companies that was determined to be other than temporary.
Gain on extinguishment of debt for fiscal 2006 resulted from our repurchase of $106.5 million of our out-
standing 3.75% convertible notes in open market transactions for $98.4 million. We recorded a gain on the
extinguishment of debt in the amount of $7.1 million, which consists of the $8.1 million gain from the repurchase
of the notes, less a write-off of $1.0 million of associated debt issuance costs.
Provision for income taxes for fiscal 2005 and fiscal 2006 was primarily attributable to foreign tax related to
Ciena’s foreign operations. We did not record a tax benefit for domestic losses during fiscal 2005 or fiscal 2006.
We will continue to maintain a valuation allowance against certain deferred tax assets until sufficient evidence
exists to support its reversal.
Fiscal 2004 compared to Fiscal 2005
Revenue, cost of goods sold and gross profit
The table below (in thousands, except percentage data) sets forth the changes in revenue, cost of goods sold and
gross profit from fiscal 2004 to fiscal 2005.
Revenue:
Products
Services
Total revenue
Costs:
Products
Services
Total cost of goods sold
Gross profit
* Denotes % of total revenue
2004
%*
2005
%*
fiscal year
$250,210
48,497
298,707
186,461
40,493
226,954
$ 71,753
83.8
16.2
100.0
62.4
13.6
76.0
24.0
$374,275
52,982
427,257
248,931
42,136
291,067
$136,190
87.6
12.4
100.0
58.2
9.9
68.1
31.9
Increase
(decrease)
$124,065
4,485
128,550
62,470
1,643
64,113
$ 64,437
%**
49.6
9.2
43.0
33.5
4.1
28.2
89.8
** Denotes % change from fiscal 2004 to fiscal 2005
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CIENA C O RPO RATI ON 10- K
CIENA CORPORAT ION 10-K
The table below (in thousands, except percentage data) sets forth the changes in product revenue, product cost of
goods sold and product gross profit from fiscal 2004 to fiscal 2005.
Product revenue
Product cost of goods sold
Product gross profit
* Denotes % of product revenue
2004
$250,210
186,461
$ 63,749
fiscal year
%*
100.0
74.5
25.5
2005
$374,275
248,931
$125,344
%*
100.0
66.5
33.5
Increase
(decrease)
$124,065
62,470
$ 61,595
%**
49.6
33.5
96.6
** Denotes % change from fiscal 2004 to fiscal 2005
The table below (in thousands, except percentage data) sets forth the changes in service revenue, service cost of goods
sold and service gross profit (loss) from fiscal 2004 to fiscal 2005.
Service revenue
Service cost of goods sold
Service gross profit
* Denotes % of service revenue
fiscal year
2004
$48,497
40,493
$ 8,004
%*
100.0
83.5
16.5
2005
$52,982
42,136
$10,846
%*
100.0
79.5
20.5
Increase
(decrease)
$4,485
1,643
$2,842
%**
9.2
4.1
35.5
** Denotes % change from fiscal 2004 to fiscal 2005
Revenue from sales to customers outside of the United States is reflected as International in the geographic distribu-
tion of revenue below. The table below (in thousands, except percentage data) sets forth the changes in geographic
distribution of revenue from fiscal 2004 to fiscal 2005.
United States
International
Total
2004
$221,456
77,251
$298,707
fiscal year
%*
74.1
25.9
100.0
2005
$340,774
86,483
$427,257
%*
79.8
20.2
100.0
Increase
(decrease)
$119,318
9,232
$128,550
%**
53.9
12.0
43.0
* Denotes % of total revenue
** Denotes % change from fiscal 2004 to fiscal 2005
During fiscal 2004 and fiscal 2005, certain customers each accounted for at least 10% of our revenue during the
respective periods as follows (in thousands, except percentage data):
Verizon
BellSouth
SAIC
Total
2004
$ N/A
N/A
46,557
$46,557
fiscal year
%*
—
—
15.6
15.6
2005
$ 43,673
43,946
46,058
$133,677
%*
10.2
10.3
10.8
31.3
N/A Denotes revenues recognized less than 10% for the period
*
Denotes % of total revenue
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C I EN A C O RPO RATI ON 1 0-K
CIENA C O RPO RATI ON 10- K
Revenue
z
z
z
z
Product revenue increased from fiscal 2004 to fiscal 2005 due to a $51.4 million increase in sales of broadband
access systems obtained from our May 2004 acquisition of Catena Networks, a $36.5 million increase in sales
from our core transport products, a $12.0 million increase in sales of our metro transport and switching products,
an $11.1 million increase in sales of our data networking products, and a $9.6 million increase in sales of our
CoreDirector® Multiservice Switch. As a result of the timing of our acquisitions of Catena and IPI, product revenue
for fiscal 2004 reflects only two quarters of revenue from these acquired products.
service revenue increased from fiscal 2004 to fiscal 2005 due to a $2.4 million increase in deployment services
and a $1.6 million increase from sales of training in fiscal 2005.
united states revenue increased from fiscal 2004 to fiscal 2005 due to a $51.2 million increase in sales of
broadband access systems, a $19.0 million increase in sales of our CoreDirector® Multiservice Switch, a $17.6 mil-
lion increase in sales from our core transport products, an $11.4 million increase in sales of our data networking
products, a $9.4 million increase in sales of our metro transport and switching products, and a $7.2 million
increase in sales of deployment services, maintenance and support, and training.
International revenue increased from fiscal 2004 to fiscal 2005 due an $18.9 million increase in sales from our
core transport products, and a $2.6 million increase in sales of our metro transport and switching products,
partially offset by a $9.4 million decrease in sales of our CoreDirector® Multiservice Switch and a $2.7 million
decrease in sales of deployment services, maintenance and support, and training.
Gross profit
z
z
z
Gross profit as a percentage of revenue increased from fiscal 2004 to fiscal 2005 primarily due to improve-
ments in product gross profit and to a lesser extent, improvements in service margins.
Product gross profit as a percentage of product revenue increased from fiscal 2004 to fiscal 2005 largely
due to favorable product mix, including a full year of sales of broadband access products in fiscal 2005, and prod-
uct cost reductions and improved manufacturing efficiencies.
service gross profit as a percentage of services revenue increased from fiscal 2004 to fiscal 2005 primarily
due to increased sales of training and reduced service overhead costs in fiscal 2005.
Operating expenses
The table below (in thousands, except percentage data) sets forth the changes in operating expenses from fiscal 2004
to fiscal 2005.
Research and development
Selling and marketing
General and administrative
Amortization of intangible assets
In-process research and development
Restructuring costs
Goodwill impairment
Long-lived asset impairment
Recovery of sale, export, use tax
liabilities and payments
(Recovery of) provision for
doubtful accounts, net
Total operating expenses
2004
$205,364
112,310
28,592
30,839
30,200
57,107
371,712
15,926
fiscal year
%*
68.8
37.6
9.6
10.3
10.1
19.1
124.4
5.3
2005
$137,245
115,022
33,715
38,782
—
18,018
176,600
45,862
%*
32.1
26.9
7.9
9.1
0.0
4.2
41.3
10.7
Increase
(decrease)
$ (68,119)
2,712
5,123
7,943
(30,200)
(39,089)
(195,112)
29,936
%**
(33.2)
2.4
17.9
25.8
(100.0)
(68.4)
(52.5)
188.0
(5,388)
(1.8)
—
0.0
5,388
(100.0)
(2,794)
$843,868
(0.9)
282.5
2,602
$567,846
0.6
132.9
5,396
$(276,022)
(193.1)
(32.7)
* Denotes % of total revenue
** Denotes % change from fiscal 2004 to fiscal 2005
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CIENA CORPORAT ION 10-K
z
z
z
z
z
z
z
z
z
research and development expense decreased from fiscal 2004 to fiscal 2005 primarily due to $22.5 million of
accelerated leasehold amortization recorded in fiscal 2004 with no comparable expense in fiscal 2005. This reduc-
tion of expense also included a reduction of $15.6 million in employee-related costs, $9.9 million in depreciation
expense, $8.3 million in facility related costs, $7.2 million in consulting costs, and $3.4 million in information sys-
tems costs during fiscal 2005. Ciena’s accelerated leasehold amortization expense during fiscal 2004 was due to
the closing of our San Jose, CA facility in September 2004. Employee-related expense reductions in 2005 reflect
lower headcount from the closing of our San Jose, CA facility and our further headcount reductions in fiscal 2005.
selling and marketing expense increased from fiscal 2004 to fiscal 2005 due to an increase of $3.0 million
related to customer demonstration systems, $1.1 million in tradeshow and marketing activities, $1.4 million
employee-related cost, and $0.6 million consulting, partially offset by reductions in depreciation expense of
$1.7 million and reductions of information system expenses of $1.3 million.
General and administrative expense increased from fiscal 2004 to fiscal 2005 primarily due to an increase
of $2.6 million related to legal services, $1.7 million for outside services related to Sarbanes-Oxley compliance,
$1.2 million related to the outsourcing of certain accounting services for our international operations, and
$1.3 million information systems. This was partially offset by a reduction of $1.9 million in employee-related costs.
Amortization of intangible assets costs increased from fiscal 2004 to fiscal 2005 due to higher amounts of
purchased intangible assets, such as developed technology and customer relationships, resulting from our acquisi-
tions of Catena Networks and Internet Photonics in May 2004. As a result of the timing of these acquisitions,
amortization of intangible assets in fiscal 2004 reflects only two fiscal quarters associated with these additional
purchased intangible assets.
In-process research and development (IPR&D) represents the estimated value of purchased in-process technol-
ogy that had not reached technological feasibility and had no alternative future use at the time of acquisition. In
the third quarter of fiscal 2004 we recorded $25.0 million and $5.2 million of IPR&D from our Catena and
Internet Photonics acquisitions, respectively. We had no acquisitions in fiscal 2005.
restructuring costs decreased from fiscal 2004 to fiscal 2005. In 2005, restructuring costs include an adjustment
of $11.4 million related to previously restructured facilities, due to lower expected sublease payments from the
continued excess supply of commercial property in certain markets where our unused facilities are located.
Restructuring costs for fiscal 2005 also include $6.6 million primarily related to workforce reductions of approxi-
mately 177 employees. In 2004, restructuring costs included $27.8 million, primarily related to the closure of our
San Jose, CA facility. Restructuring costs in 2004 also included $21.8 million related to workforce reductions of
approximately 560 employees and adjustments of $7.5 million, related to previously restructured facilities, associ-
ated with lower expected sublease payments and increased estimated operating expenses. These workforce
reductions were taken as part of our plan to reduce our costs and align resources with market opportunities.
Goodwill impairment decreased from fiscal 2004 to fiscal 2005. We incurred a goodwill impairment of
$176.6 million related to one of our former business units in fiscal 2005. This impairment was related to our
decision to suspend research and development for our CN 1000™ Next-Generation Broadband Access platform.
We recorded a goodwill impairment of $371.7 million related to three of our former business units in fiscal 2004.
This impairment was related to the decline in the forecasted demand for our products, along with the reduction in
valuations of comparable businesses.
long-lived assets impairment charges for fiscal 2005 were $45.9 million, and were largely attributable to our
decision to suspend research and development of our CN 1000™ Next-Generation Broadband Access platform
and market conditions affecting our broadband access products. The impairment of long-lived assets in fiscal
2005 included $45.7 million of intangible assets and $0.2 million of impaired research and development equip-
ment, which was classified as held for sale. During fiscal 2004, we recorded a $15.9 million long-lived assets
impairment, largely attributable to the closure of our San Jose, CA facility. The impairment of long-lived assets in
fiscal 2004 included $15.9 million of impaired research and development equipment, which was classified as held
for sale.
recovery of sales, export, use tax liabilities and payments during the fiscal 2004 was due to the resolution
of a use tax audit related to assets acquired from ONI.
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CIENA C O RPO RATI ON 10- K
z
(recovery of) provision for doubtful accounts, net during fiscal 2005 was $2.6 million and was related to
one customer from which payment was deemed doubtful due to the customer’s financial condition. During fiscal
2004, we recorded a recovery of doubtful accounts of $2.8 million, related primarily to the receipt of payment
from a customer from which payment was previously deemed doubtful. We maintain an allowance for potential
losses on a specific identification basis.
Other items
The table below (in thousands, except percentage data) sets forth the changes in other items from fiscal 2004 to
fiscal 2005.
Interest and other income, net
Interest expense
Loss on equity investments, net
Gain (loss) on extinguishment of debt
Provision for income taxes
* Denotes % of total revenue
** Denotes % change from fiscal 2004 to fiscal 2005
fiscal year
2004
$25,936
$29,841
$ 4,107
$ (8,216)
$ 1,121
%*
8.7
10.0
1.4
(2.8)
0.4
2005
$31,294
$28,413
$ 9,486
$ 3,882
$ 1,320
%*
7.3
6.7
2.2
0.9
0.3
Increase
(decrease)
$ 5,358
$ (1,428)
$ 5,379
$12,098
$ 199
%**
20.7
(4.8)
131.0
(147.2)
17.8
z
z
z
z
z
Interest and other income, net increased from fiscal 2004 to fiscal 2005 because of higher rates of return on
our investments.
Interest expense decreased from fiscal 2004 to fiscal 2005 due to the decrease in our outstanding debt obliga-
tions in fiscal 2005, resulting from our repurchase of all of the remaining outstanding ONI 5.0% convertible
subordinated notes during fiscal 2004 and the repurchase of $41.2 million in principal amount of our 3.75%
convertible notes during the third quarter of fiscal 2005.
loss on equity investments, net increased from fiscal 2004 to fiscal 2005 due to a further decline in the value
of our investments in privately held technology companies that was determined to be other than temporary.
Gain (loss) on extinguishment of debt during fiscal 2005 resulted from our repurchase of $41.2 million of our
outstanding 3.75% convertible notes, due February 1, 2008, in open market transactions for $36.9 million. We
recorded a gain on the extinguishment of debt in the amount of $3.9 million, which consists of the $4.3 million
gain from the repurchase of the notes less a write-off of $0.4 million of associated debt issuance costs. During
fiscal 2004, we recorded an $8.2 million loss on the extinguishment of debt related to our repurchase of all of
the remaining ONI 5.0% convertible subordinated notes outstanding.
Provision for income taxes for 2004 and 2005 was primarily attributable to foreign tax related to Ciena’s
foreign operations. We did not record a tax benefit for our domestic losses during either period. We will continue
to maintain a valuation allowance against certain deferred tax assets until sufficient evidence exists to support
its reversal.
liquidity and Capital resources
At October 31, 2006, our principal source of liquidity was cash and cash equivalents, short-term investments and
long-term investments. The following table summarizes our cash and cash equivalents, short-term investments and
long-term investments (in thousands):
Cash and cash equivalents
Short-term investments
Long-term investments
Total cash, cash equivalents, short-term and long-term investments
october 31,
2005
$ 358,012
579,531
155,944
$1,093,487
october 31,
2006
$ 220,164
628,393
351,407
$1,199,964
Increase
(decrease)
$(137,848)
48,862
195,463
$ 106,477
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CIENA CORPORAT ION 10-K
The increase in total cash, cash equivalents and short-term and long-term investments during fiscal 2006 was primarily
related to our issuance on April 10, 2006 of $300.0 million in aggregate principal amount of 0.25% Convertible
Senior Notes due May 1, 2013, resulting in proceeds of $263.6 million, net of offering expenses, underwriting dis-
counts and the $28.5 million cost of a call spread option purchased by Ciena. This increase was partially offset by
$98.4 million of cash used to repurchase a portion of our outstanding 3.75% convertible notes. Cash, cash equiva-
lents and short-term and long-term investments at October 31, 2006 also reflect $79.4 million of cash consumed in
operating activities during fiscal 2006. Based on past performance and current expectations, we believe that our cash
and cash equivalents, short-term investments, and cash generated from operations will satisfy our working capital
needs, capital expenditures and other liquidity requirements associated with our existing operations through at least
the next 12 months.
The following sections review the significant activities that had an impact on our cash during fiscal 2006.
Operating Activities
The following tables set forth (in thousands) significant components of our $79.4 million of cash used in operating
activities for fiscal 2006.
Net income
Net income
year ended
october 31, 2006
$ 595
Our net income for fiscal 2006 included the significant non-cash items summarized in the following table (in thousands):
Gain on early extinguishment of debt
Amortization of intangibles
Share-based compensation costs
Depreciation and amortization of leasehold improvements
Provision for inventory excess and obsolescence
Provision for warranty
Total significant non-cash charges
$ (7,052)
29,050
14,042
16,401
9,012
14,522
$75,975
Accounts receivable, Net
Cash consumed by accounts receivable, net increased from fiscal 2005 to fiscal 2006, due to increased sales volume,
contractual acceptance terms affecting the timing of our invoicing, recognition of revenue and longer payment terms
associated with our increased international revenue. The increase in our accounts receivable caused our days sales out-
standing (“DSO”) to increase from 61 days for fiscal 2005 to 68 days for fiscal 2006. We expect that our accounts
receivable, net may fluctuate from quarter to quarter, but generally will increase during fiscal 2007, due to expected
increased sales volume, and longer payment terms particularly related to our international customers.
The following table sets forth (in thousands) changes to our accounts receivable, net of allowance for doubtful
accounts, balance from the end of fiscal 2005 to the end of fiscal 2006.
Accounts receivable, net
october 31,
2005
$72,786
october 31,
2006
$107,172
Increase
(decrease)
$34,386
Inventory, Net
Cash consumed by inventory, net increased from the end of fiscal 2005 to the end of fiscal 2006, due to a combina-
tion of inventory purchased based on customer forecasts in advance of orders, finished goods inventory located at
customer facilities awaiting contractual acceptance and contract manufacturer transitions to consolidate our supply
chain and reduce product costs. As a result, Ciena’s inventory turns declined from 5.0 turns per year for the period
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ending October 31, 2005 to 2.5 turns per year for the period ending October 31, 2006. Our cash consumed by inven-
tory has increased in recent quarters. We expect our inventory turns will increase during fiscal 2007.
The following table sets forth (in thousands) changes to the components of our inventory from the end of fiscal 2005
through the end of fiscal 2006.
Raw materials
Work-in-process
Finished goods
Gross inventory
Reserve for excess and obsolescence
Net inventory
october 31,
2005
$ 21,177
3,136
47,615
71,928
(22,595)
$ 49,333
october 31,
2006
$ 29,627
9,156
89,628
128,411
(22,326)
$106,085
Increase
(decrease)
$ 8,450
6,020
42,013
56,483
269
$56,752
Restructuring and unfavorable lease commitments
During fiscal 2006, we paid $23.6 million in connection with a termination of our obligations under leases for our
former Fremont, CA and Cupertino, CA facilities. We paid an additional $9.5 million on leases related to restructured
facilities and $9.3 million on leases associated with unfavorable lease commitments. The following table reflects (in
thousands) the balance of liabilities for our restructured facilities and unfavorable lease commitments and the change
in these balances from the end of fiscal 2005 through the end of fiscal 2006.
Restructuring liabilities
Unfavorable lease commitments
Long-term restructuring liabilities
Long-term unfavorable lease commitments
Total restructuring liabilities and unfavorable
lease commitments
october 31,
2005
$ 15,492
9,011
54,285
41,364
october 31,
2006
$ 8,914
8,512
26,720
32,785
Increase
(decrease)
$ (6,578)
(499)
(27,565)
(8,579)
$120,152
$76,931
$(43,221)
Interest payable on Ciena’s convertible notes
Interest on Ciena’s outstanding 3.75% convertible notes, due February 1, 2008, is payable on February 1st and
August 1st of each year. During fiscal 2006, Ciena paid $21.7 million in interest on the 3.75% convertible notes.
Interest on Ciena’s outstanding 0.25% convertible senior notes, due May 1, 2013, is payable on May 1st and
November 1st of each year, commencing on November 1, 2006.
The following table reflects (in thousands) the balance of interest payable and the change in this balance from the end
of fiscal 2005 through the end of fiscal 2006.
Accrued interest payable
october 31,
2005
$6,082
october 31,
2006
$5,502
Increase
(decrease)
$(580)
Financing Activities
Cash provided by financing activities during fiscal 2006 was primarily related to a public offering of 0.25% Convertible
Senior Notes due May 1, 2013, in aggregate principal amount of $300.0 million that was completed during the sec-
ond quarter of fiscal 2006. Associated with the offering, we purchased a call spread option on our common stock for
$28.5 million and paid debt issuance costs of $7.9 million. During fiscal 2006, we also repurchased $106.5 million of
our outstanding 3.75% convertible notes, due February 1, 2008, in open market transactions for $98.4 million. We
also received $28.0 million from the exercise of employee stock options and employee participation in Ciena’s
employee stock purchase plan.
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CIENA CORPORAT ION 10-K
Contractual obligations
The following is a summary of our future minimum payments under contractual obligations as of October 31, 2006
(in thousands):
Convertible notes(1)
Operating leases
Purchase obligations(2)
Total
total
$ 878,057
126,882
97,326
$1,102,265
less than
one year
$ 21,128
26,141
97,326
$144,595
one to
three years
$553,929
46,628
—
$600,557
three to
five years
$ 1,500
35,143
—
$36,643
thereafter
$301,500
18,970
—
$320,470
(1) Our outstanding 3.75% convertible notes, due February 1, 2008, have an aggregate principal amount of $542.3 million. Interest is payable on
February 1st and August 1st of each year. Our outstanding 0.25% convertible senior notes, due May 1, 2013, have an aggregate principal amount
of $300.0 million. Interest on these notes is payable on November 1st and May 1st of each year, beginning on November 1, 2006.
(2) Purchase commitments relate to amounts we are obligated to pay to our contract manufacturers and component suppliers for inventory.
Some of our commercial commitments, including some of the future minimum payments set forth above, are secured
by standby letters of credit. The following is a summary of our commercial commitments secured by standby letters of
credit by commitment expiration date as of October 31, 2006 (in thousands):
Standby letters of credit
total
$8,415
less than
one year
$8,315
one to
three years
$100
three to
five years
$—
thereafter
$—
off-Balance sheet Arrangements
Ciena does not engage in any off-balance sheet financing arrangements. In particular, we do not have any interest in
so-called limited purpose entities, which include special purpose entities (SPEs) and structured finance entities.
Critical Accounting Policies and estimates
The preparation of consolidated financial statements requires Ciena to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities.
On an ongoing basis, we reevaluate our estimates, including those related to bad debts, inventories, investments,
intangible assets, goodwill, income taxes, warranty obligations, restructuring, and contingencies and litigation. Ciena
bases its 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 from these estimates
under different assumptions or conditions.
Revenue Recognition
Some of our communications networking equipment is integrated with software that is essential to the functionality
of the equipment. We provide unspecified software upgrades and enhancements related to the equipment through
our maintenance contracts for these products. Accordingly, we account for revenue in accordance with Statement of
Position No. 97-2, “Software Revenue Recognition,” and all related interpretations. Revenue is recognized when per-
suasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is
reasonably assured. In instances where final acceptance of the product is specified by the customer, revenue is deferred
until all acceptance criteria have been met. Customer purchase agreements and customer purchase orders are gener-
ally used to determine the existence of an arrangement. Shipping documents and customer acceptance, when
applicable, are used to verify delivery. We assess whether the fee is fixed or determinable based on the payment terms
associated with the transaction and whether the sales price is subject to refund or adjustment. We assess collectibility
based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the
customer’s payment history. When a sale involves multiple elements, such as sales of products that include services,
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the entire fee from the arrangement is allocated to each respective element based on its relative fair value and recog-
nized when revenue recognition criteria for each element are met. The amount of product and service revenue
recognized is affected by our judgments as to whether an arrangement includes multiple elements and, if so, whether
vendor-specific objective evidence of fair value exists. Changes to the elements in an arrangement and our ability to
establish vendor-specific objective evidence for those elements could affect the timing of revenue recognition. Our
total deferred revenue for products was $14.5 million and $4.3 million as of October 31, 2005 and October 31, 2006,
respectively. Our service revenue is deferred and recognized ratably over the period during which the services are to be
performed. Our total deferred revenue for services was $29.0 million and $36.4 million as of October 31, 2005 and
October 31, 2006, respectively.
Share-Based Compensation
On November 1, 2005, Ciena adopted SFAS 123(R), “Shared-Based Payment,” which requires the measurement and
recognition of compensation expense, based on estimated fair values, for all share-based awards, made to employees
and directors, including stock options, restricted stock, restricted stock units and participation in Ciena’s employee stock
purchase plan. Share-based compensation expense recognized in Ciena’s consolidated statement of operations for fiscal
2006 includes compensation expense for share-based awards granted (i) prior to, but not yet vested as of October 31,
2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123, and (ii) subsequent
to October 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R).
We estimate the fair value of stock options granted using the Black-Scholes option-pricing model. This option pricing
model requires the input of highly subjective assumptions, including the option’s expected life and the price volatility
of the underlying stock. The expected life of employee stock options represents the weighted-average period the stock
options are expected to remain outstanding. Because Ciena considers its options to be “plain vanilla” we calculate the
expected term using the simplified method as prescribed in Staff Accounting Bulletin (SAB) 107. Under SAB 107,
options are considered to be “plain vanilla” if they have the following basic characteristics: granted “at-the-money”;
exerciseability is conditioned upon service through the vesting date; termination of service prior to vesting results in
forfeiture; limited exercise period following termination of service; options are non-transferable and non-hedgeable.
The expected stock price volatility was determined using a combination of historical and implied volatility of Ciena’s
common stock. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards,
which is generally the vesting period. Because share-based compensation expense is based on awards that are ulti-
mately expected to vest, it has been reduced to account for estimated forfeitures. SFAS 123(R) requires forfeitures to
be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those
estimates. In Ciena’s pro forma information required under SFAS 123 for the periods prior to fiscal 2006, Ciena
accounted for forfeitures as they occurred. Changes in these inputs and assumptions can materially affect the measure
of estimated fair value of our share-based compensation.
See Note 16 to the Consolidated Financial Statements under Item 8 of Part II of this annual report for information
regarding Ciena’s treatment of share-based compensation, including information regarding treatment prior to Ciena’s
adoption of SFAS 123(R).
Reserve for Inventory Obsolescence
Ciena writes down inventory that has become obsolete or unmarketable by an amount equal to the difference
between the cost of inventory and the estimated market value based on assumptions about future demand and mar-
ket conditions. During fiscal 2006, we recorded a charge of $9.0 million primarily related to excess inventory due to a
change in forecasted sales for certain products. In an effort to limit our exposure to delivery delays and to satisfy cus-
tomer needs for shorter delivery terms, we have transitioned our manufacturing operations from the build-to-order
model we have used in recent years, to a build-to-forecast model across our product lines. This change in our inventory
purchases exposes us to the risk that our customers will not order those products for which we have forecasted sales,
or will purchase less than we have forecasted. If actual market conditions differ from those we have assumed, we may
be required to take additional inventory write-downs or benefits.
PA G E 44
PA G E 45
CIENA C O RPO RATI ON 10- K
CIENA CORPORAT ION 10-K
Restructuring
As part of its restructuring costs, Ciena provides for the estimated cost of the net lease expense for facilities that are
no longer being used. The provision is equal to the fair value of the minimum future lease payments under our con-
tracted lease obligations, offset by the fair value of the estimated sublease payments that we may receive. As of
October 31, 2006, Ciena’s accrued restructuring liability related to net lease expense and other related charges was
$35.6 million. The total minimum lease payments for these restructured facilities are $44.5 million. These lease pay-
ments will be made over the remaining lives of our leases, which range from one month to thirteen years. If actual
market conditions are different than those we have projected, we are required to recognize additional restructuring
costs or benefits associated with these facilities. During fiscal 2006, we have recognized net adjustments resulting in
restructuring costs of $9.2 million, which includes a $10.0 million adjustment during the third quarter of fiscal 2006
relating to our unused San Jose, CA facilities.
Allowance for Doubtful Accounts
Ciena’s allowance for doubtful accounts is based on our assessment, on a specific identification basis, of the collectibil-
ity of customer accounts. Ciena performs ongoing credit evaluations of its customers and generally has not required
collateral or other forms of security from its customers. In determining the appropriate balance for Ciena’s allowance
for doubtful accounts, management considers each individual customer account receivable in order to determine col-
lectibility. In doing so, management considers creditworthiness, payment history, account activity and communication
with such customer. If a customer’s financial condition changes, Ciena may be required to take a charge for an allow-
ance for doubtful accounts. During fiscal 2006, Ciena recorded the recovery of a doubtful account in the amount of
$3.0 million as a result of the receipt of amounts due from customers from whom payment was previously deemed
doubtful due to the customers’ financial condition.
Goodwill
At October 31, 2006, Ciena’s consolidated balance sheet included $232.0 million in goodwill. In accordance with
SFAS 142, Ciena tests its goodwill for impairment on an annual basis, which Ciena has determined to be the last
business day of fiscal September each year, and between annual tests if an event occurs or circumstances change that
would, more likely than not, reduce the fair value of the reporting unit below its carrying value. If actual market condi-
tions differ or forecasts change at the time of our annual assessment in fiscal 2007 or in periods prior to our annual
assessment, we may be required to record additional goodwill impairment charges.
As described in the “Overview” above, we have eliminated our former operating segments and have discontinued
reporting our results of operations on a segment basis. In accordance with SFAS 142, goodwill is allocated and
assessed at a reporting unit level. SFAS 142 delineates a reporting unit as an operating segment or one level below
an operating segment (referred to as a component). A component of an operating segment is a reporting unit if the
component constitutes a business for which discrete financial information is available and segment management
reviews the operating results of that component. Our former operating segments had no component operations below
the operating segment level. Our operating segments were considered the reporting units for purposes of goodwill
allocation and assessment. As of the third quarter of fiscal 2006, we no longer managed our business, allocated
resources or evaluated operating performance on the basis of discrete financial information about our former operating
segments and consequently our goodwill allocations and assessments were made on a single reporting unit basis.
Intangible Assets
As of October 31, 2006, Ciena’s consolidated balance sheet included $91.3 million in other intangible assets, net. We
account for the impairment or disposal of long-lived assets such as equipment, furniture, fixtures, and other intangible
assets in accordance with the provisions of SFAS 144. In accordance with SFAS 144, Ciena tests each intangible asset
for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be
recoverable. If actual market conditions differ or forecasts change, we may be required to record additional impair-
ment charges in future periods.
PA G E 46
PAGE 47
C I EN A C O RPO RATI ON 1 0-K
CIENA C O RPO RATI ON 10- K
Investments
As of October 31, 2006 Ciena’s marketable debt investments had unrealized losses of $1.2 million. The gross unreal-
ized losses, related to marketable debt investments, were primarily due to changes in interest rates. Ciena’s
management has determined that the gross unrealized losses on its marketable debt investments at October 31, 2006
are temporary in nature because Ciena has the ability and intent to hold these investments until a recovery of fair
value, which may be maturity.
As of October 31, 2006, Ciena’s minority investments in privately held technology companies were $6.5 million. These
investments are generally carried at cost because Ciena owns less than 20% of the voting equity and does not have the
ability to exercise significant influence over any of these companies. These investments are inherently high risk as the
market for technologies or products manufactured by these companies are usually early stage at the time of the invest-
ment by Ciena and such markets may never materialize or become significant. Ciena could lose its entire investment in
some or all of these companies. Ciena monitors these investments for impairment and makes appropriate reductions in
carrying values when necessary. If market conditions, expected financial performance or the competitive position of the
companies in which we invest deteriorate, Ciena may be required to record an additional charge in future periods.
Deferred Tax Valuation Allowance
As of October 31, 2006, Ciena has recorded a valuation allowance of $1.2 billion against our net deferred tax assets
of $1.2 billion. We calculated the valuation allowance in accordance with the provisions of SFAS 109, “Accounting for
Income Taxes,” which requires an assessment of both positive and negative evidence when measuring the need for a
valuation allowance. Evidence such as operating results during the most recent three-year period is given more weight
than forecasted results, due to our current lack of visibility and the degree of uncertainty that we will achieve the level
of future profitability needed to record the deferred assets. Our cumulative loss in the most recent three-year period
represents sufficient negative evidence to require a valuation allowance under the provisions of SFAS 109. We intend
to maintain a valuation allowance until sufficient positive evidence exists to support its reversal.
Warranty
The liability for product warranties, included in other accrued liabilities, was $31.8 million as of October 31, 2006,
compared to $27.0 million as of October 31, 2005. Our products are generally covered by a warranty for periods rang-
ing from one to five years. Ciena accrues for warranty costs as part of our cost of sales based on associated material
costs, technical support labor costs, and associated overhead. Material cost is estimated based primarily upon historical
trends in the volume of product returns within the warranty period and the cost to repair or replace the equipment.
Technical support labor cost is estimated based primarily upon historical trends and the cost to support the customer
cases within the warranty period.
effects of recent Accounting Pronouncements
In September 2006, the Securities and Exchange Commission issued SAB No. 108, “Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 provides inter-
pretative guidance on the process of quantifying financial statement misstatements and is effective for fiscal years
ending after November 15, 2006. Ciena does not believe that the adoption of this statement will have a material
impact on its financial condition, results of operations or cash flows.
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS 157, “Fair Value Measurements.”
SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Ciena is currently
evaluating the impact the adoption of this statement could have on its financial condition, results of operations and
cash flows.
PA G E 46
PA G E 47
CIENA C O RPO RATI ON 10- K
CIENA CORPORAT ION 10-K
In July 2006, the FASB issued FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes, an inter-
pretation of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes.” FIN 48 clarifies the
accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods, disclosure and transition. The interpretation applies
to all tax positions related to income taxes subject to SFAS 109. FIN 48 is effective for fiscal years beginning after
December 15, 2006. Differences between the amounts recognized in the statements of financial position prior to the
adoption of FIN 48 and the amounts reported after adoption should be accounted for as a cumulative-effect adjust-
ment recorded to the beginning balance of retained earnings. Ciena is currently evaluating the impact the adoption
of this statement could have on its financial condition, results of operations and cash flows.
In February 2006, the FASB issued SFAS 155, “Accounting for Certain Hybrid Financial Instruments” which amends
SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS 140, “Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 simplifies the accounting for certain
derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder
elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other pro-
visions of SFAS 133 and SFAS 140. SFAS 155 is effective for all financial instruments acquired, issued or subject to a
remeasurement event occurring in fiscal years beginning after September 15, 2006. Ciena does not believe the adop-
tion of this statement will have a material impact on its financial condition, results of operations or cash flows.
In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections” which supersedes APB Opinion
No. 20, “Accounting Changes” and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements.”
SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle.
SFAS 154 also carries forward without change the guidance contained in APB 20 for reporting the correction of an
error in previously issued financial statements and a change in accounting estimate. SFAS 154 requires retrospective
application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to deter-
mine either the period-specific effects or the cumulative effect of the change. The correction of an error in previously
issued financial statements is not a change in accounting principle. However, the reporting of an error correction
involves adjustments to previously issued financial statements similar to those generally applicable to reporting an
accounting change retroactively. Therefore, the reporting of a correction of an error by restating previously issued
financial statements is also addressed by SFAS 154. SFAS 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. Ciena does not believe that the adoption of this state-
ment will have a material impact on its financial condition, results of operations or cash flows.
Quarterly results of operations
The tables below (in thousands, except per share data) set forth the operating results represented by certain items in
Ciena’s statements of operations for each of the eight quarters in the period ended October 31, 2006. This information
is unaudited, but in our opinion reflects all adjustments (consisting only of normal recurring adjustments) that we con-
sider necessary for a fair statement of such information in accordance with generally accepted accounting principles.
The results for any quarter are not necessarily indicative of results for any future period.
PA G E 48
PAGE 49
C I EN A C O RPO RATI ON 1 0-K
CIENA C O RPO RATI ON 10- K
Jan. 31,
2005
Apr. 30,
2005
Jul. 31,
2005
oct. 31,
2005
Jan. 31,
2006
Apr. 30,
2006
Jul. 31,
2006
oct. 31,
2006
Revenue:
Products
Services
Total Revenue
Costs:
Products
Services
Total cost of goods sold
Gross profit
Operating expenses:
Research and
development
Selling and marketing
General and
administrative
Amortization of
intangible assets
Restructuring costs
Goodwill impairment
Long lived asset
impairment
$ 82,300 $ 91,618 $ 97,448 $ 102,909 $105,941 $117,208 $137,809 $141,469
18,483
13,967
118,183 120,430 131,175 152,499 159,952
12,228
12,448
94,748 103,846
13,032
110,480
14,690
15,274
14,489
60,848
9,669
70,517
24,231
65,843
10,837
76,680
27,166
62,756
10,095
72,851
37,629
59,484
11,535
71,019
47,164
60,399
9,576
69,975
50,455
58,957
9,312
68,269
62,906
70,356
10,479
80,835
71,664
73,955
13,241
87,196
72,756
34,662
26,840
35,608
29,648
34,814
30,209
32,161
28,325
29,462
26,572
28,856
26,657
26,190
24,903
26,561
26,302
7,656
8,894
9,493
7,672
9,896
11,246
16,217
10,117
10,411
1,125
—
10,204
9,765
—
9,653
4,355
—
8,514
2,773
176,600
6,295
2,015
—
6,295
3,014
—
6,295
11,008
—
6,296
(366)
—
184
—
(25)
—
(25)
—
45,728
—
(3)
(6,020)
(3)
(5,628)
—
—
6
—
Gain on lease settlement
Recovery of (provision
for) doubtful
accounts, net
—
80,878
(56,647)
7,433
(7,226)
—
22
Total operating expenses
Income (loss)
from operations
Interest and other
income, net
Interest expense
Gain (loss) on equity
investments, net
Gain on extinguishment
of debt
Income (loss) before
income taxes
Provision for income tax
Net income (loss)
Basic net income (loss)
per common share
Diluted net income (loss)
per dilutive potential
common share
Weighted average basic
common shares
Weighted average dilutive
potential common shares 81,653
81,653
—
94,094
2,604
91,103
(2)
301,771
(2,604)
65,613
(247)
70,190
(139)
84,474
(41)
68,875
(66,928)
(53,474)
(254,607)
(15,158)
(7,284)
(12,810)
3,881
7,103
(7,230)
7,522
(7,163)
9,236
(6,794)
9,262
(6,053)
11,197
(5,815)
14,045
(6,148)
15,741
(6,149)
(7,300)
(1,708)
(500)
(733)
—
948
—
3,882
—
6,690
362
—
—
—
(56,418)
577
13,473
392
$(56,995) $ (74,807) $ (51,027) $(252,870) $ (6,291) $ (1,910) $ (4,285) $ 13,081
(252,665)
205
(74,355)
452
(50,941)
86
(3,965)
320
(1,540)
370
(5,992)
299
$ (0.70) $ (0.91) $ (0.62) $ (3.06) $ (0.08) $ (0.02) $ (0.05) $ 0.15
$ (0.70) $ (0.91) $ (0.62) $ (3.06) $ (0.08) $ (0.02) $ (0.05) $ 0.14
81,938
82,333
82,689
82,967
83,518
84,197
84,657
81,938
82,333
82,689
82,967
83,518
84,197
93,146
PA G E 48
PA G E 49
CIENA C O RPO RATI ON 10- K
CIENA CORPORAT ION 10-K
Item 7A. QuAntItAtIve AnD QuAlItAtIve DIsClosures ABout
mArKet rIsK
The following discussion about Ciena’s market risk disclosures involves forward-looking statements. Actual results
could differ materially from those projected in the forward-looking statements. Ciena is exposed to market risk related
to changes in interest rates and foreign currency exchange rates. Ciena does not use derivative financial instruments
for speculative or trading purposes.
Interest Rate Sensitivity. Ciena maintains a short-term and long-term investment portfolio. These available-for-sale
securities are subject to interest rate risk and will fall in value if market interest rates increase. If market interest rates
were to increase immediately and uniformly by 10% from levels at October 31, 2006, the fair value of the portfolio
would decline by approximately $62.1 million.
Foreign Currency Exchange Risk. As a global concern, Ciena faces exposure to adverse movements in foreign
currency exchange rates. These exposures may change over time as business practices evolve and if our exposure
increases, adverse movement in foreign currency exchange rates could have a material adverse impact on Ciena’s
financial results. Historically, Ciena’s primary exposures have been related to non-dollar denominated operating
expenses in Europe and Asia where Ciena sells primarily in U.S. dollars. Ciena is prepared to hedge against fluctuations
in foreign currency if this exposure becomes material. As of October 31, 2006, the assets and liabilities of Ciena
related to non-dollar denominated currencies were not material. Therefore, we do not expect an increase or decrease
of 10% in the foreign exchange rate would have a material impact on Ciena’s financial position.
Item 8. fInAnCIAl stAtements AnD suPPlementAry DAtA
The following is an index to the consolidated financial statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
number
51
52
53
54
55
56
PA G E 50
PAGE 51
C I EN A C O RPO RATI ON 1 0-K
CIENA C O RPO RATI ON 10- K
rePort of InDePenDent reGIstereD PuBlIC ACCountInG fIrm
To the Board of Directors and Shareholders of Ciena Corporation:
We have completed integrated audits of Ciena Corporation’s 2006 and 2005 consolidated financial statements and
of its internal control over financial reporting as of October 31, 2006, and an audit of its 2004 consolidated financial
statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material
respects, the financial position of Ciena Corporation and its subsidiaries at October 31, 2006 and 2005, and the results
of their operations and their cash flows for each of the three years in the period ended October 31, 2006 in conformity
with accounting principles generally accepted in the United States of America. These financial statements are the respon-
sibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial
statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial state-
ments, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts
for share-based compensation in fiscal year 2006.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Report of Management on Internal Control Over Financial
Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as
of October 31, 2006 based on criteria established in Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on
those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of October 31, 2006, based on criteria established in Internal Control—Integrated Framework
issued by the COSO. The Company’s management is responsible for maintaining effective internal control over finan-
cial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over
financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accor-
dance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing
and evaluating the design and operating effectiveness of internal control, and performing such other procedures as
we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transac-
tions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding preven-
tion or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inade-
quate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
January 10, 2007
PA G E 50
PA G E 51
CIENA C O RPO RATI ON 10- K
CIENA CORPORAT ION 10-K
ConsolIDAteD BAlAnCe sHeets
(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories, net
Prepaid expenses and other
Total current assets
Long-term investments
Equipment, furniture and fixtures, net
Goodwill
Other intangible assets, net
Other long-term assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Restructuring liabilities
Unfavorable lease commitments
Income taxes payable
Deferred revenue
Total current liabilities
Long-term deferred revenue
Long-term restructuring liabilities
Long-term unfavorable lease commitments
Other long-term obligations
Convertible notes payable
Total liabilities
october 31,
2005
2006
$ 358,012
579,531
72,786
49,333
37,867
1,097,529
155,944
28,090
232,015
120,324
41,327
$ 1,675,229
$ 43,868
76,491
15,492
9,011
5,785
27,817
178,464
15,701
54,285
41,364
1,296
648,752
939,862
$ 220,164
628,393
107,172
106,085
36,372
1,098,186
351,407
29,427
232,015
91,274
37,404
$ 1,839,713
$ 39,277
79,282
8,914
8,512
5,981
19,637
161,603
21,039
26,720
32,785
1,678
842,262
1,086,087
Commitments and contingencies
Stockholders’ equity:
Preferred stock—par value $0.01; 20,000,000 shares authorized;
zero shares issued and outstanding
—
—
Common stock—par value $0.01; 140,000,000 shares authorized;
82,905,849 and 84,891,656 shares issued and outstanding
Additional paid-in capital
Deferred stock compensation
Changes in unrealized gains on investments, net
Translation adjustment
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
829
5,494,587
(2,286)
(4,673)
(495)
(4,752,595)
735,367
$ 1,675,229
849
5,505,853
—
(496)
(580)
(4,752,000)
753,626
$ 1,839,713
PA G E 52
PAGE 53
C I EN A C O RPO RATI ON 1 0-K
CIENA C O RPO RATI ON 10- K
ConsolIDAteD stAtements of oPerAtIons
(in thousands, except per share data)
Revenue:
Products
Services
Total revenue
Costs:
Products
Services
Total cost of goods sold
Gross profit
Operating expenses:
Research and development
Selling and marketing
General and administrative
Amortization of intangible assets
In-process research and development
Restructuring costs
Goodwill impairment
Long-lived asset impairment
Gain on lease settlement
Recovery of sale, export, use tax liabilities and payments
Provision for (recovery of) doubtful accounts
Total operating expenses
Loss from operations
Interest and other income (expense), net
Interest expense
Gain (loss) on equity investments, net
Gain (loss) on extinguishment of debt
Income (loss) before income taxes
Provision for income taxes
Net income (loss)
Basic net income (loss) per common share
Diluted net income (loss) per dilutive potential common share
Weighted average basic common shares
Weighted average dilutive potential common shares
The accompanying notes are an integral part of these consolidated financial statements.
2004
year ended october 31,
2005
2006
$ 250,210
48,497
298,707
$ 374,275
52,982
427,257
186,461
40,493
226,954
71,753
205,364
112,310
28,592
30,839
30,200
57,107
371,712
15,926
—
(5,388)
(2,794)
843,868
(772,115)
25,936
(29,841)
(4,107)
(8,216)
(788,343)
1,121
$(789,464)
$ (10.60)
$ (10.60)
74,493
74,493
248,931
42,136
291,067
136,190
137,245
115,022
33,715
38,782
—
18,018
176,600
45,862
—
—
2,602
567,846
(431,656)
31,294
(28,413)
(9,486)
3,882
(434,379)
1,320
$(435,699)
$ (5.30)
$ (5.30)
82,170
82,170
$502,427
61,629
564,056
263,667
42,608
306,275
257,781
111,069
104,434
47,476
25,181
—
15,671
—
—
(11,648)
—
(3,031)
289,152
(31,371)
50,245
(24,165)
215
7,052
1,976
1,381
$ 595
$ 0.01
$ 0.01
83,840
85,011
PA G E 52
PA G E 53
CIENA C O RPO RATI ON 10- K
CIENA CORPORAT ION 10-K
ConsolIDAteD stAtements of CHAnGes In stoCKHolDers’ eQuIty
Accumu-
receivable lated
Deferred notes other
Common
stock
shares
Additional
Paid-in-
Capital
stock
from Compre-
Compen- stock- hensive
Income
holders
sation
Accumu-
lated
Deficit
total
stockholders’
equity
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
129
2,198
11,883
(2,198)
11,883
Amount
606,441
606,312
(789,464)
12,913,823
—
817
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
11
—
—
(13,761)
—
—
5,487,075
—
(5,280)
68
—
—
—
—
—
—
—
(1)
16,769
955
—
—
—
—
—
(18,178)
(5,280)
68
(794,676)
—
16,780
(17,223)
—
—
—
7,020
1,142,272
—
(in thousands, except share data)
Balance at October 31, 2003 67,602,122 $676 $4,865,238 $ (9,664) $(448) $ 2,447 $(3,527,432) $1,330,817
Net loss
(789,464)
Changes in unrealized gains
on investments, net
Translation adjustment
Comprehensive loss
Exercise of warrant
Exercise of stock options, net
Unearned stock compensation
Deferred stock
compensation costs
Forfeiture of unearned
stock compensation
Issuance of common stock
for acquisitions, net of
issuance costs
Reduction of receivables
from stockholders
—
Balance at October 31, 2004 81,665,237
Net loss
—
Changes in unrealized
gains on investments, net
Translation adjustment
Comprehensive loss
Exercise of stock options, net
Unearned stock compensation
Deferred stock
compensation costs
Forfeiture of unearned
stock compensation
Reduction of receivables
—
from stockholders
Balance at October 31, 2005 82,905,849
Net income
—
Changes in unrealized
gains on investments, net
Translation adjustment
Comprehensive income
Exercise of stock options, net
Stock compensation expense
Removal of opening deferred
stock compensation balance
—
(2,286)
upon adoption of SFAS 123(R)
(28,457)
(28,457)
Purchase of call spread option
Balance at October 31, 2006 84,891,656 $849 $5,505,853 $ — $ — $(1,076) $(4,752,000) $ 753,626
400
(4,316,896) 1,154,422
(435,699)
—
—
—
1,240,612
—
—
—
—
1,985,807
—
(2,185)
(218)
(438,102)
9,558
—
4,177
(85)
4,687
27,987
14,042
—
—
—
27,967
14,042
(2,185)
(218)
—
—
—
4,177
(85)
—
—
—
—
(4,752,595)
595
—
—
—
9,546
10
—
5,494,587
—
48
735,367
595
—
—
—
—
(10)
—
(5,168)
—
—
(2,765)
—
—
(2,286)
—
—
—
—
12
—
—
—
—
20
—
400
(48)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
829
—
2,286
—
48
—
—
(435,699)
(2,044)
—
—
—
—
—
—
—
—
—
—
9,441
2,044
9,441
—
—
—
—
—
—
—
—
—
—
—
—
—
The accompanying notes are an integral part of these consolidated financial statements.
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ConsolIDAteD stAtements of CAsH floWs
(in thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Early extinguishment of debt
Amortization of premium (discount) on marketable securities
Non-cash loss from equity investments
Non-cash impairment of long-lived assets
Accretion of convertible notes payable
In-process research and development
Depreciation and amortization of leasehold improvements
Goodwill impairment
Stock compensation
Amortization of intangibles
Provision for doubtful accounts
Provision for inventory excess and obsolescence
Provision for warranty and other contractual obligations
Other
Changes in assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other
Accounts payable and accruals
Income taxes payable
Deferred revenue and other obligations
Net cash used in operating activities
Cash flows from investing activities:
Additions to equipment, furniture, fixtures and intellectual property
Proceeds from sale of equipment, furniture and fixtures
Restricted cash
Purchase of available for sale securities
Maturities of available for sale securities
Acquisition of business, net of cash acquired
Minority equity investments, net
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from issuance of 0.25% convertible senior notes payable
Repurchase of 3.75% convertible notes payable
Repurchase of ONI 5.00% convertible subordinated notes payable
Net proceeds from other obligations
Debt issuance costs
Purchase of call spread option
Proceeds from issuance of common stock and warrants
Repayment of notes receivable from stockholders
Net cash provided by (used in) financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest
Income taxes
The accompanying notes are an integral part of these consolidated financial statements.
year ended october 31,
2004
2005
2006
$(789,464)
$(435,699)
$ 595
8,216
26,924
4,107
15,926
599
30,200
72,213
371,712
11,883
34,708
284
4,172
8,351
3,449
(2,562)
962
15,253
(67,671)
(1,286)
6,589
(245,435)
(32,999)
1,857
(2,004)
(696,344)
897,738
4,864
(4,407)
168,705
(3,882)
13,636
9,486
45,862
—
—
33,377
176,600
9,441
42,651
2,602
5,232
9,738
3,218
(29,510)
(6,951)
7,420
(19,633)
2,431
5,942
(128,039)
(11,315)
278
1,986
(578,846)
910,505
—
4,882
327,490
—
—
(49,243)
100
—
—
16,780
47
(32,316)
(109,046)
294,914
$ 185,868
—
(36,913)
—
—
—
—
9,558
48
(27,307)
172,144
185,868
$ 358,012
(7,052)
(823)
733
—
—
—
16,401
—
14,042
29,050
—
9,012
14,522
2,028
(34,386)
(65,764)
4,056
(59,161)
196
(2,842)
(79,393)
(17,760)
—
4,552
(1,090,409)
851,084
—
948
(251,585)
300,000
(98,410)
—
—
(7,990)
(28,457)
27,987
—
193,130
(137,848)
358,012
$ 220,164
$ 26,927
$ 2,363
$ 25,817
$ 977
$ 21,685
$ 969
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CIENA C O RPO RATI ON 10- K
CIENA CORPORAT ION 10-K
notes to ConsolIDAteD fInAnCIAl stAtements
(1) Ciena Corporation and significant Accounting Policies and estimates
Description of Business
Ciena Corporation is a supplier of communications networking equipment, software and services that support the
delivery and transport of voice, video and data services. Our products are used in communications networks operated
by telecommunications service providers, cable operators, governments and enterprises across the globe. We specialize
in transitioning legacy communications networks to converged, next-generation architectures, capable of efficiently
delivering a broader mix of high-bandwidth services. By improving network productivity, reducing costs and enabling
integrated services offerings, our optical, data and broadband access platforms create business and operational value
for our customers.
Ciena was incorporated in Delaware in November 1992, and completed its initial public offering on February 7, 1997.
Ciena’s principal executive offices are located at 1201 Winterson Road, Linthicum, Maryland 21090.
Principles of Consolidation
Ciena has 14 wholly owned U.S. and international subsidiaries, which have been consolidated in the accompanying
financial statements. On May 3, 2004, Ciena acquired by merger Catena Networks Inc. (“Catena”), a Delaware com-
pany based in Kanata, Canada, and Internet Photonics, Inc. (“Internet Photonics”), a Delaware company based in
Shrewsbury, New Jersey. The Catena and Internet Photonics transactions were both accomplished as tax-free reorgani-
zations, and were recorded using the purchase accounting method.
The accompanying consolidated financial statements include the accounts of Ciena and its wholly owned subsidiaries.
All material inter-company accounts and transactions have been eliminated in consolidation.
Fiscal Year
Ciena has a 52 or 53 week fiscal year, which ends on the Saturday nearest to the last day of October in each year
(October 28, 2006, October 29, 2005, and October 30, 2004). For purposes of financial statement presentation, each
fiscal year is described as having ended on October 31. Fiscal 2006, fiscal 2005 and fiscal 2004 were each comprised
of 52 weeks.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires Ciena
to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses, together with amounts disclosed in the related notes to the financial statements. Actual results could differ
from the recorded estimates.
Cash and Cash Equivalents
Ciena considers all highly liquid investments purchased with original maturities of three months or less to be cash
equivalents. Restricted cash collateralizing letters of credits are included in other current assets and other long-term
assets depending upon the duration of the restriction.
Investments
Ciena’s short-term and long-term investments are classified as available-for-sale and are reported at fair value, with
unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income. Realized gains or losses
and declines in value determined to be other than temporary, if any, on available-for-sale securities, are reported in
other income or expense as incurred.
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Ciena also has certain other minority equity investments in privately held technology companies. These investments are
carried at cost because Ciena owns less than 20% of the voting equity and does not have the ability to exercise signifi-
cant influence over these companies. These investments are inherently high risk as the markets for technologies or
products manufactured by these companies are usually early stage at the time of the investment by Ciena and such
markets may never be significant. Ciena could lose its entire investment in some or all of these companies. Ciena mon-
itors these investments for impairment and makes appropriate reductions in carrying values when necessary.
Inventories
Inventories are stated at the lower of cost or market, with cost determined on the first-in, first-out basis. Ciena records
a provision for excess and obsolete inventory whenever an impairment has been identified.
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are recorded at cost. Depreciation and amortization are computed using the straight-
line method over useful lives of two years to five years for equipment, furniture and fixtures and nine months to
ten years for leasehold improvements. Impairments of equipment, furniture and fixtures are determined in accordance
with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets.”
Internal use software and web site development costs are capitalized in accordance with Statement of Position (SOP)
No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” and Emerging
Issues Task Force (EITF) Issue No. 00-2, “Accounting for Web Site Development Costs.” Qualifying costs incurred during
the application development stage, which consist primarily of outside services and purchased software license costs,
are capitalized and amortized over the estimated useful life of the asset.
Goodwill and Other Intangible Assets
Ciena has recorded goodwill and purchased intangible assets as a result of several acquisitions. Ciena accounts for
goodwill in accordance with SFAS 142 “Goodwill and Other Intangible Assets,” which requires Ciena to test each
reporting unit’s goodwill for impairment on an annual basis, which Ciena has determined to be the last business day
of fiscal September each year. Testing is required between annual tests if events occur or circumstances change that
would, more likely than not, reduce the fair value of the reporting unit below its carrying value.
Purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed using the
straight-line method over the economic lives of the respective assets, generally three to seven years. Impairments of
other intangibles assets are determined in accordance SFAS 144. For additional information see Note 4.
Concentrations
Substantially all of Ciena’s cash and cash equivalents, short-term and long-term investments, are maintained at two
major U.S. financial institutions. The majority of Ciena’s cash equivalents consist of money market funds and overnight
repurchase agreements. Deposits held with banks may exceed the amount of insurance provided on such deposits.
Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk.
During fiscal 2006, Sprint, Verizon and AT&T each accounted for at least 10% of Ciena’s revenue. During fiscal 2005,
Verizon, BellSouth, and Science Applications International Corporation (SAIC) each accounted for at least 10% of
Ciena’s revenue. During fiscal 2004, only SAIC accounted for at least 10% of Ciena’s revenue. The substantial reduc-
tion in orders by, or loss of, any significant customer, could materially adversely affect Ciena’s financial condition or
operating results. For additional information see Note 19.
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CIENA CORPORAT ION 10-K
Additionally, Ciena’s access to certain raw materials is dependent upon single and sole source suppliers. The inability of
any supplier to fulfill Ciena’s supply requirements could affect future results. Ciena relies on a small number of contract
manufacturers to perform the majority of the manufacturing operations for its products. If Ciena cannot effectively
manage these manufacturers and forecast future demand, or if they fail to deliver products or components on time,
Ciena’s business may suffer.
Revenue Recognition
Ciena recognizes revenue in accordance with Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition,” which
states that revenue is realized or realizable and earned when all of the following criteria are met: persuasive evidence
of an arrangement exists; delivery has occurred or services have been rendered; the price to the buyer is fixed or deter-
minable; and collectibility is reasonably assured. In instances where final acceptance of the product, system, or solution
is specified by the customer, revenue is deferred until all acceptance criteria have been met. Revenue for maintenance
services is generally deferred and recognized ratably over the period during which the services are to be performed.
Some of Ciena’s communications networking equipment is integrated with software that is essential to the functional-
ity of the equipment. In some cases, Ciena provides unspecified software upgrades and enhancements related to the
equipment through maintenance contracts for these products. For transactions involving the sale of software, revenue
is recognized in accordance with SOP 97-2, “Software Revenue Recognition,” including deferral of revenue recogni-
tion in instances where vendor specific objective evidence for undelivered elements is not determinable.
For arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets,
except as otherwise covered by SOP 97-2, the determination as to how the arrangement consideration should be
measured and allocated to the separate deliverables of the arrangement is determined in accordance with EITF 00-21,
“Revenue Arrangements with Multiple Deliverables.” When a sale involves multiple elements, such as sales of products
that include services, the entire fee from the arrangement is allocated to each respective element based on its relative
fair value and recognized when revenue recognition criteria for each element are met. Fair value for each element is
established based on the sales price charged when the same element is sold separately.
Revenue Related Accruals
Ciena provides for the estimated costs to fulfill customer warranty and other contractual obligations upon the recogni-
tion of the related revenue. Such reserves are determined based upon actual warranty cost experience, estimates of
component failure rates, and management’s industry experience. Ciena’s sales contracts do not permit the right of
return of product by the customer after the product has been accepted.
Accounts Receivable Trade, Net
Ciena’s allowance for doubtful accounts is based on its assessment, on a specific identification basis, of the collectibil-
ity of customer accounts. Ciena performs ongoing credit evaluations of its customers and generally has not required
collateral or other forms of security from its customers. In determining the appropriate balance for Ciena’s allowance
for doubtful accounts, management considers each individual customer account receivable in order to determine col-
lectibility. In doing so, management considers creditworthiness, payment history, account activity and communication
with such customer. If a customer’s financial condition changes, Ciena may be required to take a charge for an allow-
ance for doubtful accounts.
Research and Development
Ciena charges all research and development costs to expense as incurred. Types of expense incurred in research and devel-
opment include employee compensation, prototype, consulting, depreciation, facility costs and information technologies.
Advertising Costs
Ciena expenses all advertising costs as incurred.
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CIENA C O RPO RATI ON 10- K
Share-Based Compensation Expense
On November 1, 2005, Ciena adopted SFAS 123(R), “Share-Based Payment,” which requires the measurement and
recognition of compensation expense, based on estimated fair values, for all share-based awards, made to employees
and directors, including stock options, restricted stock, restricted stock units and participation in Ciena’s employee
stock purchase plan. In March 2005, the Securities and Exchange Commission issued SAB 107 relating to SFAS 123(R).
Ciena has applied the provisions of SAB 107 in its adoption of SFAS 123(R).
Ciena adopted SFAS 123(R) using the modified prospective application transition method, which requires the applica-
tion of the accounting standard as of November 1, 2005, the first day of Ciena’s fiscal year 2006. Ciena’s consolidated
financial statements for fiscal 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective
application transition method, Ciena’s consolidated financial statements for prior periods have not been restated to
reflect, and do not include, the impact of SFAS 123(R). Share-based compensation cost recognized under SFAS 123(R)
for fiscal 2006 was $14.0 million, of which $0.3 million was capitalized as part of inventory.
Prior to the adoption of SFAS 123(R), Ciena accounted for share-based awards to employees and directors using the
intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock
Issued to Employees,” as interpreted by FASB Interpretation (FIN) No. 44, “Accounting for Certain Transactions
Involving Stock Compensation, an Interpretation of APB Opinion No. 25,” as allowed under SFAS 123, “Accounting
for Stock-Based Compensation.” Share-based compensation expense of $9.4 million and $11.9 million for fiscal 2005
and fiscal 2004, respectively, was solely related to share-based awards assumed through acquisitions and restricted
stock unit awards that Ciena had been recognizing in its consolidated statement of operations in accordance with the
provisions set forth above. Because the exercise price of Ciena’s stock options granted to employees and directors
equaled the fair market value of the underlying stock at the grant date, under the intrinsic value method, no share-
based compensation expense was otherwise recognized in Ciena’s consolidated statement of operations.
SFAS 123(R) requires companies to estimate the fair value of share-based awards on the date of grant using an option-
pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense in
Ciena’s consolidated statement of operations over the requisite service periods. Share-based compensation expense
recognized in Ciena’s consolidated statement of operations for fiscal 2006 includes compensation expense for share-
based awards granted (i) prior to, but not yet vested as of October 31, 2005, based on the grant date fair value
estimated in accordance with the provisions of SFAS 123, and (ii) subsequent to October 31, 2005, based on the grant
date fair value estimated in accordance with the provisions of SFAS 123(R). Upon adoption of SFAS 123(R), Ciena
changed its method of attributing the value of share-based compensation expense from the accelerated multiple-
option approach to the straight-line single-option method. Compensation expense for all share-based awards granted
on or prior to October 31, 2005 will continue to be recognized using the accelerated multiple-option approach.
Compensation expense for all share-based awards subsequent to October 31, 2005 is recognized using the straight-
line single-option method. Because share-based compensation expense is based on awards that are ultimately
expected to vest, share-based compensation expense has been reduced to account for estimated forfeitures. SFAS
123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. In Ciena’s pro forma information required under SFAS 123 for periods prior to
fiscal 2006, Ciena accounted for forfeitures as they occurred.
To calculate option-based compensation under SFAS 123(R), Ciena uses the Black-Scholes option-pricing model, which
it had previously used for valuation of option-based awards for its pro forma information required under SFAS 123 for
periods prior to fiscal 2006. Ciena’s determination of fair value of option-based awards on the date of grant using the
Black-Scholes model is affected by Ciena’s stock price as well as assumptions regarding a number of subjective vari-
ables. These variables include, but are not limited to Ciena’s expected stock price volatility over the term of the awards,
and actual and projected employee stock option exercise behaviors. For additional information see Note 16.
No tax benefits were attributed to the share-based compensation expense because a full valuation allowance was
maintained for all net deferred tax assets.
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CIENA CORPORAT ION 10-K
Income Taxes
Ciena accounts for income taxes in accordance with SFAS 109, “Accounting for Income Taxes.” SFAS 109 describes an
asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future
tax consequences attributable to differences between the carrying amounts of assets and liabilities for financial report-
ing purposes and their respective tax bases, and for operating loss and tax credit carry forwards. In estimating future
tax consequences, SFAS 109 generally considers all expected future events other than the enactment of changes in tax
laws or rates. Valuation allowances are provided, if, based upon the weight of the available evidence, it is more likely
than not that some or all of the deferred tax assets will not be realized.
Fair Value of Financial Instruments
The carrying amounts of Ciena’s financial instruments, which include short-term and long-term investments, accounts
receivable, accounts payable, and other accrued expenses, approximate their fair values due to their short maturities.
Foreign Currency Translation
Some of Ciena’s foreign branch offices and subsidiaries use the U.S. dollar as their functional currency, because Ciena,
as the U.S. parent entity, exclusively funds the operations of these branch offices and subsidiaries with U.S. dollars. For
those subsidiaries using the local currency as their functional currency, assets and liabilities are translated at exchange
rates in effect at the balance sheet date. Resulting translation adjustments are recorded directly to a separate compo-
nent of stockholders’ equity. Where the U.S. dollar is the functional currency, translation adjustments are recorded in
other income. The net gain (loss) on foreign currency re-measurement and exchange rate changes for fiscal 2006, fis-
cal 2005 and fiscal 2004 was immaterial for separate financial statement presentation.
Computation of Basic Net Income (Loss) per Common Share and Diluted Net Income (Loss) per
Dilutive Potential Common Share
Ciena calculates earnings per share (EPS) in accordance with the SFAS 128, “Earnings per Share.” This statement
requires dual presentation of basic and diluted EPS on the face of the income statement for entities with a complex
capital structure and requires a reconciliation of the numerator and denominator used for the basic and diluted
EPS computations.
Software Development Costs
SFAS 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,” requires the
capitalization of certain software development costs incurred subsequent to the date technological feasibility is estab-
lished and prior to the date the product is generally available for sale. The capitalized cost is then amortized over the
estimated product life. Ciena defines technological feasibility as being attained at the time a working model is com-
pleted. To date, the period between achieving technological feasibility and the general availability of such software has
been short, and software development costs qualifying for capitalization have been insignificant. Accordingly, Ciena
has not capitalized any software development costs.
Segment Reporting
SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes annual and interim
reporting standards for operating segments of a company. It also requires entity-wide disclosures about the products and
services an entity provides, the material countries in which it holds assets and reports revenue, and its major customers.
Prior to the third quarter of fiscal 2006 Ciena reported its results of operations based on four operating segments:
the Transport and Switching Group (TSG), the Data Networking Group (DNG), the Broadband Access Group (BBG)
and Global Network Services (GNS). In an effort to address increased market opportunities for product convergence,
facilitate product functionality cross-over and improve operational efficiency, Ciena reorganized aspects of the man-
agement of its business. Ciena eliminated its former business units and no longer has operating segment general
managers. Ciena’s development resources were reorganized along technology skill sets applicable across multiple
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products, rather than by specific product lines. In addition, Ciena no longer manages its business, allocates its resources
or evaluates its operating performance on the basis of financial information about its former business units. As a conse-
quence, Ciena eliminated its historical operating segments and discontinued reporting its results of operations on a
historical segment basis.
Revenue from sales to customers outside of the United States is reflected as International in Ciena’s geographic distri-
bution of revenue in entity-wide disclosures.
Reclassification
Certain prior year amounts have been reclassified to conform to current year consolidated financial statement presentation.
Newly Issued Accounting Standards
In September 2006, the Securities and Exchange Commission (SEC) issued SAB 108, “Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 provides inter-
pretative guidance on the process of quantifying financial statement misstatements and is effective for fiscal years
ending after November 15, 2006. Ciena does not believe that the adoption of this statement will have a material
impact on its financial condition, results of operations or cash flows.
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS 157, “Fair Value Measurements.”
SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Ciena is currently
evaluating the impact the adoption of this statement could have on its financial condition, results of operations or
cash flows.
In July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes, an interpretation of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes.” FIN 48 clarifies the accounting for income
taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized
in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest
and penalties, accounting in interim periods, disclosure and transition. The interpretation applies to all tax positions
related to income taxes subject to SFAS 109. FIN 48 is effective for fiscal years beginning after December 15, 2006.
Differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48
and the amounts reported after adoption should be accounted for as a cumulative-effect adjustment recorded to the
beginning balance of retained earnings. Ciena is currently evaluating the impact the adoption of this interpretation
could have on its financial condition, results of operations or cash flows.
In February 2006, the FASB issued SFAS 155, “Accounting for Certain Hybrid Financial Instruments” which amends
SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS 140, “Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 simplifies the accounting for certain
derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder
elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other
provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all financial instruments acquired, issued or subject
to a remeasurement event occurring in fiscal years beginning after September 15, 2006. Ciena does not believe the
adoption of this statement will have a material impact on its financial condition, results of operations or cash flows.
In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections” which supersedes APB Opinion
No. 20, “Accounting Changes” and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS
154 changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 also
carries forward without change the guidance contained in APB 20 for reporting the correction of an error in previously
issued financial statements and a change in accounting estimate. SFAS 154 requires retrospective application to prior
periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the
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period-specific effects or the cumulative effect of the change. The correction of an error in previously issued financial
statements is not a change in accounting principle. However, the reporting of an error correction involves adjustments
to previously issued financial statements similar to those generally applicable to reporting an accounting change retro-
actively. Therefore, the reporting of a correction of an error by restating previously issued financial statements is also
addressed by SFAS 154. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. Ciena does not believe that the adoption of this statement will have a material
impact on its financial condition, results of operations or cash flows.
(2) Business Combinations
In fiscal 2004, Ciena acquired Catena and Internet Photonics. As a result of these acquisitions, Ciena has recorded
charges for in-process research and development and recorded intangible assets related to existing technology.
In-process research and development represents in-process technology that, as of the date of acquisition, has not
reached technological feasibility and has no alternative future use. Based on valuation assessments, the value of
in-process technology is determined by estimating the net cash flows from the sale of products resulting from the
completion of the projects, reduced by the portions of revenue attributable to developed technology and future
completion of the project. The resulting cash flows are then discounted back to their present values at appropriate
discount rates.
Existing technology represents purchased technology for which development had been completed as of the date of
acquisition. This amount is determined using the income approach. This method consisted of estimating future net
cash flows attributable to existing technology for a discrete projection period and discounting the net cash flows to
their present value. The existing technology will be amortized over its useful life.
The purchase price for Ciena’s acquisitions were based on the average closing price of Ciena’s common stock for the
two trading days prior to the announcement of the acquisition, the date of the announcement, and the two trading
days after the announcement.
The following table summarizes the allocation of the purchase price at the date of the acquisitions (in thousands):
Cash, cash equivalents, long and short-term investments
Inventory
Equipment, furniture and fixtures
Other tangible assets
Existing technology
Non-compete agreements
Contracts and purchase orders
Goodwill
Deferred stock compensation
Other assumed liabilities
Ciena initial investment
Unfavorable lease commitments
Promissory notes and loans
In-process research and development
Total purchase price
Internet
Photonics at
may 3, 2004
$ 767
1,499
1,287
1,666
10,000
2,200
21,100
120,574
1,094
(6,857)
—
—
(9,357)
5,200
$149,173
Catena at
may 3, 2004
$ 12,936
6,254
2,813
9,236
73,000
—
18,000
326,241
16,130
(23,150)
—
(351)
—
25,000
$466,109
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Catena
Catena was a privately held corporation headquartered in Kanata, Canada. Pursuant to the terms of the acquisition
agreement, Catena merged into Ciena, and the outstanding shares of Catena common and preferred stock were
exchanged for approximately 9,681,920 shares of Ciena common stock. The aggregate purchase price was
$466.1 million, which included Ciena common stock valued at $407.2 million, Ciena options, warrants and restricted
stock valued at $53.7 million, and transaction costs of $5.2 million.
The $73.0 million assigned to existing technology will be amortized over periods ranging from 4.5 to 6.5 years. The
$18.0 million assigned to the contracts, customer relationships and purchase orders will be amortized over periods
ranging from 3 months to 4.5 years.
The goodwill allocated to the purchase price was $326.2 million and is not deductible for tax purposes. The operations
of Catena were originally incorporated into Ciena’s former BBG operating segment, and accordingly, the goodwill from
the transaction was assigned to that operating segment. For additional information see Note 4.
The following unaudited pro forma data summarizes the results of operations for fiscal 2004 as if the Catena acquisi-
tion had been completed as of November 1, 2003. The unaudited pro forma data gives effect to the combined actual
operating results prior to the May 3, 2004 acquisition, adjusted to include the pro forma effect of amortization of
intangibles and deferred stock compensation costs. These pro forma amounts (in thousands, except per share data) do
not purport to be indicative of the results that would have actually been obtained if the acquisition had occurred as of
November 1, 2003 or the results that may be obtained in the future.
Revenue
Net loss
Diluted net loss per common share and dilutive potential common share
fiscal year (unaudited)
2004
$ 348,943
$(802,038)
$ (10.10)
Internet Photonics
Internet Photonics was a privately held corporation headquartered in Shrewsbury, New Jersey. Pursuant to the terms
of the acquisition agreement, Internet Photonics merged into Ciena, and the outstanding shares of Internet Photonics
common and preferred stock were exchanged for approximately 3,231,902 shares of Ciena common stock. The aggre-
gate purchase price was $149.2 million, which included Ciena common stock valued at $139.4 million, options and
restricted stock valued at $6.1 million, and transaction costs of $3.7 million.
The $10.0 million assigned to existing technology will be amortized over 6.5 years. The $2.2 million assigned to
non-compete agreements will be amortized over 12 months. The $21.1 million assigned to the contracts, customer
relationships and purchase orders will be amortized over periods ranging from 3 months to 6.5 years. The $9.4 million
assigned to the value of the loan payable to Ciena was based upon the present value of the loan at the time of the
acquisition. This loan was eliminated during the allocation of the purchase price.
The goodwill allocated to the purchase price was $120.6 million and is not deductible for tax purposes. The operations
of Internet Photonics were originally incorporated into Ciena’s former TSG operating segment, and accordingly, the
goodwill from the transaction was assigned to that operating segment. For additional information see Note 4. The
operations of Internet Photonics are not material to the consolidated financial statements of Ciena, and accordingly,
separate pro forma financial information has not been presented.
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(3) restructuring Costs
Ciena has previously taken actions to align its workforce, facilities and operating costs with business opportunities.
Ciena historically has committed to a restructuring plan and has incurred the associated liability concurrently in accor-
dance with the provisions of SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The
following table displays the activity and balances of the restructuring liability accounts for the years ended October 31,
2005 and October 31, 2006 (in thousands):
Balance at October 31, 2003
Additional liability recorded
Adjustment to previous estimates
Cash payments
Balance at October 31, 2004
Additional liability recorded
Adjustment to previous estimates
Cash payments
Balance at October 31, 2005
Additional liability recorded
Adjustment to previous estimates
Lease settlements
Cash payments
Balance at October 31, 2006
Current restructuring liabilities
Non-current restructuring liabilities
Workforce
reduction
$ 2,849
21,796(a)
154(a)
(23,353)
1,446
5,770(b)
—
(6,946)
270
4,652(c)
—
—
(4,922)
$ —
$ —
$ —
Consolidation
of excess
facilities
$ 63,693
27,834(a)
7,323(a)
(18,913)
79,937
884(b)
11,364(b)
(22,678)
69,507
1,782(c)
9,237(c)
(11,648)(c)
(33,244)
$ 35,634
$ 8,914
$ 26,720
total
$ 66,542
49,630
7,477
(42,266)
81,383
6,654
11,364
(29,624)
69,777
6,434
9,237
(11,648)
(38,166)
$ 35,634
$ 8,914
$ 26,720
(a) During the first quarter of fiscal 2004, Ciena recorded a restructuring charge of $1.3 million related to the exit of a warehouse, $1.4 million related to
workforce reductions of 52 employees and $0.7 million related to an adjustment to estimates associated with costs for previously restructured facilities.
During the second quarter of fiscal 2004, Ciena recorded a restructuring charge of $2.5 million related to a workforce reduction of 68 employees
and $2.6 million primarily related to an adjustment to estimates associated with costs for previously restructured facilities.
During the third quarter of fiscal 2004, Ciena recorded a restructuring charge of $12.5 million related to a workforce reduction of 321 employees,
$0.7 million related to exit activities associated with Ciena’s San Jose, CA facility and an adjustment of $0.3 million related to an adjustment to esti-
mates associated with costs for previously restructured facilities.
During the fourth quarter of fiscal 2004, Ciena recorded a restructuring charge of $5.4 million related to a workforce reduction of 119 employees,
$25.8 million primarily related to exit activities associated with Ciena’s San Jose, CA facility and $3.8 million primarily related to an adjustment to
estimates associated with costs for previously restructured facilities
(b) During the first quarter of fiscal 2005, Ciena recorded a restructuring charge of approximately $1.0 million related to a workforce reduction of
21 employees and a charge of approximately $0.3 million related to certain other costs associated with the closure of its San Jose, CA facility on
September 30, 2004. This restructuring charge also reflects a reversed charge of $0.1 million related to an adjustment to estimates associated with
costs for previously restructured facilities.
During the second quarter of fiscal 2005, Ciena recorded a restructuring charge of approximately $2.1 million related to a workforce reduction of
53 employees and a charge of approximately $7.6 million related to an adjustment to estimates associated with costs for previously restructured facilities.
During the third quarter of fiscal 2005, Ciena recorded a restructuring charge of approximately $2.3 million related to a workforce reduction of
96 employees and recorded a charge of approximately $0.1 million related to the closure of one of its Kanata, Canada facilities. This restructuring
charge also reflects approximately $1.9 million related to an adjustment to estimates associated with costs for previously restructured facilities.
During the fourth quarter of fiscal 2005, Ciena recorded a restructuring charge of approximately $0.4 million related to a workforce reduction of
7 employees and recorded a charge of approximately $0.4 million related to the closure of Ciena’s Durham, NC facilities. This restructuring charge
also reflects approximately $2.0 million related to an adjustment to estimates associated with costs for previously restructured facilities.
(c) During the first quarter of fiscal 2006, Ciena recorded a charge of $0.7 million related to the closure of one of its facilities located in Kanata, Canada
and a charge of $1.5 million related to a workforce reduction of 62 employees. During the first quarter of fiscal 2006, Ciena recorded a credit
adjustment of $0.2 million related to costs associated with previously restructured facilities. During the first quarter of fiscal 2006, Ciena recorded a
gain of $6.0 million related to the buy-out of the lease of its former Fremont, CA facility, which Ciena had previously restructured.
During the second quarter of fiscal 2006, Ciena recorded a charge of $0.7 million related to the closure of its Shrewsbury, NJ facility and a charge
of $2.5 million related to a workforce reduction of 86 employees. During the second quarter of fiscal 2006, Ciena recorded a credit adjustment of
$0.2 million related to costs associated with previously restructured facilities. During the second quarter of fiscal 2006, Ciena recorded a gain of
$5.6 million related to the buy-out of the lease of its former Cupertino, CA facility, which Ciena had previously restructured.
During the third quarter of fiscal 2006, Ciena recorded a charge of $0.5 million related to a workforce reduction of 7 employees and additional
employee costs related to the closure of its Shrewsbury, NJ facility in the second quarter of fiscal 2006. During the third quarter of fiscal 2006, pri-
marily due to changes in market conditions, Ciena recorded an adjustment of $10.1 million related to costs associated with previously restructured
facilities, $10.0 million of which was related to its former facilities located in San Jose, CA. Ciena also recorded a charge of $0.4 million related to
the closure of its facility located in Beijing, China during the third quarter of fiscal 2006.
During the fourth quarter of fiscal 2006, Ciena recorded a charge of $0.1 million related to other costs associated with a previous workforce reduc-
tion and a credit of $0.5 million related to the settlement of a previously recorded facility liability.
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(4) Goodwill and long-lived Asset Impairments
Goodwill Impairment
SFAS 142 “Goodwill and Other Intangible Assets,” requires Ciena to test each reporting unit’s goodwill for impairment
on an annual basis, which Ciena has determined to be the last business day of fiscal September each year. Testing is
required between annual tests if events occur or circumstances change that would, more likely than not, reduce the
fair value of the reporting unit below its carrying value. For fiscal 2006, fiscal 2005 and fiscal 2004, Ciena has deter-
mined that its operating segments and reporting units are the same. Due to the elimination of Ciena’s former business
units in the third quarter of fiscal 2006, the fair value of Ciena’s goodwill was tested for impairment on an enterprise
level for fiscal 2006. For fiscal 2005 and fiscal 2004, the fair value of Ciena’s goodwill was tested for impairment on a
segment level. The table below sets forth changes in carrying amount of goodwill during fiscal 2004, fiscal 2005 and
fiscal 2006 (in thousands):
Balance as of October 31, 2003
Goodwill acquired
Purchase adjustments
Impairment losses
Balance as October 31, 2004
Goodwill acquired
Impairment losses
Balance as October 31, 2005
Goodwill acquired
Impairment losses
Balance as October 31, 2006
total
$ 336,039
446,815
(2,527)
(371,712)
408,615
—
(176,600)
232,015
—
—
$ 232,015
Goodwill Assessment—Fiscal 2006
During fiscal 2006, Ciena performed an assessment of the fair value of Ciena’s single reporting unit and its intangible
assets as of September 23, 2006. Ciena compared its fair value to its carrying value including goodwill and determined
that its carrying value, including goodwill, did not exceed fair value. Because the carrying amount, including goodwill,
was less than its fair value, no impairment loss was recorded for fiscal 2006. During fiscal 2006, the fair value of Ciena
was determined using the average market price of Ciena’s common stock over a 10-day period before and after
September 23, 2006, with a control premium added to the valuation results.
Goodwill Assessment—Fiscal 2005
During the fourth quarter of fiscal 2005, Ciena performed its annual test to determine and measure goodwill impair-
ment on a reporting unit basis. Management performed an assessment of the fair value of Ciena’s reporting units and
their intangible assets as of September 24, 2005. Ciena compared the fair value of each of its reporting units at that
time to each reporting unit’s carrying value including goodwill. During the fourth quarter of fiscal 2005 and in con-
junction with Ciena’s annual assessment, it became apparent that developments in the market for broadband loop
carrier products, particularly outside of the United States, would require Ciena to make a substantial commitment of
research and development resources in order to compete successfully in this market with Ciena’s CN 1000™ Next-
Generation Broadband Access platform. Given the uncertainties associated with this international market and the
magnitude of the investment required, Ciena determined it would not be cost-effective to make such investment and
suspended research and development for this product. This decision significantly reduced Ciena’s forecasted long-term
revenue for its former BBG reporting unit. As a result, the carrying value of BBG, including goodwill, exceeded the fair
value of BBG as of September 24, 2005. The fair value of the BBG reporting unit was determined using the average of
the valuations calculated using market multiples and discounted cash flows. Because of the forecasted decline in long-
term revenue for BBG, no control premium was added to the valuation results for the BBG reporting unit.
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Because BBG’s carrying value, including goodwill, exceeded the fair value of the reporting unit as a whole, Ciena
assessed the fair value of BBG’s individual assets, including identified intangible assets and liabilities, in order to derive
an implied fair value for BBG’s goodwill. Ciena determined the estimated fair value of the identifiable intangible assets
of the unit using discounted cash flows. Ciena used cash flow periods ranging from one to ten years, depending on
the nature of the asset, and assumed that revenue for the BBG reporting unit would decline to zero over ten years.
Ciena used discount rates of 10% to 14%, based on the specific risks and circumstances associated with the identified
intangible assets and Ciena’s weighted average cost of capital. The assumptions supporting the estimated discounted
cash flows for identified intangible assets, including the cash flow periods, discount rates and forecasted future reve-
nue, reflect management’s estimates. Ciena determined that the implied fair value of goodwill assigned to BBG was
zero. Because the carrying amount of the goodwill assigned to BBG was greater than the implied fair value, Ciena
recorded an impairment loss of $176.6 million in fiscal 2005.
Goodwill Assessment—Fiscal 2004
During fiscal 2004, Ciena performed its annual test to determine and measure goodwill impairment on a reporting
unit basis. Management performed an assessment of the fair value of Ciena’s reporting units and their intangible
assets as of September 27, 2004. Ciena compared the fair value of each of its reporting units at that time to each
reporting unit’s carrying value including goodwill and determined that the carrying value, including goodwill, of the
Core Networking Group (CNG), Metro and Enterprise Solutions Group (MESG), and BBG exceeded their respective
fair values as of September 27, 2004. This decline in the fair value of CNG, MESG and BBG was primarily due to the
decline in the forecasted demand for Ciena’s products, along with the reduction in valuations of comparable busi-
nesses. The fair value of CNG, MESG and BBG was determined using the average of the outcomes from the following
valuation methods: market multiples; comparable transactions; and discounted cash flows. A control premium of 15%
to 20% was added to the valuation results for each reporting unit.
Because the carrying value, including goodwill, for CNG, MESG and BBG, exceeded the fair value of each reporting
unit as a whole, Ciena assessed the fair value of each reporting unit’s respective individual assets, including identified
intangible assets and liabilities, in order to derive an implied fair value for each reporting unit’s goodwill. Ciena deter-
mined the estimated fair value of the identifiable intangible assets of each of the reporting units using discounted
cash flows. Ciena used cash flow periods ranging from one to seven years, depending on the nature of the asset,
applying annual growth rates of 5% to 118%. Ciena used discount rates of 10% to 30% based on the specific risks
and circumstances associated with the identified intangible assets and Ciena’s weighted average cost of capital. The
assumptions supporting the estimated cash flows for identified intangible assets and other non-goodwill assets and
liabilities, including the discount rate, reflects management’s estimates. Because the carrying amount of the goodwill
assigned to CNG, MESG and BBG was greater than the implied fair values, an impairment loss of $93.3 million,
$129.0 million and $149.4 million for CNG, MESG, and BBG, respectively, was recognized in fiscal 2004.
Long-Lived Asset Impairment—Equipment, Furniture and Fixtures
Ciena did not record an impairment of equipment, furniture and fixtures in fiscal 2006. During fiscal 2005 and fiscal
2004, Ciena recorded impairment losses of $0.2 million and $15.9 million, respectively, related to excess equipment,
furniture and fixtures that were classified as held for sale as a result of Ciena’s restructuring activities.
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Long-Lived Asset Impairment—Other Intangible Assets
During fiscal 2006, fiscal 2005, and fiscal 2004, Ciena performed an assessment of the carrying value of Ciena’s other
intangible assets pursuant to SFAS 144.
Ciena did not record an impairment of intangible assets in fiscal 2006 or fiscal 2004. During fiscal 2005, Ciena recorded
a charge of $45.7 million related to the impairment of BBG developed technology and customer relationships acquired
from Catena in May 2004. This charge was based on the amount by which the carrying amount of the intangible
assets exceeded their fair value. Fair value was determined based on discounted future cash flows derived from the
intangible assets. Ciena used a cash flow period of five years and assumed that revenue related to these intangible
assets would decline to zero over five years. The discount rate used was 15%. The assumptions supporting the esti-
mated future cash flows, including the discount rate reflect management’s best estimates. The discount rate was based
upon Ciena’s weighted average cost of capital as adjusted for the risks associated with its operations.
(5) marketable Debt and equity securities
Short-term and long-term investments are comprised of the following (in thousands):
Corporate bonds
Asset backed obligations
Commercial paper
US government obligations
Included in short-term investments
Included in long-term investments
Corporate bonds
Asset backed obligations
US government obligations
Included in short-term investments
Included in long-term investments
Amortized
Cost
$468,152
195,728
152,768
163,643
$980,291
629,269
351,022
$980,291
Amortized
Cost
$291,044
195,471
253,633
$740,148
582,947
157,201
$740,148
october 31, 2006
Gross
unrealized
Gains
$437
142
—
84
$663
66
597
$663
Gross
unrealized
losses
$ 525
305
—
324
$1,154
942
212
$1,154
october 31, 2005
Gross
unrealized
Gains
$—
—
—
$—
—
—
$—
Gross
unrealized
losses
$1,888
844
1,941
$4,673
3,416
1,257
$4,673
estimated
fair
value
$468,064
195,565
152,768
163,403
$979,800
628,393
351,407
$979,800
estimated
fair
value
$289,156
194,627
251,692
$735,475
579,531
155,944
$735,475
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The gross unrealized losses, related to marketable debt investments, were primarily due to changes in interest
rates. Ciena’s management has determined that the gross unrealized losses on its marketable debt investments at
October 31, 2006 are temporary in nature because Ciena has the ability and intent to hold these investments until a
recovery of fair value, which may be maturity. The gross unrealized losses were as follows at October 31, 2005 and
October 31, 2006 (in thousands):
unrealized losses
less than 12 months
Gross
unrealized
losses
$400
153
—
112
$665
fair
value
$196,947
92,869
—
38,692
$328,508
unrealized losses
less than 12 months
Gross
unrealized
losses
$1,335
655
1,027
$3,017
fair
value
$197,754
160,495
146,783
$505,032
october 31, 2006
unrealized losses
12 months or Greater
Gross
unrealized
losses
$125
152
—
212
$489
fair
value
$ 26,687
34,828
—
40,839
$102,354
october 31, 2005
unrealized losses
12 months or Greater
Gross
unrealized
losses
$ 553
189
914
$1,656
fair
value
$ 91,402
34,132
104,909
$230,443
total
Gross
unrealized
losses
$ 525
305
—
324
$1,154
fair
value
$223,634
127,697
—
79,531
$430,862
total
Gross
unrealized
losses
$1,888
844
1,941
$4,673
fair
value
$289,156
194,627
251,692
$735,475
Corporate bonds
Asset backed obligations
Commercial paper
US government obligations
Corporate bonds
Asset backed obligations
US government obligations
The following table summarizes maturities of debt investments at October 31, 2006 (in thousands):
Less than one year
Due in 1–2 years
Due in 2–5 years
Amortized
Cost
$629,269
351,022
—
$980,291
estimated
fair value
$628,393
351,407
—
$979,800
(6) Accounts receivable
As of October 31, 2006, the trade accounts receivable, net of allowance for doubtful accounts, included two custom-
ers that accounted for 25.4% and 21.8% of the net trade accounts receivable, respectively. As of October 31, 2005,
the trade accounts receivable, net of allowance for doubtful accounts, included three customers that accounted for
12.1%, 13.1% and 13.8% of the net trade accounts receivable, respectively. Ciena’s allowance for doubtful accounts
as of October 31, 2006 and October 31, 2005 was $0.1 million and $3.3 million, respectively.
During fiscal 2006, Ciena recorded the recovery of doubtful accounts in the amount of $3.0 million as a result of the
receipt of amounts due from customers from whom payment was previously deemed doubtful due to the customers’
financial condition. In addition, during fiscal 2006, $0.1 million of uncollectible accounts were written off against
the allowance.
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During fiscal 2005, Ciena recorded a provision for doubtful accounts of $2.6 million relating to one customer from
which payment was doubtful due to a change in their financial condition.
During fiscal 2004, Ciena recovered $3.1 million from a customer, from whom payment was previously deemed doubt-
ful due to the customer’s financial condition. Ciena also recorded a provision for doubtful accounts of $0.3 million
during fiscal 2004 relating to one customer.
The following table summarizes the activity in Ciena’s allowance for doubtful accounts (in thousands):
year ended
october 31,
2004
2005
2006
Balance at
Beginning of Period
$1,498
$ 961
$3,291
Provisions
(recovery)
$ 284
$ 2,602
$(3,031)
Deductions
$821
$272
$114
Balance at
end of Period
$ 961
$3,291
$ 146
(7) Inventories
Inventories are comprised of the following (in thousands):
Raw materials
Work-in-process
Finished goods
Provision for excess and obsolescence
october 31,
2005
$ 21,177
3,136
47,615
71,928
(22,595)
$ 49,333
2006
$ 29,627
9,156
89,628
128,411
(22,326)
$106,085
Ciena writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference
between the cost of inventory and the estimated market value based on assumptions about future demand and
market conditions. During fiscal 2006, fiscal 2005 and fiscal 2004, Ciena recorded a provision for inventory reserves
of $9.0 million, $5.2 million and $4.2 million, respectively, primarily related to increases in excess inventory due to
changes in forecasted sales for certain products.
The following table summarizes the activity in Ciena’s reserve for excess and obsolete inventory (in thousands):
year ended
october 31,
2004
2005
2006
Balance at
Beginning of Period
$23,093
$21,933
$22,595
Provisions
$4,172
$5,232
$9,012
Deductions
$5,332
$4,570
$9,281
Balance at
end of Period
$21,933
$22,595
$22,326
(8) Prepaid expenses and other
Prepaid expenses and other are comprised of the following (in thousands):
october 31,
Interest receivable
Prepaid VAT and other taxes
Prepaid expenses
Restricted cash
Other non-trade receivables
2006
$ 8,547
9,467
8,445
6,990
2,923
$36,372
2005
$ 7,743
4,848
9,103
10,376
5,797
$37,867
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(9) equipment, furniture and fixtures
Equipment, furniture and fixtures are comprised of the following (in thousands):
Equipment, furniture and fixtures
Leasehold improvements
Accumulated depreciation and amortization
october 31,
2005
$ 249,282
33,266
282,548
(254,458)
$ 28,090
2006
$ 253,953
36,203
290,156
(260,729)
$ 29,427
During fiscal 2005 and fiscal 2004, Ciena recorded impairment losses of $0.2 million and $15.9 million, respectively,
for equipment, furniture and fixtures as a result of its restructuring activities. During fiscal 2004, Ciena also recorded
$22.5 million in accelerated amortization expense of leasehold improvements related to the closure of its San Jose, CA
facility. This expense is included in the research and development expense for fiscal 2004.
(10) other Intangible Assets
Other intangible assets are comprised of the following (in thousands):
Developed technology
Patents and licenses
Customer relationships, covenants
not to compete, outstanding
purchase orders and contracts
october 31,
Gross
2005
Accumulated
Intangible Amortization
$(70,502)
$139,983
(19,219)
47,370
net
Intangible
$ 69,481
28,151
Gross
2006
Accumulated
Intangible Amortization
$(87,577)
$139,983
(25,463)
47,370
net
Intangible
$52,406
21,907
45,981
$233,334
(23,289)
22,692
$120,324
45,981
$233,334
(29,020)
16,961
$91,274
During fiscal 2005, Ciena recorded an impairment of $37.7 million against developed technology and an impairment
of $8.0 million against customer relationships. For additional information see Note 4.
The aggregate amortization expense of other intangible assets was $29.1 million, $42.7 million and $34.7 million for
fiscal 2006, fiscal 2005 and fiscal 2004, respectively. Expected future amortization of other intangible assets is as fol-
lows (in thousands):
year ended october 31,
2007
2008
2009
2010
2011
$29,050
27,840
19,254
14,500
630
$91,274
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(11) other Balance sheet Details
Other long-term assets (in thousands):
Maintenance spares inventory, net
Deferred debt issuance costs
Investments in privately held companies
Restricted cash
Other
october 31,
2005
$12,513
6,406
7,223
4,393
10,792
$41,327
2006
$14,724
10,306
6,489
3,227
2,658
$37,404
Deferred debt issuance costs are amortized using the straight line method which approximates the effect of the effective
interest rate method on the maturity of the related debt. Amortization of debt issuance costs, which is included in inter-
est expense, was $3.1 million, $3.0 million and $3.0 million for fiscal 2006, fiscal 2005 and fiscal 2004, respectively.
Accrued liabilities (in thousands):
Warranty
Accrued compensation, payroll related tax and benefits
Accrued interest payable
Other
october 31,
2005
$27,044
26,164
6,082
17,201
$76,491
2006
$31,751
24,102
5,502
17,927
$79,282
The following table summarizes the activity in Ciena’s accrued warranty and other contractual obligations (in thousands):
year ended
october 31,
2004
2005
2006
Balance
at Beginning
of Period
$37,380
$30,189
$27,044
Deferred revenue (in thousands):
Products
Services
Less current portion
Long-term deferred revenue
Provisions
$ 8,351
$ 9,738
$14,522
Acquired
$1,000
—
$
—
$
settlements
$(16,542)
$(12,883)
$ (9,815)
Balance
at end
of Period
$30,189
$27,044
$31,751
october 31,
2005
$ 14,534
28,984
43,518
(27,817)
$ 15,701
2006
$ 4,276
36,400
40,676
(19,637)
$ 21,039
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CIENA CORPORAT ION 10-K
(12) Convertible notes Payable
Ciena 3.75% Convertible Notes, Due February 1, 2008
On February 9, 2001, Ciena completed a public offering of 3.75% Convertible Notes, due February 1, 2008, in an
aggregate principal amount of $690.0 million. Interest is payable on February 1st and August 1st of each year. The
notes may be converted into shares of Ciena’s common stock at any time before their maturity or their prior redemp-
tion or repurchase by Ciena. The conversion rate is 1.3687 shares per each $1,000 principal amount of notes, subject
to adjustment in certain circumstances. Ciena has the option to redeem all or a portion of the notes that have not
been previously converted at the following redemption prices (expressed as percentage of principle amount):
Period
Beginning on February 1, 2006 and ending on January 31, 2007
Beginning on February 1, 2007 and ending on January 31, 2008
redemption
Price
101.071%
100.536%
During fiscal 2006, Ciena repurchased $106.5 million of the outstanding 3.75% convertible notes for $98.4 million in
open market transactions. Ciena recorded a gain on the extinguishment of debt in the amount of $7.1 million, which
consists of the $8.1 million gain from the repurchase of the notes, less a write-off of $1.0 million of associated debt
issuance costs.
During fiscal 2005, Ciena repurchased $41.2 million of the outstanding 3.75% convertible notes for $36.9 million in
open market transactions. Ciena recorded a gain on the extinguishment of debt in the amount of $3.9 million, which
consists of the $4.3 million gain from the repurchase of the notes, less a write-off of $0.4 million of associated debt
issuance costs.
At October 27, 2006, the fair value of the outstanding $542.3 million in aggregate principal amount of 3.75% con-
vertible notes was $525.3 million. At October 28, 2005, the fair value of the outstanding $648.8 million in aggregate
principal amount of 3.75% convertible notes was $587.9 million. Fair value is based on the quoted market price for
the notes on the dates above.
0.25% Convertible Senior Notes Due May 1, 2013
On April 10, 2006, Ciena completed a public offering of 0.25% Convertible Senior Notes due May 1, 2013, in aggre-
gate principal amount of $300.0 million. The notes bear interest at the annual rate of 0.25% from April 10, 2006,
payable semi-annually on May 1 and November 1, commencing on November 1, 2006. The notes are senior unsecured
obligations of Ciena and rank equally with all of Ciena’s other existing and future senior unsecured debt.
At the election of the holder, the notes may be converted prior to maturity into shares of Ciena common stock at the
initial conversion rate of 25.3001 shares per $1,000 in principal amount, which is equivalent to an initial conversion
price of $39.5255 per share. The notes may not be redeemed by Ciena prior to May 5, 2009. At any time on or after
May 5, 2009, if the closing sale price of Ciena’s common stock for at least 20 trading days in any 30 consecutive trad-
ing day period ending on the date one day prior to the date of the notice of redemption exceeds 130% of the
conversion price, Ciena may redeem the notes in whole or in part, at a redemption price in cash equal to the principal
amount to be redeemed, plus accrued and unpaid interest.
If Ciena undergoes a “fundamental change” (as that term is defined in the indenture), holders of notes will have the
right, subject to certain exemptions, to require Ciena to purchase for cash any or all of their notes at a price equal to
the principal amount, plus accrued and unpaid interest. If the holder elects to convert his or her notes in connection
with a specified fundamental change, in certain circumstances, Ciena will be required to increase the applicable con-
version rate, depending on the price paid per share for Ciena common stock and the effective date of the fundamental
change transaction.
As of October 27, 2006, the fair value of the $300.0 million in aggregate principal amount of 0.25% convertible
senior notes outstanding was $251.3 million, based on the quoted market price for the notes.
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ONI 5.0% Convertible Subordinated Notes
During fiscal 2004, Ciena purchased the remaining $48.2 million of the outstanding ONI 5.0% convertible subordi-
nated notes. Ciena paid $49.2 million for the notes with a cumulative accreted book value of $41.0 million, which
resulted in a loss on early extinguishment of debt of $8.2 million.
(13) earnings (loss) Per share Calculation
The following table (in thousands, except per share amounts) is a reconciliation of the numerator and denominator
of the basic net income (loss) per common share (“Basic EPS”) and the diluted net income (loss) per dilutive potential
common share (“Diluted EPS”). Basic EPS is computed using the weighted average number of common shares out-
standing. Diluted EPS is computed using the weighted average number of (i) common shares outstanding, (ii) shares
issuable upon vesting of restricted stock units; and (iii) shares issuable upon exercise of outstanding stock options and
warrants using the treasury stock method.
numerator
Net income (loss)
Add: Interest expense associated with convertible
notes (excluding anti-dilutive expense per SFAS 128)
Net income (loss) used to calculate Diluted EPS
2004
$(789,464)
—
$(789,464)
Denominator
Basic weighted average shares issued and outstanding
Add: Shares issuable under stock options, employees
stock purchase plans, warrants and restricted stock units
Dilutive weighted average shares issued and outstanding
2004
74,493
—
74,493
year ended october 31,
2005
$(435,699)
—
$(435,699)
year ended october 31,
2005
82,170
—
82,170
ePs
Basic EPS
Diluted EPS
2004
$(10.60)
$(10.60)
year ended october 31,
2005
$(5.30)
$(5.30)
2006
$595
—
$595
2006
83,840
1,171
85,011
2006
$0.01
$0.01
Explanation of Shares Excluded Due to Anti-Dilutive Effect
For fiscal 2004 and fiscal 2005 respectively, approximately 7.9 million and 9.3 million shares, representing the
weighted average number of shares underlying stock options, restricted stock units, warrants and Ciena’s 3.75%
convertible notes, are considered anti-dilutive because Ciena incurred net losses during these periods.
For fiscal 2006, approximately 4.2 million shares, representing the weighted average number of shares underlying
stock options, restricted stock units and warrants, are considered anti-dilutive because the exercise price of these
equity awards is greater than the average per share closing price on the NASDAQ Stock Market during this period.
In addition, approximately 4.2 million and 0.8 million shares, representing the weighted average number of shares
issuable upon conversion of Ciena’s 0.25% convertible senior notes and 3.75% convertible notes, respectively, are
considered anti-dilutive pursuant to SFAS 128 because the interest expense (net of tax and nondiscretionary adjust-
ments) associated with each of the convertible notes above, on a per common share “if converted” basis, exceeds
Basic EPS for the period.
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CIENA CORPORAT ION 10-K
The following table (in thousands, except per share amounts) summarizes the shares excluded, due to their anti-dilutive
effect, from the calculation of the denominator for Basic and Diluted EPS above:
shares excluded from ePs
Denominator Due to Anti-Dilutive effect
Shares underlying stock options, restricted stock units and warrants
0.25% Convertible senior notes
3.75% Convertible notes
Total excluded due to anti-dilutive effect
year ended october 31,
2005
8,374
—
928
9,302
2004
6,975
—
944
7,919
2006
4,178
4,203
756
9,137
(14) stockholders’ equity
Shareholder Rights Plan
In December 1997, Ciena’s Board of Directors adopted a shareholder rights plan. This plan is designed to deter any
potential coercive or unfair takeover tactics in the event of an unsolicited takeover attempt. It is not intended to pre-
vent a takeover of Ciena on terms that are favorable and fair to all shareholders and will not interfere with a merger
approved by the Board of Directors. Each right entitles shareholders to buy a “unit” equal to one one-thousandth of a
share of preferred stock of Ciena. The rights will be exercisable only if a person or a group acquires or announces a ten-
der or exchange offer to acquire 15% or more of Ciena’s common stock or if Ciena enters into certain other business
combination transactions not approved by the Board of Directors. In June 2005, Ciena amended its rights plan to raise
the ownership trigger to 20% for FMR Corp., one of Ciena’s institutional investors, and certain of its affiliated entities.
In the event the rights become exercisable, the rights plan allows for Ciena shareholders to acquire stock of the surviv-
ing corporation, whether or not Ciena is the surviving corporation, having a value twice that of the exercise price of
the rights. The rights were distributed to shareholders of record in January 1998. Pursuant to the terms of Ciena’s
rights plan, the number of rights attached to each share of common stock was proportionately increased to reflect the
reverse stock split on September 22, 2006 described below. The rights will expire on December 29, 2007 and are
redeemable for $0.001 per right at the approval of Ciena’s Board of Directors.
Call Spread Option
Concurrent with Ciena’s April 10, 2006 issuance of 0.25% Convertible Senior Notes due May 1, 2013, Ciena purchased
a call spread option on its common stock from an affiliate of the underwriter. The call spread option is designed to
mitigate dilution from the conversion of the notes to the extent that the market price per share of Ciena common
stock upon exercise is greater than the conversion price, subject to a cap.
The call spread option covers approximately 7.6 million shares of Ciena common stock, which is the number of shares
issuable upon conversion of the notes in full. The call spread option effectively has a “lower strike price” of $39.5255
and a “higher strike price” of $45.54025 and is exercisable and expires on May 1, 2013, the maturity date of the
notes. Ciena can exercise the call spread option on a net cash basis, a net share basis or a full physical settlement. A
net cash settlement would result in Ciena receiving an amount ranging from $0, if the market price per share of Ciena
common stock upon exercise is equal to or below the lower strike price, to approximately $45.7 million, if the market
price per share of Ciena common stock upon exercise is at or above the higher strike price. Settlement of the call
spread option on a net share basis would result in Ciena receiving a number of shares ranging from 0, if the market
price per share of Ciena common stock upon exercise is equal to or below the lower strike price, up to approximately
1.0 million shares, if the market price per share of Ciena common stock upon exercise is equal to the higher strike
price. The value of the consideration of a net share settlement will be equal to the value upon a net cash settlement.
If the market price is between the lower strike price and the higher strike price, in lieu of a net share or net cash settle-
ment, Ciena may elect to receive the full number of shares underlying the call spread option upon payment by Ciena
of an aggregate option exercise price of $300.0 million. Should there be an early unwind of the call spread option, the
amount of cash or net shares to be received by Ciena will be dependent upon the existing overall market conditions,
and on Ciena’s stock price, the volatility of Ciena’s stock and the remaining term of the call spread option.
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The number of shares subject to the call spread option and the lower price and higher strike prices are subject to
customary adjustments. The $28.5 million cost of the call spread option was recorded as a reduction in additional
paid in capital.
Reverse Stock Split
At Ciena’s annual meeting on March 15, 2006, shareholders approved a proposal to authorize the Board of Directors,
in its discretion, to effect a reverse stock split at one of three approved ratios, at any time prior to the 2007 annual
meeting, without further action by shareholders. On August 30, 2006, Ciena’s Board approved a one-for-seven
(1-for-7) reverse stock split of Ciena’s common stock. The reverse stock split became effective at 5:00 p.m., Eastern
Time, on September 22, 2006. Pursuant to the reverse stock split, each seven shares of authorized and outstanding
common stock was reclassified and combined into one share of new common stock.
In connection with the reverse stock split, the number of shares of common stock authorized under Ciena’s Third
Restated Certificate of Incorporation was reduced from 980 million to 140 million shares, without any change in par
value per common share. The reverse split did not change the number of shares of Ciena preferred stock authorized,
which remains at 20 million. All references to share and per-share data for all periods presented have been adjusted to
give effect to the one-for-seven (1-for-7) reverse stock split.
(15) Income taxes
The provision for income taxes consists of the following (in thousands):
Provision for income taxes:
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
Provision for income taxes
2004
$
—
—
1,121
1,121
—
—
—
—
$1,121
october 31,
2005
$
—
—
1,320
1,320
—
—
—
—
$1,320
Income (loss) before provision for income taxes consists of the following (in thousands):
United States
International
Total
2004
$(792,059)
3,716
$(788,343)
october 31,
2005
$(438,956)
4,577
$(434,379)
2006
$
—
23
1,358
1,381
—
—
—
—
$1,381
2006
$(2,549)
4,525
$ 1,976
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CIENA CORPORAT ION 10-K
The tax provision reconciles to the amount computed by multiplying income or loss before income taxes by the U.S.
federal statutory rate of 35% as follows:
Provision at statutory rate
State taxes
Foreign taxes
Non-deductible purchased research and development
Research and development credit
Non-deductible goodwill and other
Valuation allowance
2004
35.00%
—
0.02%
(1.34%)
0.57%
(16.50%)
(17.89%)
(0.14%)
october 31,
2005
35.00%
—
0.06%
—
0.65%
(15.04%)
(20.97%)
(0.30%)
2006
35.00%
1.14%
14.04%
—
(55.94%)
16.15%
59.48%
69.87%
The significant components of deferred tax assets and liabilities were as follows (in thousands):
Deferred tax assets:
Reserves and accrued liabilities
Depreciation and amortization
NOL and credit carry forward
Other
Gross deferred tax assets
Valuation allowance
Net deferred tax asset
october 31,
2005
2006
$ 68,041
110,312
983,818
11,095
1,173,266
(1,173,266)
—
$
$ 50,088
118,122
994,906
26,406
1,189,522
(1,189,522)
—
$
During fiscal 2002, Ciena established a valuation allowance against its deferred tax assets. Ciena intends to maintain a
valuation allowance until sufficient positive evidence exists to support its reversal. The following table summarizes the
activity in Ciena’s valuation allowance against its gross deferred tax assets (in thousands):
year ended
october 31,
2004
2005
2006
Balance at
Beginning of Period
$ 894,198
$1,077,906
$1,173,266
Additions
$183,708
$ 95,360
$ 16,256
Deductions
$—
$—
$—
Balance at
end of Period
$1,077,906
$1,173,266
$1,189,522
As of October 31, 2006, Ciena had a $2.49 billion net operating loss carry forward and an $82.4 million income tax
credit carry forward which begin to expire in fiscal year 2018 and 2012, respectively. Ciena’s ability to use net operat-
ing losses and credit carry forwards may be subject to limitations pursuant to the ownership change rules of the
Internal Revenue Code Section 382.
The income tax provision does not reflect the tax savings resulting from deductions associated with Ciena’s equity
compensation and convertible debt. The tax benefit of approximately $56.3 million will be credited to additional
paid-in capital when realized.
Approximately $128.0 million of the valuation allowance as of October 31, 2006 was attributable to deferred tax
assets associated with the acquisitions of ONI, WaveSmith, Akara, Catena and IPI that, when realized, will first reduce
goodwill, then other non-current intangibles of the acquired companies, and then income tax expense. As of
October 31, 2006, it is anticipated the realization of any valuation allowance associated with acquisitions would only
reduce goodwill.
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(16) share-Based Compensation expense
During fiscal 2005, the Board of Directors determined that all future grants of stock options, restricted stock units, or
other forms of equity-based compensation will solely be issued under the Ciena Corporation 2000 Equity Incentive
Plan (the “2000 Plan”) and the 2003 Employee Stock Purchase Plan (the “ESPP”).
Ciena Corporation 2000 Equity Incentive Plan
The 2000 Plan, which is a shareholder approved plan, was assumed by Ciena as a result of its merger with ONI. It
authorizes the issuance of stock options, restricted stock, restricted stock units and stock bonuses to employees, offi-
cers, directors, consultants, independent contractors and advisors. The Compensation Committee of the Board of
Directors has broad discretion to establish the terms and conditions for equity awards, including number of shares,
vesting and required service or other performance criteria. The maximum term of any award under the 2000 Plan is
ten years. The exercise price of options may not be less than 85% of the fair market value of the stock at the date of
grant, or 100% of the fair market value for qualified options.
Under the terms of the 2000 Plan, the number of shares authorized for issuance will increase by 5.0% of the number
of issued and outstanding shares of Ciena each January 1st, unless the Compensation Committee reduces the amount
of the increase in any year. By action of the Compensation Committee, the plan increased by (i) zero shares on
January 1, 2006, (ii) zero shares on January 1, 2005, and (iii) 9.5 million shares, or 2.0% of the then issued and out-
standing shares of Ciena, on January 1, 2004. In addition, any shares subject to outstanding options or other awards
under the ONI 1997 Stock Plan, ONI 1998 Equity Incentive Plan, or ONI 1999 Equity Incentive Plan that are forfeited
upon cancellation of the award are available for issuance under the 2000 Plan. As of October 31, 2006, there were
5.6 million shares authorized and available for issuance under the 2000 Plan.
Stock Options
The following table is a summary of Ciena’s stock option activity (shares in thousands):
Balance as of October 31, 2003
Granted and assumed
Exercised
Canceled
Balance as of October 31, 2004
Granted
Exercised
Canceled
Balance as of October 31, 2005
Granted
Exercised
Canceled
Balance as of October 31, 2006
options
outstanding
7,004
5,317
(786)
(2,456)
9,079
2,041
(599)
(1,871)
8,650
579
(1,304)
(815)
7,110
Weighted Average
exercise Price
$70.70
23.17
11.97
69.65
48.23
17.78
15.75
45.15
44.80
21.95
16.71
41.18
$48.52
The total intrinsic value of options exercised during fiscal 2006 was $18.2 million.
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CIENA CORPORAT ION 10-K
The following table summarizes information with respect to stock options outstanding at October 31, 2006, based on
Ciena’s closing stock price on October 27, 2006 of $23.59 per share (shares and intrinsic value in thousands):
options outstanding at october 31, 2006
vested options at october 31, 2006
Weighted
Average Weighted
remaining Average
Contractual exercise
number life (years)
947
873
1,038
637
1,041
725
781
1,068
7,110
8.20
8.52
7.76
7.63
6.16
6.45
5.43
4.24
6.75
Price
$ 14.34
17.19
21.44
27.55
31.70
40.83
60.35
156.16
$ 48.52
Weighted
Average Weighted
remaining Average
Contractual exercise
number life (years)
342
282
864
516
1,014
663
781
1,069
5,531
7.31
8.23
7.67
7.16
6.07
6.16
5.43
4.24
6.18
Price
$ 11.61
17.08
21.74
27.48
31.71
41.37
60.35
156.16
$ 57.01
Aggregate
Intrinsic
value
$4,099
1,838
1,600
3
—
—
—
—
$7,540
Aggregate
Intrinsic
value
$ 8,756
5,593
2,234
3
—
—
—
—
$16,586
range of
exercise Price
$ 0.01–$ 16.52
$16.53–$ 17.43
$17.44–$ 22.96
$22.97–$ 31.36
$31.37–$ 31.71
$31.72–$ 46.97
$46.98–$ 83.13
$83.14–$1,046.50
$ 0.01–$1,046.50
As of October 31, 2006, total unrecognized compensation expense related to unvested stock options was $11.0 mil-
lion. This expense is expected to be recognized over a weighted-average period of 1.9 years.
On October 26, 2005, Ciena’s Board of Directors accelerated the vesting of approximately 2.0 million unvested, “out-
of-the-money” stock options previously awarded to employees, officers and directors under Ciena’s stock option plans.
Certain performance-based options held by executives were not subject to this acceleration. For purposes of the
acceleration, options with an exercise price greater than $17.43 per share were deemed “out-of-the-money.” The
accelerated options, which were considered fully vested as of October 26, 2005, had exercise prices ranging from
$17.50 to $328.93 per share and a weighted average exercise price of $30.73 per share. Ciena did not accelerate the
vesting of options that had an exercise price per share of $17.43 or less. The primary purpose of the accelerated vest-
ing was to enable Ciena to avoid recognizing future compensation expense associated with these out-of-the-money
stock options upon adoption of SFAS 123(R) for fiscal 2006.
Restricted Stock Units
A restricted stock unit is a right to receive a share of Ciena common stock when the unit vests. Ciena calculates the
fair value of each restricted stock unit using the intrinsic value method and recognizes the expense straight-line over
the requisite period. The following table is a summary of Ciena’s restricted stock unit activity, based on Ciena’s closing
stock price at October 27, 2006 of $23.59 per share (shares and intrinsic value in thousands):
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The following table is a summary of Ciena’s restricted stock unit activity (in thousands, except per share data):
Balance as of October 31, 2003
Granted
Converted
Canceled or forfeited
Balance as of October 31, 2004
Granted
Converted
Canceled or forfeited
Balance as of October 31, 2005
Granted
Converted
Canceled or forfeited
Balance as of October 31, 2006
restricted
stock units
outstanding
—
25
—
(3)
22
—
—
(4)
18
261
(64)
(53)
162
Weighted Average
Grant Date fair
value Per share
$
—
Aggregate
Intrinsic
value
$ —
$45.85
$ 373
$47.32
$ 301
$22.99
$3,829
The total intrinsic value of restricted stock units converted during fiscal 2006 was $2.6 million.
As of October 31, 2006, total unrecognized compensation expense related to restricted stock units was $2.8 million.
This expense is expected to be recognized over a weighted-average period of 1.5 years.
2003 Employee Stock Purchase Plan
In March 2003, Ciena shareholders approved the ESPP, which has a ten-year term and originally authorized the issu-
ance of 2.9 million shares. At the 2005 annual meeting, Ciena shareholders approved an amendment increasing the
number of shares available to 3.6 million and adopting an “evergreen” provision that annually increases the number
of shares available by up to 0.6 million shares, provided that the total number of shares available shall not exceed
3.6 million. Pursuant to the evergreen provision, the maximum number of shares that may be added to the ESPP dur-
ing the remainder of its ten-year term is 4.0 million
Under the ESPP, eligible employees may enroll in an offer period during certain open enrollment periods. New offer
periods begin March 16 and September 16 of each year. Prior to the offer period commencing September 15, 2006,
(i) each offer period consisted of four, six-month purchase periods during which employee payroll deductions were
accumulated and used to purchase shares of common stock; and (ii) the purchase price of the shares was 15% less
than the fair market value on either the first day of an offer period or the last day of a purchase period, whichever was
lower. In addition, if the fair market value on the purchase date was less than the fair market value on the first day of
an offer period, then participants automatically commenced a new offer period.
On May 30, 2006, the Compensation Committee amended the ESPP, effective September 15, 2006, to shorten the
offer period under the ESPP to six months. As a result of this change, the offer period and any purchase period will be
the same six-month period. Under the amended ESPP, the applicable purchase price equals 95% of the fair market
value of Ciena common stock on the last day of each purchase period. Employees enrolled with offer periods com-
menced prior to September 15, 2006, will be permitted to complete the remaining purchase periods in their current
offer period. These amendments were intended to enable the ESPP to be considered a non-compensatory plan under
FAS 123(R) for future offering periods.
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CIENA CORPORAT ION 10-K
Balance as of October 31, 2003
Issued March 15, 2004
Issued September 15, 2004
Balance as of October 31, 2004
Issued March 15, 2005
Plan Amendment
Issued September 15, 2005
Balance as of October 31, 2005
Evergreen provision
Issued March 15, 2006
Issued September 15, 2006
Balance as of October 31, 2006
esPP shares
Available for Issuance
2,644
Intrinisic value
at exercise Date
(221)
(171)
2,252
(366)
1,685
(307)
3,264
307
(335)
(260)
2,976
$1,653
347
741
1,072
8,662
$4,610
As of October 31, 2006, unrecognized compensation expense related to the ESPP was $0.5 million. This expense is
expected to be recognized over a weighted-average period of 1.2 years.
Share-Based Compensation under SFAS 123(R) for Fiscal 2006 and APB 25 for Fiscal 2005
and Fiscal 2004
On November 1, 2005, Ciena adopted SFAS 123(R), which requires the measurement and recognition of compensa-
tion expense, based on estimated fair values, for all share-based payments awards made to Ciena’s employees and
directors including stock options, restricted stock, restricted stock unit awards and stock purchased under Ciena’s ESPP.
Prior to the adoption of SFAS 123(R), Ciena accounted for share-based awards to employees and directors using the
intrinsic value method in accordance with APB 25, as interpreted by FIN 44, “Accounting for Certain Transactions
Involving Stock Compensation, an Interpretation of APB Opinion No. 25,” as allowed under SFAS 123, “Accounting
for Stock-Based Compensation.” Share-based compensation expense of $9.4 million and $11.9 million for fiscal 2005
and fiscal 2004 was solely related to share-based awards assumed through acquisitions and restricted stock unit
awards that Ciena had been recognizing in its consolidated statement of operations in accordance with the provisions
set forth above. Because the exercise price of Ciena’s stock options granted to employees and directors equaled the
fair market value of the underlying stock at the grant date, under the intrinsic value method, no share-based compen-
sation expense was otherwise recognized in Ciena’s consolidated statement of operations.
The following table summarizes share-based compensation expense under SFAS 123(R) for fiscal 2006; and share-
based compensation expense under APB 25, as interpreted by FIN 44 for fiscal 2005 and fiscal 2004, which was
allocated as follows (in thousands):
Product costs
Service costs
Stock-based compensation expense included in cost of sales
Research and development
Sales and marketing
General and administrative
Stock-based compensation expense included in operating expense
Stock-based compensation expense capitalized in inventory, net
Total stock-based compensation
2004
$
—
—
—
6,514
4,051
1,318
11,883
—
$11,883
year ended october 31,
2005
$
—
—
—
4,404
4,404
633
9,441
—
$9,441
2006
$ 1,075
810
1,885
5,057
3,415
3,385
11,857
299
$14,041
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CIENA C O RPO RATI ON 10- K
Pro Forma Share-Based Compensation under SFAS 123 for Fiscal 2005 and Fiscal 2004
Had (i) compensation expense for Ciena’s stock option plans and employee stock purchase plan been determined
based on the Black-Scholes option-pricing model; and (ii) the fair value at the grant date for awards in fiscal 2004 and
fiscal 2005 been determined consistent with the provisions of SFAS 123, “Accounting for Stock Based Compensation”
as amended by SFAS 148, “Accounting for Stock Based Compensation—Transition and Disclosure,” Ciena’s net loss
and net loss per share for the fiscal 2004 and fiscal 2005 would have changed by the pro forma amounts indicated
below (in thousands, except per share data):
Net loss applicable to common stockholders—as reported
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects
Net loss applicable to common stockholders—pro forma
Basic and diluted net loss per share—as reported
Basic and diluted net loss per share—pro forma
year ended october 31,
2004
$(789,464)
2005
$(435,699)
39,638
61,623
11,883
$(817,219)
$ (10.60)
$ (10.97)
9,441
$(487,881)
$ (5.30)
$ (5.94)
Fair Value and Assumptions Used to Calculate Fair Value under SFAS 123(R) and SFAS 123
Assumptions for option-based awards under SFAS 123(R)
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model,
with the following weighted average assumptions:
Expected volatility
Risk-free interest rate
Expected life (years)
Expected dividend yield
2004
63%–71%
3.5%
4.5
0.0%
year ended october 31,
2005
58%–67%
3.65%–4.26%
3.9–5.5
0.0%
2006
61.5%
4.3%–5.1%
5.5–6.1
0.0%
Consistent with SFAS 123(R) and SAB 107, Ciena considered the implied volatility and historical volatility of its stock
price in determining its expected volatility, and, finding both to be equally reliable, determined that a combination of
both would result in the best estimate of expected volatility.
The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of Ciena’s
employee stock options.
The expected life of employee stock options represents the weighted-average period the stock options are expected to
remain outstanding. Because Ciena considers its options to be “plain vanilla,” it calculated the expected term using
the simplified method as prescribed in SAB 107. Under SAB 107, options are considered to be “plain vanilla” if they
have the following basic characteristics: granted “at-the-money”; exerciseability is conditioned upon service through
the vesting date; termination of service prior to vesting results in forfeiture; limited exercise period following termina-
tion of service; options are non-transferable and non-hedgeable.
The dividend yield assumption is based on Ciena’s history and expectation of dividend payouts.
As share-based compensation expense recognized in the consolidated statement of operations for fiscal 2006 is based
on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures were estimated based
on Ciena’s historical experience.
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CIENA CORPORAT ION 10-K
Assumptions for option-based awards under SFAS 123
Prior to the first quarter of fiscal 2006, Ciena considered the implied volatility and historical volatility of its stock
price in determining its expected volatility. The risk-free interest rate was based upon assumption of interest rates
appropriate for the term of Ciena’s employee stock options. The dividend yield assumption was based on Ciena’s
history and expectation of dividend payouts. Forfeitures prior to the first quarter of fiscal 2006 were accounted for
as they occurred.
Assumptions for restricted stock unit awards under SFAS 123(R) and SFAS 123
The fair value of each restricted stock unit award is estimated on the date of grant using the intrinsic value method.
The weighted average fair value of each restricted stock unit granted under Ciena’s stock option plans for fiscal 2006
and 2004 was $19.47 and $44.78, respectively. No restricted stock unit awards were made during fiscal 2005.
Assumptions for Employee Stock Purchase Plan awards under SFAS 123(R)
On May 30, 2006, the Compensation Committee amended the ESPP, effective September 15, 2006, to shorten the
offer period under the ESPP from twenty four months to six months. As a result of this change, the offer period and
any purchase period will be the same six-month period. Under the amended ESPP, the applicable purchase price
equals 95% of the fair market value of Ciena common stock on the last day of each purchase period. These amend-
ments were intended to enable the ESPP to be considered a non-compensatory plan under FAS 123(R) for future
offering periods.
Employees enrolled with offer periods that commenced prior to September 15, 2006 are permitted to complete the
remaining purchase periods in their current offer period. For these continuing offer periods, the fair value is deter-
mined as of the grant date, using the graded vesting approach. Under the graded vesting approach, the 24-month
ESPP offer period, which consists of four, six-month purchase periods, is treated for valuation purpose as four separate
option tranches with individual lives of six, 12, 18 and 24 months, each commencing on the initial grant date. Each
tranche is expensed straight-line over its individual life.
(17) other employee Benefit Plans
Employee 401(k) Plan
Ciena has a 401(k) defined contribution profit sharing plan. The plan covers all U.S. based employees who are not part
of an excluded group. Participants may contribute up to 60% of pre-tax compensation, subject to certain limitations.
The plan includes an employer matching contribution equal to 50% of the first 3% an employee contributes each pay
period. Ciena may also make discretionary annual profit sharing contributions up to the IRS regulated limit. Ciena has
made no profit sharing contributions to date. During fiscal 2006, fiscal 2005 and fiscal 2004, Ciena made matching
contributions of approximately $1.2 million, $1.3 million and $1.6 million, respectively.
(18) Commitments and Contingencies
Operating Lease Commitments
Ciena has certain minimum obligations under non-cancelable operating leases expiring on various dates through
2019 for equipment and facilities. Included in Ciena’s minimum obligations under non-cancelable operating leases is
$41.2 million of unfavorable lease commitments. These unfavorable lease commitments were based on the present
value of the lease obligations assumed by Ciena through acquisition, compared to market rates at the time of acquisi-
tion. The unfavorable lease commitments will be paid over the applicable remaining lease term. Also included in
Ciena’s minimum obligations under non-cancelable operating leases is $44.5 million related to restructured facilities.
For additional information see Note 3. Both the unfavorable lease commitments and restructured facilities are recorded
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CIENA C O RPO RATI ON 10- K
as liabilities on Ciena’s balance sheet. Future annual minimum rental commitments under non-cancelable operating
leases at October 31, 2006 are as follows (in thousands):
year ended october 31,
2007
2008
2009
2010
2011
Thereafter
Total
$ 26,141
24,521
22,106
20,652
14,492
18,970
$126,882
Rental expense for fiscal 2006, fiscal 2005, and fiscal 2004 was approximately $9.2 million, $11.6 million and
$16.3 million, respectively. In addition, Ciena paid approximately $45.3 million, $33.0 million, and $19.3 million during
fiscal 2006, fiscal 2005, and fiscal 2004, respectively, related to rent costs for restructured facilities and unfavorable
lease commitments, which were offset against Ciena’s restructuring liabilities and unfavorable lease obligations.
Purchase Commitments with Contract Manufacturers and Suppliers
Ciena relies on a small number of contract manufacturers to perform the majority of the manufacturing operations for
its products. In order to reduce lead times and ensure adequate component supply, Ciena enters into agreements with
these suppliers that allow them to procure inventory for Ciena’s forecasted future demands. As of October 31, 2006,
Ciena has purchase commitments of $97.3 million.
Litigation
On October 3, 2000, Stanford University and Litton Systems filed a complaint in the United States District Court for the
Central District of California against Ciena and several other defendants, alleging that optical fiber amplifiers incorpo-
rated into certain of those parties’ products infringe U.S. Patent No. 4,859,016 (the “‘016 Patent”). The complaint
seeks injunctive relief, royalties and damages. On October 10, 2003, the court stayed the case pending final resolution
of matters before the U.S. Patent and Trademark Office (the “PTO”), including a request for and disposition of a reex-
amination of the ‘016 Patent. On October 16, 2003 and November 2, 2004, the PTO granted reexaminations of the
‘016 Patent, resulting in a continuation of the stay of the case. On September 11, 2006, the PTO issued a Notice of
Intent to Issue a Reexamination Certificate and Statement of Reasons for Patentability/Confirmation, stating its intent
to confirm certain claims of the ‘016 Patent. Thereafter, on September 19, 2006, Litton Systems filed a status report
in which it requested that the district court lift the stay of the case, which request was denied by the district court on
October 13, 2006. Ciena believes that it has valid defenses to the lawsuit and intends to defend it vigorously in the
event the stay of the case is lifted.
As a result of Ciena’s merger with ONI Systems Corp. in June 2002, Ciena became a defendant in a securities class
action lawsuit. Beginning in August 2001, a number of substantially identical class action complaints alleging violations
of the federal securities laws were filed in the United States District Court for the Southern District of New York. These
complaints name ONI, Hugh C. Martin, ONI’s former chairman, president and chief executive officer; Chris A. Davis,
ONI’s former executive vice president, chief financial officer and administrative officer; and certain underwriters of
ONI’s initial public offering as defendants. The complaints were consolidated into a single action, and a consolidated
amended complaint was filed on April 24, 2002. The amended complaint alleges, among other things, that the under-
writer defendants violated the securities laws by failing to disclose alleged compensation arrangements (such as
undisclosed commissions or stock stabilization practices) in the initial public offering’s registration statement and by
engaging in manipulative practices to artificially inflate the price of ONI’s common stock after the initial public offering.
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CIENA CORPORAT ION 10-K
The amended complaint also alleges that ONI and the named former officers violated the securities laws on the basis
of an alleged failure to disclose the underwriters’ alleged compensation arrangements and manipulative practices. No
specific amount of damages has been claimed. Similar complaints have been filed against more than 300 other issuers
that have had initial public offerings since 1998, and all of these actions have been included in a single coordinated
proceeding. Mr. Martin and Ms. Davis have been dismissed from the action without prejudice pursuant to a tolling
agreement. In July 2004, following mediated settlement negotiations, the plaintiffs, the issuer defendants (including
Ciena), and their insurers entered into a settlement agreement, whereby, if approved, the plaintiffs’ cases against the
issuers would be dismissed, the insurers would agree to guarantee a recovery by the plaintiffs from the underwriter
defendants of at least $1 billion, and the issuer defendants would agree to assign or surrender to the plaintiffs certain
claims the issuers may have against the underwriters. The settlement agreement does not require Ciena to pay any
amount toward the settlement or to make any other payments. In October 2004, the district court certified a class
with respect to the Section 10(b) claims in six “focus cases” selected out of all of the consolidated cases, which cases
did not include Ciena, and which decision was appealed by the underwriter defendants to the U.S. Court of Appeals
for the Second Circuit. On February 15, 2005, the district court granted the motion filed by the plaintiffs and issuer
defendants for preliminary approval of the settlement agreement, subject to certain modifications to the proposed bar
order, and directed the parties to submit a revised settlement agreement reflecting its opinion. On August 31, 2005,
the district court issued a preliminary order approving the revised stipulated settlement agreement, and approving and
setting dates for notice of the settlement to all class members. A fairness hearing was held on April 24, 2006, at which
time the court took the matter under advisement. If the court determines that the settlement is fair to the class mem-
bers, the settlement will be approved. On December 5, 2006, the U.S. Court of Appeals for the Second Circuit vacated
the district court’s grant of class certification in the six focus cases. Because the settlement agreement involves certifi-
cation of a settlement class as part of the approval process, the impact of the Second Circuit’s decision on the
settlement remains unclear.
In addition to the matters described above, Ciena is subject to various legal proceedings, claims and litigation arising in
the ordinary course of its business. While the outcome of these matters is currently not determinable, Ciena does not
expect that the ultimate costs to resolve these matters will have a material effect on its results of operations, financial
position or cash flows.
(19) entity-Wide Disclosures
Revenue from sales to customers outside of the United States is reflected as International in the geographic distribution
of revenue below. Ciena’s geographic distribution of revenue was as follows (in thousands, except percentage data):
United States
International
Total
2004
$221,456
77,251
$298,707
fiscal year
%*
74.1
25.9
100.0
2005
$340,774
86,483
$427,257
%*
79.8
20.2
100.0
2006
$423,687
140,369
$564,056
%*
75.1
24.9
100.0
* Denotes % of total revenue
The majority of Ciena’s assets are located in the United States and attributable to the United States operations.
Equipment, furniture and fixtures located outside of the United States are reflected as International in the geographic
distribution of equipment, furniture and fixtures below. Ciena’s geographic distribution of net equipment, furniture
and fixtures was as follows (in thousands, except percentage data):
United States
International
Total
* Denotes % of total equipment, furniture and fixtures
2005
$23,390
4,700
$28,090
%*
83.3
16.7
100.0
2006
$21,934
7,493
$29,427
%*
74.5
25.5
100.0
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CIENA C O RPO RATI ON 10- K
Product portfolio distribution of revenue was as follows (in thousands, except percentage data):
Optical networking products
Broadband networking products
Data networking products
Network and services management
software, and other
Global network services
Total
* Denotes % of total revenue
2004
$188,656
31,294
23,150
7,111
48,496
$298,707
%*
63.1
10.5
7.8
2.4
16.2
100.0
fiscal year
2005
$254,159
82,726
34,265
3,125
52,982
$427,257
%*
59.5
19.4
8.0
0.7
12.4
100.0
2006
$376,920
81,823
35,007
8,677
61,629
$564,056
During the following fiscal years customers who each accounted for at least 10% of Ciena’s revenue during the
respective periods are as follows (in thousands):
Verizon
Sprint
BellSouth
AT&T
SAIC
Total
fiscal year
2004
$ N/A
N/A
N/A
N/A
46,557
$46,557
%*
—
—
—
—
15.6
15.6
2005
$ 43,673
N/A
43,946
N/A
46,058
$133,677
%*
10.2
—
10.3
—
10.8
31.3
2006
$ 70,225
89,793
N/A
66,926
N/A
$226,944
%*
66.9
14.5
6.2
1.5
10.9
100.0
%*
12.4
15.9
—
11.9
—
40.2
* Denotes % of total revenue
N/A —denotes revenue recognized less than 10% for the period.
Item 9.
CHAnGes In AnD DIsAGreements WItH ACCountAnts on
ACCountInG AnD fInAnCIAl DIsClosure
None.
Item 9A. Controls AnD ProCeDures
Disclosure Controls and Procedures
As of the end of the period covered by this report, Ciena carried out an evaluation under the supervision and with the
participation of Ciena’s management, including Ciena’s Chief Executive Officer and Chief Financial Officer, of Ciena’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended). Based upon this evaluation, Ciena’s Chief Executive Officer and Chief Financial Officer concluded
that Ciena’s disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over financial reporting
There was no change in Ciena’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended) during the most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, Ciena’s internal control over financial reporting.
report of management on Internal Control over financial reporting
The management of Ciena Corporation is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934).
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CIENA CORPORAT ION 10-K
The internal control over financial reporting at Ciena Corporation was designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of America. Internal control over finan-
cial reporting includes those policies and procedures that:
z
z
z
z
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of Ciena Corporation;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial state-
ments in accordance with accounting principles generally accepted in the United States of America;
provide reasonable assurance that receipts and expenditures of Ciena Corporation are being made only in accor-
dance with authorization of management and directors of Ciena Corporation; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposi-
tion of assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Management of Ciena Corporation assessed the effectiveness of the company’s internal control over financial report-
ing as of October 31, 2006. Management based this assessment on criteria for effective internal control over financial
reporting described in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on this assessment, management determined that, as of October 31, 2006, Ciena
Corporation maintained effective internal control over financial reporting. Management reviewed the results of its
assessment with the Audit Committee of our Board of Directors.
PricewaterhouseCoopers LLP, independent registered public accounting firm, who audited and reported on the consol-
idated financial statements of Ciena Corporation included in this annual report, has also audited management’s
assessment and the effectiveness of Ciena Corporation’s internal control over financial reporting as of October 31,
2006 as stated in its report appearing under Item 8.
/s/ Gary B. Smith
/s/ Joseph R. Chinnici
Gary B. Smith
President and Chief Executive Officer
Joseph R. Chinnici
Senior Vice President and Chief Financial Officer
January 10, 2007
January 10, 2007
Attestation report of Independent registered Public Accounting firm
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited Ciena’s consolidated
financial statements, has issued an attestation report on management’s assessment of Ciena’s internal control over
financial reporting, which is contained under Item 8 of Part II of this annual report under the heading “Report of
Independent Registered Public Accounting Firm.” The attestation report is incorporated herein by reference.
Item 9B. otHer InformAtIon
None.
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CIENA C O RPO RATI ON 10- K
PART III
Item 10. DIreCtors AnD exeCutIve offICers of tHe reGIstrAnt
Pursuant to General Instruction G(3) of Form 10-K, information relating to Ciena’s directors and executive officers is set
forth in Part I of this annual report under the caption Item 1. “Business—Directors and Executive Officers.”
Additional information concerning our Audit Committee and regarding compliance with Section 16(a) of the Exchange
Act responsive to this item is incorporated herein by reference to Ciena’s Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to
our Annual Meeting of Shareholders to be held on March 14, 2007.
As part of our system of corporate governance, our board of directors has adopted a code of ethics that is specifically
applicable to our chief executive officer and senior financial officers. This Code of Ethics for Senior Financial Officers,
as well as our Code of Business Conduct and Ethics, applicable to all directors, officers and employees, are available on
the corporate governance page of our web site at http://www.ciena.com. We intend to satisfy any disclosure require-
ment under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of the Code of Ethics for
Senior Financial Officers, by posting such information on our web site at the address above.
Item 11. exeCutIve ComPensAtIon
Information responsive to this item is incorporated herein by reference to Ciena’s Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with
respect to our Annual Meeting of Shareholders to be held on March 14, 2007.
Item 12.
seCurIty oWnersHIP of CertAIn BenefICIAl oWners
AnD mAnAGement
Information responsive to this item is incorporated herein by reference to Ciena’s Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with
respect to our Annual Meeting of Shareholders to be held on March 14, 2007.
Item 13. CertAIn relAtIonsHIPs AnD relAteD trAnsACtIons
Information responsive to this item is incorporated herein by reference to Ciena’s Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with
respect to our Annual Meeting of Shareholders to be held on March 14, 2007.
Item 14. PrInCIPAl ACCountInG fees AnD servICes
Information responsive to this item is incorporated herein by reference to Ciena’s Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with
respect to our Annual Meeting of Shareholders to be held on March 14, 2007.
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CIENA C O RPO RATI ON 10- K
PART IV
Item 15. exHIBIts AnD fInAnCIAl stAtement sCHeDules
(a) 1. The information required by this item is included in Item 8 of Part II of this annual report.
2. The information required by this item is included in Item 8 of Part II of this annual report.
3.
Exhibits: See Index to Exhibits. The Exhibits listed in the accompanying Index to Exhibits are filed or incorpo-
rated by reference as part of this annual report.
(b) Exhibits. See Index to Exhibits. The Exhibits listed in the accompanying Index to Exhibits are filed or incorporated
by reference as part of this annual report.
(c) Not applicable.
sIGnAtures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Linthicum,
County of Anne Arundel, State of Maryland, on the 10th day of January 2007.
Ciena Corporation
By: /s/ Gary B. Smith
Gary B. Smith
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the follow-
ing persons on behalf of the Registrant and in the capacities and on the date indicated.
signatures
/s/ Patrick H. Nettles, Ph.D.
Patrick H. Nettles, Ph.D.
/s/ Gary B. Smith
Gary B. Smith
(Principal Executive Officer)
/s/ Joseph R. Chinnici
Joseph R. Chinnici
(Principal Financial Officer)
/s/ Andrew C. Petrik
Andrew C. Petrik
(Principal Accounting Officer)
/s/ Stephen P. Bradley, Ph.D.
Stephen P. Bradley, Ph.D.
/s/ Harvey B. Cash
Harvey B. Cash
/s/ Bruce L. Claflin
Bruce L. Claflin
/s/ Lawton W. Fitt
Lawton W. Fitt
/s/ Judith M. O’Brien
Judith M. O’Brien
/s/ Michael J. Rowny
Michael J. Rowny
/s/ Gerald H. Taylor
Gerald H. Taylor
title
Executive Chairman of the Board of Directors
Date
January 10, 2007
President, Chief Executive Officer and Director
January 10, 2007
Sr. Vice President, Finance and Chief Financial Officer
January 10, 2007
Vice President, Controller and Treasurer
January 10, 2007
Director
Director
Director
Director
Director
Director
Director
PA G E 88
January 10, 2007
January 10, 2007
January 10, 2007
January 10, 2007
January 10, 2007
January 10, 2007
January 10, 2007
executive officers
Patrick H. Nettles, Ph.D.
Executive Chairman of the
Board of Directors
Gary B. Smith
President, Chief Executive Officer
and Director
Stephen B. Alexander
Senior Vice President, Products
and Technology, and
Chief Technology Officer
outside board members
Stephen P. Bradley, Ph.D.
William Ziegler Professor
of Business Administration
Harvard Business School
Harvey B. Cash
General Partner
InterWest Partners
Bruce L. Claflin
Retired, President and CEO
3Com Corporation
Joseph R. Chinnici
Senior Vice President, Finance,
and Chief Financial Officer
Lawton W. Fitt
Senior Advisor
GSC Group
Arthur D. Smith, Ph.D.
Senior Vice President and
Chief Operating Officer
Michael G. Aquino
Senior Vice President,
Worldwide Sales
Judith M. O’Brien
Executive Vice President
Obopay, Inc.
Michael J. Rowny
Chairman
Rowny Capital
Russell B. Stevenson, Jr.
Senior Vice President, General
Counsel and Secretary
Gerald H. Taylor
Managing Member
mortonsgroup, LLC
Andrew C. Petrik
Vice President, Controller
and Treasurer
corporate headquarters
Ciena Corporation
1201 Winterson Road
Linthicum, MD 21090-2205
Telephone: (800) 921-1144
or (410) 865-8500
Website: www.ciena.com
annual meeting
Ciena’s annual meeting of share-
holders will be held at 3:00 pm on
Wednesday, March 14, 2007 at the
Baltimore Marriott Waterfront Hotel,
700 Aliceanna Street, Baltimore, MD.
independent certified
public accountants
PricewaterhouseCoopers LLP
McLean, VA
general counsel
Hogan & Hartson LLP
Baltimore, MD
transfer agent
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
Shareholder Inquiries: (781) 575-2879
Website: www.computershare.com
common stock market data
Since its initial public offering on
February 7, 1997, Ciena’s Common
Stock has traded on the Nasdaq
Stock Market under the symbol CIEN.
investor relations
For additional copies of this report
or other financial information, contact:
Investor Relations
Ciena Corporation
1201 Winterson Road
Linthicum, MD 21090-2205
IR Hotline: (888) 243-6223 or
(410) 865-8500
Additional information is available on
Ciena’s website at www.ciena.com
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©
1201 Winterson Road, Linthicum, Maryland 21090-2205
(410) 865-8500 (800) 921-1144 www.ciena.com
002CS-12993