: the network specialist
7035 Ridge Road, Hanover, Maryland 21076 (410) 694-5700 (800) 921-1144 ciena.com
gaining
momentum
our 20th year
annual report 2012
: the network specialist
operating
executive officers
Patrick H. Nettles, Ph.D.
Executive Chairman of the
Board of Directors
President, Chief Executive Officer
Gary B. Smith
and Director
Chief Financial Officer, Senior Vice
President, Finance
outside
board members
Harvey B. Cash
General Partner
InterWest Partners
Bruce L. Claflin
Chairman
AMD Corporation
Lawton W. Fitt
Retired Partner
Goldman Sachs
Stephen B. Alexander
Chief Technology Officer, Senior Vice
President, Products and Technology
Patrick T. Gallagher
Independent Telecoms
Industry Advisor
Judith M. O’Brien
Partner
King & Spalding LLP
Michael J. Rowny
Chairman
Rowny Capital
Rick Dodd
Senior Vice President,
Global Marketing
James Frodsham
Senior Vice President,
Chief Strategy Officer
François Locoh-Donou
Senior Vice President,
Global Products Group
Philippe Morin
Senior Vice President,
Global Field Operations
Andrew Petrik
Vice President and Controller
corporate information
Ciena’s annual meeting of shareholders
James E. Moylan, Jr.
corporate
headquarters
Ciena Corporation
7035 Ridge Road
Hanover, MD 21076
Telephone: (800) 921-1144
or (410) 694-5700
www.Ciena.com
virtual annual meeting
will be held at 3:00 PM (Eastern) on
Wednesday, March 20, 2013. Please
visit www.shareholdermeeting.com/
ciena at least 10 minutes prior to the
start time.
independent registered
public accounting firm
PricewaterhouseCoopers LLP
Baltimore, MD
outside counsel
Hogan Lovells US LLP
Baltimore, MD
transfer agent
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
Stockholder Inquiries: (781) 575-2879
www.Computershare.com
common stock market data
Since its initial public offering on
February 7, 1997, Ciena’s Common
investor relations
For additional copies of this report or
other financial information, contact:
Investor Relations
Ciena Corporation
7035 Ridge Road
Hanover, MD 21076
Telephone: (877) 243-6273
or (410) 694-5700
Additional information is available on
Ciena’s website at www.Ciena.com.
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©
Stock has traded on the Nasdaq Stock
Market under the symbol “CIEN”.
David M. Rothenstein
Senior Vice President,
General Counsel and Secretary
Ciena is the network specialist. Ciena Corporation specializes in helping our customers transition
their networks so they can better serve their customers in a rapidly evolving industry landscape. We
offer leading network infrastructure solutions, intelligent software and a comprehensive services
practice to help our customers use their networks to fundamentally change the way they compete.
With a global presence, Ciena leverages its heritage of practical innovation to deliver maximum
performance and economic value in communications networks worldwide.
Ciena’s portfolio of software-centric optical and Ethernet platforms combine network element
programmability, network automation and comprehensive network management to create a next-
generation network on which new services and applications can be delivered. Our solutions form
the foundation of many of the largest, most reliable and sophisticated service provider, enterprise,
government, and research and education networks across the globe.
Next-GeN NetworkiNG1
North America Market Share
Global Market Share
35%
30%
25%
20%
15%
10%
5%
30%
25%
20%
15%
10%
5%
0%
3Q11
4Q11
1Q12
2Q12
3Q12
3Q11
4Q11
1Q12
2Q12
3Q12
CIENA
FUJITSU
ALU
TELLABS
NEC
CISCO
ZTE
HUAWEI
1. Long-haul WDM + metro WDM + optical switching; Source: Dell’Oro Group, Optical Report, November, 2012
different by design
A letter from Gary B. Smith, President & Chief Executive Officer
2012 represented another year of substantial progress for
Ciena. We gained market share, had record order flow and
year-end backlog, generated steady profitability and revenue
growth, and strengthened our balance sheet—all amidst a
challenging macroeconomic and industry environment. And
with the market embracing our OPn Architecture for building
next-generation networks for an app-centric world, we
believe Ciena’s momentum is only beginning.
Early in 2012, we identified several strategic objectives for the Company. Specifically,
we set out to further differentiate ourselves in a crowded market; to expand our
market reach; and to deliver greater operating efficiency. We have made great
progress against each of these objectives.
Ciena’s technology and thought leadership is stronger than ever, serving to
differentiate the Company, while translating into stronger win rates and share
gains across multiple applications and around the world. Our OPn architecture
allows all types of network operators to quickly and easily adapt their networks to
changing end-user requirements by building a programmable network infrastructure
on which software applications can rapidly create new services. And it is because
of Ciena’s ‘specialist-with-scale’ positioning that we can offer this architectural
approach. As a result, we have grown our global footprint with successes beyond
Gary B. Smith
President & Chief Executive Officer
our traditional customer segments and markets. For example, Ciena has approx-
imately 25 percent market share in the submarine upgrade market, a space in
which we had virtually no presence only two years ago. At the same time, we have
pushed more deeply into additional vertical markets such as financial services,
utilities, research and education, and state and local government. Consequently,
we have been able to complement our consistent #1 market position in next-
generation networking in North America with growth in a number of regions
globally, resulting in a strengthened #2 position worldwide.
To advance our unique market position as the network specialist, we have focused
our investment on technology convergence across our portfolio by uniting platforms
with a common control plane and by sharing more software across those platforms.
By optimizing and integrating our hardware and software portfolios to better
address customer needs, we are better positioned in fast-emerging applications
such as packet networking, cloud-based services and network virtualization—all
of which represent growth areas for Ciena. To complement our hardware and
software solutions we offer services-led Network Transformation Solutions designed
to help customers migrate to next-generation technologies and fully leverage
these new architectures. This specialized consulting practice will allow Ciena to
become an even more strategic partner to our customers, deepening our
relationships and increasing our opportunities over time.
Of course, expanding our technology and thought leadership as well as our market
positioning is important but doing so profitability was also a primary driver for us
in 2012. We continued the transformation of our supply chain and operations by
leveraging increased volume across a smaller set of suppliers, building some of
our own components and subsystems, and increasingly adopting a “direct order
fulfillment” model for particular products. We also launched cost reduced
versions of some of our newer products, most notably WaveLogic 3, our third
generation coherent optical processor, which began shipping in December 2012.
Additionally, we continued to generate efficiencies within our own operations. By
establishing strategic partnerships for specific business functions, redesigning
and streamlining a number of processes, and controlling operating expenses
Increasing Cash Position
$592M
$601M
$636M
$667M
$693M
4Q11
1Q12
2Q12
3Q12
4Q12
tightly, we showed improved profitability. All of these initiatives helped us deliver
improvements across a variety of financial metrics such as Days Sales Outstanding
and Ciena’s cash position, which grew by $100 million in fiscal 2012. And finally, to
end the calendar year 2012, we strengthened our balance sheet further by
extending the maturity of half of the outstanding 2015 convertible notes to 2020,
enhancing our financial flexibility without increasing our annual cash interest
expense or adding incremental share dilution.
Simply put, Ciena outperformed in 2012. Our revenue grew 5 percent, from
$1.74 billion in fiscal 2011 to $1.83 billion in fiscal 2012, in a market that declined
approximately 7 percent. We believe our performance illustrates the degree by
which Ciena is distancing itself from legacy and niche vendors in terms of wins,
growth, market share, technology leadership and capabilities, and overall business
performance. But we have more to do in 2013.
Looking Ahead with oPn
As we look ahead, we see an environment where we can further extend our lead-
ership and increase our momentum. We believe the distinctive platform we have
created, our architectural vision, and the network deployments we have won will
translate into greater separation between us and our competitors. We achieved
notable design wins and began next generation deployments with some customers
in 2012. In 2013, we expect to see the benefits of our 2012 momentum while
continuing to accumulate new wins and applications.
Guiding these next generation deployments is Ciena’s OPn Architecture, which
is designed to address the critical need to scale networks economically and to
enable them to support new applications. OPn allows customers to converge
network functions and layers, particularly the integration of transport OTN switching
and packet switching. Notably, this upgrade cycle is not simply about capacity
but also the need to aggregate and manage multiple types of services, as well as
the need to intelligently allocate and manage capacity.
OPn also considers emerging concepts like OpenFlow and SDN, which would
represent an increase in demand for software-based programmability of network
Revenue Growth
Backlog Growth
DSO Improvement
$1.83B
$1.74B
$714M
$902M
86 Days
69 Days
Balanced Geographic
Footprint*
FY’11
FY’12
FY’11
FY’12
FY’11
FY’12
Non-U.S. 47%
U.S. 53%
* Based on FY2012 revenue
infrastructure. OPn combines optical and packet networking with software pro-
grammability and open interfaces, all areas where Ciena offers industry-leading
expertise and technology. Ciena’s approach leverages convergence to create
exponential network scale while reducing costs, implementing control plan across
multiple platforms. It also uses network level apps to direct the behavior of that
programmable network area, while leveraging open interfaces to orchestrate
network resources alongside computing and storage resources in a virtualized
environment. As a result, OPn directly aligns with the needs of both service providers
and nontraditional Ciena customers like enterprises and cloud- service providers.
We believe OPn is the most effective approach to address market needs and, as
such, the portfolio developments I discussed earlier as well as those we plan for
2013 directly support this architecture. The number of key design wins and the
high level of engagement across multiple geographies and customer segments
is evidence that our network vision is resonating. In short, we expect OPn to be a
key contributor to our 2013 results and long-term growth.
Ciena’s Journey
We have built a unique company capable of delivering a unique vision. And the
hard work of our employees and the strong support of our customers and partners
continues to yield impressive progress. Consequently, fiscal 2012 was a year in which
Ciena truly outpaced the market in an environment where many others struggled.
Our focus in 2013 will be extending our momentum. Leveraging the foundation we
have built, we expect new volume deployments from recent wins and additional
awards to result in further market share gains. We believe these successes validate
our OPn architecture and when combined with our increased thought leadership,
our expanded market position, and improvements in our operations, Ciena will
drive additional operating leverage over time.
As always, thanks also goes to all our stakeholders who have continued to support
Ciena through our journey.
Gary B. Smith
President and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2012
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)
7035 Ridge Road, Hanover, MD
(Address of principal executive offices)
23-2725311
(I.R.S. Employer
Identification No.)
21076
(Zip Code)
(410) 694-5700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.01 par value
Name of Each Exchange on 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
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
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
NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.4-5 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). YES
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, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES
NO
The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant was approximately $1.0 billion based on the
closing price of the Common Stock on the NASDAQ Global Select Market on April 27, 2012.
The number of shares of Registrant’s Common Stock outstanding as of December 13, 2012 was 100,610,686.
Part III of the Form 10-K incorporates by reference certain portions of the Registrant’s definitive proxy statement for its 2013 Annual Meeting of
Stockholders to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this report.
DOCUMENTS INCORPORATED BY REFERENCE
CIENA CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED OCTOBER 31, 2012
TABLE OF CONTENTS
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART I
PART II
Item 5. Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Consolidated Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
PART III
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits and Financial Statement Schedules
Signatures
Index to Exhibits
PART IV
Page
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2
PART I
The information in this annual report contains certain forward-looking statements, including statements related to our
business prospects and strategies, the markets for our products and services, and trends in our business and markets 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
We are a provider of equipment, software and services that support the transport, switching, aggregation and management
of voice, video and data traffic on communications networks. Our Packet-Optical Transport, Packet-Optical Switching and
Carrier-Ethernet Solutions products are used, individually or as part of an integrated solution, in communications networks
operated by service providers, cable operators, governments, enterprises, research and education institutions and other network
operators around the globe. We are a network specialist focused on solutions that enable converged, next-generation
architectures, optimized to handle a broader mix of high-bandwidth communications services. Our products allow network
operators to scale capacity and increase transmission speeds, efficiently allocate network traffic, and deliver services to
business and consumer end users. Our network solutions also include our integrated Ciena One software suite that provides
network management capabilities that unify our product portfolio and provide automation and management features that enable
efficient service delivery. To complement our hardware and software portfolio, we offer a broad range of consulting and
support services that help our customers design, optimize, deploy, manage and maintain their networks. We believe that the
close, collaborative engagement with customers enabled by our services offering is an important component of our network
specialist approach and a significant differentiator with customers.
Network operators face a challenging and rapidly changing environment that requires their networks to be robust enough
to address increasing capacity needs and flexible enough to adapt quickly to emerging applications and evolving consumer and
business use of communications services. At the same time, network operators are competing to distinguish their service
offerings and add revenue-generating services while managing the cost to implement and maintain their networks. To address
these business, infrastructure and service delivery challenges, we offer a comprehensive, solutions-oriented portfolio that builds
upon the principles of our OPn Architecture for next-generation networks. Our OPn Architecture, which underpins our solutions
offering and guides our research and development strategy, leverages the convergence of optical and packet networking
technologies to increase network scale cost effectively, while emphasizing software-enabled programmability, automation and
open interfaces. Through this network approach, we seek to enable high-capacity, configurable infrastructures that can be
managed and adapted by network-level applications, and to provide flexible interfaces for the integration of computing, storage
and network resources. By increasing network flexibility for service delivery, reducing required network elements and enabling
increased scale at reduced cost, our communications networking solutions create business and operational value for our
customers.
Certain Financial Information and Segment Data
We generated revenue of $1.8 billion in fiscal 2012, as compared to $1.7 billion in fiscal 2011. For more information
regarding our results of operations, see “Management's Discussion and Analysis of Financial Condition and Results of
Operations” in Item 7 of Part II of this annual report. We currently organize our operations into four separate operating
segments: “Packet-Optical Transport,” “Packet-Optical Switching,” “Carrier Ethernet Solutions,” and “Software and Services.”
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 include additional financial information about our operating
segments, total assets, revenue, measures of profit and loss, and financial information about geographic areas and customers
representing greater than 10% of revenue.
Corporate Information and Access to SEC Reports
We were incorporated in Delaware in November 1992 and completed our initial public offering on February 7, 1997. Our
principal executive offices are located at 7035 Ridge Road, Hanover, Maryland 21076. Our telephone number is (410)
694-5700, 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, available free of charge on the "Investors" page of our
web site as soon as reasonably practicable after we file these reports with the Securities and Exchange Commission (SEC). We
routinely post the reports above, recent news and announcements, financial results and other important information about our
business on our website at www.ciena.com. Information contained on our web site is not a part of this annual report.
3
Industry Background
The markets in which we sell our communications networking solutions have been subject to significant changes in recent
years, including rapid growth in network traffic, expanded service offerings, and evolving technologies and end user demands.
These conditions have created market opportunities and business challenges, and they have changed competitive landscapes.
Existing and emerging network operators are competing to distinguish their service offerings and rapidly introduce
differentiated, revenue-generating services. At the same time, network operators continue to seek to manage network expense
and operate their businesses profitably. These dynamics continue to drive technology convergence of network features,
functions and layers, as well as demand for software-based programmability. We believe these market dynamics will cause
network operators to adopt communications network infrastructures that are increasingly more automated, robust and
configurable.
Network Traffic Growth Driving Increased Capacity Requirements and Transmission Speeds
Optical networks, which carry voice, video and data traffic using multiple wavelengths of light across fiber optic cables,
have experienced a multi-year period of strong traffic growth, and industry analysts project continued growth for the
foreseeable future. Increasing network traffic is being driven by growing use of and reliance upon a broad range of
communications services by consumer and business end users, as well as the expansion of bandwidth intensive wireline and
wireless service offerings. Expanding mobile applications, including Internet, video and data services from the proliferation of
smartphones, tablets and other devices with wireless access, are further increasing network traffic. Business customers seeking
to improve automation, efficiency and productivity are increasingly dependent upon bandwidth-intensive, enterprise-oriented
communications services that facilitate global operations, employee mobility and seamless access to critical business
applications and data. Enterprise technology trends such as virtualization, cloud computing and machine-to-machine
connections are placing new capacity and service requirements on networks. At the same time, an increasing portion of network
traffic is being driven by growth of consumer-oriented applications and adoption of mobile and broadband technologies. These
include peer-to-peer Internet applications, residential video services, multimedia downloads, cloud-based consumer services
and online gaming. This traffic growth requires that network operators add capacity or transition to higher capacity networks
with increased transmission speeds.
Multiservice Traffic and Transition to Software-Defined Programmable Network Architectures
We expect that the broadening mix of high-bandwidth, data and video communications services, together with growing
mobility and expanding wireless applications, will require upgrades to existing network infrastructure, including mobile
backhaul and traditional wireline networks. We believe that this mix of high-bandwidth and latency-sensitive data traffic, and
an increased focus on controlling network costs, are driving a transition from multiple, disparate SONET/SDH-based networks
to more efficient, converged, multi-purpose optical transport network (OTN)/Ethernet packet-based network architectures. The
industry has previously experienced such network technology transitions and these upgrade and investment cycles tend to
happen over multi-year periods. For instance, from the mid 1980s to the mid 1990s, service providers focused network
upgrades on the transition required to digitize voice traffic. From the mid 1990s to the mid 2000s, service providers focused
network upgrades on the transition to SONET/SDH networks designed to reliably handle substantially more network traffic.
We believe that the industry is currently experiencing a network transition to flexible, multi-purpose OTN/Ethernet packet-
based network architectures that more efficiently handle a growing mix of high-bandwidth communications services and a
greater concentration of data traffic.
Emerging Drivers for Network Modernization
Enterprise and consumer end users historically perceived value simply from their network connectivity. Today, however,
end users are increasingly focused upon the value that they receive from the services, applications and performance delivered
by the underlying network. As a result, network operators seek to create, market, and profitably sell services, as opposed to
simply selling connectivity. This shift fundamentally changes how communications networks are designed and managed. Some
of the areas that network operators are pursuing to better compete and drive end user value include:
• Mobility. The emergence of smart mobile devices that deliver integrated voice, audio, photo, video, email and mobile
Internet capabilities, like Apple's iPhone™ and iPad™, and Android™-based smart phones and tablets, is rapidly
changing the service type and magnitude of data traffic carried by wireless networks. The increase in availability and
improved ease of use of mobile web-based applications expands the reach of virtualized services beyond a wireline
connection. For instance, consumer-driven video and gaming are being virtualized, allowing broad access, regardless
4
of the device or the network used. Because most wireless traffic ultimately travels over a wireline network in order to
reach its destination, growth in mobile communications continues to place demands upon wireline networks.
•
•
“Cloud” Services. Cloud services are characterized by the sharing of computing, storage and network resources to
improve economics through higher utilization of network elements. IT and network service providers are centralizing
these resources in order to offer usage-based and metered services that are hosted remotely across a network. Prevalent
cloud-based services include Platform as a Service (PaaS), Software as a Service (SaaS) and Infrastructure as a
Service (IaaS). As a result, smaller enterprises and consumers can subscribe to an expanding range of cloud services to
replace local computing and storage requirements. Larger enterprises and data center operators may use private clouds
to consolidate their own resources and public clouds to accommodate peak demand situations, often in combination.
Network Virtualization. Virtualization is the process of decoupling physical IT or communications assets from the
logical services or capabilities they can provide. This approach has many appealing attributes such as minimizing
expensive resources while adding flexibility and scale. The virtualization of computing, storage and network resources
elevates the value of connectivity and drives demand for network infrastructures that offer greater programmability,
scale, and flexibility.
• Machine-to-Machine (M2M) Applications. In the past, communications services largely related to the connection of
people-to-people or people with content. Today, the number of networked connections between devices and servers is
growing rapidly with M2M-related traffic expected to represent an increasing portion of Internet traffic. These
connections allow the sharing of data that can be monitored and analyzed by applications residing on those devices in
order to provide value-added services to users. We expect service traffic relating to the interconnection of machines or
devices to grow as Internet and cloud content delivery, smartgrid applications, health care and safety monitoring,
resource/inventory management, home entertainment, consumer appliances and other mobile data applications become
more widely adopted.
Market Conditions and Effect on Network Investment
We believe that these dynamics, together with multiservice traffic growth, are driving a shift in network priorities and
spending toward high-capacity, converged network architectures. However, during fiscal 2012 our market experienced a
challenging environment, including declining growth rates in spending in the packet-optical networking markets our solutions
address. We believe that this reflects the macroeconomic conditions and competitive landscape encountered in our market
during the year. The sustained period of macroeconomic weakness and volatility in the global economy resulted in heightened
uncertainty and cautious customer spending in our industry. These market dynamics have caused increased customer scrutiny
and more rigid prioritization of network investment, resulting in protracted sales cycles, lengthier network deployments, and
revenue recognition delays. In addition, our market is intensely competitive and fragmented and securing new opportunities,
particularly for international sales, can often require less favorable pricing and less favorable commercial terms that can
elongate the revenue recognition cycle and contribute to fluctuations in operating results. In spite of these macroeconomic and
competitive conditions, we grew our business in fiscal 2012 and believe we are well positioned for the longer-term
opportunities presented by multiservice traffic growth. By offering a solution that converges network functions and layers,
particularly the integration of transport, OTN switching and packet-switching, we believe we offer a more robust, efficient and
differentiated network architecture that allows network operators to create and rapidly deliver new service offerings and derive
increased value from their network investment.
Strategy
We believe that a number of underlying drivers in the marketplace represent significant, long-term opportunities for our
business. We believe that market trends, including the proliferation of smartphones, tablets and similar devices running mobile
web applications, the prevalence of video applications, and the shift of enterprise and consumer applications to cloud-based or
virtualized network environments, are indicative of increasing use and dependence by consumers and enterprises upon a
growing variety of broadband applications and services. We expect that these services will continue to add significant
multiservice network traffic, requiring network operators to invest in next-generation, high-capacity network infrastructures
that are more efficient, robust and programmable.
Our corporate strategy to capitalize on these market dynamics, promote operational efficiency and drive profitable growth
of our business includes the following initiatives:
Promote our OPn Architecture for Next-Generation Networks. The services and applications running on communications
networks require that more of the traffic on these networks be packet-oriented. The traditional approach to this problem has
5
been to add IP routing capability at various points in the network. As capacity needs grow, this approach becomes unnecessarily
complex and costly. We reduce the cost and complexity of growing these networks with a programmable infrastructure that we
believe brings together the reliability and capacity of optical networking with the flexibility and economics of packet
networking technologies. Combining these attributes with network level applications creates an approach we call our OPn
Architecture. Our OPn Architecture leverages the convergence of optical and packet networking to enable network scale,
applies advanced control plane software for network programmability and enables network-level applications to integrate and
optimize network, computing and storage resources in a virtualized environment. We intend to promote the scalability,
programmability, flexibility and cost effectiveness advantages of our OPn Architecture, and we see opportunities in offering a
portfolio of carrier-class solutions that facilitate the transition to converged, next-generation networks.
Alignment of Research and Development Investment with Growth Opportunities. We seek to ensure that our product
development initiatives and investments are closely aligned with market growth opportunities and reflect the changing
dynamics faced by network operators. We are investing in our OPn Architecture, which combines a cost-optimized,
programmable network platform with open interfaces and network-level software applications. Our current development efforts
are focused upon expanding packet capabilities on our Carrier Ethernet Solutions and Packet-Optical Transport products for
metro and service aggregation applications, optimizing our core network solutions for application in metro networks, and
investing in new vectors for growth. Research and development efforts are focused on extending our WaveLogic coherent
optical processor for 40G and 100G optical transport across our portfolio and introducing 400G transmission products. We are
also focused upon enhancing our software applications, extending our OneConnect control plane across the 5400 and 6500
platform families, and developing network level applications that automate network functions and support new service
introduction.
Evolve Go-to-Market Model. We seek to evolve our go-to-market selling model, both from a coverage and an engagement
perspective.
Coverage. Our coverage model is focused on penetrating high-growth geographic markets, selling into key customer
segments and addressing additional network applications with our solutions. We seek to enhance our brand internationally,
expand our geographic reach and capture market share in international markets, including Brazil, the Middle East, Russia,
Japan and India. We intend to pursue opportunities to diversify our customer base beyond our traditional customer base.
We are expanding our sales efforts to capture opportunities arising from enterprise migration to, and increased reliance
upon, cloud-based services, and targeting government agencies, and research and educational institutions. We are also
targeting Internet content providers and other network operators emerging as a result of network modernization drivers and
the adoption of new communication services. We seek to expand the application of our solutions, including in metro
aggregation, submarine networks, and in support of cloud-based services, business Ethernet services and mobile backhaul.
We intend to pursue selling initiatives and strategic channel opportunities, including relationships with key resellers, and
carrier-managed sales to end users through our service provider customers, in order to complement our direct sales force
and penetrate more deeply our targeted geographic markets, customer segments and additional applications for our
solutions.
Engagement. Our strategy is to leverage our close relationship with customers in the design, development,
implementation and support of their networks and to promote a close alignment of our solutions with customer network
priorities. This engagement model is a key differentiator for our business and provides us with unique insight into the
business and network needs of our customers. We seek to expand our Network Transformation Solutions offering to
address the network modernization and service delivery demands of our customers, as well as their desire to drive
additional value from their network infrastructure. We believe this services-oriented solutions offering shifts our value
proposition beyond the sale of our next-generation communications networking products and allows us to play a key role
in the design and evolution of our customers' networks to support their strategic business objectives. By understanding and
addressing their network infrastructure needs and the evolving markets in which our customers compete, we believe this
customized solutions offering creates additional business and operational value for our customers, enabling them to better
compete in a challenging environment.
Business optimization to yield operating leverage. We seek to improve the operational efficiencies in our business and gain
additional operating leverage. We are focused on the transformation and redesign of certain business processes, systems, and
resources. These initiatives include additional investments, re-engineering and automation of certain key business processes,
including the engagement of strategic partners or resources to assist with select business functions. In addition, we are focused
on optimizing our supply chain structure in order to increase efficiency, reduce overhead and cost-reduce our product solutions.
These initiatives include the rationalization and consolidation of third party manufacturers, distribution facilities and logistics
providers, direct order fulfillment of additional products, and the consideration of select vertical integration within our supply
chain. We seek to leverage these opportunities to promote the profitable growth of our business.
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Customers and Markets
Our customer base, and the geographic markets and customer segments into which we sell our products and services, have
expanded in recent years. As a result of industry dynamics above, additional network operators supporting new
communications services and applications continue to emerge. The network infrastructure needs of our customers vary,
depending upon their size, location, the nature of their end users and the services that they deliver and support. We sell our
product and service solutions through our direct sales force and third party channel partners to end user network operators in
the following customer segments:
Communications Service Providers
Our service provider customers include regional, national and international wireline and wireless carriers, as well as
service provider consortia offering services over submarine networks. Our customers include AAPT, Allstream, AT&T,
Australia Japan Cable, Bell Canada, BT, Cable & Wireless, CenturyLink, France Telecom, Japan-US Cable, Korea Telecom,
PLDT, Reliance, SEA-ME-WE 4, SingTel, Southern Cross, Sprint, Tata Communications, Telefonica, Telmex, Telus, Verizon,
Vimpelcom, Vodafone and XO Communications. Communications service providers are our historical customer base and
continue to represent a significant majority of our revenue. We provide service providers with products from the network core
to its edge where end users gain access. Our service provider solutions address growing bandwidth demand from multiservice
traffic growth and support key service provider offerings, including carrier-managed services, wide area network (WAN)
consolidation, data center and inter-site connectivity, wireless backhaul and business Ethernet services.
Cable & Multiservice Operators (MSO)
Our customers include leading cable and multiservice operators in the U.S. and internationally. These customers include
Cogeco, Comcast, Cox, RCN, Rogers and Time Warner. Our cable and multiservice operator customers rely upon us for carrier-
grade, Ethernet transport and switching products and high-capacity coherent optical transport to support enterprise-oriented
services. Our platforms allow cable operators to integrate voice, video and data applications over a converged infrastructure
and to scale their networking infrastructure to keep ahead of the bandwidth and application demands of their subscribers. Our
products support key cable applications including business Ethernet services, wireless backhaul, broadcast and digital video,
voice over IP, and video on demand.
Enterprise
Our enterprise customers include large, multi-site commercial organizations, including participants in the financial, health
care, transportation, utilities and retail industries. Our solutions enable enterprises to leverage network resources to achieve
operational improvements, increased automation and information technology cost reductions. Our products enable inter-site
connectivity between data centers, sales offices, manufacturing plants, retail stores and research and development centers, using
an owned or leased private fiber network or a carrier-managed service. Our products facilitate key enterprise applications
including IT virtualization, cloud computing, business Ethernet services, business continuity, online collaboration, video
conferencing, low latency networking and WAN encryption. Our products also enable our enterprise customers to prevent
unexpected network downtime and ensure the safety, security and availability of their data.
Internet Content Providers
Our customers include global providers of a diverse range of Internet content services and applications such as search,
social media, video, real-time communications and cloud-based offerings to consumers and enterprises. Our customers require
massive scale, low latency, and proven reliability and performance to connect end-users to network resources and to
interconnect critical data centers. Our customers leverage high-capacity coherent optics, packet switching, automated service
provisioning and software-based network control to deliver flexible, high-performance connectivity services on demand in a
virtualized network environment.
Government, Research and Education
Our government customers include federal and state agencies in the U.S. as well as international government entities. Our
government and research and education customers seek to take advantage of technology innovation, improve their information
infrastructure, and facilitate increased collaboration. Our solutions feature ultra-high capacity, reconfigurability and service
flexibility to meet the requirements of supercomputing systems. Our solutions offering promotes network assurance, security
and reliability while improving network performance, capacity, and flexibility. We collaborate with leading institutions to
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provide government and research and education communities with optimized networks that minimize cost and complexity,
through initiatives that support intelligent control plane technologies, interoperability and scalability.
Products and Services
Our product portfolio consists of our Packet-Optical Transport, Packet-Optical Switching and Carrier Ethernet Solutions
products. These products, together with our unified network management software, network transformation solutions and
support services offerings, allow us to offer customers comprehensive solutions to address their communications network
priorities.
Packet-Optical Transport
Our Packet-Optical Transport platforms include flexible, scalable wavelength division multiplexing (WDM) solutions that
add capacity to core, regional and metro networks and enable cost-effective and efficient transport of voice, video and data
traffic at high transmission speeds. We offer scalable Packet-Optical Transport platforms, including several chassis sizes and a
comprehensive set of line cards, that can be utilized from the customer premises, where space and power are limited, to the
metropolitan/regional core, where the need for high capacity and carrier-class performance is essential. By automating optical
infrastructures, our Packet-Optical Transport products support the efficient delivery of a wide variety of consumer-oriented
network services, as well as key managed service and enterprise applications. Our Packet-Optical Transport portfolio includes
the following products:
•
•
•
•
•
•
6500 Packet-Optical Platform;
4200® Advanced Services Platform;
5100/5200 Advanced Services Platform;
Corestream® Agility Optical Transport System;
Common Photonic Layer (CPL); and
6100 Multiservice Optical Platform.
Our Packet-Optical Transport portfolio, including our 6500 Packet-Optical Platform, features coherent, 40G and 100G
optical transport technology and our WaveLogic coherent optical processors. We are currently shipping our third generation of
these proprietary silicon chips that facilitate deployment of our transport technology over existing customer fiber plant
(terrestrial and submarine), enable our optical transmission systems to scale capacity to 40G and 100G, and yield additional
economic benefits through the reduction or elimination of network equipment, such as amplifiers, regenerators and dispersion
compensating devices. Our 6500 Packet-Optical Platform includes certain integrated switching elements addressing market
demand for converged network features, functions and layers to drive more robust and cost-effective network infrastructures.
Our Packet-Optical Transport solutions also include our traditional SONET/SDH products and data networking products, as
well as certain enterprise-oriented transport solutions that support storage and local area network (LAN) extension,
interconnection of data centers, and virtual private networks.
Packet-Optical Switching
Our Packet-Optical Switching family of products provides time division multiplexing (TDM) switching and packet
switching capability to allocate efficiently network capacity and to enable service delivery. Our principal Packet-Optical
Switching products are our CoreDirector® Multiservice Optical Switch, our 5430 Reconfigurable Switching System and our
OTN configuration for the 5410 Reconfigurable Switching System. This product segment includes multiservice, multi-protocol
switching systems that consolidate the functionality of an add/drop multiplexer, digital cross-connect and packet switch into a
single, high-capacity intelligent switching system. These products address both core and metro segments of communications
networks and support key managed services, including Ethernet/TDM Private Line and IP services. Our Packet-Optical
Switching solutions include a family of multi-terabit reconfigurable switching systems that utilize intelligent mesh networking
to provide resiliency and feature an integrated optical control plane to automate the provisioning and bandwidth control of
high-capacity services. Our Packet-Optical Switching systems flexibly support a mix of Carrier Ethernet/MPLS, OTN, WDM,
and SONET/SDH switching to facilitate the transition to a service-enabling infrastructure.
Carrier Ethernet Solutions
Our Carrier Ethernet Solutions allow customers to utilize the automation and capacity created by our Packet-Optical
Transport products in core and metro networks and to deliver new, revenue-generating services to consumers and enterprises.
These products have applications from the edge of metro and core networks, where they aggregate traffic, to the access tiers of
networks where they can be deployed to support wireless backhaul infrastructures and deliver business data services.
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Employing sophisticated Carrier Ethernet switching technology, these products deliver quality of service capabilities, virtual
local area networking and switching functions, and carrier-grade operations, administration, and maintenance features.
Our Carrier Ethernet Solutions offering primarily consists of our 3000 family of service delivery switches and service
aggregation switches, our 5000 series of service aggregation switches, and our Carrier Ethernet configuration for the 5410
Service Aggregation Switch. Our service delivery and packet aggregation switches provide a more reliable and feature-rich
Ethernet technologies that can support a wider variety of services. Service delivery products are often used at customer
premises locations while aggregation platforms are used to combine services to improve network resource utilization. This
segment also includes our legacy broadband products that transition voice networks to support IP telephony, video services and
DSL.
Unified Software and Service Management Tools
Our integrated software offering, the Ciena One software suite, includes OneControl, our integrated network management
software that unifies our product portfolio and provides the automation and management features that enable efficient service
delivery. Our network management tools offer a comprehensive set of functions, from monitoring network performance and
provisioning the network to full service level management across a variety of network layers and domains. Our Ciena One
software suite is a robust, service aware framework that improves network utilization and availability, while delivering
enhanced performance monitoring and reliability. By increasing network automation, minimizing network downtime and
monitoring network performance and service metrics, our software tools enable customers to improve cost effectiveness, while
increasing the performance and functionality of their network operations. This software suite also includes Ciena OnePlanner, a
suite of planning tools that help network operators utilize their networks more efficiently, and our ON-Center® Network &
Service Management Suite.
Network Transformation Solutions and Support Services
To complement our product portfolio, we offer a broad range of consulting and support services that help our customers
design, optimize, deploy, manage and maintain their communications networks. We believe that our broad set of service
offerings is an important component of our network specialist approach and a significant differentiator from our competitors.
We believe that our services offering and our close collaborative engagement with customers provide us with valued insight
into network and business challenges faced by our customers, enabling them to modernize and gain value from their network
infrastructures. Our network transformation solutions offering enables us to work closely with our customers in the assessment,
planning, deployment, and transformation of their networks. We believe that customers place significant value on the strategic,
consultative engagements afforded by our services offering, and our ability to partner with them through services-oriented
solutions that address their network and business needs.
Our services and support portfolio includes the following offerings:
•
Network transformation solutions, including:
Network analysis, planning and design; and
Network optimization, modernization and assurance services.
• Maintenance and support services, including:
helpdesk and technical assistance;
training;
spares and logistics management;
engineering dispatch and on-site professional services;
equipment repair and replacement; and
software maintenance and updates.
•
•
Deployment services, including turnkey installation and turn-up and test services; and
Project management services, including staging, site preparation and installation support activities.
We provide these services using a combination of internal resources and qualified third party service partners.
Product Development
Our industry is subject to rapid technological developments, evolving service delivery requirements, standards and
protocols, and shifts in customer and end user network demand. To remain competitive, we must continually enhance existing
product platforms by adding new features and functionality, increasing transmission speeds and capacity, and introducing new
network solutions that address multiservice traffic growth and enable new service offerings. Our research and development
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strategy has been to pursue technology convergence, which allows us to consolidate network features, functionalities and layers
onto a single platform, helping network operators architect robust, feature-rich networks that reduce required network elements
and address cost, space and power limitations. We believe these converged, next-generation networking solutions promote
rapid service delivery and allow network operators to derive business and operational value from their network infrastructures.
We are investing in our OPn Architecture for designing next-generation network. Our OPn Architecture, which underpins
our solutions offering and guides our research and development strategy, leverages the convergence of optical and packet
technologies to increase network scale cost effectively, while emphasizing software-enabled programmability, automation and
open interfaces. Through this network approach, we seek to enable high-capacity, configurable infrastructures that can be
managed and adapted by network-level applications, and to provide flexible interfaces for the integration of computing and
storage resources in a unified network. Our product development initiatives also include design and development work
intended to address growing opportunities, such as metropolitan network applications, enterprise networking, cloud
infrastructure and packet-based infrastructure solutions for next-generation, high-capacity networks. To address these
opportunities and realize our network vision, our current development efforts are focused upon:
•
•
•
•
•
•
Extending our leadership in 40G and 100G long-haul transport, and making metropolitan network applications more
cost effective for network operators;
Continued development of our high-capacity optical transport technology and our WaveLogic coherent optical
processor to further improve network capacity, transmission speed, spectral efficiency and reach;
Expanding packet networking capabilities and features for our high-capacity Ethernet aggregation switches, for metro
and service aggregation applications, mobile backhaul and business Ethernet services;
Enhancing our data-optimized, switching solutions to enable an end-to-end Optical Transport Network (OTN)
architecture that offers improved cost per bit, flexibility and reliability;
Interoperability and enhancing our control plane and integrated network management software platform to enable
service level management across our solutions; and
Development of network level applications that automate various network functions and support new service
introduction.
Our research and development efforts are also geared toward engineering changes intended to drive cost reductions across our
platforms.
To ensure that our product development investments and solutions offering are closely aligned with market demand, we
continually seek input from customers and promote collaboration among our product development, marketing and global field
organizations. In some cases, we work with third parties pursuant to technology licenses, original equipment manufacturer
(OEM) arrangements and other strategic technology relationships or investments, to develop new components or products,
modify existing platforms or offer complementary technology to our customers. In addition, we participate in industry and
standards organizations, where appropriate, and incorporate information from these affiliations throughout the product
development process.
We regularly review our existing product offerings and prospective development projects to determine their fit within our
portfolio and broader corporate strategy. We assess the market demand, technology evolution, prospective return on investment
and growth opportunities, as well as the costs and resources necessary to develop and support these products. In recent years,
our strategy has been to pursue technology and product convergence that allows us to consolidate multiple technologies and
functionalities on a single platform, or to control and manage multiple elements throughout the network from a uniform
management system, ultimately creating more robust, integrated and cost-effective network tools. We have also shifted our
strategic development approach from delivering point products to providing a focused combination of networking equipment,
software and service solutions that address the business and network needs of our customers.
Within our global products group, we maintain a team of skilled engineers with extensive experience in the areas of
photonics, packet and circuit switching, network system design, embedded operating system and network management
software. Our research and development expense was $327.6 million, $379.9 million and $364.2 million, for fiscal 2010, 2011
and 2012, respectively. For more information regarding our research and development expense, see “Management's Discussion
and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of this report.
Sales and Marketing
We sell our communications networking solutions through our direct sales resources as well as through strategic channel
relationships. In addition to securing new customers in growth geographies and customer market segments, our sales strategy
has focused on building long-term, consultative relationships with existing customers. We believe this approach promotes our
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network specialist approach and helps ensure the alignment of our expertise with the business and network requirements of our
customers. We believe this approach also provides opportunities to participate in future projects relating to the transition or
expansion of existing network infrastructures and to cross-sell solutions across our portfolio.
Within our global field organization, we maintain a direct sales presence that is organized geographically around the
following markets: (i) U.S. and Canada; (ii) Caribbean and Latin America; (iii) Europe, Middle East and Africa; and (iv) Asia-
Pacific. These regions include sales personnel that focus on one or more of the following customer segments: communications
service providers including wireless providers, cable and multiservice operators, enterprise customers and government,
research and education. Within each geographic area, we maintain regional, country and/or customer-specific teams, including
sales management, account salespersons, and systems engineers, as well as strategic marketing, services and commercial
management personnel, who ensure we operate closely with and provide a high level of support to our customers. We also
maintain global sales teams that focus on submarine network opportunities and emerging customer segments including Internet
content and cloud infrastructure providers.
We also maintain a global channel program that works with resellers, systems integrators, service providers, and other third
party distributors who market and sell our products and services. Our third party channel sales and other distribution
arrangements enable us to reach additional geographic regions and customer segments. We intend to pursue and foster a small
number of strategic channel relationships in an effort to enable us to sell our products as a complement to the broader offering
of these vendors or integrators, including, in particular, in support of enterprise-oriented applications and cloud-based services.
We also see opportunities to leverage these strategic channel relationships to address additional customer segments, emerging
applications for our solutions and growth geographies. Our use of channel partners has been a key component in our sales to
government, research and education and enterprise customers. We believe this strategy and our use of third party channels
affords us expanded market opportunities and reduces the financial and operational risk of entering these additional markets.
To support our sales efforts, we engage in marketing activities intended to position and promote both our brand and our
product, software and service offerings. Our marketing team supports sales efforts through direct customer interaction, industry
events, public relations, industry analysts, social media, tradeshows, our website and other marketing channels for our
customers and channel partners.
Operations and Supply Chain Management
Operations personnel within our global products group manage our relationships with our third party manufacturers and
manage our supply chain. In addition, this team also addresses component procurement and sourcing, product testing and
quality, fulfillment and logistics relating to our sales, support and professional services, and distribution efforts.
We utilize a global sourcing strategy that emphasizes procurement of materials and product manufacturing in lower cost
regions. Activities performed by our third party supply partners can include design and prototype development, component
sourcing, full production, final assembly, testing and customer order fulfillment. We rely upon third party contract
manufacturers, with facilities in Canada, China, Mexico, Thailand and the United States, to perform nearly all of the
manufacturing of our products. As a result, we are exposed to risks associated with the business continuity of these third parties
and other events or conditions affecting the locations where their manufacturing occurs. We are also exposed to risks associated
with their business practices and practices in the markets in which they operate including the level of corruption or protection
of intellectual property. To address customer concerns and to mitigate the related risks to our business, operations and
intellectual property, we have been reducing our reliance upon contract manufacturers and component suppliers in China and
are currently transitioning, or expect to transition in the near-term, the procurement of certain components and the manufacture
and assembly of our product platforms to alternate locations.
We are currently utilizing a direct order fulfillment model for the sale of certain products, and are engaged in initiatives to
expand this model to a broader set of products. This model allows us to rely on our third party manufacturers to perform final
system integration and testing prior to shipment of products from their facilities directly to our customers. For certain products,
we continue to perform a portion of the system assembly, software application, final system integration and testing internally.
We believe that our sourcing and manufacturing strategy allows us to conserve capital, lower costs of product sales, adjust
quickly to changes in market demand, and operate without dedicating significant resources to manufacturing-related plant and
equipment. As part of our effort to optimize our operations, we continue to focus on driving cost reductions through sourcing
and engineering efforts, rationalizing our supply chain and consolidating third party contract manufacturers, distribution sites
and service logistics partners.
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Our manufacturers procure components necessary for assembly and manufacture of our products based on our
specifications, approved vendor lists, bill of materials and testing and quality standards. Our manufacturers' activity is based on
rolling forecasts that we provide to them to estimate demand for our products. This build-to-forecast purchase model exposes
us to the risk that our customers will not order those products for which we have forecast sales, or will purchase less than we
have forecast. As a result, we incur carrying charges or obsolete material charges for components purchased by our
manufacturers. We work closely with our 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.
Our products include some components that are proprietary in nature, only available from one or a small number of
suppliers, or manufactured by sole or limited sources responsible for production. If component supplies become limited,
production at a manufacturer is disrupted, or if we experience difficulty in our relationship with a key supplier or manufacturer,
we may encounter manufacturing delays that could adversely affect our business.
Backlog
Generally, we make sales pursuant to purchase orders issued under framework agreements that govern the general
commercial terms and conditions of the sale of our products and services. These agreements do not obligate customers to
purchase any minimum or guaranteed order quantities. Our backlog includes orders for products that have not been shipped and
for services that have not yet been performed. In addition, backlog also includes orders relating to products that have been
delivered and services that have been performed, but are awaiting customer acceptance under the applicable purchase terms.
Generally, our customers may cancel or change their orders with limited advance notice, or they may decide not to accept these
products and services, although both cancellation and non-acceptance are infrequent. Orders in backlog may be fulfilled several
quarters following receipt or may relate to multi-year support service obligations. As a result, backlog should not be viewed as
an accurate indicator of future revenue in any particular period.
Our backlog increased from $714.1 million as of October 31, 2011 to $902.0 million as of October 31, 2012. Backlog
includes product and service orders from commercial and government customers combined. Backlog at October 31, 2012
includes approximately $140.5 million, primarily related to orders for maintenance and support services that we do not
reasonably expect to be filled within the next fiscal year. Backlog at October 31, 2011 included approximately $84.1 million
that was not expected to be filled within fiscal 2012. Our presentation of backlog may not be comparable with figures presented
by other companies in our industry.
Seasonality
Like other companies in our industry, we have experienced quarterly fluctuations in customer activity due to seasonal
considerations. We typically experience reductions in order volume toward the end of the calendar year, as the procurement
cycles of some of our customers slow and network deployment activity at service providers is curtailed. This seasonality in our
order flows can result in somewhat weaker revenue results in the first quarter of our fiscal year. These seasonal effects do not
apply consistently and do not always correlate to our financial results. Accordingly, they should not be considered a reliable
indicator of our future revenue or results of operations.
Competition
Competition among communications network solution vendors remains intense. The markets in which we compete are
characterized by rapidly advancing and converging technologies, introduction of new network solutions and selling efforts to
displace incumbent vendors and secure market share. Successfully competing in these markets is based on any one or a
combination of the following factors:
•
•
•
•
•
product functionality, speed, capacity, scalability and performance;
price and total cost of ownership;
incumbency and existing business relationships;
ability to offer comprehensive networking solutions, consisting of equipment, software and network consulting
services;
product development plans and the ability to drive convergence of network features, functions and layers and meet
customers' immediate and future network requirements;
flexibility, including ease of integration, product interoperability and integrated management;
•
• manufacturing and lead-time capability; and
•
services and support capabilities.
12
In this competitive environment, securing new opportunities, particularly in international markets, often requires that we agree
to less favorable commercial terms or pricing, financial commitments requiring collateralized performance bonds or similar
instruments that place cash resources at risk, and other onerous contractual commitments that place a disproportionate
allocation of risk upon the vendor. These terms can adversely affect our result of operations.
Competition for sales of communications networking solutions is dominated by a small number of very large, multi-
national companies. Our competitors have included Alcatel-Lucent, Cisco, Ericsson, Fujitsu, Huawei, Juniper Networks, Nokia
Siemens Networks, and ZTE. Many of these competitors have substantially greater financial, operational and marketing
resources than Ciena, significantly broader product offerings or more extensive customer bases. In recent years, mergers among
some of our larger competitors have intensified these advantages. We expect the level of competition, particularly in North
America, to continue and potentially increase, as Chinese equipment vendors seek to gain entry into the U.S. market, and other
multinational competitors seek to retain incumbent positions and market share with large customers in the region.
We expect our competitive landscape to be dynamic as network technologies and features converge, and vendors compete
to have their network architectural approaches adopted. As this convergence occurs, and networks become more cloud-based,
virtualized and software-defined, we expect that we may compete with additional information technology and software
vendors, as well as suppliers of networking technology traditionally geared toward different network layers or functions. We
also continue to compete with several smaller, but established, companies that offer one or more products that compete directly
or indirectly with our offerings or whose products address specific niches within the markets and customer segments we
address. These competitors include ADVA, BTI, Infinera, Tellabs and Transmode. In addition, there are a variety of earlier-
stage companies with products targeted at specific segments of the communications networking market. These competitors
often employ aggressive competitive and business tactics as they seek to gain entry to certain customers or markets. Due to
these practices and the narrower focus of their development efforts, these competitors may be able to develop and introduce
products more quickly, or offer commercial terms that are more attractive to customers.
Patents, Trademarks and Other Intellectual Property Rights
The success of our business and technology leadership is significantly dependent upon our proprietary and internally
developed technology. We rely upon patents, copyrights, trademarks, and trade secret laws to establish and maintain proprietary
rights in our technology. We maintain a patent incentive program that seeks to reward innovation. We regularly file applications
for patents and have a significant number of patents in the United States and other countries where we do business. As of
December 1, 2012, we had 1,357 U.S. patents and 233 pending U.S. applications. We also have over 415 non-U.S. patents.
We also rely on non-disclosure agreements and other contracts and policies regarding confidentiality with employees,
contractors and customers, to establish proprietary rights and protect trade secrets and confidential information. Our practice is
to require employees and relevant consultants to execute non-disclosure and proprietary rights agreements upon
commencement of employment or consulting arrangements with us. These agreements acknowledge our ownership of
intellectual property developed by the individual during the course of his or her work with us. The agreements also require that
these persons maintain the confidentiality of all proprietary information disclosed to them.
Enforcing proprietary rights, especially patents, can be costly and uncertain. Moreover, 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. In
recent years, we have filed suit to enforce our intellectual property rights. We have also been subject to several claims related to
patent infringement, including by competitors and non-practicing entities or "patent trolls," and have been requested to
indemnify customers pursuant to contractual indemnity obligations relating to infringement claims made by third parties.
Intellectual property infringement assertions could cause us to incur substantial costs, including legal fees in the defense of
these actions. If we are not successful in defending these claims, our business would be adversely affected. For example, we
may be required to enter into a license agreement requiring ongoing royalty payments, required to redesign our products, or
prohibited from selling any infringing technology.
Our operating system, element and network management software and other products incorporate software and
components under licenses from third parties. We may be required to license additional technology from third parties in order
to develop new products or product enhancements. Failure to obtain or maintain such licenses or other rights could affect our
development efforts, require us to re-engineer our products or obtain alternate technologies.
In connection with our acquisition of substantially all of the optical networking and Carrier Ethernet assets of Nortel's
Metro Ethernet Networks business (the "MEN Acquisition"), we obtained a non-exclusive license to use patents and other
intellectual property controlled or exclusively owned by Nortel in connection with our manufacture, sale and support of a broad
range of optical networking and Carrier Ethernet products and services and natural evolutions of such products and services.
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This license also provides us with an exclusive license to use a narrower set of patents and other intellectual property owned by
Nortel in connection with Ciena's manufacture, sale and support of optical networking and Carrier Ethernet products and
services within a narrower field of use and subject to certain limitations. As part of this license, we granted Nortel a non-
exclusive license to use the patents and other intellectual property (except trademarks) that we acquired as part of the MEN
Business in connection with the manufacture and sale of products and services in the fields of Nortel's other businesses
(including those businesses sold and to be sold to other parties) and natural evolutions of such fields.
Environmental Matters
Our business and operations are subject to environmental laws in various jurisdictions around the world, including the
Waste Electrical and Electronic Equipment (WEEE) and Restriction of the Use of Certain Hazardous Substances in Electrical
and Electronic Equipment (RoHS) regulations adopted by the European Union. We seek to operate our business in compliance
with such laws relating to the materials and content of our products and product takeback and recycling. Environmental
regulation is increasing, particularly outside of the United States, and we expect that our domestic and international operations
may be subject to additional environmental compliance requirements, which could expose us to additional costs. To date, our
compliance costs relating to environmental regulations have not resulted in a material cost or effect on our business, results of
operations or financial condition.
Employees
As of October 31, 2012, we had 4,481 employees. We have not experienced any work stoppages, and we consider the
relationships with our employees to be good. Competition to attract and retain highly skilled technical, engineering and other
personnel with experience in our industry is intense. We believe that our future success depends in critical part on our continued
ability to recruit, motivate and retain such qualified personnel.
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Directors and Executive Officers
The table below sets forth certain information concerning our directors and executive officers:
Name
Patrick H. Nettles, Ph.D.
Gary B. Smith
Stephen B. Alexander
Rick Dodd
James A. Frodsham
François Locoh-Donou
Philippe Morin
James E. Moylan, Jr.
Andrew C. Petrik
David M. Rothenstein
Harvey B. Cash (1)(3)
Bruce L. Claflin (1)(2)
Lawton W. Fitt (2)
Judith M. O’Brien (1)(3)
Michael J. Rowny (2)
Patrick T. Gallagher (2)
Age
Position
69 Executive Chairman of the Board of Directors
52 President, Chief Executive Officer and Director
53 Senior Vice President, Chief Technology Officer
43 Senior Vice President, Global Marketing
46 Senior Vice President, Chief Strategy Officer
41 Senior Vice President, Global Products Group
47 Senior Vice President, Global Field Organization
61 Senior Vice President, Finance and Chief Financial Officer
49 Vice President and Controller
44 Senior Vice President, General Counsel and Secretary
74 Director
61 Director
59 Director
62 Director
62 Director
57 Director
_________________________________
(1)
(2)
(3)
Member of the Compensation Committee
Member of the Audit Committee
Member of the Governance and Nominations Committee
Our Directors hold staggered terms of office, expiring as follows: Ms. Fitt, Dr. Nettles and Mr. Rowny in 2013;
Ms. O’Brien and Messrs. Cash and Smith in 2014; and Messrs. Claflin and Gallagher in 2015.
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 Optiwind Corp, a privately held company, and has
previously served on the board of directors of Apptrigger, Inc., formerly known as Carrius Technologies, Inc.
Gary B. Smith joined Ciena in 1997 and has served as President and Chief Executive Officer since May 2001. Mr. Smith
has served on Ciena’s Board of Directors since October 2000. Prior to his current role, his positions with Ciena included Chief
Operating Officer, and Senior Vice President, Worldwide Sales. Mr. Smith previously served as Vice President of Sales and
Marketing for INTELSAT and Cray Communications, Inc. Mr. Smith also serves on the board of directors for Avaya Inc. and
CommVault Systems, Inc. Mr. Smith is a member of the President’s National Security Telecommunications Advisory
Committee, the Global Information Infrastructure Commission and the Center for Corporate Innovation (CCI).
Stephen B. Alexander joined Ciena in 1994 and has served as Chief Technology Officer since September 1998 and as a
Senior Vice President since January 2000. Mr. Alexander has previously served as General Manager of Products & Technology
and General Manager of Transport and Switching and Data Networking.
Rick Dodd has served as Ciena's Senior Vice President, Global Marketing since December 2010 and is responsible for
Ciena's product, solutions and corporate marketing organizations. In this role, he provides strategic support to Ciena’s global
field organization and global products groups. Mr. Dodd previously worked at Infinera Corporation from September 2003 to
December 2010 and served in roles including Vice President of Product Marketing and Vice President of Corporate Marketing.
Mr. Dodd previously served as Associate Partner at venture capital firm Kleiner, Perkins, Caufield and Byers and as Ciena's
Director, Strategic Marketing.
15
James A. Frodsham joined Ciena in May 2004 and has served as Senior Vice President and Chief Strategy Officer since
March 2010 with responsibility for our strategic planning and corporate development activities. In August 2010, Mr. Frodsham
also assumed responsibility for the integration of the MEN Business, which was substantially completed in fiscal 2011.
Mr. Frodsham previously served as Senior Vice President, General Manager of Ciena’s former Broadband Access Group from
October 2004 to October 2005 and Metro and Enterprise Solutions Group from May 2004 to October 2004. From August 2000
to January 2003, Mr. Frodsham served as chief operating officer of Innovance Networks, an optical networking company. On
December 23, 2003, Innovance filed a Notice of Intent to make a proposal pursuant to Part III of the Bankruptcy and
Insolvency Act (Canada). Prior to that, Mr. Frodsham was employed for more than ten years in senior level positions with
Nortel Networks in product development and marketing strategy, lastly as Vice President, Product Line Marketing, Optical
Networking Group, from December 1998 to June 2000. Mr. Frodsham serves on the board of directors of Innovance Networks.
François Locoh-Donou has served as Ciena's Senior Vice President, Global Products Group since August 2011. In this
capacity, Mr. Locoh-Donou leads Ciena’s engineering, supply chain, product line management, quality/customer advocacy and
solutions interpretation organizations on a global basis. Mr. Locoh-Donou joined Ciena in August 2002 and served as Ciena’s
Vice President and General Manager, EMEA from June 2005 to August 2011.
Philippe Morin joined Ciena in March 2010 in connection with Ciena’s acquisition of Nortel’s MEN Business and has
served as Senior Vice President, Global Field Organization since August 2011, where he is responsible for leading Ciena’s
global sales and services organizations. From March 2010 to August 2011, Mr. Morin served as Ciena's Senior Vice President,
Global Products Group. Mr. Morin previously served as President of Nortel’s MEN Business from May 2006 until Ciena’s
completion of the MEN Acquisition in March 2010. In January 2009, Nortel Networks Corporation and certain of its
subsidiaries filed voluntary petitions in the United States under Chapter 11 of the U.S. Bankruptcy Code. From January 2003 to
May 2006, Mr. Morin held the position of Nortel’s General Manager of Optical Networks. Mr. Morin previously held other
positions at Nortel in manufacturing, marketing, sales and product management both in North America and Europe.
James E. Moylan, Jr. has served as Senior Vice President, Finance and Chief Financial Officer since December 2007. From
June 2006 to December 2007, Mr. Moylan served as Executive Vice President and Chief Financial Officer of Swett &
Crawford, a wholesale insurance broker.
Andrew C. Petrik joined Ciena in 1996 and has served as Vice President, Controller since August 1997 and served as
Treasurer from August 1997 to October 2008.
David M. Rothenstein joined Ciena in January 2001 and has served as Senior Vice President, General Counsel and
Secretary since November 2008. Mr. Rothenstein served as Vice President and Associate General Counsel from July 2004 to
October 2008 and previously as Assistant General Counsel.
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, which he joined in 1985. Mr. Cash serves on the board of directors of First
Acceptance Corp., Silicon Laboratories, Inc. and Argonaut Group, Inc. and has previously served on the boards of directors of
i2 Technologies, Inc., Voyence, Inc. and Staktek Holdings, Inc.
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) where he is currently Chairman of the Board.
Lawton W. Fitt has served as a Director of Ciena since November 2000. 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 to October 2002, and a managing director from 1996 to
October 2002. In addition to her service as a director of non-profit organizations, Ms. Fitt currently serves on the board of
directors of Thomson Reuters, The Carlyle Group L.P., and The Progressive Corporation, and has previously served on the
board of directors of Overture Acquisition Corporation and Frontier Communications Company.
Judith M. O’Brien has served as a Director of Ciena since July 2000. Since November 2012, Ms. O'Brien has served as a
partner and head of the Emerging Company Practice Group at the law firm of King & Spalding. From November 2006 through
December 2010, Ms. O’Brien served as Executive Vice President and General Counsel of Obopay, Inc., a provider of mobile
payment services. From February 2001 until October 2006, Ms. O’Brien served as a Managing Director at Incubic Venture
Fund, a venture capital firm. Ms. O’Brien was a lawyer with Wilson Sonsini Goodrich & Rosati, where, from February 1984 to
February 2001, she was a partner specializing in corporate finance, mergers and acquisitions and general corporate matters. Ms.
O'Brien has previously served on the board of directors of Adaptec, Inc.
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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’s career in
business and government has also included positions as Chairman and Chief Executive Officer of the Ransohoff Company,
Chief Executive Officer of Hermitage Holding Company, Executive Vice President and Chief Financial Officer of ICF Kaiser
International, Inc., Vice President of the Bendix Corporation, and Deputy Staff Director of the White House. Mr. Rowny also
serves on the board of directors of Neustar, Inc. and Pixspan, Inc. and has previously served on the boards of directors of
Llamagraphics, Inc. and Step 9 Software Corporation.
Patrick T. Gallagher has served as a Director of Ciena since May 2009. From March 2008 until March 2012, Mr. Gallagher
was Chairman of Ubiquisys Ltd., a leading developer and supplier of femtocells for the global 3G mobile wireless market.
From January 2008 until February 2009, Mr. Gallagher was Chairman of Macro 4 plc, a global software solutions company,
and from May 2006 until March 2008, served as Vice Chairman of Golden Telecom Inc., a leading facilities-based provider of
integrated communications in Russia and the CIS. From 2003 until 2006, Mr. Gallagher was Executive Vice Chairman and
served as Chief Executive Officer of FLAG Telecom Group and, prior to that role, held various senior management positions at
British Telecom. Mr. Gallagher also serves on the boards of directors of Harmonic Inc. and Sollers JSC.
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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.
Our revenue and operating results can fluctuate significantly and unpredictably from quarter to quarter.
Our revenue and results of operations can fluctuate significantly and unpredictably from quarter to quarter. Our budgeted
expense levels depend in part on our expectations of long-term, future revenue and gross margin, and substantial reductions in
expense are difficult and can take time to implement. Uncertainty or lack of visibility into customer spending, and changes in
economic or market conditions that affect customer spending can make it difficult to forecast future revenue and margins. In
addition, increases in the percentage of a given quarter's revenue relating to orders placed during that quarter, along with
significant order volume late that quarter, could further result in variability and less predictability in our quarterly revenue.
Consequently, our level of operating expense or inventory may be high relative to revenue, which could harm our profitability
and cash flow. Additional factors that contribute to fluctuations in our revenue and operating results include:
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broader macroeconomic conditions, including weakness and volatility in global markets, affecting our customers;
changes in capital spending by large communications service providers;
order flow and backlog levels;
the timing of our ability to recognize revenue on sales;
the mix of revenue by product segment, geography and customer in any particular quarter;
the level of competition and pricing pressure we encounter;
seasonal effects in our business;
the level of start-up costs we incur to support initial deployments, gain new customers or enter new markets; and
our level of success in improving manufacturing efficiencies and achieving cost reductions in our supply chain.
Quarterly fluctuations from these and other factors may cause our results of operations to fall short of or significantly exceed the
expectations of securities analysts or investors, which may cause volatility in our stock price.
We face intense competition that could hurt our sales and results of operations.
We face a competitive market for sales of communications networking equipment, software and services and increased
competition could result in pricing pressure, reduced demand, lower gross margins and the loss of market share that could harm
our business and results of operations. Competition is particularly intense as we and our competitors aggressively seek to
displace incumbent equipment vendors at large service providers and secure new customers. In an effort to secure customer
opportunities and capture market share, we have in the past, and may in the future, agree to onerous commercial terms or pricing
that result in low or negative gross margins on a particular order or group of orders. We expect the level of competition we face
to continue and potentially increase, particularly in the U.S., as larger Chinese equipment vendors such as Huawei seek to gain
market entry and other global competitors seek to retain incumbent positions with customers in the region.
Competition in our markets, generally, is based on any one or a combination of the following factors: price; product
features; functionality and performance; service offering; manufacturing capability and lead-times; incumbency and existing
business relationships; scalability; and the flexibility of products to meet the immediate and future network and service
requirements of customers. A small number of very large companies have dominated our industry, many of which have
substantially greater financial and marketing resources, broader product offerings and more established relationships with
service providers and other customer segments than we do. In addition, a number of these vendors are putting forth competing
visions for how next-generation network architectures should be designed. Because of their scale and resources, they may be
perceived to be a better fit for the procurement, or network operating and management, strategies of large service providers. We
also compete with a number of smaller companies that provide significant competition for a specific product, application,
customer segment or geographic market. Due to the narrower focus of their efforts, these competitors may achieve commercial
availability of their products more quickly or may be more attractive to customers. If competitive pressures increase or we fail to
compete successfully in our markets, our business and results of operations would suffer.
Our business and operating results could be adversely affected by unfavorable changes in macroeconomic and market
conditions and reductions in the level of capital expenditure by customers in response to these conditions.
Global markets have experienced a period of significant volatility that has resulted in a high degree of uncertainty and
cautious customer behavior. Broad macroeconomic weakness and market volatility have previously resulted in sustained periods
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of decreased demand for our products and services that have adversely affected our operating results. Continuation of or an
increase in macroeconomic weakness could result in:
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reductions in customer spending and delay, deferral or cancellation of network infrastructure initiatives;
difficulty forecasting, budgeting and planning;
increased competition for fewer network projects and sales opportunities;
increased pricing pressure that may adversely affect revenue, gross margin and profitability;
higher overhead costs as a percentage of revenue;
tightening of credit markets to fund capital expenditures by our customers and us;
customer financial difficulty, including longer collection cycles and difficulties collecting accounts receivable or write-
offs of receivables; and
increased risk of charges relating to excess and obsolete inventories and the write-off of other intangible assets.
Our business and operating results could be materially adversely affected by reduced customer spending in response to
unfavorable or uncertain macroeconomic and market conditions, globally or specific to a particular region where we operate.
A small number of large communications service providers account for a significant portion of our revenue and the loss
of any of these customers, or a significant reduction in their spending, would have a material adverse effect on our
business and results of operations.
A significant portion of our revenue is concentrated among a few, large global communications service providers. By way of
example, AT&T accounted for approximately 13.5% of fiscal 2012 revenue and our largest ten customers contributed 54.2% of
fiscal 2012 revenue. Consequently, our financial results are closely correlated with the spending of a relatively small number of
service provider customers and can be significantly affected by market or industry changes that affect their businesses. These
factors can include consumer and enterprise spending on communication services, macroeconomic volatility, the adoption of
new communications products and services, the emergence of competing network operators and changing demands of end user
customers. Because the terms of our frame contracts generally do not include any minimum purchase commitment and spending
by these service providers can be unpredictable and sporadic, our revenue and operating results can fluctuate on a quarterly
basis. Reliance upon a relatively small number of service providers increases our exposure to changes in the network and
purchasing strategies. Some of our customers are pursuing efforts to outsource the management and operation of their networks,
or have indicated a procurement strategy to reduce the number of vendors from which they purchase equipment, which may
benefit our larger competitors. Our concentration in revenue has increased in the past as a result of consolidation among a
number of our largest customers. Consolidation may increase the likelihood of temporary or indefinite reductions in customer
spending or changes in network strategy that could harm our business and operating results. The loss of one or more of our large
service provider customers, a significant reduction in their spending, or market or industry factors adversely affecting service
providers generally, would have a material adverse effect on our business, financial condition and results of operations.
Our reliance upon third party contract manufacturers exposes us to risks that could negatively affect our business and
operations.
We rely upon third party contract manufacturers to perform substantially all of the manufacturing of our products and a
significant portion of our component sourcing. We do not have guaranteed supply of components or access to manufacturing
capacity, and in some cases are utilizing temporary or transitional commercial arrangements. Our reliance upon third party
manufacturers could expose us to increased risks related to lead times, continuity of supply, on-time delivery, quality assurance,
and compliance with environmental standards and other regulations. Reliance upon third party manufacturers exposes us to
significant risks related to their operations, financial position, business continuity, sourcing relationships and labor relationships,
that may affect their servicing of Ciena including their continued viability. Our product manufacturing principally takes place in
Mexico, Canada, China and Thailand. Significant disruptions in these and other countries where our products or key components
are manufactured, including natural disasters, epidemics, acts of war or terrorism, social or political unrest or work stoppages,
could affect the cost, availability or allocation of supply and manufacturing capacity and negatively affect our business and
results of operations.
In an effort to drive cost reductions and further optimize Ciena's operations, we are working to rationalize our supply chain,
consolidate third party contract manufacturers and distribution facilities and transition to alternative manufacturing locations. We
are also actively pursuing additional opportunities for direct fulfillment of products from our manufacturers to our customers.
These transitions are complex and there can be no assurance that these efforts, including any reallocation of third party
manufacturing and sourcing, or our changes in fulfillment, will not ultimately result in additional costs or disruptions in our
operations and business that affect our results of operations.
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Our reliance upon third party component suppliers, including sole and limited source suppliers, exposes our business to
additional risk and could limit our sales, increase our costs and harm our customer relationships.
We maintain a global sourcing strategy and depend on third party suppliers for our product components and subsystems.
Our products include key optical and electronic components for which reliable, high-volume supply is often available only from
sole or limited sources. Increases in market demand or scarcity of resources or manufacturing capability have previously resulted
in shortages in availability of important components for our solutions, allocation challenges and increased lead times. We are
exposed to risks relating to unfavorable economic conditions or other similar challenges affecting the businesses of our
component providers that can affect their liquidity levels, ability to continue to invest in their business, and manufacturing
capability. This could expose our business to increased costs, lack of supply or discontinuation of components that can result in
lost revenue, additional product costs, increased lead times and deployment delays that could harm our business and customer
relationships. We do not have any guarantee of supply from these third parties, and in certain cases are relying upon temporary
or transitional commercial arrangements. As a result, there is no assurance that we will be able to secure the components or
subsystems that we require in sufficient quantity and quality on reasonable terms. The loss of a source of supply, or lack of
sufficient availability of key components, could require that we locate an alternate source or redesign our products, each of
which could increase our costs and negatively affect our product gross margin and results of operations. Our business and results
of operations would be negatively affected if we were to experience any significant disruption or difficulties with key suppliers
affecting the price, quality, availability or timely delivery of required components.
Investment of research and development resources in communications networking technologies for which there is not a
matching market opportunity, or failure to sufficiently or timely invest in technologies for which there is market demand,
would adversely affect our revenue and profitability.
The market for communications networking equipment is characterized by rapidly evolving technologies and changes in
market demand. We continually invest in research and development to sustain or enhance our existing products and develop or
acquire new product technologies. Our current development efforts are focused upon enhancing our software applications,
extending our OneConnect control plane across the 5400 and 6500 platform families, expanding packet applications on service
delivery switches, aggregation switches, and packet-optical transport platforms, extending our WaveLogic chipset, enabling 40G
and 100G coherent optical transport across our portfolio, and introducing 400G transmission products. There is often a lengthy
period between commencing these development initiatives and bringing a new or improved products to market. During this time,
technology preferences, customer demand and the market for our products, or those introduced by our competitors, may move in
directions we had not anticipated. There is no guarantee that our new products or enhancements will achieve market acceptance
or that the timing of market adoption will be as predicted. There is a significant possibility, therefore, that some of our
development decisions, including significant expenditures on acquisitions, research and development costs, or investments in
technologies, will not turn out as anticipated, and that our investment in some projects will be unprofitable. There is also a
possibility that we may miss a market opportunity because we failed to invest, or invested too late, in a technology, product or
enhancement sought by our customers, or addressing growth markets or emerging customer segments or applications beyond our
traditional customer base. Changes in market demand or investment priorities may also cause us to discontinue existing or
planned development for new products or features, which can have a disruptive effect on our relationships with customers. If we
fail to make the right investments or fail to make them at the right time, our competitive position may suffer and our revenue and
profitability could be harmed.
We may experience delays in the development of our products that may negatively affect our competitive position and
business.
Our products are based on complex technology, and we can experience unanticipated delays in developing and
manufacturing these solutions. Our current development efforts are focused upon enhancing our software applications, extending
our OneConnect control plane across the 5400 and 6500 platform families, expanding packet applications on service delivery
switches, aggregation switches, and packet-optical transport platforms, extending our WaveLogic 3 chipset for 40G and 100G
coherent optical transport across our portfolio, and introducing 400G transmission products. Delays in these and other product
development may affect our reputation with customers, affect our ability to seize market opportunities and impact the timing and
level of demand for our products. Each step in the development life cycle of our products presents serious risks of failure,
rework or delay, any one of which could adversely affect the cost-effective and timely development of our products. We may
encounter delays relating to engineering development activities and software, design, sourcing and manufacture of critical
components, and the development of prototypes. In addition, intellectual property disputes, failure of critical design elements,
and other execution risks may delay or even prevent the release of these products. If we do not successfully develop products in
a timely manner, our competitive position may suffer and our business, financial condition and results of operations would be
harmed.
20
Product performance problems and undetected errors affecting the performance, reliability or security of our products
could damage our business reputation and negatively affect our results of operations.
The development and production of sophisticated hardware and software for communications network equipment is
complicated. Some of our products can be fully tested only when deployed in communications networks or when carrying traffic
with other equipment. As a result, undetected defects or errors, and product quality, interoperability, reliability and performance
problems are often more acute for initial deployments of new products and product enhancements. We are in the process of
launching a number of new platforms across our product segments. Unanticipated product performance problems can relate to
the design, manufacturing and installation of our products. Undetected errors can also arise as a result of defects in components,
software or manufacturing, installation or maintenance services supplied by third parties, and technology acquired from or
licensed by third parties. Unanticipated security vulnerabilities relating to our products or the activities of our supply chain,
including any actual or perceived exposure of our solutions to malicious software or cyber-attacks, would adversely affect our
business and reputation. Product performance, reliability, security and quality problems can negatively affect our business,
including:
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damage to our reputation, declining sales and order cancellations.
increased costs to remediate defects or replace products;
payment of liquidated damages, contractual or similar penalties, or other claims for performance failures or delays;
increased warranty expense or estimates resulting from higher failure rates, additional field service obligations or other
rework costs related to defects;
increased inventory obsolescence;
costs and claims that may not be covered by liability insurance coverage or recoverable from third parties; and
delays in recognizing revenue or collecting accounts receivable.
These and other consequences relating to undetected errors affecting the quality, reliability and security of our products could
negatively affect our business 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 commercial terms or conditions that negatively affect pricing, risk
allocation, payment and the timing of revenue recognition.
A significant portion of our revenue comes from sales to large communications service providers. These sales typically
involve lengthy sales cycles, extensive product testing, and demonstration laboratory or network certification, including
network-specific or region-specific product certification or homologation processes. These sales also often involve protracted
and sometimes difficult contract negotiations in which we may deem it necessary to agree to unfavorable contractual or
commercial terms that adversely affect pricing, expose us to penalties for delays or non-performance, and require us to assume a
disproportionate amount of risk. We may also be requested to provide deferred payment terms, vendor or third-party financing,
or offer other alternative purchase structures that extend the timing of payment and revenue recognition. These terms may
negatively affect our revenue and results of operations and increase our susceptibility to quarterly fluctuations in our results.
Service providers may ultimately insist upon terms and conditions that we deem too onerous or not in our best interest.
Moreover, our purchase agreements generally do not include minimum purchase commitments and customers often have the
right to modify, delay, reduce or cancel previous orders. As a result, we may incur substantial expense and devote time and
resources to potential sales opportunities that never materialize or result in lower than anticipated sales.
Efforts by us or our strategic third party channel partners to sell our solutions into targeted geographic markets and
customer segments may be unsuccessful.
We continue to take steps, including sales initiatives and strategic channel relationships, to sell our products into new
markets, growth geographies and diverse customer segments beyond our traditional service provider customer base. Specifically,
we are targeting opportunities in Brazil, the Middle East, Russia, Japan and India. We are also targeting sales opportunities with
enterprises, wireless operators, cable operators, submarine network operators, Internet content providers, cloud infrastructure
providers, research and education institutions, and federal, state and local governments. We believe sales to these customer
segments, as well as emerging network operators supporting new communications services and applications, will be an
important component of our growth strategy. In many cases, we have less experience in these markets and customer segments
and they may have less familiarity with our company. To succeed in some of these geographic markets and customer segments
we intend to leverage strategic sales channels and distribution arrangements and expect these relationships to be an important
part of our business. Our efforts may be unsuccessful, and difficulties selling into these target markets, including through third
party channels, could limit our growth and harm our results of operations.
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The international scale of our operations exposes us to additional risk and expense that could adversely affect our results
of operations.
We market, sell and service our products globally and rely upon a global supply chain for sourcing important components
and manufacturing of our products. Our international operations are subject to inherent risks, including:
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the impact of economic conditions in countries outside the United States;
effects of changes in currency exchange rates;
greater difficulty in collecting accounts receivable and longer collection periods;
difficulty and cost of staffing and managing foreign operations;
less protection for intellectual property rights in some countries;
adverse tax and customs consequences, particularly as related to transfer-pricing issues;
social, political and economic instability;
higher incidence of corruption or unethical business practices that could expose us to liability or damage our reputation;
trade protection measures, export compliance, domestic preference procurement requirements, qualification to transact
business and additional regulatory requirements; and
natural disasters, epidemics and acts of war or terrorism.
We expect that we may enter new markets and withdraw from or reduce operations in others. Our global operations expose us to
additional risk and expense that could give rise to unanticipated liabilities, costs or other difficulties that could adversely affect
our operations and financial results.
We may be required to write off significant amounts of inventory as a result of our inventory purchase practices, the
obsolescence of product lines or unfavorable market conditions.
To avoid delays and meet customer demand for shorter delivery terms, we place orders with our contract manufacturers and
component suppliers based in part on forecasts of customer demand. As a result, our business is exposed to the risk that our
customers ultimately may not order the products we have forecast, or will purchase fewer products than forecast. As features and
functionalities converge across our product lines, and we introduce new products with overlapping feature sets, it is increasingly
possible that customers may forgo purchases of one product we have inventoried in favor of another product with similar
functionality. Market uncertainty can also limit our visibility into customer spending plans and compound the difficulty of
forecasting inventory at appropriate levels. Moreover, our customer purchase agreements generally do not include any minimum
purchase commitment, and customers often have the right to modify, reduce or cancel purchase quantities. We may also be
exposed to the risk of inventory write offs as a result of certain supply chain initiatives, including consolidation and transfer of
key manufacturing activities As a result, we may purchase inventory in anticipation of sales that ultimately do not occur. If we
are required to write off or write down a significant amount of inventory, our results of operations for the period would be
materially adversely affected.
Our intellectual property rights may be difficult and costly to enforce.
We generally rely on a combination of patents, copyrights, trademarks and trade secret laws to establish and maintain
proprietary rights in our products and technology. Although we have been issued numerous patents and other patent applications
are currently pending, there can be no assurance that any of these patents or other proprietary rights will not be challenged,
invalidated or circumvented or that our rights will provide us with any competitive advantage. In addition, there can be no
assurance that patents will be issued from pending applications or that claims allowed on any patents will be sufficiently broad to
protect our technology. Further, the laws of some foreign countries may not protect our proprietary rights to the same extent as
do the laws of the United States.
We are subject to the risk that third parties may attempt to access, divert or use our intellectual property without
authorization. Protecting against the unauthorized use of our products, technology and other proprietary rights is difficult, time-
consuming and expensive, and we cannot be certain that the steps that we are taking will prevent or minimize the risks of such
unauthorized use. Litigation may be necessary to enforce or defend our intellectual property rights or to determine the validity or
scope of the proprietary rights of others. Such litigation could result in substantial cost and diversion of management time and
resources, and there can be no assurance that we will obtain a successful result. Any inability to protect and enforce our
intellectual property rights, despite our efforts, could harm our ability to compete effectively.
We may incur significant costs in response to claims by others that we infringe their intellectual property rights.
From time to time third parties may assert claims or initiate litigation or other proceedings related to patent, copyright,
trademark and other intellectual property rights to technologies and related standards that are relevant to our business. The rate
of patent infringement assertions both by operating entities and third party non-practicing entities (sometimes referred to as
“patent trolls”) is increasing, particularly in the United States and Canada. We can be adversely affected by litigation, other
22
proceedings or claims against us, as well as our manufacturers, suppliers or customers, alleging infringement of third party
proprietary rights by our products and technology, or components of those products. Regardless of the merit of these claims, they
can be time-consuming, divert the time and attention of our technical and management personnel, and result in costly litigation.
These claims, if successful, can require us to:
•
•
•
•
•
pay substantial damages or royalties;
comply with an injunction or other court order that could prevent us from offering certain of our products;
seek a license for the use of certain intellectual property, which may not be available on commercially reasonable terms
or at all;
develop non-infringing technology, which could require significant effort and expense and ultimately may not be
successful; and
indemnify our customers pursuant to contractual obligations and pay expense or damages on their behalf.
Any of these events could adversely affect our business, results of operations and financial condition. Our exposure to risks
associated with the use of intellectual property may be increased as a result of acquisitions, as we have a lower level of visibility
into the development process with respect to such technology or the steps taken to safeguard against the risks of infringing the
rights of third parties.
Our failure to manage effectively our relationships with third party service partners could adversely impact our financial
results and relationship with customers.
We rely on a number of third party service partners, both domestic and international, to complement our global service and
support resources. We rely upon these partners for certain installation, maintenance and support functions. In order to ensure the
proper installation and maintenance of our products, we must identify, train and certify qualified service partners. Certification
can be costly and time-consuming, and our partners often provide similar services for other companies, including our
competitors. We may not be able to manage effectively our relationships with our service partners and cannot be certain that they
will be able to deliver services in the manner or time required. We may also be exposed to liability relating to the performance of
our service partners. If our service partners are unsuccessful in delivering services:
•
•
•
we may suffer delays in recognizing revenue;
our services revenue and gross margin may be adversely affected; and
our relationship with customers could suffer.
If we do not manage effectively our relationships with third party service partners, or they fail to perform these services in the
manner or time required, our financial results and relationship with customers could be adversely affected.
We may be exposed to unanticipated risks and additional obligations in connection with our resale of complementary
products or technology of other companies.
We have entered into agreements with strategic supply partners that permit us to distribute their products or technology. We
may rely upon these relationships to add complementary products or technologies, diversify our product portfolio, or address a
particular customer or geographic market. We may enter into additional original equipment manufacturer (OEM), resale or
similar strategic arrangements in the future, including in support of our selection as a domain supply partner with AT&T. We
may incur unanticipated costs or difficulties relating to our resale of third party products. Our third party relationships could
expose us to risks associated with the business, financial condition, intellectual property rights and supply chain continuity of
such partners, as well as delays in their development, manufacturing or delivery of products or technology. We may also be
required by customers to assume warranty, indemnity, service and other commercial obligations, including potential liability to
customers, greater than the commitments, if any, made to us by our technology partners. Some of our strategic supply partners
are relatively small companies with limited financial resources. If they are unable to satisfy their obligations to us or our
customers, we may have to expend our own resources to satisfy these obligations. Exposure to these risks could harm our
reputation with key customers and negatively affect our business and our results of operations.
Our exposure to the credit risks of our customers and resellers may make it difficult to collect receivables and could
adversely affect our revenue and operating results.
In the course of our sales to customers and resale channel partners, we may have difficulty collecting receivables and our
business and results of operations could be exposed to risks associated with uncollectible accounts. Lack of liquidity in the
capital markets, macroeconomic weakness and market volatility may increase our exposure to these credit risks. Our attempts to
monitor these situations carefully and take appropriate measures to protect ourselves may not be sufficient, and it is possible that
we may have to write down or write off accounts receivable. Such write-downs or write-offs could negatively affect our
23
operating results for the period in which they occur, and, if large, could have a material adverse effect on our revenue and
operating results.
Our business is dependent upon the proper functioning of our internal business processes and information systems and
modification or interruption of such systems may disrupt our business, processes and internal controls.
We rely upon a number of internal business processes and information systems to support key business functions and the
efficient operation of these processes and systems is critical to our business. Our business processes and information systems
need to be sufficiently scalable to support the growth of our business and may require modifications or upgrades that expose us
to a number of operational risks. We are currently pursuing initiatives to transform and optimize our business operations through
the reengineering of certain processes, investment in automation and engagement of strategic partners or resources to assist with
certain business functions. These changes may be costly and disruptive to our operations, and could impose substantial demands
on management time. These changes may also require changes in our information systems, modification of internal control
procedures and significant training of employees or third party resources. Our information technology systems, and those of
third party providers, may also be vulnerable to damage or disruption caused by circumstances beyond our control. These
include catastrophic events, power anomalies or outages, natural disasters, computer system or network failures, viruses or
malware, physical or electronic break-ins, unauthorized access and cyber-attacks affecting our systems or those of third party
business partners. Any material disruption, malfunction or similar challenges with our business processes or information
systems, or disruptions or challenges relating to the transition to new processes, systems or providers, could have a material
adverse effect on the operation of our business and our results of operations.
Data breaches and cyber-attacks could compromise our intellectual property or other sensitive information and cause
significant damage to our business and reputation.
In the ordinary course of our business, we maintain sensitive data on our networks, including our intellectual property and
proprietary or confidential business information relating to our business and that of our customers and business partners. The
secure maintenance of this information is critical to our business and reputation. We believe that companies in the technology
industry have been increasingly subject to a wide variety of security incidents, cyber-attacks and other attempts to gain
unauthorized access. Our network and storage applications may be subject to unauthorized access by hackers or breached due to
operator error, malfeasance or other system disruptions. In some cases, it is difficult to anticipate or immediately detect such
incidents and the damage caused thereby. These data breaches and any unauthorized access or disclosure of our information,
could compromise our intellectual property and expose sensitive business information. Cyber-attacks could also cause us to
incur significant remediation costs, disrupt key business operations and divert attention of management and key information
technology resources. These incidents could also subject us to liability, expose us to significant expense, or cause significant
harm to our reputation.
Outstanding indebtedness under our convertible notes may adversely affect our liquidity and results of operations and
could limit our business.
At October 31, 2012, indebtedness on our outstanding convertible notes totaled approximately $1.4 billion in aggregate
principal, including approximately $216.0 million in convertible notes that mature in May 2013. Our indebtedness could have
important negative consequences, including:
•
•
•
•
•
increasing our vulnerability to adverse economic and industry conditions;
limiting our ability to obtain additional financing, particularly in unfavorable capital and credit market conditions;
incurrence of debt service and repayment obligations that reduce the availability of cash resources for other business
purposes;
limiting our flexibility in planning for, or reacting to, changes in our business and the markets; and
placing us at a possible competitive disadvantage to competitors that have better access to capital resources.
On August 13, 2012, we entered into a $150 million senior secured asset-based revolving Credit Facility. In addition to
customary remedies should we default under the credit agreement governing this facility, we may be subject to lender control
over certain cash assets and required to comply with a fixed charge coverage ratio in the event that we do not maintain the
requisite level of availability under the facility. The credit agreement also contains customary covenants that limit our ability to,
among other things, pay cash dividends, incur debt, create liens and encumbrances, redeem or repurchase stock, enter into
certain acquisition transactions, repay indebtedness, make investments or dispose of assets. The Credit Facility matures on
August 13, 2015, provided that it will mature early on (i) January 31, 2013, if any of Ciena's 0.25% senior convertible notes due
May 1, 2013 are then outstanding and Ciena is unable to meet certain financial criteria with respect to its cash position at that
time, or (ii) December 15, 2014, if any of Ciena's 4.00% senior convertible notes due March 15, 2015 are then outstanding. We
24
may also enter into additional transactions or lending facilities, including equipment loans, working capital lines of credit and
other long-term debt, that may increase our indebtedness and result in additional restrictions upon our business.
Significant volatility and uncertainty in the capital markets may limit our access to funding.
We have accessed the capital markets in the past and successfully raised funds, through the issuance of equity or convertible
debt, to increase our cash position, support our operations and undertake strategic growth initiatives, including the acquisition of
the MEN Business. We regularly evaluate our liquidity position, debt obligations, and anticipated cash needs to fund our long-
term operating plans and may consider raising additional capital in the future. Global capital markets have undergone a sustained
period of significant volatility and uncertainty, and there can be no assurance that such financing alternatives would be available
to us, should we determine it necessary or advisable to seek additional cash resources.
Facilities transitions could be disruptive to our operations and result in unanticipated expense.
We have recently undertaken and expect to undertake a number of significant facilities transitions affecting a number of our
largest employee populations, including our headquarters facility. In November 2011, we entered into a lease for our new
corporate headquarters in Hanover, Maryland. While we have transitioned certain affected employees and operations, including
key management and administration resources, to this new facility, we do not expect to complete the transition of all affected
personnel and functions until early 2013. This transition could be disruptive to our operations and could result in unanticipated
expense that adversely affects our financial results. In addition, the lease of our “Lab 10” building on the Carling Campus in
Ottawa, Canada will expire in fiscal 2016 and the lease for our research and development facility in Gurgaon, India will expire
in fiscal 2014. Both locations include sophisticated research and development lab equipment and key engineering personnel, and
our Ottawa facility is our largest facility globally. We are currently considering facilities and development alternatives in
advance of the expiration of these leases. However, locating appropriate alternative space for our engineering operations may be
costly and there can be no assurance that the transition of key engineering functions to a successor facility will not be disruptive,
or adversely affect productivity.
Restructuring activities could disrupt our business and affect our results of operations.
We have previously taken steps, including reductions in force, office closures, and internal reorganizations to reduce the size
and cost of our operations, improve efficiencies, or realign our organization and staffing to better match our market opportunities
and our technology development initiatives. We may take similar steps in the future as we seek to realize operating synergies,
optimize our operations to achieve our target operating model and profitability objectives, or better reflect changes in the
strategic direction of our business. These changes could be disruptive to our business and may result in significant expense
including accounting charges for inventory and technology-related write-offs, workforce reduction costs and charges relating to
consolidation of excess facilities. Substantial expense or charges resulting from restructuring activities could adversely affect our
results of operations in the period in which we take such a charge.
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, engineering and other personnel with experience in our industry is
intense, 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. Because we rely upon equity awards
as a significant component of compensation, particularly for our executive team, a lack of positive performance in our stock
price, reduced grant levels, or changes to our compensation program may adversely affect our ability to attract and retain key
employees. The loss of members of our management team or other key personnel could be disruptive to our business, and, were
it necessary, it could be difficult to replace members of our management team or other key personnel. In addition, none of our
executive officers is bound by an employment agreement for any specific term. If we are unable to attract and retain qualified
personnel, we may be unable to manage our business effectively, and our operations and results of operations could suffer.
We may be adversely affected by fluctuations in currency exchange rates.
As a global concern, we face exposure to adverse movements in foreign currency exchange rates. Historically, our sales
were primarily denominated in U.S. dollars. As a result of our increased global presence, a larger percentage of our revenue and
operating expense are now non-U.S. dollar denominated and therefore subject to foreign currency fluctuation. We face exposure
to currency exchange rates as a result of the growth in our non-U.S. dollar denominated operating expense in Canada, Europe,
Asia and Latin America. From time to time, we may hedge against currency exposure associated with anticipated foreign
currency cash flows. There can be no assurance that any hedging instruments will be effective, and losses associated with these
instruments and the adverse effect of foreign currency exchange rate fluctuation may negatively affect our results of operations.
25
Our products incorporate software and other technology under license from third parties and our business would be
adversely affected if this technology were no longer available to us on commercially reasonable terms.
We integrate third-party software and other technology into our embedded operating system, network management system
tools and other products. Licenses for this technology may not be available or continue to be available to us on commercially
reasonable terms. Third party licensors may insist on unreasonable financial or other terms in connection with our use of such
technology. Difficulties with third party technology licensors could result in termination of such licenses, which may result in
significant costs and require us to obtain or develop a substitute technology. Difficulty obtaining and maintaining third-party
technology licenses may disrupt development of our products and increase our costs.
Strategic acquisitions and investments may expose us to increased costs and unexpected liabilities.
We may acquire or make investments in other technology companies, or enter into other strategic relationships, to expand
the markets we address, diversify our customer base or acquire or accelerate the development of technology or products. To do
so, we may use cash, issue equity that would dilute our current stockholders' ownership, or incur debt or assume indebtedness.
These transactions involve numerous risks, including:
•
•
•
•
•
•
•
•
•
significant integration costs;
disruption due to the integration and rationalization of operations, products, technologies and personnel;
diversion of management's attention;
difficulty completing projects of the acquired company and costs related to in-process projects;
the loss of key employees;
ineffective internal controls over financial reporting;
dependence on unfamiliar suppliers or manufacturers;
exposure to unanticipated liabilities, including intellectual property infringement claims; and
adverse tax or accounting effects including amortization expense related to intangible assets and charges associated
with impairment of goodwill.
As a result of these and other risks, our acquisitions, investments or strategic transactions may not reap the intended benefits and
may ultimately have a negative impact on our business, results of operation and financial condition.
Changes in government regulation affecting the communications industry and the businesses of our customers could
harm our prospects and operating results.
The Federal Communications Commission, or FCC, has jurisdiction over the U.S. communications industry and similar
agencies have jurisdiction over the communication industries in other countries. Many of our largest customers are subject to the
rules and regulations of these agencies. Changes in regulatory requirements applicable to wireline or wireless communications
and the Internet in the United States or other countries could serve as a disincentive to providers to invest in their
communications network infrastructures or introduce new services. These changes could adversely affect the sale of our products
and services. Changes in regulatory tariff requirements or other regulations relating to pricing or terms of carriage on
communications networks could slow the development or expansion of network infrastructures and adversely affect our
business, operating results, and financial condition.
Governmental regulations affecting the use, import or export of products could adversely affect our operations, and
negatively affect our revenue and increase our costs.
The United States and various foreign governments have imposed controls, license requirements and other restrictions on
the usage, import or export of some of the technologies that we sell. Governmental regulation of usage, import or export of our
products, technology within our products, or our failure to obtain required approvals for our products, could harm our
international and domestic sales and adversely affect our revenue and costs of sales. Failure to comply with such regulations
could result in enforcement actions, fines or penalties and restrictions on export privileges. In addition, costly tariffs on our
equipment, restrictions on importation, trade protection measures and domestic preference requirements of certain countries
could limit our access to these markets and harm our sales. For example, India's government has recently implemented and is
considering additional security regulations applicable to network equipment vendors, and has imposed significant tariffs that
may inhibit sales of certain communications equipment; including equipment manufactured in China, where certain of our
products are assembled. These and other regulations could adversely affect the sale or use of our products, substantially increase
our cost of sales and could adversely affect our business and revenue.
26
Governmental regulations related to the environment and potential climate change, could adversely affect our business
and operating results.
Our operations are regulated under various federal, state, local and international laws relating to the environment and
potential climate change. We could incur fines, costs related to damage to property or personal injury, and costs related to
investigation or remediation activities, if we were to violate or become liable under these laws or regulations. Our product design
efforts, and the manufacturing of our products, are also subject to evolving requirements relating to the presence of certain
materials or substances in our equipment, including regulations that make producers for such products financially responsible for
the collection, treatment and recycling of certain products. For example, our operations and financial results may be negatively
affected by environmental regulations, such as the Waste Electrical and Electronic Equipment (WEEE) and Restriction of the
Use of Certain Hazardous Substances in Electrical and Electronic Equipment (RoHS) that have been adopted by the European
Union. Compliance with these and similar environmental regulations may increase our cost of designing, manufacturing, selling
and removing our products. These regulations may also make it difficult to obtain supply of compliant components or require us
to write off non-compliant inventory, which could have an adverse effect our business and operating results.
We may be required to write down long-lived assets and these impairment charges would adversely affect our operating
results.
As of October 31, 2012, our balance sheet includes $438.3 million in long-lived assets, which includes $257.1 million of
intangible assets. Valuation of our long-lived assets requires us to make assumptions about future sales prices and sales volumes
for our products. These assumptions are used to forecast future, undiscounted cash flows. Given the significant uncertainty and
instability of macroeconomic conditions in recent periods, forecasting future business is difficult and subject to modification. If
actual market conditions differ or our forecasts change, we may be required to reassess long-lived assets and could record an
impairment charge. Any impairment charge relating to long-lived assets would have the effect of decreasing our earnings or
increasing our losses in such period. If we are required to take a substantial impairment charge, our operating results could be
materially adversely affected in such period.
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
management's assessment of the effectiveness of our internal controls over financial reporting as of the end of our fiscal year and
a statement as to whether or not such internal controls are effective. 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. Changes in our business,
including certain initiatives to transform business processes, invest in information systems or transition certain functions to third
party resources or providers, will necessitate modifications to our internal control systems, processes and information systems as
we optimize our business and operations. Our increased global operations and expansion into new regions could pose additional
challenges to our internal control systems. We cannot be certain that our current design for internal control over financial
reporting, or any additional changes to be made, will be sufficient to enable management 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, 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 stock price is volatile.
Our common stock price has experienced substantial volatility in the past and may remain volatile in the future. Volatility in
our stock price can arise as a result of a number of the factors discussed in this “Risk Factors” section. During fiscal 2012, our
closing stock price ranged from a high of $17.98 per share to a low of $10.38 per share. The stock market has experienced
significant price and volume fluctuations that have affected the market price of many technology companies, with such volatility
often unrelated to the operating performance of these companies. Divergence between our actual or anticipated financial results
and published expectations of analysts can cause significant swings in our stock price. Our stock price can also be affected by
announcements that we, our competitors, or our customers may make, particularly announcements related to acquisitions or
other significant transactions. Our common stock is included in a number of market indices and any change in the composition
of these indices to exclude our company would adversely affect our stock price. These factors, as well as conditions affecting the
general economy or financial markets, may materially adversely affect the market price of our common stock in the future.
27
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Overview. As of October 31, 2012, all of our properties are leased and we do not own any real property. We lease facilities
globally related to the ongoing operations of our four business segments and related functions. Our principal executive offices
are located in two buildings in Hanover, Maryland. In addition, we currently occupy five buildings at various sites in
Linthicum, Maryland, including an engineering facility, two supply chain and logistics facilities, and two administrative and
sales facilities, though we will be vacating three of these buildings in the first half of fiscal 2013.
Our largest facility is our research and development center located at “Lab 10” on the former Nortel Carling Campus in
Ottawa, Canada. See below for information regarding the lease associated with this engineering facility. We also have
engineering and/or service facilities located in San Jose, California; Alpharetta, Georgia; Spokane, Washington; Kanata,
Canada; and Gurgaon, India. In addition, we lease various smaller offices in the United States, Mexico, South America,
Europe, the Middle East and Asia-Pacific to support our sales and services operations. We believe the facilities we are now
using are adequate and suitable for our business requirements.
Hanover, Maryland Headquarters Lease. Ciena entered into a lease agreement dated November 3, 2011, with W2007 RDG
Realty, L.L.C. relating to office space for its new corporate headquarters in Hanover, Maryland, consisting of an agreed-upon
rentable area of approximately 154,100 square feet. At the commencement date, the minimal rental commitments to be paid
over the 15-year lease term are approximately $61.8 million.
Carling, Ottawa Lease. Upon the completion of the MEN Acquisition, Ciena Canada Inc., a subsidiary of Ciena, entered
into a lease agreement with Nortel Networks Technology Corp. (“Landlord”) relating to the “Lab 10” building on Nortel’s
Carling Campus in Ottawa, Canada (the “Carling lease”). This facility consists of a rentable area of 265,000 square feet for
which we incur lease expense of approximately $7.2 million CAD per year, consisting of both base rent and fixed additional
operating expense, the latter of which increases at 2% per year. The Carling lease initially had a ten-year term, subject to an
early termination feature that allowed Nortel to reduce the term of the lease in exchange for its payment of an early termination
fee of up to $33.5 million. During the first quarter of fiscal 2011, Ciena received both notice of early termination from Nortel
shortening the Carling lease to five years and the corresponding $33.5 million early termination payment.
Restructuring. We attempt to sublease properties that we no longer occupy. As part of our restructuring costs, we provide
for the estimated cost of the future 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, 2012, our accrued restructuring liability related to these properties was $3.6 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 Note 21 to
the Consolidated Financial Statements in Item 8 of Part II of this annual report.
28
Item 3. Legal Proceedings
On July 29, 2011, Cheetah Omni LLC filed a complaint in the United States District Court for the Eastern District of Texas
against Ciena and several other defendants, alleging, among other things, that certain of the parties' products infringe upon
multiple U.S. Patents relating to certain reconfigurable optical add-drop multiplexer (ROADM) technologies. The complaint
seeks injunctive relief and damages. On November 8, 2011, Ciena filed an answer and counterclaims to Cheetah Omni's
amended complaint. The parties are currently engaged in discovery. Ciena believes that it has valid defenses to the lawsuit and
intends to defend it vigorously.
On May 29, 2008, Graywire, LLC filed a complaint in the United States District Court for the Northern District of Georgia
against Ciena and four other defendants, alleging, among other things, that certain of the parties' products infringe U.S. Patent
6,542,673 (the “'673 Patent”), relating to an identifier system and components for optical assemblies. The complaint seeks
injunctive relief and damages. In July 2009, upon request of Ciena and certain other defendants, the U.S. Patent and Trademark
Office (“PTO”) granted the defendants' inter partes application for reexamination with respect to certain claims of the '673
Patent, and the district court granted the defendants' motion to stay the case pending reexamination of all of the patents-in-suit.
In December 2010, the PTO confirmed the validity of some claims and rejected the validity of other claims of the '673 Patent,
to which Ciena and other defendants filed an appeal. On March 16, 2012, the PTO on appeal rejected multiple claims of the
'673 Patent, including the two claims on which Ciena is alleged to infringe. Subsequently, the plaintiff requested a reopening of
the prosecution of the '673 Patent, to which Ciena and the other defendants filed an opposition. The case currently remains
stayed, and there can be no assurance as to whether or when the stay will be lifted.
In addition to the matters described above, we are subject to various legal proceedings and claims arising in the ordinary
course of our business, including claims against third parties that may involve a contractual indemnification obligation on the
part of Ciena. We do not expect that the ultimate costs to resolve these matters will have a material effect on our results of
operations, financial position or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Our 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 our common stock, as reported on the NASDAQ Global Select Market, for the fiscal
periods indicated.
Fiscal Year 2011
First Quarter ended January 31
Second Quarter ended April 30
Third Quarter ended July 31
Fourth Quarter ended October 31
Fiscal Year 2012
First Quarter ended January 31
Second Quarter ended April 30
Third Quarter ended July 31
Fourth Quarter ended October 31
High
Low
$
$
$
$
$
$
$
$
25.49
28.81
27.91
14.82
15.34
17.16
16.81
17.98
$
$
$
$
$
$
$
$
13.55
22.03
15.46
10.28
10.38
13.44
11.49
12.17
As of December 13, 2012, there were approximately 834 holders of record of our common stock and 100,610,686 shares of
common stock outstanding. We have never paid cash dividends on our 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.
The following graph shows a comparison of cumulative total returns for an investment in our common stock, the NASDAQ
Telecommunications Index and the NASDAQ Composite Index from October 31, 2007 to October 31, 2012. The NASDAQ
29
Composite Index measures all domestic and international based common stocks listed on The Nasdaq Stock Market. The
NASDAQ Telecommunications Index contains securities of NASDAQ-listed companies classified according to the Industry
Classification Benchmark as Telecommunications and Telecommunications Equipment. They include providers of fixed-line
and mobile telephone services, and makers and distributors of high-technology communication products. This graph is not
deemed to be “filed” with the SEC or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, and the
graph shall not be deemed to be incorporated by reference into any prior or subsequent filing by us under the Securities Act of
1933 or the Exchange Act.
Assumes $100 invested in Ciena Corporation, the NASDAQ Telecommunications Index and the NASDAQ Composite
Index on October 31, 2007 with all dividends reinvested at month-end.
(b) Not applicable.
(c) Not applicable.
30
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.” We have 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 statement presentation, each fiscal
year is described as having ended on October 31. Fiscal 2008, 2009, 2010 and 2011 consisted of 52 weeks and fiscal 2012
consisted of 53 weeks.
Cash and cash equivalents
Short-term investments
Long-term investments
Total assets
Short-term convertible notes payable
Long-term convertible notes payable
Total liabilities
Stockholders’ equity (deficit)
Year Ended October 31,
(in thousands)
2008
550,669
366,336
156,171
$
$
$
2009
485,705
563,183
8,031
$
$
$
$
$
$
2010
2011
2012
688,687
$
541,896
$
642,444
— $
— $
— $
50,057
50,264
$
—
$ 2,024,594
$ 1,504,383
$ 2,118,093
$ 1,951,418
$ 1,881,143
$
$
— $
— $
— $
— $
216,210
798,000
$
798,000
$ 1,442,705
$ 1,442,364
$ 1,225,806
$ 1,025,645
998,949
$
$ 1,048,545
455,838
$
$ 1,958,800
159,293
$
$ 1,937,545
13,873
$
$ 1,970,115
(88,972)
$
31
Statement of Operations Data:
Revenue
Cost of goods sold
Gross profit
Operating expenses:
Research and development
Selling and marketing
General and administrative
Acquisition and integration costs
Amortization of intangible assets
Restructuring costs
Goodwill impairment
Change in fair value of contingent consideration
Total operating expenses
Income (loss) from operations
Interest and other income (loss), net
Interest expense
Realized loss due to impairment of marketable debt
investments
Gain (loss) on cost method investments
Gain on extinguishment of debt
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Basic net income (loss) per common share
Diluted net income (loss) per potential common
share
$
$
$
Year Ended October 31,
(in thousands, except per share data)
2008
2009
2010
2011
2012
$
902,448
$
652,629
$ 1,236,636
$ 1,741,970
$ 1,833,923
739,135
497,501
1,032,824
1,109,699
709,146
724,224
327,626
193,515
102,692
101,379
99,401
8,514
—
(13,807)
819,320
(321,819)
3,917
(18,619)
379,862
251,990
126,242
42,088
69,665
5,781
—
(3,289)
872,339
(163,193)
6,022
(37,926)
—
—
—
7,249
364,179
266,338
114,002
—
51,697
7,854
—
—
804,070
(79,846)
(15,200)
(39,653)
—
—
367,799
284,830
190,319
134,527
47,509
—
24,826
11,207
455,673
—
864,061
(579,231)
9,487
(7,406)
—
(5,328)
—
(582,478)
(1,324)
451,521
450,927
175,023
152,018
68,639
—
32,264
1,110
—
—
429,054
21,873
36,762
(12,927)
(5,101)
—
932
41,539
2,645
38,894
0.44
4,948
(331,573)
1,941
—
(134,699)
9,322
$ (581,154) $ (333,514) $ (195,521) $ (144,021)
(1.45)
$
—
(187,848)
7,673
(6.37) $
(3.58) $
(2.04) $
0.42
$
(6.37) $
(3.58) $
(2.04) $
(1.45)
99,341
Weighted average basic common shares outstanding
89,146
91,167
93,103
95,854
Weighted average dilutive potential common shares
outstanding
110,605
91,167
93,103
95,854
99,341
32
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This report contains statements that discuss future events or expectations, projections of results of operations or financial
condition, changes in the markets for our products and services, or other “forward-looking” information. Our “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,” “intends,” “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 our securities. We undertake no obligation to revise
or update any forward-looking statements. The following discussion and analysis should be read in conjunction with our “Selected
Consolidated Financial Data” and consolidated financial statements and notes thereto included elsewhere in this annual report.
Overview
We are a provider of equipment, software and services that support the transport, switching, aggregation and management
of voice, video and data traffic on communications networks. Our Packet-Optical Transport, Packet-Optical Switching and
Carrier-Ethernet Solutions products are used, individually or as part of an integrated solution, in communications networks
operated by service providers, cable operators, governments, enterprises, research and education institutions and other network
operators around the globe. We are a network specialist focused on solutions that enable converged, next-generation
architectures, optimized to handle a broader mix of high-bandwidth communications services. Our products allow network
operators to scale capacity and increase transmission speeds, efficiently allocate network traffic, and deliver services to
business and consumer end users. Our network solutions also include our integrated Ciena One software suite that provides
network management capabilities that unify our product portfolio and provide automation and management features that enable
efficient service delivery. To complement our hardware and software portfolio, we offer a broad range of consulting and
support services that help our customers design, optimize, deploy, manage and maintain their communications networks. We
believe that the close, collaborative engagement with customers enabled by our services offering is an important component of
our network specialist approach and a significant differentiator with customers.
Our quarterly reports on Form 10-Q, annual reports on Form 10-K and current reports on Form 8-K filed with the SEC are
available through the SEC's website at www.sec.gov or free of charge on our website as soon as reasonably practicable after we
file these documents. We routinely post the reports above, recent news and announcements, financial results and other
important information about Ciena on the "Investors" page of our website at www.ciena.com.
Market Opportunity and Strategy
We believe that a number of underlying drivers in the marketplace represent long-term opportunities for our business, and
we expect them to result in growing demand for next-generation networking solutions in our target markets. We believe that
market trends, including the proliferation of smartphones, tablets and similar devices running mobile web applications, the
prevalence of video applications, and the shift of enterprise and consumer applications to cloud-based or virtualized network
environments, are indicative of increasing use and dependence by consumers and enterprises upon a growing variety of high-
bandwidth applications and services. We expect that these services will continue to add significant multiservice network traffic,
requiring our customers to continue to invest in high-capacity network infrastructures that are more robust, programmable and
efficient. These dynamics also continue to drive demand for convergence of network features, functions and layers. Our
strategy to capitalize on these market dynamics, promote operational efficiency and drive profitable growth of our business
includes the corporate initiatives set forth in the "Strategy" subsection of the description of our business under Item 1 of Part I
of this annual report above.
Global Market Conditions and Competitive Landscape
We believe that the market opportunity described above, together with multiservice traffic growth, are driving a shift in
network priorities and spending toward high-capacity, next-generation network architectures. However, during fiscal 2012 our
market experienced a challenging environment including declining growth rates in spending on in the markets addressed by our
packet-optical networking solutions. We believe that this reflects the macroeconomic conditions and competitive landscape
encountered in our market during the year.
33
The sustained period of macroeconomic uncertainty and volatility in the global economy and in capital markets has
resulted in a high degree of uncertainty and cautious customer behavior in our industry and markets. These dynamics,
particularly in Europe, have resulted and may continue to result in lower levels of capital expenditure on communications
network infrastructure. Conditions in our markets have also resulted in protracted sales cycles, lengthier network deployments
and revenue recognition delays. Broad macroeconomic weakness has previously resulted in periods of decreased demand for
our products and services that have adversely affected our results of operations. We remain uncertain as to how long current
macroeconomic and industry conditions will persist and the magnitude of the effect of these conditions on the growth of our
markets and business, as well as our results of operations.
We also continue to encounter a highly competitive marketplace, particularly within our Packet-Optical Transport segment,
where we and our competitors have introduced new, high-capacity, high-speed network solutions and have aggressively sought
to capture market share. In this competitive environment, securing new opportunities, particularly in international markets,
often requires that we agree to less favorable initial pricing, commercial terms that can elongate the revenue recognition cycle,
startup costs to operationalize our solutions in customer networks, financial commitments or performance bonds that place cash
resources at risk, and other onerous contractual commitments that place a disproportionate allocation of risk upon the
vendor. These terms can adversely affect our results of operations and contribute to fluctuations in our results. We expect the
competitive landscape to remain challenging and dynamic as we and our competitors introduce new, competing platforms, as
networking technologies or features converge, and as competitors seek customer adoption of their network architectural
approaches. See the "Competition" section of Item 1, "Business," in Part I of this annual report for more information regarding
our competitive landscape. We expect the level of competition to continue and potentially increase, particularly in North
America, as Chinese equipment vendors seek to gain entry into the U.S. market, and other multinational competitors seek to
retain incumbent positions with large customers in the region.
Financial Results for Fourth Quarter of Fiscal 2012
Revenue for the fourth quarter of fiscal 2012 was $465.5 million, representing a sequential decrease of 1.8% from $474.1
million in the third quarter of fiscal 2012. Revenue-related details reflecting sequential changes from the third quarter of fiscal
2012 include:
•
•
•
•
•
•
Product revenue for the fourth quarter of fiscal 2012 decreased by $10.2 million, primarily reflecting a decrease in
Packet-Optical Switching revenue of $17.3 million and a decrease of $9.1 million in Packet-Optical Transport
revenue. These decreases were offset by an increase of $16.6 million in sales of Carrier-Ethernet Solutions.
Service revenue for the fourth quarter of fiscal 2012 increased by $1.7 million.
Revenue from the United States for the fourth quarter of fiscal 2012 was $249.5 million, an increase from $237.3
million in the third quarter of fiscal 2012.
International revenue for the fourth quarter of fiscal 2012 was $216.0 million, a decrease from $236.8 million in the
third quarter of fiscal 2012.
As a percentage of revenue, international revenue was 46.4% during the fourth quarter of fiscal 2012, a decrease from
49.9% during the third quarter of fiscal 2012.
For the fourth quarter of fiscal 2012, one customer accounted for greater than 10% of revenue, representing 11.3% of
total revenue. There were no customers that accounted for greater than 10% revenue in the third quarter of fiscal 2012.
Gross margin for the fourth quarter of fiscal 2012 was 41.3%, an increase from 38.2% in the third quarter of fiscal 2012.
Gross margin for the fourth quarter of fiscal 2012 benefited from a favorable mix within our Packet-Optical Transport revenue,
including an increased concentration of line cards for our 6500 Packet-Optical Platform, and improved margin relating to our
Software and Services, Packet-Optical Switching and Carrier-Ethernet Solutions segments.
Operating expense was $214.1 million for the fourth quarter of fiscal 2012, an increase from $196.6 million in the third
quarter of fiscal 2012. Increased operating expense for the fourth quarter described below, reflects, in part, the effect of an
additional week during the fiscal period, as compared to the third quarter of fiscal 2012. See Note 1 to our Consolidated
Financial Statements in Item 8 of Part II of this annual report describing our 53-week fiscal year for fiscal 2012. Fourth quarter
operating expense reflects an increase of $8.6 million in selling and marketing expense, primarily due to increased variable
compensation resulting from increased order flow, and product demonstration costs. Fourth quarter operating expense also
reflects an increase of $7.5 million in research and development expense relating to employee compensation and prototype
activity, and a $1.9 million increase in general and administrative expense due to employee compensation.
34
In spite of margin improvement in the fourth quarter of fiscal 2012, our lower revenue and increased operating expense
described above resulted in a loss from operations for the fourth quarter of fiscal 2012 of $21.9 million, as compared to a $15.3
million loss from operations during the third quarter of fiscal 2012. Our net loss for the fourth quarter of fiscal 2012 was $38.8
million, or $0.39 per share. This compares to a net loss of $29.8 million or $0.30 per share, for the third quarter of fiscal 2012.
We generated $10.6 million in cash from operations during the fourth quarter of fiscal 2012, consisting of $23.7 million
provided by net losses adjusted for non-cash charges partially offset by a $13.1 million use of cash related to changes in
working capital. This compares with $23.1 million provided by cash from operations during the third quarter of fiscal 2012,
consisting of $21.9 million from net losses adjusted for non-cash charges and $1.2 million in cash provided by changes in
working capital.
As of October 31, 2012, we had $642.4 million in cash and cash equivalents and $50.1 million of short-term investments in
U.S. treasury securities. This compares to $617.2 million in cash and cash equivalents and $50.1 million of short-term
investments in U.S. treasury securities at July 31, 2012. As of October 31, 2011, we had $541.9 million in cash and cash
equivalents and $50.3 million of long-term investments in U.S. treasury securities.
As of October 31, 2012, headcount was 4,481, an increase from 4,463 as of July 31, 2012 and an increase from 4,339 and
4,201 at October 31, 2011 and 2010, respectively.
35
Consolidated Results of Operations
We report our results of operations based on the following operating segments:
•
•
•
•
Packet-Optical Transport - includes optical transport solutions that increase network capacity and enable more rapid
delivery of a broader mix of high-bandwidth services. These products are used by network operators to facilitate the
cost effective and efficient transport of voice, video and data traffic in core, regional, metro and access networks.
Ciena's Packet-Optical Transport products support the efficient delivery of a wide variety of consumer-oriented
network services, as well as key managed service and enterprise applications. Ciena's principal products in this
segment include the 6500 Packet-Optical Platform, 4200 Advanced Services Platform, Corestream® Agility Optical
Transport System, 5100/5200 Advanced Services Platform, Common Photonic Layer (CPL), and 6100 Multiservice
Optical Platform. This segment also includes sales from legacy SONET/SDH, transport and data networking products,
as well as certain enterprise-oriented transport solutions that support storage and LAN extension, interconnection of
data centers, and virtual private networks. This segment also includes operating system software and enhanced
software features embedded in each of these products. Revenue from this segment is included in product revenue on
the Consolidated Statement of Operations.
Packet-Optical Switching - includes optical switching platforms that enable automated optical infrastructures for the
delivery of a wide variety of enterprise and consumer-oriented network services. Ciena's principal products in this
segment include its family of CoreDirector® Multiservice Optical Switches, its 5430 Reconfigurable Switching
System and its OTN configuration for the 5410 Reconfigurable Switching System. These products include
multiservice, multi-protocol switching systems that consolidate the functionality of an add/drop multiplexer, digital
cross-connect and packet switch into a single, high-capacity intelligent switching system. These products address both
the core and metro segments of communications networks and support key managed services, Ethernet/TDM Private
Line, Triple Play and IP services. This segment also includes sales of operating system software and enhanced
software features embedded in each of these products. Revenue from this segment is included in product revenue on
the Consolidated Statement of Operations.
Carrier-Ethernet Solutions - principally includes Ciena's 3000 family of service delivery switches and service
aggregation switches, the 5000 series of service aggregation switches, and its Carrier Ethernet packet configuration for
the 5410 Service Aggregation Switch. These products support the access and aggregation tiers of communications
networks and have principally been deployed to support wireless backhaul infrastructures and business data services.
Employing sophisticated Carrier Ethernet switching technology, these products deliver quality of service capabilities,
virtual local area networking and switching functions, and carrier-grade operations, administration, and maintenance
features. This segment also includes legacy broadband products that transition voice networks to support Internet-
based (IP) telephony, video services and DSL. This segment also includes sales of operating system software and
enhanced software features embedded in each of these products. Revenue from this segment is included in product
revenue on the Consolidated Statement of Operations.
Software and Services - includes the Ciena One software suite, including OneControl, the integrated network and
service management software designed to automate and simplify network management, operation and service delivery.
These software solutions can track individual services across multiple product suites, facilitating planned network
maintenance, outage detection and identification of customers or services affected by network performance. In
addition to Ciena One, this segment includes the ON-Center® Network & Service Management Suite, and the OMEA
and Preside platforms from the MEN Business. This segment also includes a broad range of consulting and support
services, including installation and deployment, maintenance support, consulting, network design and training
activities. Except for revenue from the software portion of this segment, which is included in product revenue, revenue
from this segment is included in services revenue on the Consolidated Statement of Operations.
Fiscal 2011 compared to Fiscal 2012
Revenue
The table below (in thousands, except percentage data) sets forth the changes in our operating segment revenue for the
periods indicated:
36
Revenue:
Packet-Optical Transport
Packet-Optical Switching
Carrier-Ethernet Solutions
Software and Services
Consolidated revenue
Fiscal Year
2011
%*
2012
%*
Increase
(decrease)
%**
$ 1,121,811
64.5
$ 1,172,159
63.9
$
148,395
127,868
343,896
8.5
7.3
19.7
132,705
131,693
397,366
7.2
7.2
21.7
$ 1,741,970
100.0
$ 1,833,923
100.0
$
50,348
(15,690)
3,825
53,470
91,953
4.5
(10.6)
3.0
15.5
5.3
_________________________________
*
Denotes % of total revenue
** Denotes % change from 2011 to 2012
•
•
•
•
Packet-Optical Transport revenue increased reflecting a $232.8 million increase in sales of our 6500 Packet-
Optical Platform, largely driven by service provider demand for high-capacity, optical transport for coherent 40G and
100G network infrastructures. This increase was partially offset by sales decreases of $82.1 million in our 4200
Advanced Services Platform, $40.0 million of 5100/5200 Advanced Services Platform, $25.2 million in legacy
transport products, $19.8 million in 6100 Multiservice Optical Platform and $15.4 million of CPL. This shift in
revenue reflects changing market demand as network operators adopt coherent, high-capacity network
infrastructures, and our focused marketing and development investment on our next-generation 6500 Packet-Optical
Platform that leverages the convergence of packet and optical networking technologies to enable a scalable,
programmable solution.
Packet-Optical Switching revenue decreased reflecting a $50.2 million decrease in sales of our CoreDirector®
Multiservice Optical Switches. Packet-Optical Switching revenue has historically reflected sales of our CoreDirector
platform, which has a concentrated customer base. As a result, revenue and gross margin for this segment can
fluctuate considerably depending upon individual customer purchasing decisions. Our Packet-Optical Switching
segment is in the midst of a platform transition to our next-generation 5430 Reconfigurable Switching System and the
OTN configuration for the 5410 Reconfigurable Switching System. These platforms reflect market and customer
demand for solutions that consolidate network features, such as OTN switching and transport, that leverage the
convergence of packet and optical networking technologies. As a result, Packet-Optical Switching benefited from a
$23.4 million increase in sales of our 5430 Reconfigurable Switching System, primarily relating to the completion of
an international, solutions-based, submarine network deployment, and an $11.1 million increase in sales of our OTN
configuration for the 5410 Reconfigurable Switching System.
Carrier-Ethernet Solutions revenue increased reflecting increases of $10.1 million in sales of our 3000 and 5000
families of service delivery and aggregation switches and a $5.9 million increase in sales of our 5410 Service
Aggregation Switch to support wireless backhaul, Ethernet business services and residential broadband applications.
These increases were partially offset by a $12.2 million reduction in sales of our legacy broadband products.
Software and Services revenue increased reflecting increases of $15.2 million in network transformation consulting
services, $15.0 million in installation and deployment, $13.3 million in maintenance and support services revenue
and $10.0 million in software sales.
Revenue from sales to customers outside of the United States is reflected as International in the geographic distribution of
revenue below. The table below (in thousands, except percentage data) sets forth the changes in geographic distribution of
revenue for the periods indicated:
United States
International
Total
Fiscal Year
2011
%*
2012
%*
Increase
(decrease)
%**
$
930,880
811,090
53.4
46.6
$
972,576
861,347
$ 1,741,970
100.0
$ 1,833,923
53.0
47.0
100.0
$
$
41,696
50,257
91,953
4.5
6.2
5.3
_________________________________
37
*
Denotes % of total revenue
** Denotes % change from 2011 to 2012
•
•
United States revenue reflects increases of $31.6 million in Software and Services revenue, $28.7 million in Packet-
Optical Transport sales and $5.4 million in Carrier-Ethernet Solutions sales. These increases were partially offset by a
decrease of $24.0 million in Packet-Optical Switching sales.
International revenue reflects increases of $21.8 million in Software and Services revenue, $21.7 million in Packet-
Optical Transport sales and $8.3 million in Packet-Optical Switching sales. These increases were slightly offset by a
decrease of $1.5 million in Carrier-Ethernet Solutions sales.
A sizable portion of our revenue continues to come from sales to a small number of service providers. As a result, our
financial results are significantly affected by and can fluctuate depending upon spending levels and the business opportunities
and challenges encountered by our service provider customers. Some of our customers have indicated a procurement strategy to
reduce the number of vendors from which they purchase equipment, which could further affect our concentration of revenue
where we participate in these efforts. Sales to AT&T were $269.9 million, or 15.5% of total revenue, in fiscal 2011 and $248.1
million, or 13.5% of total revenue, in fiscal 2012. We did not have any other customers accounting for greater than 10% of our
revenue in fiscal 2011 or 2012.
Cost of Goods Sold and Gross Profit
Product cost of goods sold consists primarily of amounts paid to third-party contract manufacturers, component costs,
employee-related costs and overhead, shipping and logistics costs associated with manufacturing-related operations, warranty
and other contractual obligations, royalties, license fees, amortization of intangible assets, cost of excess and obsolete inventory
and, when applicable, estimated losses on committed customer contracts.
Services cost of goods sold consists primarily of direct and third-party costs, including employee-related costs, associated
with our provision of services including installation, deployment, maintenance support, consulting and training activities, and,
when applicable, estimated losses on committed customer contracts.
Our gross profit as a percentage of revenue, or “gross margin,” is susceptible to fluctuations due to a number of factors. In
any given period, gross margin can vary significantly depending upon the mix and concentration of revenue by segment,
product line within a particular segment, geography, and customers. Gross margin can also be affected by our concentration of
lower margin "commons" equipment sales and higher margin channel cards, the mix of lower margin installation services
within our service revenue, our introduction of new products, and changes in expense for excess and obsolete inventory and
warranty obligations. We expect that gross margins will be subject to fluctuation based on our level of success in driving
product cost reductions, rationalizing our supply chain and consolidating third party contract manufacturers and distribution
sites as part of our effort to optimize our operations. Gross margin can also be adversely affected by the level of pricing
pressure and competition that we encounter in the market. In an effort to retain or secure customers, enter new markets or
capture market share, we may agree to pricing or other unfavorable commercial terms that result in lower or negative gross
margins on a particular order or group of orders. These market dynamics and factors may adversely affect our gross margins
and results of operations in certain periods.
Service gross margin can be affected by the mix of customers and services, particularly the mix between deployment and
maintenance services, geographic mix and the timing and extent of any investments in internal resources to support this
business.
The tables below (in thousands, except percentage data) set forth the changes in revenue, cost of goods sold and gross profit
for the periods indicated:
Total revenue
Total cost of goods sold
Gross profit
Fiscal Year
2011
%*
2012
%*
Increase
(decrease)
%**
$ 1,741,970
1,032,824
$
709,146
100.0
$ 1,833,923
59.3
40.7
1,109,699
$
724,224
100.0
60.5
39.5
$
$
91,953
76,875
15,078
5.3
7.4
2.1
_________________________________
38
*
Denotes % of total revenue
** Denotes % change from 2011 to 2012
Fiscal Year
2011
%*
2012
%*
Increase
(decrease)
%**
Product revenue
Product cost of goods sold
Product gross profit
$ 1,406,532
100.0
$ 1,454,991
825,969
$
580,563
58.7
41.3
868,805
$
586,186
100.0
59.7
40.3
$
$
48,459
42,836
5,623
3.4
5.2
1.0
_________________________________
*
Denotes % of product revenue
** Denotes % change from 2011 to 2012
Service revenue
Service cost of goods sold
Service gross profit
Fiscal Year
2011
335,438
206,855
128,583
$
$
%*
100.0
61.7
38.3
$
$
2012
378,932
240,894
138,038
%*
Increase
(decrease)
%**
100.0
63.6
36.4
$
$
43,494
34,039
9,455
13.0
16.5
7.4
_________________________________
*
Denotes % of service revenue
** Denotes % change from 2011 to 2012
• Gross profit as a percentage of revenue decreased as a result of the factors described below.
• Gross profit on products as a percentage of product revenue decreased, primarily due to a higher concentration of
lower margin product revenue within our Packet-Optical Switching segment, increased warranty expense and
provisions for inventory excess and obsolescence, partially offset by higher margin on our Packet-Optical Transport
products.
• Gross profit on services as a percentage of services revenue decreased due to a higher concentration of lower
margin installation and deployment services for international solutions-based projects.
Operating Expense
Operating expense consists of the component elements described below. We expect operating expense to increase in fiscal
2013 from the level reported for fiscal 2012 to support the growth of our business and fund our research and development
initiatives.
Research and development expense primarily consists of salaries and related employee expense (including share-based
compensation expense), prototype costs relating to design, development, and testing of our products, depreciation expense
and third-party consulting costs.
Sales and marketing expense primarily consists of salaries, commissions and related employee expense (including
share-based compensation expense), and sales and marketing support expense, including travel, demonstration units, trade
show expense and third-party consulting costs.
General and administrative expense primarily consists of salaries and related employee expense (including share-
based compensation expense), and costs for third-party consulting and other services.
Amortization of intangible assets primarily reflects purchased technology and customer relationships from our
acquisitions.
39
The table below (in thousands, except percentage data) sets forth the changes in operating expense for the periods
indicated:
Fiscal Year
2011
%*
2012
%*
Increase
(decrease)
%**
Research and development
$
379,862
Selling and marketing
General and administrative
Acquisition and integration costs
Amortization of intangible assets
Restructuring costs
Change in fair value of contingent
consideration
Total operating expenses
251,990
126,242
42,088
69,665
5,781
(3,289)
$
872,339
_________________________________
*
Denotes % of total revenue
** Denotes % change from 2011 to 2012
21.8
14.5
7.2
2.4
4.0
0.3
(0.2)
50.0
$
364,179
266,338
114,002
—
51,697
7,854
—
$
19.9
14.5
6.2
—
2.8
0.4
—
$
804,070
43.8
$
(15,683)
14,348
(12,240)
(42,088)
(17,968)
2,073
3,289
(68,269)
(4.1)
5.7
(9.7)
(100.0)
(25.8)
35.9
(100.0)
(7.8)
•
•
Research and development expense benefited from $6.8 million as a result of foreign exchange rates, primarily due
to the strengthening of the U.S. dollar in relation to the Canadian dollar and the Indian Rupee. The $15.7
million decrease primarily reflects decreases of $11.0 million in employee compensation and related costs, $4.2
million in depreciation expense and $2.8 million in prototype expense. This was partially offset by an increase of $3.2
million for facilities and information systems expense.
Selling and marketing expense benefited from $4.5 million due to foreign exchange rates, primarily due to the
strengthening of the U.S. dollar in relation to the Euro and the Canadian dollar. The $14.3 million increase primarily
reflects increases of $9.9 million in employee compensation, a portion of which relates to increases in variable
compensation due to our level of order flow, $4.2 million in facilities and information systems expense and $2.1
million of travel and related costs. This increase was partially offset by decreases of $1.0 million each in trade show
and advertising expense.
• General and administrative expense decreased by $12.2 million primarily related to decreases of $4.9 million in
professional services, $4.4 million in employee compensation and related costs largely related to reduced share-based
compensation expense, and $2.3 million in facilities and information systems expense.
•
•
•
•
Acquisition and integration costs principally consist of transaction, consulting and third party service fees related to
the acquisition and integration of the MEN Business into the combined operations. This integration activity was
substantially completed in the first half of fiscal 2011.
Amortization of intangible assets decreased due to certain intangible assets from the MEN Business reaching the end
of their economic lives during fiscal 2011. See Note 2 to our Consolidated Financial Statements in Item 8 of Part II of
this annual report.
Restructuring costs for fiscal 2011 and 2012 primarily reflect certain severance and related expense associated with
headcount reductions and restructuring activities to align our workforce and resources with market opportunities and
research and development initiatives. In addition, restructuring costs for fiscal 2102 include the consolidation of
certain facilities located within Maryland.
Change in fair value of contingent consideration relates to the contingent refund right we received as part of the
acquisition of the MEN Business associated with the early termination of the Carling lease. During the first quarter of
fiscal 2011, Ciena received both notice of early termination from Nortel shortening the Carling lease to five years and
as a result reported a $3.3 million gain. See Note 2 to our Consolidated Financial Statements in Item 8 of Part II of this
annual report for additional information.
Other items
The table below (in thousands, except percentage data) sets forth the changes in other items for the periods indicated:
40
Fiscal Year
2011
%*
2012
%*
Increase
(decrease)
%**
Interest and other income (loss), net
Interest expense
Gain on cost method investment
Provision for income taxes
$
$
$
$
6,022
37,926
7,249
7,673
0.3
2.2
0.4
0.4
$
$
$
$
(15,200)
39,653
—
9,322
(0.8) $
$
2.2
— $
0.5
$
(21,222)
1,727
(7,249)
1,649
(352.4)
4.6
100.0
21.5
_________________________________
*
Denotes % of total revenue
** Denotes % change from 2011 to 2012
•
•
Interest and other income (loss), net decreased due to a $7.7 million non-cash loss in fiscal 2012 related to the
foreign exchange rates on assets and liabilities denominated in a currency other than the relevant functional currency
as compared to a $4.3 million non-cash gain in fiscal 2011. Interest and other income (loss), net was also affected by a
$6.6 million non-cash loss in fiscal 2012 related to the change in fair value of the embedded redemption feature
associated with our 4.0% convertible senior notes due March 15, 2015, as compared to a $2.8 million non-cash gain in
fiscal 2011.
Interest expense increased due to an additional week of interest expense from our convertible notes payable in fiscal
2012 and the addition of our asset backed loan commitment.
• Gain on cost method investment for fiscal 2011 was the result of the sale of a privately held technology company in
which we held a minority equity investment.
•
Provision for income taxes increased primarily due to increased foreign taxes related to additional foreign activity.
Fiscal 2010 compared to Fiscal 2011
On March 19, 2010, Ciena completed its acquisition (the "MEN Acquisition") of the optical networking and Carrier
Ethernet assets of Nortel's Metro Ethernet Business (the "MEN Business"). As a result of this acquisition, our results of
operations for fiscal 2010 do not include a full year of MEN Business activity. The MEN Acquisition materially affected our
operations and financial results. These effects include:
•
•
•
•
•
In fiscal 2010, we paid the $676.8 million purchase price for the MEN Acquisition in cash and issued $375.0
million in aggregate principal amount of 4.0% convertible senior notes due March 15, 2015, in part to fund the
purchase price. See Note 2 and Note 13 of the Consolidated Financial Statements found under Item 8 of Part II of
this annual report;
Our revenue increased materially, as not all of fiscal 2010 reflects the addition of the MEN Business due to the
timing of the MEN Acquisition;
Our concentration of Packet-Optical Transport revenue and revenue from outside of the United States increased.;
Gross margin was adversely affected by the valuation, required under accounting rules, of the acquired finished
goods inventory of the MEN Business to fair value upon closing. This valuation increased marketable inventory
carrying value by $62.3 million, of which $48.0 million and $14.3 million were recognized in cost of goods sold
during fiscal 2010 and 2011, respectively;
Our operating expense increased materially after the MEN Acquisition, reflecting:
the addition of approximately 2,000 employees, nearly doubling our headcount;
increased operating costs associated with a significantly expanded, global business;
increased amortization costs relating to the acquisition of $492.4 million in intangible assets;
transition service expense for services performed by a Nortel affiliate through the second quarter of fiscal
2011, relating to finance and accounting functions, supply chain and logistics management, maintenance
and product support, order management and fulfillment, trade compliance, and information technology;
and
integration-related costs, including transaction, consulting and third party service fees, severance and
purchases of capitalized information technology equipment of $122.3 million and $59.6 million for fiscal
2010 and 2011, respectively.
41
In reviewing our financial results, investors should consider these and other factors in order to better understand period to
period comparisons.
Revenue
The table below (in thousands, except percentage data) sets forth the changes in our operating segment revenue for the
periods indicated:
Revenue:
Packet-Optical Transport
Packet-Optical Switching
Carrier-Ethernet Solutions
Software and Services
Consolidated revenue
Fiscal Year
2010
%*
2011
%*
Increase
(decrease)
%**
$
705,551
57.0
$ 1,121,811
64.5
$
416,260
112,058
179,083
239,944
9.1
14.5
19.4
148,395
127,868
343,896
8.5
7.3
19.7
36,337
(51,215)
103,952
$ 1,236,636
100.0
$ 1,741,970
100.0
$
505,334
59.0
32.4
(28.6)
43.3
40.9
_________________________________
*
Denotes % of total revenue
** Denotes % change from 2010 to 2011
•
•
•
•
Packet-Optical Transport revenue increased reflecting a $377.8 million increase in sales of our 6500 Packet-Optical
Platform, largely driven by service provider demand for high-capacity, optical transport, including coherent 40G and
100G network infrastructures. Packet-Optical Transport revenue also benefited from sales increases of $23.4 million in
4200 Advanced Services Platform, $19.9 million in 6100 Multiservice Optical Platform, $15.9 million in 5100/5200
Advanced Services Platform, and $10.2 million in CPL. These increases were partially offset by decreases of $25.6
million in Corestream® Agility Optical Transport System and $5.1 million in legacy transport products.
Packet-Optical Switching revenue increased reflecting a $21.3 million increase in sales of our 5430 Reconfigurable
Switching System and a $14.1 million increase in sales of our CoreDirector® Multiservice Optical Switches. Packet-
Optical Switching revenue has historically reflected sales of our CoreDirector platform, which has a concentrated
customer base.
Carrier-Ethernet Solutions revenue increased reflecting a $51.6 million decrease in sales of our 3000 and 5000
families of service delivery switches and service aggregation switches and an $8.7 million decrease in sales of our
legacy metro Ethernet and broadband products. Carrier Ethernet Service Delivery revenue benefited from $9.1 million
in initial revenue from the introduction of the 5410 Service Aggregation Switch to support wireless backhaul, Ethernet
business services and residential broadband applications.
Software and Services revenue increased reflecting a $66.1 million increase in maintenance support revenue and a
$42.0 million increase in installation, deployment and consulting services.
Revenue from sales to customers outside of the United States is reflected as International in the geographic distribution of
revenue below. The table below (in thousands, except percentage data) sets forth the changes in geographic distribution of
revenue for the periods indicated:
United States
International
Total
Fiscal Year
2010
%*
2011
%*
Increase
(decrease)
%**
$
744,232
492,404
$ 1,236,636
60.2
$
930,880
39.8
100.0
811,090
$ 1,741,970
53.4
46.6
100.0
$
$
186,648
318,686
505,334
25.1
64.7
40.9
_________________________________
*
Denotes % of total revenue
** Denotes % change from 2010 to 2011
42
•
•
United States revenue increased primarily due to a $185.2 million increase in sales of Packet-Optical Transport
products, a $38.3 million increase in Software and Services revenue and a $17.4 million increase in Packet-Optical
Switching products. These increases were partially offset by a $54.2 million decrease in Carrier Ethernet Solutions
sales.
International revenue increased primarily due to a $231.1 million increase in Packet-Optical Transport revenue, a
$65.7 million increase in Software and Services revenue and an $18.9 million increase in sales of Packet-Optical
Switching products.
Cost of Goods Sold and Gross Profit
The tables below (in thousands, except percentage data) set forth the changes in revenue, cost of goods sold and gross profit
for the periods indicated:
Total revenue
Total cost of goods sold
Gross profit
Fiscal Year
2010
%*
2011
%*
Increase
(decrease)
%**
$ 1,236,636
739,135
497,501
$
100.0
$ 1,741,970
59.8
40.2
1,032,824
709,146
$
100.0
59.3
40.7
$
$
505,334
293,689
211,645
40.9
39.7
42.5
_________________________________
Denotes % of total revenue
*
** Denotes % change from 2010 to 2011
Fiscal Year
2010
%*
2011
%*
Increase
(decrease)
%**
Product revenue
Product cost of goods sold
Product gross profit
$ 1,009,239
100.0
$ 1,406,532
596,704
$
412,535
59.1
40.9
825,969
$
580,563
100.0
58.7
41.3
$
$
397,293
229,265
168,028
39.4
38.4
40.7
_________________________________
*
Denotes % of product revenue
** Denotes % change from 2010 to 2011
Service revenue
Service cost of goods sold
Service gross profit
Fiscal Year
2010
227,397
142,431
84,966
$
$
%*
100.0
62.6
37.4
$
$
2011
335,438
206,855
128,583
%*
Increase
(decrease)
%**
100.0
61.7
38.3
$
$
108,041
64,424
43,617
47.5
45.2
51.3
_________________________________
*
Denotes % of service revenue
** Denotes % change from 2010 to 2011
• Gross profit as a percentage of revenue increased as a result of the factors described below.
• Gross profit on products as a percentage of product revenue increased despite less favorable product mix in fiscal
2011, largely as a result of the adverse effect, in fiscal 2010, of a number of items relating to the MEN Acquisition that
increased costs of goods sold in that period. These items included $48.0 million related to the revaluation of inventory
as of the date of the MEN Acquisition and $6.6 million in excess purchase commitment losses on Ciena's pre-
43
acquisition inventory relating to product rationalization decisions. Fiscal 2011 cost of goods sold included $14.3
million related to the revaluation of inventory above and an $8.8 million increase in amortization of intangible assets.
• Gross profit on services as a percentage of services revenue increased due to higher concentration of professional
services as a percentage of revenue, and improved operational efficiencies.
Operating expense
The table below (in thousands, except percentage data) sets forth the changes in operating expense for the periods
indicated:
Fiscal Year
2010
%*
2011
%*
Increase
(decrease)
%**
Research and development
$
327,626
Selling and marketing
General and administrative
Acquisition and integration costs
Amortization of intangible assets
Restructuring costs
Change in fair value of contingent
consideration
Total operating expenses
193,515
102,692
101,379
99,401
8,514
26.5
15.6
8.3
8.2
8.0
0.7
$
379,862
251,990
126,242
42,088
69,665
5,781
$
21.8
14.5
7.2
2.4
4.0
0.3
52,236
58,475
23,550
(59,291)
(29,736)
(2,733)
(13,807)
$
819,320
(1.1)
66.2
$
(3,289)
872,339
(0.2)
50.0
$
10,518
53,019
15.9
30.2
22.9
(58.5)
(29.9)
(32.1)
(76.2)
6.5
_________________________________
*
Denotes % of total revenue
** Denotes % change from 2010 to 2011
•
•
Research and development expense was adversely affected by $12.2 million as a result of foreign exchange rates,
primarily due to the weakening of the U.S. dollar in relation to the Canadian dollar. The $52.2 million increase
primarily reflects increases of $47.4 million in employee compensation and related costs, $13.6 million in facilities
and information systems, $4.8 million in depreciation expense and $2.5 million in professional services and fees.
These increases were partially offset by decreases of $9.6 million in prototype expense and a $5.5 million benefit
related to a conditional grant from the Province of Ontario. For additional information regarding the Ontario Grant,
see Note 21 of the Consolidated Financial Statements found under Item 8 of Part II of this annual report.
Selling and marketing expense was adversely affected by $2.5 million due to foreign exchange rates, primarily due
to the weakening of the U.S. dollar in relation to the Euro and the Canadian dollar. The $58.5 million increase
primarily reflects increases of $37.9 million in employee compensation and related costs, $6.0 million in facilities and
information systems, $5.2 million in travel-related expenditures, $4.8 million in marketing program costs, $2.7 million
in prototype expense and $2.0 million in professional services and fees.
• General and administrative expense increased by $21.5 million in employee compensation and related costs,
reflecting increased administrative support service requirements relating to the growth in operations from the MEN
Business and the termination of transition support services following the MEN Acquisition.
•
•
•
Acquisition and integration costs principally consist of transaction, consulting and third party service fees related to
the acquisition and integration of the MEN Business into the combined operations. This integration activity was
substantially completed in the first half of fiscal 2011.
Amortization of intangible assets decreased due to certain intangible assets from the MEN Acquisition reaching the
end of their economic lives during fiscal 2011. See Note 2 to our Consolidated Financial Statements in Item 8 of Part
II of this annual report.
Restructuring costs primarily reflect the headcount reductions and restructuring activities described in the “Overview
— Acquisition of Nortel Metro Ethernet Networks Business and Effect on Results of Operations and Financial
Condition ” above.
44
•
Change in fair value of contingent consideration is related to the contingent refund right we received as part of the
MEN Acquisition relating to the early termination of the Carling lease. See Note 2 to our Consolidated Financial
Statements in Item 8 of Part II of this annual report for additional information.
Other items
The table below (in thousands, except percentage data) sets forth the changes in other items for the periods indicated:
Fiscal Year
2010
%*
2011
%*
Increase
(decrease)
%**
Interest and other income (loss), net
Interest expense
Gain on cost method investments
Gain on extinguishment of debt
Provision for income taxes
$
$
$
$
$
3,917
18,619
—
4,948
1,941
_________________________________
*
Denotes % of total revenue
** Denotes % change from 2010 to 2011
0.3
1.5
$
$
— $
0.4
0.2
$
$
6,022
37,926
7,249
—
7,673
0.3
2.2
0.4
0.0
0.4
$
$
$
$
$
2,105
19,307
7,249
(4,948)
5,732
53.7
103.7
100.0
(100.0)
295.3
•
•
Interest and other income (loss), net increased due to a $2.8 million positive effect of foreign exchange rates on
assets and liabilities denominated in a currency other than the relevant functional currency. Fiscal 2010 reflects a $2.0
million charge relating to the termination of an indemnification asset upon the expiration of the statute of limitations
applicable to one of the uncertain tax contingencies acquired as part of the MEN Acquisitions.
Interest expense increased due to our issuance during fiscal 2010 of $375.0 million in aggregate principal amount of
4.0% convertible senior notes due March 15, 2015 and $350.0 million in aggregate principal amount of 3.75%
convertible senior notes due October 15, 2018. See Note 13 to the Consolidated Financial Statements found under
Item 8 of Part II of this annual report.
• Gain on cost method investments for fiscal 2011 was the result of the sale of a privately held technology company in
which we held a minority equity investment.
• Gain on extinguishment of debt for fiscal 2010 resulted from our repurchase of $81.8 million in aggregate principal
amount of our outstanding 0.25% convertible notes in privately negotiated transactions for $76.1 million. We recorded
a gain on the extinguishment of debt in the amount of $4.9 million, which consists of the $5.7 million gain from the
repurchase of the notes, less $0.8 million of associated debt issuance costs.
•
Provision for income taxes increased primarily due to increased foreign taxes.
Segment Profit (Loss)
The table below (in thousands, except percentage data) sets forth the changes in our segment profit (loss) for the respective
periods:
Segment profit (loss):
Packet-Optical Transport
Packet-Optical Switching
Carrier-Ethernet Solutions
Software and Services
_________________________________
Fiscal Year
2011
2012
Increase
(decrease)
%*
$
$
$
$
191,727
49,286
10,849
77,422
$
$
$
$
$
242,137
$
22,842
(4,066) $
$
99,132
50,410
(26,444)
(14,915)
21,710
26.3
(53.7)
(137.5)
28.0
45
*
Denotes % change from 2011 to 2012
•
•
•
•
Packet-Optical Transport segment profit increased primarily due to increased sales volume and decreased research
and development costs, partially offset by decreased gross margin.
Packet-Optical Switching segment profit decreased primarily due to lower gross margins related to a change in
product mix as described in our operating segment revenue discussion above, and decreased sales volume, partially
offset by decreased research and development costs.
Carrier-Ethernet Solutions segment loss in fiscal 2012, as compared to segment profit in fiscal 2011, was primarily
due to increased research and development costs and decreased gross margin, partially offset by increased sales
volume.
Software and Services segment profit increased primarily due to increased sales volume and decreased research and
development costs, partially offset by a higher concentration of revenue from lower margin installation and
deployment services for international solutions-based projects.
The table below (in thousands, except percentage data) sets forth the changes in our segment profit (loss) for the respective
periods:
Segment profit (loss):
Packet-Optical Transport
Packet-Optical Switching
Carrier-Ethernet Solutions
Software and Services
_________________________________
*
Denotes % change from 2010 to 2011
Fiscal Year
2010
2011
Increase
(decrease)
%*
$
$
$
$
69,319
15,662
28,742
56,152
$
$
$
$
191,727
49,286
10,849
77,422
$
$
$
$
122,408
33,624
(17,893)
21,270
176.6
214.7
(62.3)
37.9
•
•
•
•
Packet-Optical Transport segment profit increased primarily due to higher sales volume. Segment profit during
fiscal 2010 was adversely affected by the revaluation of the acquired finished goods inventory of the MEN Business to
fair value upon closing and the excess purchase commitment losses on Ciena's pre-acquisition inventory relating to
product rationalization decisions described above.
Packet-Optical Switching segment profit increased due to higher sales volume and decreased research and
development costs, partially offset by lower product gross margin.
Carrier-Ethernet Solutions segment profit decreased due to lower sales volume, partially offset by higher gross
margin and decreased research and development costs.
Software and Services segment profit was significantly affected by the MEN Acquisition. Segment profit increased
due to increased sales volume, partially offset by increased research and development costs.
Liquidity and Capital Resources
At October 31, 2012, our principal sources of liquidity were cash and cash equivalents and short-term investments in
marketable debt securities, representing U.S. treasuries. The following table sets forth (in thousands) changes in our cash and
cash equivalents and investments in marketable debt securities (in thousands):
Cash and cash equivalents
Short-term investments in marketable debt securities
Long-term investments in marketable debt securities
October 31,
2011
2012
Increase
(decrease)
$
541,896
$
642,444
$
100,548
—
50,264
50,057
—
50,057
(50,264)
Total cash and cash equivalents and investments in marketable debt
securities
$
592,160
$
692,501
$
100,341
46
The change in total cash and cash equivalents and investments in marketable debt securities during fiscal 2012 was
primarily related to the following:
•
•
•
$107.1 million cash generated by operations, consisting of $92.6 million from net losses adjusted for non-cash charges
and $14.5 million for changes in working capital;
$12.2 million from proceeds of stock issuances under our employee stock purchase plan and the exercise of stock
options, slightly offset by $2.3 million of debt issuance costs and $1.9 million for the repayment of capital lease
obligations; and
$48.1 million for purchases of equipment, furniture, fixtures and intellectual property, partially offset by $35.6 million
transferred from restricted cash as a result of reductions in cash collateral required to support our standby letters of
credit described below.
On August 13, 2012, we entered into a $150.0 million senior secured asset-based revolving credit facility (the “Credit
Facility”). See Note 14 to our Consolidated Financial Statements included in Item 8 of Part II of this annual report for a
summary of the material terms and conditions of this Credit Facility. We principally expect to use the Credit Facility to support
the issuance of letters of credit that arise in the ordinary course of our business and thereby to reduce our use of cash required
to collateralize these instruments. As of October 31, 2012, letters of credit totaling $50.8 million were collateralized by the
Credit Facility. There were no borrowings outstanding under the Credit Facility as of October 31, 2012. Ciena expects to satisfy
the financial criteria such that the Credit Facility will not early mature on January 31, 2013.
We regularly evaluate our liquidity position, debt obligations, and anticipated cash needs to fund our operating plans and
may consider capital raising and other market opportunities that may be available to us. Based on past performance and current
expectations, we believe that our cash, cash equivalents and investments will satisfy our working capital needs, capital
expenditures, the repayment of our outstanding 0.25% convertible senior notes due May 1, 2013 and other liquidity
requirements associated with our operations through at least the next 12 months.
The following sections set forth the components of our $107.1 million of cash generated by operating activities for fiscal
2012:
Net loss adjusted for non-cash charges
The following tables set forth (in thousands) our net loss adjusted for non-cash charges during the period:
Net loss
Adjustments for non-cash charges:
Change in fair value of embedded redemption feature
Depreciation of equipment, furniture and fixtures, and amortization of leasehold improvements
Share-based compensation costs
Amortization of intangible assets
Provision for inventory excess and obsolescence
Provision for warranty
Other
Net losses adjusted for non-cash charges
$
Working Capital
Accounts Receivable, Net
Year ended
October 31, 2012
$
(144,021)
6,600
59,099
32,394
74,497
23,438
33,418
7,122
92,547
Cash generated by accounts receivable during fiscal 2012, net of $1.6 million in provision for doubtful accounts, was $70.4
million. Our days sales outstanding (DSOs) decreased from 86 days for fiscal 2011 to 69 days for fiscal 2012. DSOs decreased
largely due to improved operational efficiencies from the redesign of billing and collection processes and systems.
The following table sets forth (in thousands) changes to our accounts receivable, net of allowance for doubtful accounts,
from the end of fiscal 2011 through the end of fiscal 2012:
47
Accounts receivable, net
Inventory
October 31,
2011
2012
Increase
(decrease)
$
417,509
$
345,496
$
(72,013)
Cash used by inventory during fiscal 2012 was $53.5 million. Our inventory turns decreased from 3.6 turns during fiscal
2011 to 3.3 turns during fiscal 2012. During fiscal 2012, changes in inventory reflect a $23.4 million reduction related to a non-
cash provision for excess and obsolescence of which $15.2 million was scrapped. The following table sets forth (in thousands)
changes to the components of our inventory from the end of fiscal 2011 through the end fiscal 2012:
Raw materials
Work-in-process
Finished goods
Deferred cost of goods sold
Gross inventory
Provision for inventory excess and obsolescence
Inventory
Prepaid expenses and other
October 31,
2011
2012
Increase
(decrease)
$
45,333
$
39,678
$
13,851
134,998
67,665
261,847
(31,771)
230,076
$
10,736
178,210
71,484
300,108
(40,010)
260,098
$
$
(5,655)
(3,115)
43,212
3,819
38,261
(8,239)
30,022
Cash generated by prepaid expense and other during fiscal 2012 was $1.7 million, primarily related to decreases in prepaid
taxes and product demonstration units, partially offset by increases in other non-trade receivables and deferred deployment
expense.
Accounts payable, accruals and other obligations
Cash generated by accounts payable, accruals and other obligations during fiscal 2012 was $12.6 million. This amount
reflects a $49.6 million increase in our accounts payable, accruals and other obligations, and an additional $1.2 million related
to payments for previously accrued equipment purchases, less non-cash provisions of $33.4 million related to warranties and
$4.8 million for financing activities related to unpaid capital leases. The following table sets forth (in thousands) changes in our
accounts payable, accruals and other obligations from the end of fiscal 2011 through the end of fiscal 2012:
Accounts payable
Accrued liabilities
Other long-term obligations
Accounts payable, accruals and other obligations
Interest Paid on Convertible Notes and Credit Facility
October 31,
2011
2012
Increase
(decrease)
$
$
157,116
$
179,704
$
197,004
17,263
209,540
31,779
371,383
$
421,023
$
22,588
12,536
14,516
49,640
Interest on our outstanding 0.25% convertible senior notes, due May 1, 2013, is payable on May 1 and November 1 of each
year. We paid $0.8 million in interest on these convertible notes during fiscal 2012.
Interest on our outstanding 4.0% convertible senior notes, due March 15, 2015, is payable on March 15 and September 15
of each year. We paid $15.0 million in interest on these convertible notes during fiscal 2012.
Interest on our outstanding 0.875% convertible senior notes, due June 15, 2017, is payable on June 15 and December 15 of
each year. We paid $4.4 million in interest on these convertible notes during fiscal 2012.
48
Interest on our outstanding 3.75% convertible senior notes, due October 15, 2018, is payable on April 15 and October 15 of
each year. We paid $13.1 million in interest on these convertible notes during fiscal 2012.
During fourth quarter of fiscal 2012, Ciena utilized the Credit Facility to collateralize certain standby letters of credit. We
paid $0.2 million in commitment fees, interest expense and other administrative charges relating to the Credit Facility during
fiscal 2012.
For additional information about our convertible notes, see Note 13 to our Consolidated Financial Statements included in
Item 8 of Part II of this annual report. See Note 22 to the Consolidated Financial Statements in Item 8 of Part II of this annual
report for information relating to Ciena's pending private exchange transactions relating to a portion of our outstanding 4.0%
convertible senior notes, due March 15, 2015, and the issuance of new 4.0% convertible senior notes, due December 15, 2020.
For additional information about the Credit Facility, see Note 14 to our Consolidated Financial Statements included in Item 8 of
Part II of this report.
Deferred revenue
Deferred revenue decreased by $16.7 million during fiscal 2012. Product deferred revenue represents payments received in
advance of shipment and payments received in advance of our ability to recognize revenue. Services deferred revenue is related
to payment for service contracts that will be recognized over the contract term. The following table reflects (in thousands) the
balance of deferred revenue and the change in this balance from the end of fiscal 2011 through the end of fiscal 2012:
Products
Services
Total deferred revenue
Contractual Obligations
October 31,
2011
2012
Increase
(decrease)
$
$
42,915
80,883
123,798
$
$
29,279
77,797
107,076
$
$
(13,636)
(3,086)
(16,722)
During fiscal 2012, we entered into a lease relating to office space for our new corporate headquarters in Hanover,
Maryland, consisting of a rentable area of approximately 154,100 square feet. The future minimal rental commitments to be
paid over the 15-year lease term are approximately $61.8 million. The following is a summary of our future minimum
payments under contractual obligations as of October 31, 2012 (in thousands):
Interest due on convertible notes
$
138,395
$
32,770
$
57,500
$
35,000
$
13,125
Principal due at maturity on convertible notes
1,441,210
216,210
375,000
500,000
350,000
Total
Less than one
year
One to three
years
Three to five
years
Thereafter
Operating leases (1)
Capital lease
Other obligations
Purchase obligations (2)
Total (3)
_________________________________
145,601
6,328
1,856
165,617
31,381
3,040
879
165,617
48,497
3,288
977
—
19,597
—
—
—
46,126
—
—
—
$ 1,899,007
$
449,897
$
485,262
$
554,597
$
409,251
(1)
(2)
(3)
The amount for operating leases above does not include variable insurance, taxes, maintenance and other costs
required by the applicable operating lease. These costs are not expected to have a material future impact.
Purchase obligations relate to purchase order commitments to our contract manufacturers and component suppliers for
inventory. In certain instances, we are permitted to cancel, reschedule or adjust these orders. Consequently, only a
portion of the amount reported above relates to firm, non-cancelable and unconditional obligations.
As of October 31, 2012, we also had approximately $11.5 million of other long-term obligations in our Consolidated
Balance Sheet for unrecognized tax positions that are not included in this table because the timing or amount of any
cash settlement with the respective tax authority cannot be reasonably estimated.
49
Some of our commercial commitments, including some of the future minimum payments in operating leases set forth
above and certain commitments to customers, are secured by standby letters of credit collateralized under our Credit Facility or
restricted cash. Restricted cash balances are included in other current assets or other long-term assets depending upon the
duration of the underlying letter of credit obligation. Use of restricted cash to support these standby letters of credit decreased
significantly during fiscal 2012 as we utilized our Credit Facility to replace cash previously required to collateralize these
obligations. See Note 14 to our Consolidated Financial Statements included in Item 8 of Part II of this annual report for a
summary of the material terms and condition of the Credit Facility. The following is a summary of our commercial
commitments secured by standby letters of credit by commitment expiration date as of October 31, 2012 (in thousands):
Standby letters of credit
$
56,101
$
49,980
$
3,852
$
14 $
2,255
Total
Less than one
year
One to
three years
Three to
five years
Thereafter
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet financing arrangements. In particular, we do not have any equity interests in so-
called limited purpose entities, which include special purpose entities (SPEs) and structured finance entities.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires that we make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue and expense, and related disclosure of contingent assets and liabilities. By their
nature, these estimates and judgments are subject to an inherent degree of uncertainty. On an ongoing basis, we reevaluate our
estimates, including those related to share-based compensation, bad debts, inventories, intangible and other long-lived assets,
income taxes, warranty obligations, restructuring, derivatives and hedging, and contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.
Among other things, these estimates form the basis for judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
To the extent that there are material differences between our estimates and actual results, our consolidated financial statements
will be affected.
We believe that the following critical accounting policies reflect those areas where significant judgments and estimates are
used in the preparation of our consolidated financial statements.
Revenue Recognition
We recognize revenue 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 determinable; and collectibility is reasonably
assured. Customer purchase agreements and customer purchase orders are generally used to determine the existence of an
arrangement. Shipping documents and evidence of customer acceptance, when applicable, are used to verify delivery or
services rendered. We assess whether the price 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.
Revenue for maintenance services is generally deferred and recognized ratably over the period during which the services are to
be performed.
We apply the percentage of completion method to long-term arrangements where we are required to undertake significant
production, customizations or modification engineering, and reasonable and reliable estimates of revenue and cost are
available. Utilizing the percentage of completion method, we recognize revenue based on the ratio of actual costs incurred to
date to total estimated costs expected to be incurred. In instances that do not meet the percentage of completion method criteria,
recognition of revenue is deferred until there are no uncertainties regarding customer acceptance.
Software revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed
or determinable, and collectibility is probable. In instances where final acceptance criteria of the software is specified by the
customer, revenue is deferred until there are no uncertainties regarding customer acceptance.
50
We limit the amount of revenue recognition for delivered elements to the amount that is not contingent on the future
delivery of products or services, future performance obligations or subject to customer-specified return or refund privileges.
Accounting for multiple element arrangements entered into prior to fiscal 2011
Arrangements with customers may include multiple deliverables, including any combination of equipment, services and
software. If multiple element arrangements include software or software-related elements that are essential to the equipment,
we allocate the arrangement fee among separate units of accounting. Multiple element arrangements that include software are
separated into more than one unit of accounting if the functionality of the delivered element(s) is not dependent on the
undelivered element(s), there is vendor-specific objective evidence (“VSOE”) of the fair value of the undelivered element(s),
and general revenue recognition criteria related to the delivered element(s) have been met. The amount of product and services
revenue recognized is affected by our judgment as to whether an arrangement includes multiple elements and, if so, whether
VSOE of fair value exists. VSOE is established based on our standard pricing and discounting practices for the specific product
or service when sold separately. In determining VSOE, we require that a substantial majority of the selling prices for a product
or service fall within a reasonably narrow pricing range. Changes to the elements in an arrangement and our ability to establish
VSOE for those elements could affect the timing of revenue recognition. For all other multiple element arrangements, we
separate the elements into more than one unit of accounting if the delivered element(s) have value to the customer on a stand-
alone basis, objective and reliable evidence of fair value exists for the undelivered element(s), and delivery of the undelivered
element(s) is probable and substantially in our control. Revenue is allocated to each unit of accounting based on the relative fair
value of each accounting unit or using the residual method if objective evidence of fair value does not exist for the delivered
element(s). The revenue recognition criteria described above are applied to each separate unit of accounting. If these criteria are
not met, revenue is deferred until the criteria are met or the last element has been delivered.
Accounting for multiple element arrangements entered into or materially modified after fiscal 2010
In October 2009, the Financial Accounting Standards Board, (“FASB”) amended the accounting standard for revenue
recognition with multiple deliverables which provided guidance on how the arrangement fee should be allocated. The amended
guidance allows the use of management's best estimate of selling price (“BESP”) for individual elements of an arrangement
when VSOE or third-party evidence (“TPE”) is unavailable. Additionally, it eliminates the residual method of revenue
recognition in accounting for multiple deliverable arrangements. The FASB also amended the accounting guidance for revenue
arrangements with software elements to exclude from the scope of the software revenue recognition guidance, tangible
products that contain both software and non-software components that function together to deliver the product's essential
functionality.
We adopted the new accounting guidance on a prospective basis for arrangements entered into or materially modified on or
after November 1, 2010. Under the new guidance, we separate elements into more than one unit of accounting if the delivered
element(s) have value to the customer on a stand-alone basis, and delivery of the undelivered element(s) is probable and
substantially in our control. Therefore, the new guidance allows for deliverables, for which revenue was previously deferred
due to an absence of fair value, to be separated and recognized as revenue as delivered. Also, because the residual method has
been eliminated, discounts offered by us are allocated to all deliverables, rather than to the delivered element(s). Our adoption
of the new guidance for revenue arrangements changed the accounting for certain products that consist of hardware and
software components, in which these components together provided the product's essential functionality. For transactions
involving these products entered into prior to fiscal 2011, we recognized revenue based on software revenue recognition
guidance.
Revenue for multiple element arrangements is allocated to each unit of accounting based on the relative selling price of
each element, with revenue recognized when the revenue recognition criteria are met for each delivered element. We determine
the selling price for each deliverable based upon the selling price hierarchy for multiple-deliverable arrangements. Under this
hierarchy, we use VSOE of selling price, if it exists, or TPE of selling price if VSOE does not exist. If neither VSOE nor TPE
of selling price exists for a deliverable, we use our BESP for that deliverable.
VSOE is established based on our standard pricing and discounting practices for the specific product or service when sold
separately. In determining VSOE, which exists across certain of our service offerings, we require that a substantial majority of
the selling prices for a product or service fall within a reasonably narrow pricing range. We have generally been unable to
establish TPE of selling price because our go-to-market strategy differs from that of others in our markets, and the extent of
customization and differentiated features and functions varies among comparable products or services from our peers. We
determine BESP based upon management-approved pricing guidelines, which consider multiple factors including the type of
product or service, gross margin objectives, competitive and market conditions, and the go-to-market strategy; all of which can
affect pricing practices.
51
Historically, for arrangements with multiple elements, we were typically able to establish fair value for undelivered
elements and so we applied the residual method. As a result, assuming the adoption of the accounting guidance above on a
prospective basis for arrangements entered into or materially modified on or after November 1, 2009, the effect on revenue
recognized for fiscal 2010 would have been an increase of approximately $33.0 million.
Our total deferred revenue for products was $42.9 million and $29.3 million as of October 31, 2011 and October 31, 2012,
respectively. Our services revenue is deferred and recognized ratably over the period during which the services are to be
performed. Our total deferred revenue for services was $80.9 million and $77.8 million as of October 31, 2011 and October 31,
2012, respectively.
Business Combinations
We record acquisitions using the purchase method of accounting. All of the assets acquired, liabilities assumed, contractual
contingencies and contingent consideration are recognized at their fair value as of the acquisition date. The excess of the
purchase price over the estimated fair values of the net tangible and net intangible assets acquired is recorded as goodwill. The
application of the purchase method of accounting for business combinations requires management to make significant estimates
and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate
purchase price consideration between assets that are depreciated and amortized from goodwill. These assumptions and
estimates include a market participant's use of the asset and the appropriate discount rates for a market participant. Our
estimates are based on historical experience, information obtained from the management of the acquired companies and, when
appropriate, includes assistance from independent third-party appraisal firms. Our significant assumptions and estimates can
include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-
average cost of capital, and the cost savings expected to be derived from acquiring an asset. These estimates are inherently
uncertain and unpredictable. In addition, unanticipated events and circumstances may occur which may affect the accuracy or
validity of such estimates. During fiscal 2010, we completed the MEN Acquisition for a purchase price of $676.8 million. As a
result of the purchase price allocation to the assets acquired and liabilities assumed, as well as contingent consideration, there
was no value assigned to goodwill. See Note 2 to the Consolidated Financial Statements included in Item 8 of Part II of this
annual report.
Share-Based Compensation
We estimate the fair value of our restricted stock unit awards based on the fair value of our common stock on the date of
grant. Our outstanding restricted stock unit awards are subject to service-based vesting conditions and/or performance-based
vesting conditions. We recognize the estimated fair value of service-based awards, net of estimated forfeitures, as share-based
expense ratably over the vesting period on a straight-line basis. Awards with performance-based vesting conditions require the
achievement of certain financial or other performance criteria or targets as a condition to the vesting, or acceleration of vesting.
We recognize the estimated fair value of performance-based awards, net of estimated forfeitures, as share-based expense over
the performance period, using graded vesting, which considers each performance period or tranche separately, based upon our
determination of whether it is probable that the performance targets will be achieved. At each reporting period, we reassess the
probability of achieving the performance targets and the performance period required to meet those targets. Determining
whether the performance targets will be achieved involves judgment, and the estimate of expense may be revised periodically
based on changes in the probability of achieving the performance targets. Revisions are reflected in the period in which the
estimate is changed. If any performance goals are not met, no compensation cost is ultimately recognized against that goal, and,
to the extent previously recognized, compensation cost is reversed.
Because share-based compensation expense is based on awards that are ultimately expected to vest, the amount of expense
takes into account estimated forfeitures. We estimate forfeitures at the time of grant and revise, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. Changes in these estimates and assumptions can materially affect the
measure of estimated fair value of our share-based compensation. See Note 18 to our Consolidated Financial Statements in
Item 8 of Part II of this report for information regarding our assumptions related to share-based compensation and the amount
of share-based compensation expense we incurred for the periods covered in this report. As of October 31, 2012, total
unrecognized compensation expense was $49.4 million: (i) $0.2 million, which relates to unvested stock options and is
expected to be recognized over a weighted-average period of 0.5 year; and (ii) $49.2 million, which relates to unvested
restricted stock units and is expected to be recognized over a weighted-average period of 1.3 years.
We recognize windfall tax benefits associated with the exercise of stock options or release of restricted stock units directly
to stockholders' equity only when realized. A windfall tax benefit occurs when the actual tax benefit realized by us upon an
employee's disposition of a share-based award exceeds the deferred tax asset, if any, associated with the award that we had
52
recorded. When assessing whether a tax benefit relating to share-based compensation has been realized, we follow the tax law
“with-and-without” method. Under the with-and-without method, the windfall is considered realized and recognized for
financial statement purposes only when an incremental benefit is provided after considering all other tax benefits including our
net operating losses. The with-and-without method results in the windfall from share-based compensation awards always being
effectively the last tax benefit to be considered. Consequently, the windfall attributable to share-based compensation will not be
considered realized in instances where our net operating loss carryover (that is unrelated to windfalls) is sufficient to offset the
current year's taxable income before considering the effects of current-year windfalls.
Reserve for Inventory Obsolescence
We make estimates about future customer demand for our products when establishing the appropriate reserve for excess
and obsolete inventory. We write 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 market
conditions. Inventory write downs are a component of our product cost of goods sold. Upon recognition of the write down, a
new lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the
restoration or increase in that newly established cost basis. In an effort to limit our exposure to delivery delays and to satisfy
customer needs we purchase inventory based on forecasted sales across our product lines. In addition, part of our research and
development strategy is to promote the convergence of similar features and functionalities across our product lines. Each of
these practices exposes us to the risk that our customers will not order products for which we have forecasted sales, or will
purchase less than we have forecasted. Historically, we have experienced write downs due to changes in our strategic direction,
discontinuance of a product and declines in market conditions. We recorded charges for excess and obsolete inventory of $17.3
million and $23.4 million in fiscal 2011 and 2012, respectively. The charges in fiscal 2011 were primarily related to excess
inventory due to a change in forecasted sales across our product line. The charges in fiscal 2012 were primarily related to
engineering design changes and the discontinuance of certain parts and components used in the manufacture of our Packet-
Optical Transport and Packet-Optical Switching products. Our inventory net of allowance for excess and obsolescence was
$230.1 million and $260.1 million as of October 31, 2011 and October 31, 2012, respectively.
Allowance for Doubtful Accounts Receivable
Our allowance for doubtful accounts receivable is based on management's assessment, on a specific identification basis, of
the collectibility of customer accounts. We perform ongoing credit evaluations of our customers and generally have not
required collateral or other forms of security from customers. In determining the appropriate balance for our allowance for
doubtful accounts receivable, management considers each individual customer account receivable in order to determine
collectibility. In doing so, we consider creditworthiness, payment history, account activity and communication with such
customer. If a customer's financial condition changes, or if actual defaults are higher than our historical experience, we may be
required to take a charge for an allowance for doubtful accounts receivable which could have an adverse impact on our results
of operations. Our accounts receivable, net of allowance for doubtful accounts, was $417.5 million and $345.5 million as of
October 31, 2011 and October 31, 2012, respectively. Our allowance for doubtful accounts was $0.7 million and $1.5 million as
of October 31, 2011 and October 31, 2012, respectively.
Long-lived Assets
Our long-lived assets include: equipment, furniture and fixtures; finite-lived intangible assets; and maintenance spares. As
of October 31, 2011 and October 31, 2012 these assets totaled $504.6 million and $438.3 million, net, respectively. We test
long-lived assets for impairment whenever events or changes in circumstances indicate that the assets' carrying amount is not
recoverable from its undiscounted cash flows. Our long-lived assets are assigned to asset groups which represents the lowest
level for which we identify cash flows. Due to the lack of a triggering event, no impairment analysis was performed in fiscal
2011 or 2012.
Deferred Tax Valuation Allowance
As of October 31, 2012, we have recorded a valuation allowance of $1.5 billion which offsets nearly all our net deferred
tax assets. When measuring the need for a valuation allowance, we assess both positive and negative evidence regarding the
realizability of these deferred tax assets. We record a valuation allowance to reduce our deferred tax assets to the amount that is
more likely than not to be realized. In determining net deferred tax assets and valuation allowances, management is required to
make judgments and estimates related to projections of profitability, the timing and extent of the utilization of net operating
loss carryforwards, applicable tax rates, transfer pricing methodologies and tax planning strategies. The valuation allowance is
reviewed quarterly and is maintained until sufficient positive evidence exists to support a reversal. Because evidence such as
our operating results during the most recent three-year period is afforded more weight than forecasted results for future periods,
53
our cumulative loss during this three-year period represents sufficient negative evidence regarding the need for nearly a full
valuation allowance. We will release this valuation allowance when management determines that it is more likely than not that
our deferred tax assets will be realized. Any future release of valuation allowance may be recorded as a tax benefit increasing
net income or as an adjustment to paid-in capital, based on tax ordering requirements.
Warranty
Our liability for product warranties, included in other accrued liabilities, was $47.3 million and $55.1 million as of
October 31, 2011 and October 31, 2012, respectively. Our products are generally covered by a warranty for periods ranging
from one to five years. We accrue for warranty costs as part of our cost of goods sold 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.
The provision for product warranties was $18.5 million and $33.4 million for fiscal 2011 and 2012, respectively. See Note 12 to
the Consolidated Financial Statements included in Item 8 of Part II of this report. The provision for warranty claims may
fluctuate on a quarterly basis depending upon the mix of products and customers in that period. If actual product failure rates,
material replacement costs, service or labor costs differ from our estimates, revisions to the estimated warranty provision would
be required. An increase in warranty claims or the related costs associated with satisfying these warranty obligations could
increase our cost of sales and negatively affect our gross margin.
Effects of Recent Accounting Pronouncements
See Note 1 to our Consolidated Financial Statements in Item 8 of Part II of this report for information relating to our
discussion of the effects of recent accounting pronouncements.
Unaudited Quarterly Results of Operations
The tables below (in thousands, except per share data) set forth the operating results in our consolidated statements of
operations for each of the eight quarters in the period ended October 31, 2012. This information is unaudited, but in our opinion
reflects all adjustments (consisting only of normal recurring adjustments) that we consider 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.
54
Revenue:
Products
Services
Jan. 31,
Apr. 30,
Jul. 31,
Oct. 31,
Jan. 31,
Apr. 30,
Jul. 31,
Oct. 31,
2011
2011
2011
2011
2012
2012
2012
2012
$ 352,427
$ 336,026
$ 350,030
$ 368,049
$ 333,673
$ 384,726
$ 373,418
$ 363,174
80,881
81,868
85,283
87,406
83,012
92,891
100,672
474,090
102,357
465,531
Total Revenue
433,308
417,894
435,313
455,455
416,685
477,617
Cost of goods sold:
Products
Services
Total costs of goods sold
Gross profit
Operating expenses:
Research and
development
Selling and marketing
General and
administrative
Acquisition and
integration costs
Amortization of
intangible assets
Restructuring costs
Change in fair value of
contingent consideration
214,401
202,665
198,217
210,686
197,752
234,372
225,238
211,443
50,401
264,802
168,506
49,396
252,061
165,833
52,199
250,416
184,897
54,859
265,545
189,910
51,177
248,929
167,756
60,304
294,676
182,941
67,531
292,769
181,321
61,882
273,325
192,206
95,790
57,092
99,624
61,768
93,216
61,895
91,232
71,235
89,664
64,411
90,399
62,517
88,315
65,397
95,801
74,013
38,314
32,480
28,172
27,276
29,664
26,670
27,876
29,792
24,185
10,741
4,822
2,340
—
—
—
—
28,784
1,522
13,674
3,164
(3,289)
—
13,673
13,534
504
—
591
—
13,471
1,722
12,967
1,851
12,714
2,291
12,545
1,990
—
—
—
—
Total operating expenses
242,398
221,451
Loss from operations
(73,892)
(55,618)
202,282
(17,385)
206,208
(16,298)
198,932
(31,176)
194,404
(11,463)
196,593
(15,272)
214,141
(21,935)
Interest and other income
(loss), net
Interest expense
Gain on cost method
investment
Loss before income taxes
Provision for income tax
Net loss
Basic net loss per
common share
Diluted net loss per
potential common share
Weighted average basic
common shares
outstanding
Weighted average dilutive
potential common shares
outstanding
6,265
4,229
(9,550)
(9,406)
(3,160)
(9,470)
(1,312)
(9,500)
(4,887)
(9,570)
(4,387)
(9,646)
(2,458)
(9,597)
(3,468)
(10,840)
—
—
(77,177)
—
(36,243)
2,528
$ (79,056) $ (62,686) $ (31,450) $ (22,329) $ (47,653) $ (27,780) $ (29,817) $ (38,771)
—
(30,015)
1,435
7,249
(19,861)
2,468
—
(27,327)
2,490
—
(25,496)
2,284
—
(45,633)
2,020
(60,795)
1,879
1,891
$
$
(0.84) $
(0.66) $
(0.33) $
(0.23) $
(0.49) $
(0.28) $
(0.30) $
(0.39)
(0.84) $
(0.66) $
(0.33) $
(0.23) $
(0.49) $
(0.28) $
(0.30) $
(0.39)
94,496
95,360
96,313
97,197
98,066
98,981
99,530
100,506
94,496
95,360
96,313
97,197
98,066
98,981
99,530
100,506
55
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our market risk disclosures involves forward-looking statements. Actual results could
differ materially from those projected in the forward-looking statements. We are exposed to market risk related to changes in
interest rates and foreign currency exchange rates.
Interest Rate Sensitivity. We currently hold an investment in a U.S. Government obligation that matures in January 2013.
See Notes 5 and 6 to our Consolidated Financial Statements for information relating to investments and fair value. This
investment is sensitive to interest rate movements, and its fair value will decline as interest rates rise and increase as interest
rates decline. The estimated impact on this investment of a 100 basis point (1.0%) increase in interest rates across the yield
curve from rates in effect as of the balance sheet date would be a $0.1 million decline in value.
Foreign Currency Exchange Risk. As a global concern, our business and results of operations are exposed to movements in
foreign currency exchange rates. As a result of our increased global presence, a larger percentage of our revenue is non-U.S.
dollar denominated with Canadian Dollars and Euros being our most significant foreign currency revenue streams. If the U.S.
dollar strengthens against these currencies, our revenues reported in U.S. dollars would decline. For our U.S. dollar
denominated sales, an increase in the value of the U.S. dollar would increase the real cost to our customers of our products in
markets outside the United States, which could impact our competitive position.
With regard to operating expense, our primary exposure to foreign currency exchange risk relates to operating expense
incurred in Canadian Dollars, British Pounds, Euros and Indian Rupees. During fiscal 2012, approximately 52.0% of our
operating expense was non-U.S. dollar denominated. If these currencies strengthen, costs reported in U.S. dollars will increase,
which would increase our expenses. During fiscal 2012, research and development expense benefited from approximately $6.8
million, inclusive of hedging, due to the strengthening of the U.S. dollar in relation to the Canadian Dollar and the Indian
Rupee in comparison to fiscal 2011. Also in fiscal 2012, sales and marketing expense benefited from approximately $4.5
million due to the strengthening of the U.S. dollar in relation to the Euro in comparison to fiscal 2011.
From time to time, we use foreign currency forward contracts to reduce part of the variability in certain forecasted non-
U.S. dollar denominated cash flows. Generally, these derivatives are for maturities of 12 months or less and are designated as
cash flow hedges. We consider several factors when evaluating hedges of our forecasted foreign currency exposures, such as
significance of the exposure, offsetting economic exposures, potential costs of hedging, and the potential for hedge
ineffectiveness. We do not enter into derivative transactions for purposes other than hedging economic exposures. During fiscal
2011 and 2012, we entered into forward contracts to reduce the variability in our Canadian Dollar and Indian Rupee
denominated operating expenses which principally relate to our research and development activities.
Convertible Debt Outstanding. The fair market value of each of our outstanding issues of convertible notes is subject to
interest rate and market price risk due to the convertible feature of the notes and other factors. Generally the fair market value
of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The fair market value of the notes
may also increase as the market price of our stock rises and decrease as the market price of the stock falls. Interest rate and
market value changes affect the fair market value of the notes, and may affect the prices at which we would be able to
repurchase such notes were we to do so. These changes do not impact our financial position, cash flows or results of operations.
For additional information on the fair value of our outstanding notes, see Note 13 to our Consolidated Financial Statements
included in Item 8 of Part II of this report.
56
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 (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
Number
58
59
60
61
62
63
57
To the Board of Directors and Shareholders of Ciena Corporation
Report of Independent Registered Public Accounting Firm
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 (the “Company”) at October 31, 2012 and 2011, and the results
of their operations and their cash flows for each of the three years in the period ended October 31, 2012 in conformity with
accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of October 31, 2012, based on criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
Report of Management on Internal Control Over Financial Reporting under Item 9A. Our responsibility is to express opinions
on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal control over financial reporting was maintained in
all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for
revenue in fiscal 2011.
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 transactions 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 prevention 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 inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
December 21, 2012
58
CIENA CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories
Prepaid expenses and other
Total current assets
Long-term investments
Equipment, furniture and fixtures, net
Intangible assets, net
Other long-term assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable
Accrued liabilities
Deferred revenue
Convertible notes payable
Total current liabilities
Long-term deferred revenue
Other long-term obligations
Long term convertible notes payable
Total liabilities
Commitments and contingencies
Stockholders’ equity (deficit):
Preferred stock — par value $0.01; 20,000,000 shares authorized; zero shares issued and
outstanding
Common stock — par value $0.01; 290,000,000 shares authorized; 97,440,436 and
100,601,792 shares issued and outstanding
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders’ equity (deficit)
Total liabilities and stockholders’ equity (deficit)
October 31,
2011
2012
$
541,896
$
642,444
—
417,509
230,076
143,357
50,057
345,496
260,098
117,595
1,332,838
1,415,690
50,264
122,558
331,635
114,123
—
123,580
257,137
84,736
$
1,951,418
$
1,881,143
$
157,116
$
197,004
99,373
—
453,493
24,425
17,263
179,704
209,540
79,516
216,210
684,970
27,560
31,779
1,442,364
1,937,545
1,225,806
1,970,115
—
974
5,753,236
31
(5,740,368)
13,873
$
1,951,418
$
—
1,006
5,797,765
(3,354)
(5,884,389)
(88,972)
1,881,143
The accompanying notes are an integral part of these consolidated financial statements.
59
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Revenue:
Products
Services
Total revenue
Cost of goods sold:
Products
Services
Total cost of goods sold
Gross profit
Operating expenses:
Research and development
Selling and marketing
General and administrative
Acquisition and integration costs
Amortization of intangible assets
Restructuring costs
Change in fair value of contingent consideration
Total operating expenses
Loss from operations
Interest and other income (loss), net
Interest expense
Gain on cost method investments
Gain on extinguishment of debt
Loss before income taxes
Provision for income taxes
Net loss
Basic net loss per common share
Diluted net loss per potential common share
Weighted average basic common shares outstanding
Weighted average dilutive potential common shares outstanding
Year Ended October 31,
2010
2011
2012
$
1,009,239
$
1,406,532
$
1,454,991
227,397
1,236,636
335,438
1,741,970
378,932
1,833,923
825,969
206,855
1,032,824
709,146
868,805
240,894
1,109,699
724,224
596,704
142,431
739,135
497,501
327,626
193,515
102,692
101,379
99,401
8,514
(13,807)
819,320
(321,819)
3,917
(18,619)
—
379,862
251,990
126,242
42,088
69,665
5,781
(3,289)
872,339
(163,193)
6,022
(37,926)
7,249
4,948
(331,573)
1,941
(333,514) $
(3.58) $
(3.58) $
93,103
93,103
—
(187,848)
7,673
(195,521) $
(2.04) $
(2.04) $
95,854
95,854
$
$
$
364,179
266,338
114,002
—
51,697
7,854
—
804,070
(79,846)
(15,200)
(39,653)
—
—
(134,699)
9,322
(144,021)
(1.45)
(1.45)
99,341
99,341
The accompanying notes are an integral part of these consolidated financial statements.
60
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except share data)
Common Stock
Shares
Par Value
Additional
Paid-in-Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity (Deficit)
92,038,360
$
920
$
5,665,028
$
1,223
$ (5,211,333) $
455,838
(333,514)
(333,514)
Balance at October 31, 2009
Net loss
Changes in unrealized gains and losses on investments, net
Translation adjustment
Comprehensive loss
Issuance of shares from employee equity plans
Share-based compensation expense
Balance at October 31, 2010
Net loss
Changes in unrealized gains and losses on investments, net
Translation adjustment
Comprehensive loss
Issuance of shares from employee equity plans
Share-based compensation expense
Balance at October 31, 2011
Net loss
Changes in unrealized gains and losses on investments, net
Changes in unrealized gains and losses on foreign currency contracts, net
Translation adjustment
Comprehensive loss
Issuance of shares from employee equity plans
Share-based compensation expense
Balance at October 31, 2012
—
—
—
—
2,021,940
—
94,060,300
—
—
—
—
3,380,136
—
97,440,436
—
—
—
—
3,161,356
—
—
—
—
—
21
—
—
—
—
—
1,549
35,560
—
(458)
297
—
—
—
—
—
—
—
—
941
5,702,137
1,062
(5,544,847)
—
—
—
—
33
—
974
—
—
—
—
32
—
—
—
—
—
13,169
37,930
5,753,236
—
—
—
—
12,135
32,394
—
393
(1,424)
—
—
—
31
—
(166)
49
(3,268)
—
—
—
(195,521)
—
—
—
—
—
(5,740,368)
(144,021)
—
—
—
—
—
(458)
297
(333,675)
1,570
35,560
159,293
(195,521)
393
(1,424)
(196,552)
13,202
37,930
13,873
(144,021)
(166)
49
(3,268)
(147,406)
12,167
32,394
100,601,792
$
1,006
$
5,797,765
$
(3,354) $ (5,884,389) $
(88,972)
The accompanying notes are an integral part of these consolidated financial statements.
61
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Gain on extinguishment of debt
Gain on cost method investments
Change in fair value of embedded redemption feature
Change in fair value of contingent consideration
Depreciation of equipment, furniture and fixtures, and amortization of leasehold
improvements
Share-based compensation costs
Amortization of intangible assets
Provision for inventory excess and obsolescence
Provision for warranty
Other
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable
Inventories
Prepaid expenses and other
Accounts payable, accruals and other obligations
Deferred revenue
Net cash provided by (used in) operating activities
Cash flows used in investing activities:
Payments for equipment, furniture, fixtures and intellectual property
Restricted cash
Purchase of available for sale securities
Proceeds from maturities of available for sale securities
Proceeds from sales of available for sale securities
Proceeds from sale of cost method investment
Acquisition of business, net of cash acquired
Receipt of contingent consideration related to business acquisition
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of senior convertible notes payable
Repayment of capital lease obligations
Repayment of senior convertible notes payable
Debt issuance costs
Proceeds from issuance of common stock
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) 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
Cash paid during the period for income taxes, net
Non-cash investing and financing activities
Purchase of equipment in accounts payable
Debt issuance costs in accrued liabilities
Fixed assets purchased under capital leases
Year Ended October 31,
2010
2011
2012
$
(333,514) $
(195,521) $
(144,021)
(4,948)
—
(2,510)
(13,807)
42,789
35,560
127,018
13,696
15,353
3,570
(218,196)
(40,957)
(34,908)
180,814
1,030
(229,010)
(51,207)
(24,521)
(63,591)
454,141
179,531
—
(693,247)
—
(198,894)
725,000
—
(76,065)
(20,301)
1,570
630,204
682
202,982
485,705
688,687
12,248
1,705
5,259
206
$
$
$
$
$
— $
—
(7,249)
(2,800)
—
60,154
37,930
95,927
17,334
18,451
5,541
(75,623)
14,209
(18,302)
(59,285)
18,749
(90,485)
(52,367)
10,751
(49,892)
—
—
6,544
—
16,394
(68,570)
—
—
—
—
13,202
13,202
(938)
(146,791)
688,687
541,896
32,931
3,204
6,431
$
$
$
$
— $
1,106
$
—
—
6,600
—
59,099
32,394
74,497
23,438
33,418
7,122
70,366
(53,460)
1,748
12,610
(16,722)
107,089
(48,098)
35,597
—
—
—
524
—
—
(11,977)
—
(1,895)
—
(2,332)
12,167
7,940
(2,504)
100,548
541,896
642,444
33,511
9,603
5,202
319
6,736
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
62
CIENA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) CIENA CORPORATION AND SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Description of Business
Ciena Corporation (“Ciena” or the “Company”) is a provider of communications networking equipment, software and
services that support the transport, switching, aggregation and management of voice, video and data traffic. Ciena’s Packet-
Optical Transport, Packet-Optical Switching and Carrier-Ethernet Solutions products are used, individually or as part of an
integrated solution, in networks operated by communications service providers, cable operators, governments and enterprises
around the globe. Ciena is a network specialist targeting the transition of disparate, legacy communications networks to
converged, next-generation architectures, better able to handle increased traffic and deliver more efficiently a broader mix of
high-bandwidth communications services. Ciena’s products, along with its embedded, network element software and unified
service and transport management, enable service providers to efficiently and cost-effectively deliver critical enterprise and
consumer-oriented communication services. Ciena’s principal executive offices are located at 7035 Ridge Road, Hanover,
Maryland 21076.
Principles of Consolidation
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.
Acquisition of MEN Business (“MEN Acquisition”)
On March 19, 2010, Ciena completed its acquisition of substantially all of the optical and carrier Ethernet assets of Nortel’s
Metro Ethernet Networks Business (the “MEN Business”). Additional details regarding this transaction are set forth in Note 2
below.
Business Combinations
Ciena records business combinations such that the total purchase price is allocated to the assets acquired and liabilities
assumed based on their estimated fair values. The fair values assigned to the assets acquired and liabilities assumed are based
on valuations using management’s best estimates and assumptions. The allocation of the purchase price as reflected in the
consolidated financial statements is based on the best information available to management at the time the consolidated
financial statements are issued.
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 30, 2010, October 29, 2011, and November 3, 2012 for the periods reported). Fiscal 2010 and fiscal 2011 consisted of
a 52 week fiscal year and fiscal 2012 consisted of a 53 week fiscal year. For purposes of financial statement presentation, each
fiscal year is described as having ended on October 31.
During fiscal 2012, Ciena recorded out of period adjustments that increased its revenue by $6.8 million and decreased pre-
tax loss by $5.2 million. These adjustments related to errors in the timing of recognition of revenue, for which all required
criteria had been satisfied in prior periods. Specifically, revenues for fiscal 2010 and fiscal 2011 were understated by $1.4
million and $5.4 million, respectively. Ciena has determined that these adjustments were not material to any prior annual or
interim periods, and the resulting correction is not material to its annual results for fiscal 2012.
Use of Estimates
The preparation of the financial statements and related disclosures in conformity with accounting principles generally
accepted in the United States requires management to make estimates and judgments that affect the amounts reported in the
consolidated financial statements and accompanying notes. Estimates are used for selling prices for multiple element
arrangements, shared-based compensation, purchase accounting, bad debts, valuation of inventories and investments,
recoverability of intangible assets and other long-lived assets, income taxes, warranty obligations, restructuring liabilities,
derivatives, contingencies and litigation. Ciena bases its estimates on historical experience and assumptions that it believes are
reasonable. Actual results may differ materially from management’s estimates.
Cash and Cash Equivalents
Ciena considers all highly liquid investments purchased with original maturities of 3 months or less to be cash equivalents.
Restricted cash collateralizing letters of credit is included in other current assets and other long-term assets depending upon the
expected duration of the underlying letter of credit.
Investments
63
Ciena's investments are classified as available-for-sale and are reported at fair value, with unrealized gains and losses
recorded in accumulated other comprehensive income. Ciena recognizes losses when it determines that declines in the fair
value of its investments, below their cost basis, are other-than-temporary. In determining whether a decline in fair value is
other-than-temporary, Ciena considers various factors including market price (when available), investment ratings, the financial
condition and near-term prospects of the investee, the length of time and the extent to which the fair value has been less than
Ciena's cost basis, and its intent and ability to hold the investment until maturity or for a period of time sufficient to allow for
any anticipated recovery in market value. Ciena considers all marketable debt securities that it expects to convert to cash within
one year or less to be short-term investments. All others are considered long-term investments.
At the end of fiscal 2010, Ciena owned a minority equity investment in a privately held technology company. This
investment was carried at cost because Ciena did not have the ability to exercise significant influence over the company. During
fiscal 2011, as a result of the sale of this privately held technology company, Ciena recorded a gain of $7.2 million.
Inventories
Inventories are stated at the lower of cost or market, with cost computed using standard cost, which approximates actual
cost, on a first-in, first-out basis. Ciena records a provision for excess and obsolete inventory when an impairment has been
identified.
Segment Reporting
Ciena's chief operating decision maker, its chief executive officer, evaluates performance and allocates resources based on
multiple factors, including segment profit (loss) information for the following product categories: (i) Packet-Optical Transport;
(ii) Packet-Optical Switching; (iii) Carrier-Ethernet Solutions; and (iv) Software and Services. Operating segments are defined
as components of an enterprise: that engage in business activities which may earn revenue and incur expense; for which
discrete financial information is available; and for which such information is evaluated regularly by the chief operating decision
maker for purposes of allocating resources and assessing performance. Ciena considers the four product categories above to be
its operating segments for reporting purposes. See Note 19 below.
Long-lived Assets
Long-lived assets include: equipment, furniture and fixtures; intangible assets; and maintenance spares. Ciena tests long-
lived assets for impairment whenever triggering events or changes in circumstances indicate that the assets' carrying amount is
not recoverable from its undiscounted cash flows. An impairment loss is measured as the amount by which the carrying amount
of the asset or asset group exceeds its fair value. Ciena's long-lived assets are assigned to asset groups which represent the
lowest level for which cash flows can be 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 to five years for equipment, furniture and fixtures and the shorter of useful life or lease term for
leasehold improvements.
Qualifying internal use software and website development costs incurred during the application development stage, which
consist primarily of outside services and purchased software license costs, are capitalized and amortized straight-line over the
estimated useful lives of two to five years.
Intangible Assets
Ciena has recorded finite-lived intangible assets as a result of several acquisitions. Finite-lived intangible assets are carried
at cost less accumulated amortization. Amortization is computed using the straight-line method over the expected economic
lives of the respective assets, up to seven years, which approximates the use of intangible assets.
Maintenance Spares
Maintenance spares are recorded at cost. Spares usage cost is expensed ratably over four years.
Concentrations
Substantially all of Ciena's invested cash and cash equivalents are maintained at a small number of major U.S. financial
institutions or in large, liquid money market funds. Deposits held with banks may exceed the amount of insurance provided on
such deposits. Generally, these deposits may be redeemed upon demand and, therefore, management believes that they bear
minimal risk.
64
Historically, a significant percentage of Ciena's revenue has been concentrated among sales to a small number of large
communications service providers. Consolidation among Ciena's customers has increased this concentration. Consequently,
Ciena's accounts receivable are concentrated among these customers. See Note 19 below.
Additionally, Ciena's access to certain materials or components is dependent upon sole or limited source suppliers. The
inability of any of these suppliers to fulfill Ciena's supply requirements, or significant changes in their cost, could affect future
results. Ciena relies on a small number of contract manufacturers to perform the majority of the manufacturing 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 and results of operations may be affected.
Revenue Recognition
Ciena recognizes revenue 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 determinable; and collectibility is reasonably
assured. Customer purchase agreements and customer purchase orders are generally used to determine the existence of an
arrangement. Shipping documents and evidence of customer acceptance, when applicable, are used to verify delivery or
services rendered. Ciena assesses whether the price is fixed or determinable based on the payment terms associated with the
transaction and whether the sales price is subject to refund or adjustment. Ciena assesses collectibility based primarily on the
creditworthiness of the customer as determined by credit checks and analysis, as well as the customer's payment history.
Revenue for maintenance services is generally deferred and recognized ratably over the period during which the services are to
be performed. Shipping and handling fees billed to customers are included in revenue, with the associated expenses included in
product cost of goods sold.
Ciena applies the percentage of completion method to long-term arrangements where it is required to undertake significant
production, customizations or modification engineering, and reasonable and reliable estimates of revenue and cost are
available. Utilizing the percentage of completion method, Ciena recognizes revenue based on the ratio of actual costs incurred
to date to total estimated costs expected to be incurred. In instances that do not meet the percentage of completion method
criteria, recognition of revenue is deferred until there are no uncertainties regarding customer acceptance.
Software revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed
or determinable, and collectibility is probable. In instances where final acceptance criteria of the software is specified by the
customer, revenue is deferred until there are no uncertainties regarding customer acceptance.
Ciena limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future
delivery of products or services, future performance obligations or subject to customer-specified return or refund privileges.
Accounting for multiple element arrangements entered into prior to fiscal 2011
Arrangements with customers may include multiple deliverables, including any combination of equipment, services and
software. If multiple element arrangements include software or software-related elements that are essential to the equipment,
Ciena allocates the arrangement fee among separate units of accounting. Multiple element arrangements that include software
are separated into more than one unit of accounting if the functionality of the delivered element(s) is not dependent on the
undelivered element(s), there is vendor-specific objective evidence (“VSOE”) of the fair value of the undelivered element(s),
and general revenue recognition criteria related to the delivered element(s) have been met. The amount of product and services
revenue recognized is affected by Ciena's judgment as to whether an arrangement includes multiple elements and, if so,
whether VSOE of fair value exists. VSOE is established based on Ciena's standard pricing and discounting practices for the
specific product or service when sold separately. In determining VSOE, Ciena requires that a substantial majority of the selling
prices for a product or service fall within a reasonably narrow pricing range. Changes to the elements in an arrangement and
Ciena's ability to establish VSOE for those elements could affect the timing of revenue recognition. For all other multiple
element arrangements, Ciena separates the elements into more than one unit of accounting if the delivered element(s) have
value to the customer on a stand-alone basis, objective and reliable evidence of fair value exists for the undelivered element(s),
and delivery of the undelivered element(s) is probable and substantially in Ciena's control. Revenue is allocated to each unit of
accounting based on the relative fair value of each accounting unit or using the residual method if objective evidence of fair
value does not exist for the delivered element(s). The revenue recognition criteria described above are applied to each separate
unit of accounting. If these criteria are not met, revenue is deferred until the criteria are met or the last element has been
delivered.
Accounting for multiple element arrangements entered into or materially modified after fiscal 2010
In October 2009, the Financial Accounting Standards Board (“FASB”) amended the accounting standard for revenue
recognition with multiple deliverables which provided guidance on how the arrangement fee should be allocated and allows the
use of management's best estimate of selling price (“BESP”) for individual elements of an arrangement when VSOE or third-
65
party evidence (“TPE”) is unavailable. Additionally, it eliminates the residual method of revenue recognition in accounting for
multiple deliverable arrangements. The FASB also amended the accounting guidance for revenue arrangements with software
elements to exclude from the scope of the software revenue recognition guidance, tangible products that contain both software
and non-software components that function together to deliver the product's essential functionality.
Ciena adopted the new accounting guidance on a prospective basis for arrangements entered into or materially modified on
or after November 1, 2010. Under the new guidance, Ciena separates elements into more than one unit of accounting if the
delivered element(s) have value to the customer on a stand-alone basis, and delivery of the undelivered element(s) is probable
and substantially in Ciena's control. Therefore, the new guidance allows for deliverables, for which revenue was previously
deferred due to an absence of fair value, to be separated and recognized as revenue as delivered. Also, because the residual
method has been eliminated, discounts offered by Ciena are allocated to all deliverables, rather than to the delivered element(s).
Ciena's adoption of the new guidance for revenue arrangements changed the accounting for certain Ciena products that consist
of hardware and software components, in which these components together provided the product's essential functionality. For
arrangements involving these products entered into prior to fiscal 2011, Ciena recognized revenue based on software revenue
recognition guidance.
Revenue for multiple element arrangements is allocated to each unit of accounting based on the relative selling price of
each delivered element, with revenue recognized when the revenue recognition criteria are met for each delivered element.
Ciena determines the selling price for each deliverable based upon the selling price hierarchy for multiple-deliverable
arrangements. Under this hierarchy, Ciena uses VSOE of selling price, if it exists, or TPE of selling price if VSOE does not
exist. If neither VSOE nor TPE of selling price exists for a deliverable, Ciena uses its BESP for that deliverable.
VSOE is established based on Ciena's standard pricing and discounting practices for the specific product or service when
sold separately. In determining VSOE, which exists across certain of Ciena's service offerings, Ciena requires that a substantial
majority of the selling prices for a product or service fall within a reasonably narrow pricing range. Ciena has been unable to
establish TPE of selling price because its go-to-market strategy differs from that of others in its markets, and the extent of
customization and differentiated features and functions varies among comparable products or services from its peers. Ciena
determines BESP based upon management-approved pricing guidelines, which consider multiple factors including the type of
product or service, gross margin objectives, competitive and market conditions, and the go-to-market strategy; all of which can
affect pricing practices.
Historically, for arrangements with multiple elements, Ciena was typically able to establish fair value for undelivered
elements and so Ciena applied the residual method. As a result, assuming the adoption of the accounting guidance above on a
prospective basis for arrangements entered into or materially modified on or after November 1, 2009, the effect on revenue
recognized for fiscal 2010 would have been an increase of approximately $33.0 million.
Warranty Accruals
Ciena provides for the estimated costs to fulfill customer warranty obligations upon the recognition of the related revenue.
Estimated warranty costs include estimates for material costs, technical support labor costs and associated overhead. The
warranty liability is included in cost of goods sold and 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, Net
Ciena's allowance for doubtful accounts is based on its assessment, on a specific identification basis, of the collectibility 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 collectibility. 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 record an allowance for doubtful accounts, which would
negatively affect its results of operations.
Research and Development
Ciena charges all research and development costs to expense as incurred. Types of expense incurred in research and
development include employee compensation, cost of prototype equipment, consulting and third party services, depreciation,
facility costs and information technology.
Government Grants
66
Ciena accounts for proceeds from government grants as a reduction of operating expense when there is reasonable
assurance that Ciena has complied with the conditions attached to the grant and that the grant proceeds will be received. Grant
benefits are recorded to the line item in the Consolidated Statement of Operations to which the grant activity relates. See Note
21 below.
Advertising Costs
Ciena expenses all advertising costs as incurred.
Legal Costs
Ciena expenses legal costs associated with litigation defense as incurred.
Share-Based Compensation Expense
Ciena measures and recognizes compensation expense for share-based awards based on estimated fair values on the date of
grant. Ciena estimates the fair value of each option-based award on the date of grant using the Black-Scholes option-pricing
model. This model is affected by Ciena's stock price as well as estimates regarding a number of variables including expected
stock price volatility over the expected term of the award and projected employee stock option exercise behaviors. Ciena
estimates the fair value of each restricted stock unit based on the fair value of the underlying common stock on the date of
grant. In each case, Ciena only recognizes expense to its consolidated statement of operations for those options or shares that
are expected ultimately to vest. Ciena recognizes the estimated fair value of performance-based awards, net of estimated
forfeitures, as share-based expense over the performance period, using graded vesting, which considers each performance
period or tranche separately, based upon its determination of whether it is probable that the performance targets will be
achieved. At each reporting period, Ciena reassesses the probability of achieving the performance targets and the performance
period required to meet those targets. Ciena uses the straight-line method to record expense for grants with only service-based
vesting. See Note 18 below.
Income Taxes
Ciena accounts for income taxes using an asset and liability approach that recognizes deferred tax assets and liabilities for
the expected future tax consequences attributable to differences between the carrying amounts of assets and liabilities for
financial reporting purposes and their respective tax bases, and for operating loss and tax credit carryforwards. In estimating
future tax consequences, Ciena 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.
In the ordinary course of business, transactions occur for which the ultimate outcome may be uncertain. In addition, tax
authorities periodically audit Ciena's income tax returns. These audits examine significant tax filing positions, including the
timing and amounts of deductions and the allocation of income tax expenses among tax jurisdictions. Ciena is currently under
audit in India for 2007 and 2008 and in the United Kingdom for 2009. Management does not expect the outcome of these audits
to have a material adverse effect on the Company's consolidated financial position, result of operations or cash flows. Ciena's
major tax jurisdictions and the earliest open tax years are as follows: United States (2009), United Kingdom (2007), Canada
(2006) and India (2007). However, limited adjustments can be made to Federal tax returns in earlier years in order to reduce net
operating loss carryforwards. Ciena classifies interest and penalties related to uncertain tax positions as a component of income
tax expense. All of the uncertain tax positions, if recognized, would decrease the effective income tax rate.
Ciena has not provided for U.S. deferred income taxes on the cumulative unremitted earnings of its non-U.S. affiliates as it
plans to permanently reinvest cumulative unremitted foreign earnings outside the U.S. and it is not practicable to determine the
unrecognized deferred income taxes. These cumulative unremitted foreign earnings relate to ongoing operations in foreign
jurisdictions and are required to fund foreign operations, capital expenditures and any expansion requirements.
Ciena recognizes windfall tax benefits associated with the exercise of stock options or release of restricted stock units
directly to stockholders' equity only when realized. A windfall tax benefit occurs when the actual tax benefit realized by Ciena
upon an employee's disposition of a share-based award exceeds the deferred tax asset, if any, associated with the award that
Ciena had recorded. When assessing whether a tax benefit relating to share-based compensation has been realized, Ciena
follows the tax law “with-and-without” method. Under the with-and-without method, the windfall is considered realized and
recognized for financial statement purposes only when an incremental benefit is provided after considering all other tax
benefits including Ciena's net operating losses. The with-and-without method results in the windfall from share-based
compensation awards always being effectively the last tax benefit to be considered. Consequently, the windfall attributable to
share-based compensation will not be considered realized in instances where Ciena's net operating loss carryover (that is
unrelated to windfalls) is sufficient to offset the current year's taxable income before considering the effects of current-year
windfalls.
67
Loss Contingencies
Ciena is subject to the possibility of various losses arising in the ordinary course of business. These may relate to disputes,
litigation and other legal actions. Ciena considers the likelihood of loss or the incurrence of a liability, as well as Ciena's ability
to reasonably estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is accrued when it
is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Ciena regularly evaluates
current information available to it in order to determine whether any accruals should be adjusted and whether new accruals are
required.
Fair Value of Financial Instruments
The carrying value of Ciena's cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities
approximates fair market value due to the relatively short period of time to maturity. For information related to the fair value of
Ciena's convertible notes, see Note 13 below.
Fair value for the measurement of financial assets and liabilities is defined as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair
value is a market-based measurement that should be determined based on assumptions that market participants would use in
pricing an asset or liability. Ciena utilizes a valuation hierarchy for disclosure of the inputs for fair value measurement. This
hierarchy prioritizes the inputs into three broad levels as follows:
Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 inputs are quoted prices for identical or similar assets or liabilities in less active markets or model-derived
valuations in which significant inputs are observable for the asset or liability, either directly or indirectly through market
corroboration, for substantially the full term of the financial instrument;
Level 3 inputs are unobservable inputs based on Ciena's assumptions used to measure assets and liabilities at fair value.
By distinguishing between inputs that are observable in the marketplace, and therefore more objective, and those that are
unobservable and therefore more subjective, the hierarchy is designed to indicate the relative reliability of the fair value
measurements. A financial asset or liability's classification within the hierarchy is determined based on the lowest level input
that is significant to the fair value measurement.
Restructuring
From time to time, Ciena takes actions to better align its workforce, facilities and operating costs with perceived market
opportunities, business strategies and changes in market and business conditions. Ciena implements these restructuring plans
and generally incurs the associated liability concurrently. Generally accepted accounting principles require that a liability for
the cost associated with an exit or disposal activity be recognized in the period in which the liability is incurred, except for one-
time employee termination benefits related to a service period of more than 60 days, which are accrued over the service period.
See Note 3 below.
Foreign Currency
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. 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, and the statement of operations is translated at a monthly average rate. Resulting translation adjustments are recorded
directly to a separate component of stockholders' equity. Where the monetary assets and liabilities are transacted in a currency
other than the entity's functional currency, re-measurement adjustments are recorded in other income. The net gain (loss) on
foreign currency re-measurement and exchange rate changes is immaterial for separate financial statement presentation.
Derivatives
Ciena's 4.0% convertible senior notes include a redemption feature that is accounted for as a separate embedded derivative.
The embedded redemption feature is recorded at fair value on a recurring basis, and these changes are included in interest and
other income, net on the Consolidated Statement of Operations.
From time to time, Ciena uses foreign currency forward contracts to reduce variability in certain forecasted non U.S.-dollar
denominated cash flows. Generally, these derivatives have maturities of twelve months or less and are designated as cash flow
hedges. At the inception of the cash flow hedge, and on an ongoing basis, Ciena assesses whether the forward contract has been
effective in offsetting changes in cash flows attributable to the hedged risk during the hedging period. The effective portion of
the derivative's net gain or loss is initially reported as a component of accumulated other comprehensive income (loss), and,
68
upon the occurrence of the forecasted transaction, is subsequently reclassified to the line item in the Consolidated Statement of
Operations to which the hedged transaction relates. Any net gain or loss associated with the ineffectiveness of the hedging
instrument is reported in interest and other income (loss), net.
During fiscal 2012, Ciena entered into forward contracts to reduce the variability in its Canadian Dollar and Indian Rupee
denominated expense, which principally relate to research and development activities. These derivative contracts have been
designated as cash flow hedges and are immaterial for separate financial statement presentation.
Computation of Net Income (Loss) per Share
Ciena calculates basic earnings per share (EPS) by dividing earnings attributable to common stock by the weighted-
average number of common shares outstanding for the period. Diluted EPS includes other potential dilutive shares that would
be outstanding if securities or other contracts to issue common stock were exercised or converted into common stock. Ciena
uses a dual presentation of basic and diluted EPS on the face of its income statement. A reconciliation of the numerator and
denominator used for the basic and diluted EPS computations is set forth in Note 15.
Software Development Costs
Ciena develops software for sale to its customers. Generally accepted accounting principles require the capitalization of
certain software development costs that are incurred subsequent to the date technological feasibility is established and prior to
the date the product is generally available for sale. The capitalized cost is then amortized straight-line over the estimated life of
the product. Ciena defines technological feasibility as being attained at the time a working model is completed. To date, the
period between Ciena 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.
Newly Issued Accounting Standards
In May 2011, the FASB issued an accounting standards update that amends current fair value measurement and disclosure
guidance to converge with International Financial Reporting Standards (IFRS). This update provides improved comparability
of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS.
This guidance is effective for fiscal years and interim periods beginning after December 15, 2011. Early application by public
companies is not permitted. Ciena will adopt this guidance in fiscal 2013 and does not expect this new guidance to have any
impact on its financial condition, results of operations and cash flows.
In June 2011, the FASB issued an accounting standards update that requires an entity to present total comprehensive
income, the components of net income, and the components of other comprehensive income either in a single continuous
statement of comprehensive income or in two separate but consecutive statements and eliminates the option to present the
components of other comprehensive income as part of the statement of changes in stockholders' equity. In December 2011, the
portion of this guidance related to the presentation of the reclassifications of items out of accumulated other comprehensive
income was deferred. The remainder of this guidance is effective for fiscal years and interim periods beginning after December
15, 2011. Early adoption is permitted. Ciena will adopt this guidance in fiscal 2013 and does not expect this new guidance to
have any impact on its financial condition, results of operations and cash flows.
(2) BUSINESS COMBINATIONS
Acquisition of MEN Business
On March 19, 2010, Ciena completed its acquisition of the MEN Business. Ciena acquired the MEN Business in an effort
to strengthen its technology leadership position in next-generation, converged optical Ethernet networking, accelerate the
execution of its corporate and research and development strategies and enable Ciena to better compete with larger equipment
vendors. The acquisition expanded Ciena's geographic reach, customer relationships, and portfolio of network solutions.
In accordance with the agreements for the acquisition, the $773.8 million aggregate purchase price was subsequently
adjusted downward by $80.6 million based upon the amount of net working capital transferred to Ciena at closing. As a result,
Ciena paid $693.2 million in cash for the purchase of the MEN Business.
In connection with the acquisition, Ciena entered into an agreement with Nortel to lease the “Lab 10” building on Nortel’s
Carling Campus in Ottawa, Canada (the “Carling lease”) for a term of ten years. The lease agreement contained a provision that
allowed Nortel to reduce the term of the lease, and, in exchange, Ciena could receive a payment of up to $33.5 million. This
amount was placed into escrow by Nortel in accordance with the acquisition agreements. The $16.4 million fair value of this
contingent refund right was recorded as a reduction to the consideration paid, resulting in a purchase price of $676.8 million.
69
On October 19, 2010, Nortel issued a public announcement that it had entered into a sale agreement of its Carling campus
with Publics Works and Government Services Canada (PWGSC) and had been directed to exercise its early termination rights
under the Carling lease, shortening the lease term from ten years to five years. As a result, and based on this change in
circumstances and expected outcome probability, during the fourth quarter of fiscal 2010 Ciena recorded an unrealized gain of
$13.8 million resulting in a fair value of $30.2 million for the contingent consideration right. During the first quarter of fiscal
2011, Ciena received notice of early termination from Nortel and the corresponding $33.5 million payment described above,
resulting in a gain of $3.3 million.
During fiscal 2010, Ciena incurred $101.4 million in transaction, consulting and third party service fees, $8.5 million in
restructuring expense, and an additional $12.4 million in costs primarily related to purchases of capitalized information
technology equipment. During fiscal 2011, Ciena incurred $42.1 million in transaction, consulting and third party service fees,
$6.6 million in restructuring expense, and an additional $10.9 million in costs primarily related to purchases of capitalized
information technology equipment. This integration activity was substantially completed in the first half of fiscal 2011.
The following table summarizes the final purchase price allocation related to the MEN Business, based on the estimated
fair value of the acquired assets and assumed liabilities (in thousands):
Unbilled receivables
Inventories
Prepaid expenses and other
Other long-term assets
Equipment, furniture and fixtures
Developed technology
In-process research and development
Customer relationships, outstanding purchase orders and contracts
Trade name
Deferred revenue
Accrued liabilities
Other long-term obligations
Total purchase price allocation
Final
Allocation
7,136
146,272
32,517
21,924
41,213
218,774
11,000
260,592
2,000
(28,086)
(33,845)
(2,644)
676,853
$
$
Unbilled receivables represent unbilled claims for which Ciena, subsequent to the effective date of the MEN Acquisition
date, invoiced customers upon completion of the acquired projects.
Under the acquisition method of accounting, Ciena recorded the acquired finished goods inventory at fair value, which was
determined to be most appropriately recognized as the estimated selling price less the sum of (a) costs of disposal, and (b) a
reasonable profit allowance for Ciena's selling effort.
Prepaid expenses and other include product demonstration units used to support research and development projects and
indemnification assets related to uncertain tax contingencies acquired and recorded as part of other long-term obligations. Other
long-term assets represent spares used to support customer maintenance commitments.
Developed technology represents purchased technology that had reached technological feasibility and for which
development had been completed as of the date of the acquisition. Developed technology will be amortized on a straight line
basis over its estimated useful lives of two to seven years.
In-process research and development represents development projects that had not reached technological feasibility at the
time of the acquisition. This in-process research and development was completed during the fourth quarter of fiscal 2010 and is
being amortized over a period of seven years. Expenditures to complete the in-process research and development were
expensed as incurred.
70
Customer relationships, outstanding purchase orders and contracts represent agreements with existing customers of the
MEN Business. These intangible assets are expected to have estimated useful lives of nine months to seven years, with the
exception of $14.6 million related to a contract asset for acquired in-process projects, which was subsequently billed by Ciena
and recognized as a reduction in revenue. Trade name represents acquired product trade names that are expected to have a
useful life of nine months.
Deferred revenue represents obligations assumed by Ciena to provide maintenance support services for which payment for
such services had already been made to Nortel.
Accrued liabilities represent assumed warranty obligations, other customer contract obligations, and certain employee
benefit plans. Other long-term obligations represent uncertain tax contingencies.
The following unaudited pro forma financial information summarizes the results of operations for the period indicated as if
Ciena's acquisition of the MEN Business had been completed as of the beginning of the period presented. These pro forma
amounts (in thousands) do not purport to be indicative of the results that would have actually been obtained if the acquisition
occurred as of the beginning of the period presented or that may be obtained in the future.
Pro forma revenue
Pro forma net loss
(3) RESTRUCTURING COSTS
Fiscal Year
2010
$ 1,592,911
(536,253)
$
Ciena has undertaken a number of restructuring activities intended to reduce expense and better align its workforce and
costs with market opportunities, product development and business strategies. The following table displays the activity and
balances of the historical restructuring liability accounts for the fiscal years indicated (in thousands):
Balance at October 31, 2009
Additional liability recorded
Adjustment to previous estimates
Cash payments
Balance at October 31, 2010
Additional liability recorded
Adjustment to previous estimates
Cash payments
Balance at October 31, 2011
Additional liability recorded
Adjustment to previous estimates
Cash payments
Balance at October 31, 2012
Current restructuring liabilities
Non-current restructuring liabilities
_________________________________
Workforce
reduction
Consolidation
of excess
facilities
Total
$
170
$
9,435
$
9,256 (a)
—
(7,850)
1,576
6,627 (b)
—
(8,043)
160
—
(742) (a)
(2,301)
6,392
—
(846) (b)
(2,253)
3,293
5,484 (c)
2,370 (c)
—
(4,195)
1,449
1,449
—
$
$
$
—
(2,063)
3,600
2,067
1,533
$
$
$
$
$
$
9,605
9,256
(742)
(10,151)
7,968
6,627
(846)
(10,296)
3,453
7,854
—
(6,258)
5,049
3,516
1,533
(a)
During fiscal 2010, Ciena recorded a charge of $2.1 million related to a workforce reduction of approximately 70
employees, principally affecting Ciena’s global product group and global field organization outside of the EMEA
region and $7.1 million related to a workforce reduction of 82 employees associated with the restructuring activities in
the EMEA region described above and an adjustment of $0.7 million associated with previously restructured facilities.
71
(b)
(c)
During fiscal 2011, Ciena recorded a charge of $6.6 million of severance and other employee-related costs associated
with a workforce reduction of approximately 150 employees related to a number of restructuring activities intended to
reduce operating expense and better align its workforce with market opportunities. Ciena also recorded an adjustment
of $0.8 million related to its previous restructured Acton, Massachusetts facility.
During fiscal 2012, Ciena recorded a charge of $5.5 million of severance and other employee-related costs associated
with a workforce reduction of approximately 135 employees related to a number of restructuring activities intended to
reduce operating expense and better align its workforce with market opportunities. Ciena also recorded an adjustment
of $2.4 million related to its consolidation of several facilities in the Linthicum, Maryland area.
(4) LONG-LIVED ASSET IMPAIRMENTS
Due to the reorganization as a result of the MEN Acquisition, Ciena performed an impairment analysis of its long-lived
assets during the second quarter of fiscal 2010. Based on Ciena’s estimate of future undiscounted cash flows by asset group, no
impairment was required. Due to the lack of a triggering event, no impairment analysis was performed in fiscal 2011 or 2012.
(5) SHORT-TERM AND LONG-TERM INVESTMENTS
As of October 31, 2011, long-term investments are comprised of the following (in thousands):
US government obligations
October 31, 2011
Amortized Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Estimated Fair
Value
$
$
49,933
49,933
$
$
331
331
$
$
— $
— $
50,264
50,264
As of October 31, 2012, short-term investments have final legal maturities of less than one year and are comprised of the
following (in thousands):
October 31, 2012
Amortized Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Estimated Fair
Value
$
$
49,987
49,987
$
$
70
70
$
$
— $
— $
50,057
50,057
US government obligations
(6) FAIR VALUE MEASUREMENTS
As of the date indicated, the following table summarizes the fair value of assets that are recorded at fair value on a
recurring basis (in thousands):
Assets:
U.S government obligations
Embedded redemption feature
Total assets measured at fair value
Level 1
Level 2
Level 3
Total
October 31, 2011
$
$
50,264
—
50,264
$
$
— $
—
— $
— $
7,020
7,020
$
50,264
7,020
57,284
72
Assets:
U.S. government obligations
Embedded redemption feature
Total assets measured at fair value
Level 1
Level 2
Level 3
Total
October 31, 2012
$
$
50,057
—
50,057
$
$
— $
—
— $
— $
50,057
420
420
420
$
50,477
As of the dates indicated, the assets above were presented on Ciena’s Consolidated Balance Sheet as follows (in thousands):
Assets:
Long-term investments
Other long-term assets
Total assets measured at fair value
Assets:
Short-term investments
Other long-term assets
Total assets measured at fair value
Level 1
Level 2
Level 3
Total
October 31, 2011
50,264
—
50,264
$
$
— $
—
— $
— $
7,020
7,020
$
50,264
7,020
57,284
Level 1
Level 2
Level 3
Total
October 31, 2012
50,057
—
50,057
$
$
— $
—
— $
— $
50,057
420
420
420
$
50,477
$
$
$
$
Ciena’s Level 3 assets included in other long-term assets reflect an embedded redemption feature contained within Ciena’s
4.0% convertible senior notes. See Note 13 below. The embedded redemption feature is bifurcated from Ciena’s 4.0%
convertible senior notes using the “with-and-without” approach. As such, the total value of the embedded redemption feature is
calculated as the difference between the value of the 4.0% convertible senior notes (the “Hybrid Instrument”) and the value of
an identical instrument without the embedded redemption feature (the “Host Instrument”). Both the Host Instrument and the
Hybrid Instrument are valued using a modified binomial model. The modified binomial model utilizes a risk free interest rate,
an implied volatility of Ciena’s stock, the recovery rates of bonds and the implied default intensity of the 4.0% convertible
senior notes.
As of the dates indicated, the following table sets forth, in thousands, the reconciliation of changes in Level 3 assets
recorded at fair value:
Balance at October 31, 2011
Issuances
Settlements
Changes in unrealized gain
Transfers into Level 3
Transfers out of Level 3
Balance at October 31, 2012
(7) ACCOUNTS RECEIVABLE
Level 3
7,020
—
—
(6,600)
—
—
420
$
$
Ciena has not historically experienced a significant amount of bad debt expense. The following table summarizes the
activity in Ciena’s allowance for doubtful accounts for the fiscal years indicated (in thousands):
73
Year ended
October 31,
2010
2011
2012
$
$
$
(8) INVENTORIES
Balance at beginning
of period
Provisions
Net
Deductions
Balance at end of
period
116
117
701
$
$
$
1
1,696
1,647
$
$
$
— $
1,112
848
$
$
117
701
1,500
As of the dates indicated, inventories are comprised of the following (in thousands):
Raw materials
Work-in-process
Finished goods
Deferred cost of goods sold
Provision for excess and obsolescence
October 31,
2011
2012
$
45,333
$
13,851
134,998
67,665
261,847
(31,771)
230,076
$
$
39,678
10,736
178,210
71,484
300,108
(40,010)
260,098
Ciena writes down its inventory for estimated obsolescence or unmarketable inventory by an amount 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 2010 and fiscal 2011, recorded provisions for inventory reserves were primarily related to changes in
forecasted sales for certain products. During fiscal 2012, recorded provisions for inventory reserves were primarily related to
engineering design changes and the discontinuance of certain parts and components used in the manufacture of our Packet-
Optical Transport and Packet-Optical Switching products. Deductions from the provision for excess and obsolete inventory
relate to disposal activities.
The following table summarizes the activity in Ciena’s reserve for excess and obsolete inventory for the fiscal years
indicated (in thousands):
Year ended
October 31,
2010
2011
2012
Balance at
beginning of
period
Provisions
Disposals
Balance at
end of period
$
$
$
24,002
30,767
31,771
$
$
$
13,696
17,334
23,438
$
$
$
6,931
16,330
15,199
$
$
$
30,767
31,771
40,010
(9) PREPAID EXPENSES AND OTHER
As of the dates indicated, prepaid expenses and other are comprised of the following (in thousands):
Prepaid VAT and other taxes
Deferred deployment expense
Product demonstration equipment, net
Prepaid expenses
Restricted cash
Other non-trade receivables
74
October 31,
2011
2012
$
44,969
$
17,839
46,996
14,769
12,533
6,251
37,806
19,449
33,144
16,477
2,030
8,689
$
143,357
$
117,595
Depreciation of product demonstration equipment was $4.3 million, $9.7 million and $7.8 million for fiscal 2010, 2011 and
2012, respectively.
(10) EQUIPMENT, FURNITURE AND FIXTURES
As of the dates indicated, equipment, furniture and fixtures are comprised of the following (in thousands):
Equipment, furniture and fixtures
Leasehold improvements
Accumulated depreciation and amortization
October 31,
2011
2012
$
396,310
$
422,118
50,380
446,690
(324,132)
122,558
$
61,493
483,611
(360,031)
123,580
$
During fiscal 2010, fiscal 2011 and fiscal 2012, Ciena recorded depreciation of equipment, furniture and fixtures, and
amortization of leasehold improvements of $38.5 million, $50.5 million and $51.3 million, respectively.
(11) INTANGIBLE ASSETS
As of the dates indicated, 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
Total intangible assets
October 31,
2011
2012
Gross
Intangible
$
417,833
46,538
Accumulated
Amortization
$ (234,393) $
(45,320)
Net
Intangible
Gross
Intangible
183,440
$
417,833
1,218
46,538
Accumulated
Amortization
$ (279,195) $
(45,566)
Net
Intangible
138,638
972
323,573
$
787,944
(176,596)
$ (456,309) $
146,977
323,573
331,635
$
787,944
(206,046)
$ (530,807) $
117,527
257,137
The aggregate amortization expense of intangible assets was $127.0 million, $95.9 million and $74.5 million for fiscal
2010, fiscal 2011 and fiscal 2012, respectively. Expected future amortization of intangible assets for the fiscal years indicated is
as follows (in thousands):
Year Ended October 31,
2013
2014
2015
2016
2017
Thereafter
$
71,309
57,151
52,879
52,879
22,783
136
$
257,137
(12) OTHER BALANCE SHEET DETAILS
As of the dates indicated, other long-term assets are comprised of the following (in thousands):
75
Maintenance spares inventory, net
Deferred debt issuance costs, net
Embedded redemption feature
Restricted cash
Other
October 31,
2011
2012
$
50,442
$
23,481
7,020
27,507
5,673
57,548
20,575
420
2,413
3,780
$
114,123
$
84,736
Deferred debt issuance costs are amortized using the straight line method which approximates the effect of the effective
interest rate method through the maturity of the related debt. Amortization of debt issuance costs related to our convertible
notes payable, which is included in interest expense, was $3.8 million, $5.3 million and $5.3 million for fiscal 2010, fiscal 2011
and fiscal 2012, respectively.
As of the dates indicated, accrued liabilities are comprised of the following (in thousands):
Warranty
Compensation, payroll related tax and benefits
Vacation
Current restructuring liabilities
Interest payable
Other
October 31,
2011
2012
$
47,282
$
51,808
27,808
664
4,248
65,194
55,132
48,885
29,581
3,516
4,404
68,022
$
197,004
$
209,540
The following table summarizes the activity in Ciena’s accrued warranty for the fiscal years indicated (in thousands):
Year ended
October 31,
2010
2011
2012
Beginning
Balance
$
$
$
40,196
54,372
47,282
$
$
$
Acquired
Provisions
Settlements
Balance at end
of period
24,041
$
— $
— $
15,353
18,451
33,418
$
$
$
25,218
25,541
25,568
$
$
$
54,372
47,282
55,132
As a result of the substantial completion of integration activities related to the MEN Business, Ciena consolidated certain
support operations and processes during fiscal 2011, resulting in a reduction in costs to service future warranty obligations. As
a result of the lower expected costs, Ciena reduced its warranty liability by $6.9 million, which had the effect of reducing the
provisions in the table above. The increase in fiscal 2012 warranty provision was driven primarily by sales that included
longer-term support obligations and technical support requirements from additional geographies.
As of the dates indicated, deferred revenue is comprised of the following (in thousands):
Products
Services
Less current portion
Long-term deferred revenue
(13) CONVERTIBLE NOTES PAYABLE
76
October 31,
2011
2012
42,915
$
80,883
123,798
(99,373)
24,425
$
29,279
77,797
107,076
(79,516)
27,560
$
$
Outstanding Convertible Notes Payable
Ciena has four issuances of convertible notes payable outstanding. The notes are senior unsecured obligations of Ciena and
rank equally with all of Ciena’s other existing and future senior unsecured debt. The indentures governing Ciena’s notes
provide for customary events of default which include (subject in certain cases to customary grace and cure periods), among
others, the following: nonpayment of principal or interest; breach of covenants or other agreements in the indenture; defaults in
or failure to pay certain other indebtedness; and certain events of bankruptcy or insolvency. Generally, if an event of default
occurs and is continuing, the trustee or the holders of at least 25% in aggregate principal amount of the notes may declare the
principal of, accrued interest on, and premium, if any, on all the notes immediately due and payable. Under the indentures, if
Ciena undergoes a “fundamental change” (as that term is defined in the indenture governing the notes to include certain change
in control transactions), 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 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 conversion rate, depending on the price paid per share for Ciena common stock and the effective date of the
fundamental change transaction.
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 aggregate
principal amount of $300.0 million. Interest is payable on May 1 and November 1 of each year.
At the election of the holder, 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 be redeemed by Ciena if the closing sale price of Ciena’s common stock for at least 20 trading days in
any 30 consecutive trading 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.
Ciena used approximately $28.5 million of the net proceeds of this offering to purchase a call spread option on its common
stock that is intended to limit exposure to potential dilution from the conversion of the notes. See Note 16 below for a
description of this call spread option.
During the fourth quarter of fiscal 2010, Ciena repurchased $81.8 million in aggregate principal amount of its outstanding
0.25% convertible senior notes in privately negotiated transactions, which resulted in a gain of approximately $4.9 million. As
of October 31, 2012, the outstanding principal on these notes was $216.2 million.
4.0% Convertible Senior Notes, due March 15, 2015
On March 15, 2010, Ciena completed a private placement of 4.0% convertible senior notes due March 15, 2015, in
aggregate principal amount of $375.0 million. Interest is payable on the notes on March 15 and September 15 of each year,
beginning on September 15, 2010.
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 49.0557 shares per $1,000 in principal amount, which is equivalent to an initial conversion price of
approximately $20.38 per share. The notes may be redeemed by Ciena on or after March 15, 2013 if the closing sale price of
Ciena’s common stock for at least 20 trading days in any 30 consecutive trading day period ending on the date one day prior to
the date of the notice of redemption exceeds 150% 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, including any
additional interest to, but excluding, the redemption date, plus a make-whole premium payment. The “make whole premium”
payment will be made in cash and equal the present value of the remaining interest payments, to maturity, computed using a
discount rate equal to 2.75%. The make-whole premium is paid to holders whether or not they convert the notes following
Ciena’s issuance of a redemption notice. For accounting purposes, this redemption feature is an embedded derivative that is not
clearly and closely related to the notes. Consequently, it was initially bifurcated from the indenture and separately recorded at
its fair value as an asset with subsequent changes in fair value recorded through earnings. As of October 31, 2012, the fair value
of the embedded redemption feature was $0.4 million and is included in other long-term assets on the Consolidated Balance
Sheet. Changes in fair value of the embedded redemption feature in the amount of $6.6 million are reflected as interest and
other income (loss), net in the Consolidated Statement of Operations during fiscal 2012.
The net proceeds from the offering of the notes were $364.3 million after deducting the placement agents’ fees and other
fees and expenses. Ciena used $243.8 million of this amount to fund its payment election to replace its contractual obligation to
issue convertible notes to Nortel as part of the aggregate purchase price for the acquisition of the MEN Business. The
remaining proceeds were used to reduce the cash on hand required to fund the aggregate purchase price of the MEN Business.
See Note 2 above.
77
0.875% Convertible Senior Notes due June 15, 2017
On June 11, 2007, Ciena completed a public offering of 0.875% convertible senior notes due June 15, 2017, in aggregate
principal amount of $500.0 million. Interest is payable on June 15 and December 15 of each year, beginning on December 15,
2007.
At the election of the holder, notes may be converted prior to maturity into shares of Ciena common stock at the initial
conversion rate of 26.2154 shares per $1,000 in principal amount, which is equivalent to an initial conversion price of
approximately $38.15 per share. The notes are not redeemable by Ciena prior to maturity.
Ciena used approximately $42.5 million of the net proceeds of this offering to purchase a call spread option on its common
stock that is intended to limit exposure to potential dilution from conversion of the notes. See Note 16 below for a description
of this call spread option.
3.75% Convertible Senior Notes, due October 15, 2018
On October 18, 2010, Ciena completed a private placement of 3.75% convertible senior notes due October 15, 2018, in
aggregate principal amount of $350.0 million. Interest is payable on the notes on April 15 and October 15 of each year,
beginning on April 15, 2011.
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 49.5872 shares per $1,000 in principal amount, which is equivalent to an initial conversion price of
approximately $20.17 per share.
The net proceeds from the offering were approximately $340.4 million after deducting the placement agents’ fees and other
fees and expenses. Ciena used $76.1 million of the net proceeds to effect the repurchase of its 0.25% convertible senior notes
due 2013 described above.
The following table sets forth, in thousands, the carrying value and the estimated current fair value of Ciena’s outstanding
convertible notes:
Description
0.25% Convertible Senior Notes due May 1, 2013
4.0% Convertible Senior Notes, due March 15, 2015 (1)
0.875% Convertible Senior Notes due June 15, 2017
3.75% Convertible Senior Notes, due October 15, 2018
October 31, 2012
Carrying Value
Fair Value
$
216,210
$
375,806
500,000
350,000
213,237
397,885
425,625
360,063
$
1,442,016
$
1,396,810
_________________________________
(1)
Includes unamortized bond premium related to embedded redemption feature
The fair value reported above is based on the quoted market price for the notes on the date above.
(14) CREDIT FACILITY
On August 13, 2012 (the “Closing Date”), Ciena and certain of its subsidiaries, including Ciena Communications, Inc. and
Ciena Canada, Inc. (with Ciena, collectively, the “Borrowers”), entered into asset-based lending (ABL) facility and executed
an ABL Credit Agreement (the “Credit Agreement”) with the lenders party thereto, including Deutsche Bank AG New York
Branch, as administrative agent and collateral agent (the “Agent”), Bank of America, N.A., as Syndication Agent, and Morgan
Stanley Senior Funding, Inc. and Wells Fargo Bank, National Association, as Co-Documentation Agents. The Credit Agreement
provides for a senior secured asset-based revolving credit facility of up to $150 million (the “Credit Facility”). Ciena has the
option to increase the total commitment under the Credit Facility to $200 million, subject to certain conditions, including
obtaining commitments from one or more lenders. The Credit Agreement provides that the entire amount of the Credit Facility
is available for issuances of letters of credit, and allows for both swingline loans, and Canadian dollar denominated loans
to Ciena's Canadian subsidiary (the “Canadian Borrower”) in an amount not to exceed $20 million. Ciena principally expects to
use the Credit Facility to support the issuance of letters of credit that arise in the ordinary course of its business and thereby to
reduce its use of cash to support and collateralize these instruments. As of October 31, 2012, letters of credit totaling $50.8
million were collateralized by the Credit Facility. There are no borrowings outstanding under the Credit Facility as of
October 31, 2012.
78
Availability under the Credit Facility is based upon monthly (or weekly, in certain cases) borrowing base certifications
valuing the Borrowers' eligible inventory and eligible accounts receivable, as reduced by certain reserves in effect from time to
time. Outstanding borrowings under the Credit Facility accrue interest at floating rates plus an applicable margin ranging from
2.00% to 2.50% for LIBOR rate loans, and 1.00% to 1.50% for base rate loans. The commitment fee payable on the unused
portion of the Credit Facility equals 0.50% or 0.375% based on utilization of the Credit Facility and Borrowers will pay
customary letter of credit fees.
The Credit Facility matures on August 13, 2015, provided that it will mature early on (i) January 31, 2013, if any of Ciena's
0.25% senior convertible notes due May 1, 2013 are then outstanding and Ciena is unable to meet certain financial criteria with
respect to its cash position at that time, or (ii) December 15, 2014, if any of Ciena's 4.00% senior convertible notes due March
15, 2015 are then outstanding. Ciena expects to satisfy the financial criteria such that the Credit Facility will not early mature
on January 31, 2013.
On the Closing Date, Ciena and Ciena Communications, Inc. entered into a U.S. Guaranty in favor of the Agent, providing
an unconditional guaranty of all amounts owing under the Credit Facility. Ciena Canada entered into a similar guaranty in favor
of the Agent with respect to the Canadian Borrower's obligations. These agreements may require additional subsidiary
guarantors in the future. In addition, Ciena, the other domestic Borrowers and the Agent entered into a Security Agreement and
a Pledge Agreement on the Closing Date. Pursuant to the Security Agreement and Pledge Agreement, the obligations of Ciena
and the other domestic Borrowers and the guarantees by the domestic guarantors are secured by first priority security interests
(subject only to customary permitted liens and certain other permitted liens) in substantially all current assets of Ciena, the
other domestic Borrowers and the domestic guarantors, such property consisting of accounts receivable, inventory, cash,
deposit and securities accounts, chattel paper, promissory notes and payment intangibles and, to the extent evidencing or
otherwise related to such property, all general intangibles, licenses, letter of credit rights, commercial tort claims, instruments,
supporting obligations and documents. Pursuant to a Canadian Security Agreement entered into on the Closing Date by and
between Ciena Canada and the Agent, similar assets of the Canadian Borrower secure the obligations of the Canadian
Borrower.
The Credit Agreement contains customary covenants that limit, absent lender approval, the ability of Ciena and certain of
its affiliates to, among other things, pay cash dividends, incur debt, create liens and encumbrances, redeem or repurchase stock,
enter into certain acquisition transactions or transactions with affiliates, merge, dissolve, repay certain indebtedness, change the
nature of Ciena's business, make investments or dispose of assets. In some cases, these restrictions are subject to certain
negotiated exceptions or permit Ciena to undertake otherwise restricted activities if it satisfies certain required conditions. In
addition, Ciena will be required to maintain a minimum fixed charge coverage ratio of not less than 1.0 to 1.0 as of the end of
any period of four fiscal quarters when excess availability under the Credit Facility is less than the greater of (i) 12.5% of
availability or (ii) $15,000,000. Ciena is also required to maintain at all times at least $200 million in the aggregate of
unrestricted cash and cash equivalents.
If (x) excess availability under the Credit Facility is less than the greater of (i) 12.5% of availability or (ii) $15,000,000 or
(y) there exists an event of default, amounts in any of the Borrowers' or subsidiary guarantors' designated core deposit accounts
will be transferred daily into a blocked account held by the Agent and applied to reduce outstanding amounts under the Credit
Facility.
The Credit Agreement contains customary events of default including, among other things, failure to pay obligations when
due, initiation of bankruptcy or insolvency proceedings, defaults on certain other indebtedness, change of control, incurrence of
certain material judgments that are not stayed, satisfied, bonded or discharged within 30 days, certain ERISA events, invalidity
of the credit documents, and violation of affirmative and negative covenants or breach of representations and warranties set
forth in the Credit Agreement. Upon an event of default, the lenders may, subject to various customary cure rights, require the
immediate payment of all amounts outstanding and foreclose on collateral.
Ciena recorded $2.7 million of debt issuance costs related to the credit facility agreement of which $2.3 million has been
paid.
(15) 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 potential common share
(“Diluted EPS”). Since the numerator reflects net losses for the fiscal years indicated, both Basic EPS and Diluted EPS are
computed using the weighted average number of common shares outstanding. If the numerator reflected net income, Diluted
79
EPS would also include, to the extent the effect is not anti-dilutive, the following: (i) shares issuable upon vesting of restricted
stock units, (ii) shares issuable under Ciena's employee stock purchase plan and upon exercise of outstanding stock options,
using the treasury stock method; and (iii) shares underlying Ciena's outstanding convertible notes.
Numerator
Net loss
Denominator
Basic weighted average shares outstanding
Dilutive weighted average shares outstanding
EPS
Basic EPS
Diluted EPS
Year Ended October 31,
2010
(333,514) $
2011
(195,521) $
2012
(144,021)
$
Year Ended October 31,
2010
2011
2012
93,103
93,103
95,854
95,854
99,341
99,341
Year Ended October 31,
2010
2011
2012
$
$
(3.58) $
(3.58) $
(2.04) $
(2.04) $
(1.45)
(1.45)
The following table summarizes the weighted average shares excluded from the calculation of the denominator for Diluted
EPS due to their anti-dilutive effect for the fiscal years indicated (in thousands):
Shares underlying stock options and restricted stock units
0.25% Convertible Senior Notes due May 1, 2013
4.00% Convertible Senior Notes due March 15, 2015
0.875% Convertible Senior Notes due June 15, 2017
3.75% Convertible Senior Notes due October 15, 2018
Total excluded due to anti-dilutive effect
(16) STOCKHOLDERS’ EQUITY
Call Spread Options
Year Ended October 31,
2010
2011
2012
7,397
7,454
11,605
13,108
717
40,281
6,141
5,470
18,395
13,108
17,356
60,470
5,726
5,470
18,395
13,108
17,355
60,054
Ciena holds two call spread options on its common stock relating to the shares issuable upon conversion of two issues of
convertible notes. These call spread options are designed to mitigate exposure to potential dilution from the conversion of these
notes. Ciena purchased a call spread option relating to the 0.25% convertible senior notes due May 1, 2013 for $28.5 million
during the second quarter of fiscal 2006. Ciena purchased a call spread option relating to the 0.875% convertible senior notes
due June 15, 2017 for $42.5 million during the third quarter of fiscal 2007. In each case, the call spread options were purchased
at the time of the notes offering from an affiliate of the underwriter. The cost of each call spread option was recorded as a
reduction in paid-in capital.
Each call spread option is exercisable, upon maturity of the relevant issue of convertible notes, for such number of shares of
Ciena common stock issuable upon conversion of that series of notes in full. Each call spread option has a “lower strike price”
equal to the conversion price for the notes and a “higher strike price” that serves to cap the amount of dilution protection
provided. At its election, Ciena can exercise the call spread options on a net cash basis or a net share basis. The value of the
consideration of a net share settlement will be equal to the value upon a net cash settlement and can range 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 (in the case of the April 2006 call spread option) or approximately $76.1 million (in the case of the June 2007 call
spread option), if the market price per share of Ciena common stock upon exercise is at or above the higher strike price. If the
market price on the date of exercise is between the lower strike price and the higher strike price, in lieu of a net settlement,
Ciena may elect to receive the full number of shares underlying the call spread option by paying the aggregate option exercise
80
price, which is equal to the original principal outstanding on that series of notes. Should there be an early unwind of the call
spread option, the amount of cash or shares to be received by Ciena will depend 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. The number of
shares subject to the call spread options, and the lower and higher strike prices, are subject to customary adjustments.
(17) INCOME TAXES
For the periods indicated, the provision (benefit) 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
2010
October 31,
2011
2012
$
(918) $
223
1,936
1,241
(194) $
(518)
8,202
7,490
700
—
—
700
160
23
—
183
—
857
8,465
9,322
—
—
—
—
$
1,941
$
7,673
$
9,322
For the periods indicated, income (loss) before provision for income taxes consists of the following (in thousands):
United States
Foreign
Total
October 31,
2010
(317,899) $
(13,674)
(331,573) $
2011
(240,244) $
52,396
(187,848) $
2012
(151,958)
17,259
(134,699)
$
$
For the periods indicated, the tax provision (benefit) 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
Research and development credit
Non-deductible compensation and other
Valuation allowance
Effective income tax rate
2010
35.00 %
(0.07)%
(4.56)%
2.54 %
(1.43)%
(32.07)%
(0.59)%
October 31,
2011
35.00 %
0.27 %
2.32 %
11.03 %
(3.96)%
(48.74)%
(4.08)%
2012
35.00 %
(0.64)%
(5.09)%
10.21 %
(4.92)%
(41.48)%
(6.92)%
The significant components of deferred tax assets and liabilities are as follows (in thousands):
81
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,
2011
2012
$
30,637
$
259,899
1,154,571
22,304
1,467,411
(1,467,411)
$
— $
44,128
276,710
1,142,647
25,509
1,488,994
(1,488,994)
—
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as
follows (in thousands):
Unrecognized tax benefits at October 31, 2009
Increase related to positions taken in prior period
Increase related to positions taken in current period
Reductions related to expiration of statute of limitations
Unrecognized tax benefits at October 31, 2010
Increase related to positions taken in prior period
Increase related to positions taken in current period
Reductions related to expiration of statute of limitations
Unrecognized tax benefits at October 31, 2011
Increase related to positions taken in prior period
Increase related to positions taken in current period
Reductions related to expiration of statute of limitations
Unrecognized tax benefits at October 31, 2012
$
$
6,189
26
3,383
(2,156)
7,442
(450)
1,847
(249)
8,590
(12)
2,866
(392)
11,052
As of October 31, 2011 and 2012, Ciena had accrued $1.1 million and $1.4 million, respectively, of interest and some minor
penalties related to unrecognized tax benefits within other long-term liabilities in the Consolidated Balance Sheets. A charge of
$0.2 million, a benefit of $0.3 million, and a charge of $0.3 million of interest were recorded to the provision for income taxes
during fiscal 2010, 2011 and 2012, respectively. If recognized, the entire balance of unrecognized tax benefits would impact the
effective tax rate. Over the next 12 months, Ciena does not estimate any material changes in unrecognized income tax benefits.
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 a reversal. Any future release of the valuation allowance
may be recorded as a tax benefit increasing net income or as an adjustment to paid-in capital, based on tax ordering
requirements. The following table summarizes the activity in Ciena’s valuation allowance against its gross deferred tax assets
(in thousands):
Year ended
October 31,
2010
2011
2012
Balance at beginning
of period
Additions
Deductions
$
$
$
1,198,067
1,363,493
1,467,411
$
$
$
165,426
103,918
21,583
$
$
$
Balance at end
of period
— $
— $
— $
1,363,493
1,467,411
1,488,994
As of October 31, 2012, Ciena had a $2.8 billion net operating loss carry forward and a $0.1 billion income tax credit carry
forward which begin to expire in fiscal year 2018 and 2013, respectively. Ciena’s ability to use net operating losses and credit
carry forwards is subject to limitations pursuant to the ownership change rules of the Internal Revenue Code Section 382.
82
The income tax provision does not reflect the tax savings resulting from deductions associated with Ciena’s equity
compensation and the call spread option associated with Ciena’s convertible debt. The cumulative tax benefit through
October 31, 2012 of approximately $78.0 million will be credited to additional paid-in capital when realized. For deductions
associated with Ciena’s equity compensation, credits to paid-in capital will be recorded when those tax benefits are used to
reduce taxes payable.
(18) SHARE-BASED COMPENSATION EXPENSE
Ciena grants equity awards under its 2008 Omnibus Incentive Plan and the Amended and Restated Employee Stock
Purchase Plan (“ESPP”).
2008 Plan
The 2008 Omnibus Incentive Plan (the “2008 Plan”) authorizes the issuance of awards including stock options, restricted
stock units (RSUs), restricted stock, unrestricted stock, stock appreciation rights (SARs) and other equity and/or cash
performance incentive awards to employees, directors, and consultants of Ciena. Subject to certain restrictions, the
Compensation Committee of the Board of Directors has broad discretion to establish the terms and conditions for awards under
the 2008 Plan, including the number of shares, vesting conditions and the required service or performance criteria. Options and
SARs have a maximum term of ten years, and their exercise price may not be less than 100% of fair market value on the date of
grant. Repricing of stock options and SARs is prohibited without stockholder approval. Certain change in control transactions
may cause awards granted under the 2008 Plan to vest, unless the awards are continued or substituted for in connection with the
transaction.
The 2008 Plan reserves 18.5 million shares of common stock for issuance, subject to increase from time to time by the
number of shares: (i) subject to outstanding awards granted under Ciena’s prior equity compensation plans that terminate
without delivery of any stock (to the extent such shares would have been available for issuance under such prior plan), and
(ii) subject to awards assumed or substituted in connection with the acquisition of another company. The 2008 Plan includes a
fungible share feature that counts each share of common stock underlying full value awards, such as restricted stock units, as
1.31 shares for purposes of calculating the shares remaining available under the 2008 Plan. As of October 31, 2012,
approximately 7.0 million shares remained available for issuance under the 2008 Plan.
Stock Options
Outstanding stock option awards to employees are generally subject to service-based vesting restrictions and vest
incrementally over a four-year period. The following table is a summary of Ciena's stock option activity for the periods
indicated (shares in thousands):
Balance as of October 31, 2009
Granted
Exercised
Canceled
Balance as of October 31, 2010
Granted
Exercised
Canceled
Balance as of October 31, 2011
Granted
Exercised
Canceled
Balance as of October 31, 2012
83
Shares
Underlying
Options
Outstanding
Weighted
Average
Exercise Price
5,538
86
(103)
(519)
5,002
—
(411)
(901)
3,690
—
(56)
(427)
3,207
$
$
45.80
12.42
5.21
95.00
40.96
—
14.88
97.64
30.01
—
6.72
51.28
27.58
The total intrinsic value of options exercised during fiscal 2010, fiscal 2011 and fiscal 2012 was $0.9 million, $3.4 million
and $0.5 million, respectively. The weighted average fair value of each stock option granted by Ciena during fiscal 2010 was
$6.94. There were no stock options granted by Ciena during fiscal 2011 or fiscal 2012.
The following table summarizes information with respect to stock options outstanding at October 31, 2012, based on
Ciena’s closing stock price on the last trading day of Ciena’s fiscal 2012 (shares and intrinsic value in thousands):
Options Outstanding at
October 31, 2012
Vested Options at
October 31, 2012
Weighted
Average
Remaining
Number
Weighted
Number
Weighted
Average
Remaining
of
Contractual
Average
Aggregate
of
Contractual
Underlying
Life
Exercise
Intrinsic
Underlying
Life
Shares
(Years)
Price
Value
Shares
(Years)
318
389
529
406
195
506
345
487
32
3,207
5.03
2.68
2.48
3.67
3.20
0.31
3.89
1.93
0.80
2.66
$
8.44
$
1,445
16.68
20.46
27.00
29.80
31.72
35.19
44.83
49.35
—
—
—
—
—
—
—
—
286
389
529
406
195
506
345
487
32
$
27.58
$
1,445
3,175
4.84
2.68
2.48
3.67
3.20
0.31
3.89
1.93
0.80
2.62
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
$
8.16
$
1,387
16.68
20.46
27.00
29.80
31.72
35.19
44.83
49.35
—
—
—
—
—
—
—
—
$
27.75
$
1,387
Range of
Exercise
Price
0.94 — $
16.52 — $
17.43 — $
24.69 — $
28.61 — $
31.71 — $
33.00 — $
37.31 — $
47.53 — $
0.94 — $
$
$
$
$
$
$
$
$
$
$
16.31
17.29
24.50
28.28
31.43
32.55
37.10
47.32
55.79
55.79
Assumptions for Option-Based Awards
Ciena recognizes the fair value of service-based options as share-based compensation expense on a straight-line basis over
the requisite service period. During fiscal 2010, Ciena estimated the fair value of each option award on the date of grant using
the Black-Scholes option-pricing model. Ciena did not grant any option-based awards during fiscal 2011 or fiscal 2012. The
following table lists the assumptions used in valuing option-based awards granted in fiscal 2010:
Expected volatility
Risk-free interest rate
Expected term (years)
Expected dividend yield
Year Ended
October 31,
2010
61.9%
2.0%-3.0%
5.3-5.5
0.0%
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 expected 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. Ciena uses historical information about specific exercise behavior of its grantees to determine the expected
term.
The dividend yield assumption is based on Ciena's history and expectation of dividend payouts.
84
Because share-based compensation expense is recognized only for those awards that are ultimately expected to vest, the
amount of share-based compensation expense recognized reflects a reduction for estimated forfeitures. Ciena estimates
forfeitures at the time of grant and revises those estimates in subsequent periods based upon new or changed information. Ciena
relies upon historical experience in establishing forfeiture rates. If actual forfeitures differ from current estimates, total
unrecognized share-based compensation expense will be adjusted for future changes in estimated forfeitures.
Restricted Stock Units
A restricted stock unit is a stock award that entitles the holder to receive shares of Ciena common stock as the unit vests.
Ciena's outstanding restricted stock unit awards are subject to service-based vesting conditions and/or performance-based
vesting conditions. Awards subject to service-based conditions typically vest in increments over a three or four-year period.
Awards with performance-based vesting conditions require the achievement of certain operational, financial or other
performance criteria or targets as a condition of vesting, or the acceleration of vesting, of such awards. Ciena recognizes the
estimated fair value of performance-based awards, net of estimated forfeitures, as share-based compensation expense over the
performance period, using graded vesting, which considers each performance period or tranche separately, based upon Ciena's
determination of whether it is probable that the performance targets will be achieved. At each reporting period, Ciena reassesses
the probability of achieving the performance targets and the performance period required to meet those targets.
The following table is a summary of Ciena's restricted stock unit activity for the period indicated, with the aggregate fair
value of the balance outstanding at the end of each period, based on Ciena's closing stock price on the last trading day of the
relevant period (shares and aggregate fair value in thousands):
Balance as of October 31, 2009
3,716
$
14.67
$
43,591
Restricted
Stock Units
Outstanding
Weighted
Average
Grant Date
Fair Value
Per Share
Aggregate Fair
Value
Granted
Vested
Canceled or forfeited
Balance as of October 31, 2010
Granted
Vested
Canceled or forfeited
Balance as of October 31, 2011
Granted
Vested
Canceled or forfeited
Balance as of October 31, 2012
3,643
(1,846)
(322)
5,191
2,064
(2,466)
(491)
4,298
2,433
(1,912)
(416)
4,403
13.81
71,681
16.28
59,399
$
14.16
$
56,267
The total fair value of restricted stock units that vested and were converted into common stock during fiscal 2010, fiscal
2011 and fiscal 2012 was $25.7 million, $45.3 million and $27.0 million, respectively. The weighted average fair value of each
restricted stock unit granted by Ciena during fiscal 2010, fiscal 2011 and fiscal 2012 was $13.43, $19.73 and $11.28,
respectively.
Assumptions for Restricted Stock Unit Awards
The fair value of each restricted stock unit award is based on the closing price on the date of grant. Share-based expense
for service-based restricted stock unit awards is recognized, net of estimated forfeitures, ratably over the vesting period on a
straight-line basis.
Share-based expense for performance-based restricted stock unit awards, net of estimated forfeitures, is recognized ratably
over the performance period based upon Ciena's determination of whether it is probable that the performance targets will be
achieved. At each reporting period, Ciena reassesses the probability of achieving the performance targets and the performance
period required to meet those targets. The estimation of whether the performance targets will be achieved involves judgment,
85
and the estimate of expense is revised periodically based on the probability of achieving the performance targets. Revisions are
reflected in the period in which the estimate is changed. If any performance goals are not met, no compensation cost is
ultimately recognized against that goal and, to the extent previously recognized, compensation cost is reversed.
2003 Employee Stock Purchase Plan
Under the ESPP, eligible employees may enroll in a twelve-month offer period that begins in December and June of each
year. Each offer period includes two six-month purchase periods. Employees may purchase a limited number of shares of the
Company stock at 85% of the fair market value on either the day immediately preceding the offer date or the purchase date,
whichever is lower. The ESPP is considered compensatory for purposes of share-based compensation expense. In March 2012,
Ciena stockholders approved an amendment and restatement of the ESPP, extending the term to January 24, 2023 and
increasing by 5.0 million the number of shares authorized for issuance thereunder. Pursuant to the ESPP's “evergreen”
provision, on December 31 of each year, the number of shares available under the ESPP increases by up to 0.6 million shares,
provided that the total number of shares available at that time shall not exceed 8.2 million.
During fiscal 2010, fiscal 2011 and fiscal 2012, Ciena issued 0.1 million, 0.5 million and 1.2 million shares under the
ESPP, respectively. At October 31, 2012, 7.6 million shares remained available for issuance under the ESPP.
Share-Based Compensation Expense for Periods Reported
The following table summarizes share-based compensation expense for the periods indicated (in thousands):
Year Ended October 31,
2010
2011
2012
Product costs
Service costs
Share-based compensation expense included in cost of goods sold
Research and development
Sales and marketing
General and administrative
Acquisition and integration costs
Share-based compensation expense included in operating expense
Share-based compensation expense capitalized in inventory, net
$
2,140
$
2,269
$
1,717
3,857
9,310
10,950
9,959
1,342
31,561
142
1,881
4,150
10,149
12,182
11,140
308
33,779
1
Total share-based compensation
$
35,560
$
37,930
$
2,156
1,462
3,618
8,567
11,558
8,691
7
28,823
(47)
32,394
As of October 31, 2012, total unrecognized compensation expense was $49.4 million: (i) $0.2 million, which relates to
unvested stock options and is expected to be recognized over a weighted-average period of 0.5 years; and (ii) $49.2 million,
which relates to unvested restricted stock units and is expected to be recognized over a weighted-average period of 1.3 years.
(19) SEGMENT AND ENTITY WIDE DISCLOSURES
Segment Reporting
Ciena’s chief operating decision maker, its chief executive officer, evaluates performance and allocates resources based on
multiple factors, including segment profit (loss) information for the following product categories:
•
Packet-Optical Transport — includes optical transport solutions that increase network capacity and enable more rapid
delivery of a broader mix of high-bandwidth services. These products are used by network operators to facilitate the
cost effective and efficient transport of voice, video and data traffic in core, regional, metro and access networks.
Ciena's Packet-Optical Transport products support the efficient delivery of a wide variety of consumer-oriented
network services, as well as key managed service and enterprise applications. Ciena's principal products in this
segment include the 6500 Packet-Optical Platform, 4200 Advanced Services Platform, Corestream® Agility Optical
Transport System, 5100/5200 Advanced Services Platform, Common Photonic Layer (CPL), and 6100 Multiservice
Optical Platform. This segment also includes sales from legacy SONET/SDH, transport and data networking products,
as well as certain enterprise-oriented transport solutions that support storage and LAN extension, interconnection of
data centers, and virtual private networks. This segment also includes operating system software and enhanced
software features embedded in each of these products. Revenue from this segment is included in product revenue on
the Consolidated Statement of Operations.
86
•
•
•
Packet-Optical Switching — includes optical switching platforms that enable automated optical infrastructures for the
delivery of a wide variety of enterprise and consumer-oriented network services. Ciena's principal products in this
segment include its family of CoreDirector® Multiservice Optical Switches, its 5430 Reconfigurable Switching
System and its OTN configuration for the 5410 Reconfigurable Switching System. These products include
multiservice, multi-protocol switching systems that consolidate the functionality of an add/drop multiplexer, digital
cross-connect and packet switch into a single, high-capacity intelligent switching system. These products address both
the core and metro segments of communications networks and support key managed services, Ethernet/TDM Private
Line, Triple Play and IP services. This segment also includes sales of operating system software and enhanced
software features embedded in each of these products. Revenue from this segment is included in product revenue on
the Consolidated Statement of Operations.
Carrier-Ethernet Solutions - principally includes Ciena's 3000 family of service delivery switches and service
aggregation switches, the 5000 series of service aggregation switches, and its Carrier Ethernet packet configuration for
the 5410 Service Aggregation Switch. These products support the access and aggregation tiers of communications
networks and have principally been deployed to support wireless backhaul infrastructures and business data services.
Employing sophisticated Carrier Ethernet switching technology, these products deliver quality of service capabilities,
virtual local area networking and switching functions, and carrier-grade operations, administration, and maintenance
features. This segment includes legacy broadband products that transition legacy voice networks to support Internet-
based (IP) telephony, video services and DSL. This segment also includes sales of operating system software and
enhanced software features embedded in each of these products. Revenue from this segment is included in product
revenue on the Consolidated Statement of Operations.
Software and Services - includes the Ciena One software suite, including OneControl, the integrated network and
service management software designed to automate and simplify network management, operation and service delivery.
These software solutions can track individual services across multiple product suites, facilitating planned network
maintenance, outage detection and identification of customers or services affected by network troubles. In addition to
Ciena One, this segment includes the ON-Center® Network & Service Management Suite, and the OMEA and Preside
platforms from the MEN Business. This segment also includes a broad range of consulting and support services,
including installation and deployment, maintenance support, consulting, network design and training activities. Except
for revenue from the software portion of this segment, which is included in product revenue, revenue from this
segment is included in services revenue on the Consolidated Statement of Operations.
Reportable segment asset information is not disclosed because it is not reviewed by the chief operating decision maker for
purposes of evaluating performance and allocating resources.
The table below (in thousands, except percentage data) sets forth Ciena’s segment revenue for the respective periods:
Revenues:
Packet-Optical Transport
Packet-Optical Switching
Carrier Ethernet Solutions
Software and Services
Consolidated revenue
Segment Profit (Loss)
Fiscal Year
2010
2011
2012
$
705,551
$ 1,121,811
$ 1,172,159
112,058
179,083
239,944
148,395
127,868
343,896
132,705
131,693
397,366
$ 1,236,636
$ 1,741,970
$ 1,833,923
Segment profit (loss) is determined based on internal performance measures used by the chief executive officer to assess
the performance of each operating segment in a given period. In connection with that assessment, the chief executive officer
excludes the following items: selling and marketing costs; general and administrative costs; acquisition and integration costs;
amortization of intangible assets; restructuring costs; change in fair value of contingent consideration; interest and other income
(net); interest expense; equity investment gains or losses and provisions (benefit) for income taxes.
The table below (in thousands) sets forth Ciena’s segment profit (loss) and the reconciliation to consolidated net income
(loss) during the respective periods:
87
Segment profit:
Packet-Optical Transport
Packet-Optical Switching
Carrier-Ethernet Solutions
Software and Services
Total segment profit
Less: non-performance operating expenses
Selling and marketing
General and administrative
Acquisition and integration costs
Amortization of intangible assets
Restructuring costs
Change in fair value of contingent consideration
Add: other non-performance financial items
Interest expense and other income (loss), net
Gain on cost method investments
Gain on extinguishment of debt
Less: Provision for income taxes
Consolidated net loss
Entity Wide Reporting
2010
Fiscal Year
2011
2012
$
69,319
$
191,727
$
242,137
15,662
28,742
56,152
169,875
193,515
102,692
101,379
99,401
8,514
(13,807)
(14,702)
—
4,948
49,286
10,849
77,422
329,284
251,990
126,242
42,088
69,665
5,781
(3,289)
(31,904)
7,249
—
1,941
(333,514) $
7,673
(195,521) $
$
22,842
(4,066)
99,132
360,045
266,338
114,002
—
51,697
7,854
—
(54,853)
—
—
9,322
(144,021)
The following table reflects Ciena’s geographic distribution of revenue based on the location of the purchaser, with any
country accounting for at least 10% of total revenue in the period specifically identified. Revenue attributable to geographic
regions outside of the United States is reflected as International revenue. For the periods below, Ciena’s geographic distribution
of revenue was as follows (in thousands, except percentage data):
United States
International
Total
Fiscal Year
2010
2011
2012
$
744,232
$
930,880
$
972,576
492,404
$ 1,236,636
811,090
$ 1,741,970
861,347
$ 1,833,923
The following table reflects Ciena's geographic distribution of equipment, furniture and fixtures, with any country
accounting for at least 10% of total equipment, furniture and fixtures in the period specifically identified. Equipment, furniture
and fixtures attributable to geographic regions outside of the United States and Canada are reflected as “Other International.”
For the periods below, Ciena's geographic distribution of equipment, furniture and fixtures was as follows (in thousands, except
percentage data):
United States
Canada
Other International
Total
October 31,
2010
2011
2012
$ 63,675
$
60,848
$
64,653
45,103
11,516
47,424
14,286
48,376
10,551
$ 120,294
$
122,558
$ 123,580
88
For the periods below, customers accounting for at least 10% of Ciena’s revenue were as follows (in thousands, except
percentage data):
AT&T
(20) OTHER EMPLOYEE BENEFIT PLANS
Fiscal Year
2010
2011
2012
$
267,422
$
269,858
$
248,123
Effective March 1, 2010, Ciena has a Defined Contribution Pension Plan that covers all of its Canada-based employees who
are not part of an excluded group. Total contributions (employee and employer) cannot exceed the lesser of 18% of participant
earnings and an annual dollar limit (CAD$23,820 for 2012). This plan includes a required employer contribution of 1% for all
participants and a 50% matching of participant contributions up to a total annual maximum of CAD$3,000 per employee.
During fiscal 2010, 2011 and 2012, Ciena made matching contributions of approximately CAD$2.5 million, CAD$4.3 million
and CAD$4.0 million, respectively.
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 6% an employee contributes each pay period. Ciena may
also make discretionary annual profit contributions up to the IRS regulated limit. Ciena has made no profit sharing
contributions to date. During fiscal 2010, 2011 and 2012, Ciena made matching contributions of approximately $3.4 million,
$3.9 million and $4.1 million, respectively.
(21) COMMITMENTS AND CONTINGENCIES
Ontario Grant
Ciena was awarded a conditional grant from the Province of Ontario in June 2011. Under this strategic jobs investment
fund grant, Ciena can receive up to an aggregate of CAD$25.0 million in funding for eligible costs relating to certain next-
generation, coherent optical transport development initiatives over the period from November 1, 2010 to October 31, 2015.
Ciena anticipates receiving disbursements, approximating CAD$5.0 million per fiscal year over the period above. Amounts
received under the grant are subject to recoupment in the event that Ciena fails to achieve certain minimum investment,
employment and project milestones. Ciena recorded a CAD$5.3 million and a CAD$5.6 million benefit, as a reduction in
research and development expenses, in fiscal 2011 and 2012, respectively. As of October 31, 2011 and 2012, amounts
receivable from this grant were CAD$0.3 million and CAD$2.5 million, respectively.
Foreign Tax Contingencies
Ciena has received assessment notices from the Mexican tax authorities asserting deficiencies in payments between 2001
and 2005 related primarily to income taxes and import taxes and duties. Ciena has filed judicial petitions appealing these
assessments. As of October 31, 2011 and 2012, Ciena had accrued liabilities of $1.4 million and $1.7 million related to these
contingencies, which are reported as a component of other current accrued liabilities. As of October 31, 2012, Ciena estimates
that it could be exposed to possible losses of up to $5.8 million, for which it has not accrued liabilities. Ciena has not accrued
the additional income tax liabilities because it does not believe that such losses are more likely than not. Ciena has not accrued
the additional import taxes and duties because it does not believe the incurrence of such losses are probable. Ciena continues to
evaluate the likelihood of probable and reasonably possible losses, if any, related to these assessments. As a result, future
increases or decreases to accrued liabilities may be necessary and will be recorded in the period when such amounts are
estimable and more likely than not (for income taxes) or probable (for non-income taxes).
In addition to the matters described above, Ciena is subject to various tax liabilities arising in the ordinary course of
business. Ciena does not expect that the ultimate settlement of these liabilities will have a material effect on its results of
operations, financial position or cash flows.
Litigation
On July 29, 2011, Cheetah Omni LLC filed a complaint in the United States District Court for the Eastern District of Texas
against Ciena and several other defendants, alleging, among other things, that certain of the parties' products infringe upon
multiple U.S. patents relating to certain reconfigurable optical add-drop multiplexer (ROADM) technologies. The complaint
seeks injunctive relief and damages. On November 8, 2011, Ciena filed an answer and counterclaims to Cheetah Omni's
89
amended complaint. The parties are currently engaged in discovery. Ciena believes that it has valid defenses to the lawsuit and
intends to defend it vigorously.
On May 29, 2008, Graywire, LLC filed a complaint in the United States District Court for the Northern District of Georgia
against Ciena and four other defendants, alleging, among other things, that certain of the parties' products infringe U.S. Patent
6,542,673 (the “'673 Patent”), relating to an identifier system and components for optical assemblies. The complaint seeks
injunctive relief and damages. In July 2009, upon request of Ciena and certain other defendants, the U.S. Patent and Trademark
Office (“PTO”) granted the defendants' inter partes application for reexamination with respect to certain claims of the '673
Patent, and the district court granted the defendants' motion to stay the case pending reexamination of all of the patents-in-suit.
In December 2010, the PTO confirmed the validity of some claims and rejected the validity of other claims of the '673 Patent,
to which Ciena and other defendants filed an appeal. On March 16, 2012, the PTO on appeal rejected multiple claims of the
'673 Patent, including the two claims on which Ciena is alleged to infringe. Subsequently, the plaintiff requested a reopening of
the prosecution of the '673 Patent, to which Ciena and the other defendants filed an opposition. The case currently remains
stayed, and there can be no assurance as to whether or when the stay will be lifted.
As a result of its June 2002 acquisition of ONI Systems Corp., Ciena became a defendant in a securities class action
lawsuit filed in the United States District Court for the Southern District of New York in August 2001. On January 9, 2012, the
final appellant in this securities class action lawsuit withdrew and dismissed its appeal with prejudice in accordance with the
terms of the settlement agreement. Ciena was not required to pay any amount toward the settlement or to make any other
payments to plaintiffs in connection with the resolution of this matter.
In addition to the matters described above, Ciena is subject to various legal proceedings and claims arising in the ordinary
course of business, including claims against third parties that may involve a contractual indemnification obligation on the part
of Ciena. 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.
Operating Lease Commitments
Ciena has certain minimum obligations under non-cancelable operating leases expiring on various dates through 2027 for
equipment and facilities. During fiscal 2012, the Company entered into a lease relating to office space for its new corporate
headquarters in Hanover, Maryland, consisting of a rentable area of approximately 154,100 square feet. The future minimal
rental commitments to be paid over the 15-year lease term are approximately $61.8 million. Future annual minimum operating
lease commitments under non-cancelable operating leases at October 31, 2012 are as follows (in thousands):
Year ended October 31,
2013
2014
2015
2016
2017
Thereafter
Total
$
31,381
26,569
21,928
12,967
6,630
46,126
$
145,601
Rental expense for fiscal 2010, fiscal 2011 and fiscal 2012 was approximately $22.2 million, $25.5 million and $21.7
million, respectively. In addition, Ciena paid approximately $2.2 million, $2.4 million and $1.4 million during fiscal 2010,
fiscal 2011 and fiscal 2012, respectively, related to rent costs for restructured facilities and unfavorable lease commitments,
which were offset against Ciena’s restructuring liabilities and unfavorable lease obligations. The amount for operating lease
commitments above does not include variable expenses relating to insurance, taxes, maintenance and other costs required by
the applicable operating lease. These costs are not expected to have a material impact on Ciena's financial condition, results of
operations or cash flows.
(22) SUBSEQUENT EVENTS
On December 19, 2012, Ciena entered into separate, privately negotiated exchange agreements under which it will retire
$187.5 million in aggregate principal amount of its outstanding 4.0% Convertible Senior Notes due 2015 (the “2015 Notes”) in
exchange for its issuance of a new series of 4.0% Convertible Senior Notes due 2020 (the “2020 Notes”) in an aggregate
original principal amount of $187.5 million (collectively, the “Exchange Transactions”). Following the Exchange Transactions,
90
there will be a total of $187.5 million in aggregate principal amount of 2015 Notes outstanding, with terms unchanged by the
Exchange Transactions, and $187.5 million in aggregate principal amount of 2020 Notes outstanding. The 2015 Notes and the
2020 Notes will be the Company's senior unsecured obligations and will rank equally with all of the Company's other existing
and future senior unsecured debt. The 2020 Notes will be issued pursuant to an indenture between the Company and Bank of
New York Mellon to be entered into in connection with the closing of the Exchange Transactions.
The 2020 Notes will pay interest semi-annually at a rate of 4.0% per year in respect of each $1,000 original principal
amount of 2020 Notes. The 2020 Notes will mature on December 15, 2020. The principal amount of the 2020 Notes will also
accrete at a rate of 1.85% per year commencing December 27, 2012, compounding on a semi-annual basis. The accreted
portion of the principal payable at maturity does not bear interest and is not convertible into shares of the Company's common
stock.
The 2020 Notes may be converted prior to maturity (unless earlier repurchased), at the option of the holder, into shares of
the Company's common stock at an initial conversion rate of 49.0557 shares of Ciena common stock per $1,000 in original
principal amount, which is equal to an initial conversion price of $20.385 per share. In addition, upon satisfaction of certain
conditions, the Company may elect to convert the 2020 Notes in whole or in part, prior to maturity. An aggregate of 9,197,944
shares of the Company's common stock issuable upon conversion of the 2020 Notes have been reserved for issuance. If the
Company elects to convert the 2020 Notes on or before maturity, holders will also receive a make-whole premium payable in
the Company's common stock, or its cash equivalent, at the election of the Company.
Upon certain fundamental changes, holders of the 2020 Notes have the option to require the Company to purchase the 2020
Notes at a price equal to the accreted principal amount of the 2020 Notes delivered for repurchase plus any accrued and unpaid
interest on the original principal amount of such 2020 Notes. Upon a holder's election to convert the 2020 Notes in connection
with certain fundamental changes, such holder will receive a make-whole premium payable in the Company's common stock,
or its cash equivalent, at the election of the Company.
Ciena expects the Exchange Transactions to close on December 27, 2012.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
91
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation under the supervision and with the
participation of management, including our Chief Executive Officer and Chief Financial Officer, of our 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, our Chief Executive Officer and Chief Financial Officer concluded that our 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).
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 financial reporting includes
those policies and procedures that:
•
•
•
•
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 statements
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 accordance
with authorization of management and directors of Ciena Corporation; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
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 reporting as
of October 31, 2012. 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, 2012, 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
consolidated financial statements of Ciena Corporation included in this annual report, has also audited the effectiveness of
Ciena Corporation’s internal control over financial reporting as of October 31, 2012, as stated in its report appearing under
Item 8 of Part II of this annual report.
/s/ Gary B. Smith
Gary B. Smith
President and Chief Executive Officer
December 21, 2012
/s/ James E. Moylan, Jr.
James E. Moylan, Jr.
Senior Vice President and Chief Financial Officer
December 21, 2012
Item 9B. Other Information
None.
92
Item 10. Directors, Executive Officers and Corporate Governance
PART III
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 definitive proxy statement with respect to our 2013
Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Form
10-K.
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 requirement 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 definitive proxy statement with respect to
our 2013 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by
this Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information responsive to this item is incorporated herein by reference to Ciena’s definitive proxy statement with respect to
our 2013 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by
this Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information responsive to this item is incorporated herein by reference to Ciena’s definitive proxy statement with respect to
our 2013 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by
this Form 10-K.
Item 14. Principal Accountant Fees and Services
Information responsive to this item is incorporated herein by reference to Ciena’s definitive proxy statement with respect to
our 2013 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by
this Form 10-K.
93
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)
1.
2.
3.
The information required by this item is included in Item 8 of Part II of this annual report.
The information required by this item is included in Item 8 of Part II of this annual report.
Exhibits: See Index to Exhibits, which is incorporated by reference in this Item. The Exhibits listed in the
accompanying Index to Exhibits are filed or incorporated by reference as part of this annual report.
(b)
Exhibits. See Index to Exhibits, which is incorporated by reference in this Item. The Exhibits listed in the
accompanying Index to Exhibits are filed or incorporated by reference as part of this annual report.
(c)
Not applicable.
94
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 on the 21st day of December 2012.
SIGNATURES
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 following
persons on behalf of the Registrant and in the capacities and on the date indicated.
Signatures
Title
Date
/s/ Patrick H. Nettles, Ph.D.
Executive Chairman of the Board of Directors
December 21, 2012
Patrick H. Nettles, Ph.D.
/s/ Gary B. Smith
President, Chief Executive Officer and Director
December 21, 2012
Gary B. Smith
(Principal Executive Officer)
/s/ James E. Moylan, Jr.
James E. Moylan, Jr.
(Principal Financial Officer)
Sr. Vice President, Finance and Chief Financial
Officer
December 21, 2012
/s/ Andrew C. Petrik
Vice President, Controller
December 21, 2012
Andrew C. Petrik
(Principal Accounting Officer)
/s/ Harvey B. Cash
Harvey B. Cash
/s/ Bruce L. Claflin
Bruce L. Claflin
/s/ Lawton W. Fitt
Lawton W. Fitt
Director
Director
Director
/s/ Patrick T. Gallagher
Director
Patrick T. Gallagher
/s/ Judith M. O’Brien
Director
Judith M. O’Brien
/s/ Michael J. Rowny
Director
Michael J. Rowny
95
December 21, 2012
December 21, 2012
December 21, 2012
December 21, 2012
December 21, 2012
December 21, 2012
INDEX TO EXHIBITS
Exhibit
Number
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
2.11
2.12
3.1
3.2
4.1
4.2
4.3
Exhibit Description
Amended & Restated Asset Sale Agreement by and among
Nortel Networks Corporation, Nortel Networks Limited,
Nortel Networks, Inc. and certain other entities identified
therein as sellers and Ciena Corporation, dated as of
November 24, 2009 (“Nortel ASA”)+
Amendment No. 1 to Nortel ASA dated as of December 3,
2009+
Amendment No. 2 to Nortel ASA dated as of December 23,
2009+
Amendment No. 3 to Nortel ASA dated as of March 15, 2010
Amendment No. 4 to the Nortel ASA dated as of March 15,
2010+
Amendment No. 5 to the Nortel ASA dated as of March 19,
2010+
Asset Sale Agreement (relating to the sale and purchase of
certain Nortel assets in Europe, the Middle East and Africa)
by and among the Nortel affiliates, Joint Administrators and
Joint Israeli Administrators named therein and Ciena
Corporation, dated as of October 7, 2009 (“Nortel EMEA
ASA”)+
Deed of Amendment, dated October 20, 2009, relating to the
Nortel EMEA ASA+
Amending Agreement dated November 24, 2009 relating to
the Nortel EMEA ASA+
Amending Agreement dated December 16, 2009 relating to
the Nortel EMEA ASA+
Deed of Amendment (Amendment No. 4) dated January 13,
2010 relating to Nortel EMEA ASA+
Deed of Amendment (Amendment No. 5) dated March 19,
2010 relating to Nortel EMEA ASA+
Amended and Restated Certificate of Incorporation
Amended and Restated By-Laws of Ciena Corporation
Specimen Stock Certificate
Indenture dated as of April 10, 2006 between Ciena
Corporation and The Bank of New York, as trustee, for
0.25% Convertible Senior Notes due 2013, including the
Form of Global Note attached as Exhibit A thereto
Indenture dated June 11, 2007 between Ciena Corporation
and The Bank of New York, as trustee, for 0.875%
Convertible Senior Notes due 2017, including the Form of
Global Note attached as Exhibit A thereto
Incorporated by Reference
Form and
Registration or
Commission No.
10-K
(000-21969)
Filed
Here-
with (X)
Exhibit
2.1
Filing Date
12/22/2009
10-K
(000-21969)
10-Q
(000-21969)
10-Q
(000-21969)
10-Q
(000-21969)
10-Q
(000-21969)
10-K
(000-21969)
10-K
(000-21969)
10-K
(000-21969)
10-K
(000-21969)
10-Q
(000-21969)
10-Q
(000-21969)
8-K
(333-17729)
8-K
(000-21969)
10-K
(000-21969)
8-K
(000-21969)
8-K
(000-21969)
2.2
2.1
2.1
2.2
2.3
2.3
2.4
2.5
2.6
2.2
2.1
3.1
3.1
4.1
4.7
12/22/2009
3/5/2010
6/10/2010
6/10/2010
6/10/2010
12/22/2009
12/22/2009
12/22/2009
12/22/2009
3/5/2010
6/10/2010
3/27/2008
8/28/2008
12/27/2007
4/10/2006
4.7
6/12/2007
96
Incorporated by Reference
Form and
Registration or
Commission No.
8-K
(000-21969)
Filed
Here-
with (X)
Exhibit
4.1
Filing Date
3/19/2010
8-K
(000-21969)
4.1
10/21/2010
10-K
(000-21969)
10-K
(000-21969)
10-Q
(000-21969)
10-Q
(000-21969)
10-K
(000-21969)
8-K
(000-21969)
8-K
(000-21969)
8-K
(000-21969)
10.22
12/10/1999
10.25
12/3/2001
10.38
5/20/2004
10.39
5/20/2004
10.37
12/11/2003
10.1
11/4/2005
10.2
11/4/2005
10.3
11/4/2005
10-K
(000-21969)
S-1
(333-17729)
S-1
(333-17729)
10.11
12/22/2011
10.4
12/12/1996
10.5
12/12/1996
Exhibit
Number
4.4
4.5
Exhibit Description
Indenture dated March 15, 2010 between Ciena Corporation
and The Bank of New York Mellon, as trustee, for 4.0%
Convertible Senior Notes due 2015, including the Form of
Global Note attached as Exhibit A thereto
Indenture dated as of October 18, 2010 between Ciena
Corporation and The Bank of New York Mellon Trust
Company, N.A., as trustee, for 3.75% Convertible Senior
Notes due 2018, including the Form of Global Note attached
as Exhibit A thereto
10.1
1999 Non-Officer Stock Option Plan and Form of Stock
Option Agreement*
10.2
Amendment No. 1 to 1999 Non-Officer Stock Option Plan*
Catena Networks, Inc. 1998 Equity Incentive Plan, as
amended*
Internet Photonics, Inc. Amended and Restated 2000
Corporate Stock Option Plan*
Ciena Corporation 2000 Equity Incentive Plan (Amended and
Restated ONI Systems Corp. 2000 Equity Incentive Plan)*
Form of Stock Option Award Agreement for executive
officers under Ciena Corporation 2000 Equity Incentive
Plan*
Form of Restricted Stock Unit Agreement for executive
officers under Ciena Corporation 2000 Equity Incentive
Plan*
Form of Performance Stock Unit Award Agreement for
executive officers under Ciena Corporation 2000 Equity
Incentive Plan*
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
Amended and Restated 2003 Employee Stock Purchase Plan
(as amended on May 30, 2006 and September 10, 2010)*
10.12
1996 Outside Directors Stock Option Plan*
10.13
Forms of 1996 Outside Directors Stock Option Agreement*
97
Form of Stock Option Award Agreement for directors under
Ciena Corporation 2000 Equity Incentive Plan*
8-K
(000-21969)
10.4
11/4/2005
Form of Restricted Stock Unit Award Agreement for directors
under Ciena Corporation 2000 Equity Incentive Plan*
8-K
(000-21969)
10.5
11/4/2005
Filed
Here-
with (X)
Exhibit
Number
10.14
10.15
Exhibit Description
Third Amended and Restated 1994 Stock Option Plan*
Amended and Restated 1994 Stock Option Plan Forms of
Employee Stock Option Agreement*
10.16
2008 Omnibus Incentive Compensation Plan*
10.17
10.18
10.19
10.20
10.21
Amendment to Ciena Corporation 2008 Omnibus Incentive
Plan*
Amendment to Ciena Corporation 2008 Omnibus Incentive
Plan dated March 21, 2012
Form of 2008 Omnibus Incentive Plan Restricted Stock Unit
Agreement (Employee)*
Form of 2008 Omnibus Incentive Plan Non-Qualified Stock
Option Agreement (Employee)*
Form of 2008 Omnibus Incentive Plan Restricted Stock Unit
Agreement (Director)*
10.22 World Wide Packets, Inc. 2000 Stock Incentive Plan, as
amended*
10.23
10.24
10.25
Form of Indemnification Agreement with Directors and
Executive Officers*
Amended and Restated Change in Control Severance
Agreement between Ciena Corporation and Gary B. Smith*
Form of Amended and Restated Change in Control Severance
Agreement between Ciena and Executive Officers*
10.26
Ciena Corporation Directors Restricted Stock Deferral Plan*
10.27
Ciena Corporation Amended and Restated Incentive Bonus
Plan, as amended December 15, 2011*
10.28
Ciena Corporation 2010 Inducement Equity Award Plan*
10.29
Form of 2010 Inducement Equity Award Plan Restricted
Stock Unit Agreement*
10.30
U.S. Executive Severance Benefit Plan*
10.31
10.32
10.33
10.34
10.35
Lease Agreement dated as of March 19, 2010 between Ciena
Canada, Inc. and Nortel Networks Technology Corp.#
Lab 10 Lease Amending Agreement dated February 13, 2012
between Ciena Canada, Inc. and Public Works and
Government Services Canada
Transition Services Agreement, dated as of March 19, 2010
between Ciena Corporation and Nortel Networks Corporation
and certain affiliated entities#
Intellectual Property License Agreement dated as of
March 19, 2010 between Ciena Luxembourg S.a.r.l. and
Nortel Networks Limited#
Employee Stock Purchase Plan Enrollment Agreement*
Incorporated by Reference
Form and
Registration or
Commission No.
S-1
(333-17729)
S-1
(333-17729)
8-K
(000-21969)
8-K
(000-21969)
8-K
(000-21969)
10-K
(000-21969)
10-Q
(000-21969)
10-Q
(000-21969)
S-8
(333-149520)
10-Q
(000-21969)
10-K
(000-21969)
10-K
(000-21969)
10-Q
(000-21969)
10-K
(000-21969)
10-K
(000-21969)
10-Q
(000-21969)
10-Q
(000-21969)
10-Q
(000-21969)
8-K
(000-21969)
10-Q
(000-21969)
10-Q
(000-21969)
10-K
(000-21969)
Exhibit
10.2
Filing Date
12/12/1996
10.3
12/12/1996
10.1
3/27/2008
10.1
4/15/2010
10.1
3/23/2012
10.18
12/22/2011
10.2
10.3
10.1
10.1
6/4/2009
6/4/2009
3/4/2008
3/3/2006
10.23
12/22/2010
10.24
12/22/2010
10.1
8/31/2007
10.26
12/22/2011
10.35
12/22/2009
10.2
3/25/2009
10.1
6/9/2011
10.1
6/10/2010
1.1
2/15/2012
10.2
6/10/2010
10.3
6/10/2010
10.33
12/22/2011
10.36
Amended & Restated Employee Stock Purchase Plan dated
March 21, 2012
8-K
(000-21969)
10.2
3/23/2012
98
10.37
Lease Agreement dated November 3, 2011 between Ciena
Corporation and W2007 RDG Realty, L.L.C.
10-K
(000-21969)
10.34
12/22/2011
10.38
10.39
10.40
10.41
10.42
10.43
10.44
ABL Credit Agreement, dated August 13, 2012, by and
among Ciena Corporation, Ciena Communications, Inc. and
Ciena Canada, Inc., as the borrowers, the lenders party
thereto, Deutsche Bank AG New York Branch, as
administrative agent and collateral agent, Bank of America,
N.A., as syndication agent, and Morgan Stanley Senior
Funding, Inc. and Wells Fargo Bank, National Association, as
co-documentation agents +
10-Q
(000-21969)
10.1
9/5/2012
Amendment to Credit Agreement, dated August 24, 2012, by
and among Ciena Corporation, Ciena Communications, Inc.
and Ciena Canada, Inc., as he borrowers, and Deutsche Bank
AG New York Branch, as administrative agent +
10-Q
(000-21969)
10.2
9/5/2012
Security Agreement, dated August 13, 2012, by and among
Ciena Corporation and Ciena Communications, Inc., as
assignors, and Deutsche Bank AG New York Branch, as
collateral agent +
Pledge Agreement, dated August 13, 2012, by and among
Ciena Corporation and Ciena Communications, Inc., as
pledgers, and Deutsche Bank AG New York Branch, as
collateral agent and pledgee +
U.S. Guaranty, dated August 13, 2012, by and among Ciena
Corporation and Ciena Communications, Inc., as guarantors,
and Deutsche Bank AG New York Branch, as administrative
agent +
10-Q
(000-21969)
10.3
9/5/2012
10-Q
(000-21969)
10.4
9/5/2012
10-Q
(000-21969)
10.5
9/5/2012
Canadian Security Agreement, dated August 13, 2012, by and
between Ciena Canada, Inc., as assignor, and Deutsche Bank
AG New York Branch, as collateral agent +
10-Q
(000-21969)
10.6
9/5/2012
Canadian Guaranty, dated August 13, 2012, by and between
Ciena Canada, Inc., as guarantor, and Deutsche Bank AG
New York Branch, as administrative agent +
10-Q
(000-21969)
10.7
9/5/2012
99
12.1
21.1
23.1
31.1
31.2
32.1
32.2
101.I
NS**
101.S
CH**
101.
CAL
**
101.
DEF*
*
101.L
AB**
101.P
RE**
Computation of Earnings to Fixed Charges
Subsidiaries of registrant
Consent of Independent Registered Public Accounting Firm
Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350 as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350 as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase
Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase
Document
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X
X
X
X
X
X
X
X
X
X
X
X
X
________________________________
*
**
+
#
Represents management contract or compensatory plan or arrangement
In accordance with Regulation S-T, XBRL (Extensible Business Reporting Language) related information in Exhibit No.
(101) to this Annual Report on Form 10-K shall be deemed “furnished” and not “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, and shall not be
incorporated by reference into any registration statement pursuant to the Securities Act of 1933, as amended.
Pursuant to Item 601(b)(2) of Regulation S-K certain schedules and exhibits referenced in the table of contents have been
omitted. Ciena hereby agrees to furnish supplementally a copy of any omitted exhibit or schedule to the SEC upon request.
In addition, representations and warranties included in these agreements, as amended, were made by the parties to one
another in connection with a negotiated transaction. These representations and warranties were made as of specific dates,
only for purposes of these agreements and for the benefit of the parties thereto. These representations and warranties were
subject to important exceptions and limitations agreed upon by the parties, including being qualified by confidential
disclosures, made for the purposes of allocating contractual risk between the parties rather than establishing these matters
as facts. These agreements are filed with this report only to provide investors with information regarding its terms and
conditions, and not to provide any other factual information regarding Ciena or any other party thereto. Accordingly,
investors should not rely on the representations and warranties contained in these agreements or any description thereof as
characterizations of the actual state of facts or condition of any party, its subsidiaries or affiliates. The information in these
agreements should be considered together with Ciena’s public reports filed with the SEC.
Certain portions of these documents have been omitted based on a request for confidential treatment submitted to the SEC.
The non-public information that has been omitted from these documents has been separately filed with the SEC. Each
redacted portion of these documents is indicated by a “[*]” and is subject to the request for confidential treatment
submitted to the SEC. The redacted information is confidential information of the Registrant.
100
corporate information
operating
executive officers
Patrick H. Nettles, Ph.D.
Executive Chairman of the
Board of Directors
Gary B. Smith
President, Chief Executive Officer
and Director
James E. Moylan, Jr.
Chief Financial Officer, Senior Vice
President, Finance
outside
board members
Harvey B. Cash
General Partner
InterWest Partners
Bruce L. Claflin
Chairman
AMD Corporation
Lawton W. Fitt
Retired Partner
Goldman Sachs
Stephen B. Alexander
Chief Technology Officer, Senior Vice
President, Products and Technology
Patrick T. Gallagher
Independent Telecoms
Industry Advisor
Judith M. O’Brien
Partner
King & Spalding LLP
Michael J. Rowny
Chairman
Rowny Capital
Rick Dodd
Senior Vice President,
Global Marketing
James Frodsham
Senior Vice President,
Chief Strategy Officer
François Locoh-Donou
Senior Vice President,
Global Products Group
Philippe Morin
Senior Vice President,
Global Field Operations
Andrew Petrik
Vice President and Controller
David M. Rothenstein
Senior Vice President,
General Counsel and Secretary
corporate
headquarters
Ciena Corporation
7035 Ridge Road
Hanover, MD 21076
Telephone: (800) 921-1144
or (410) 694-5700
www.Ciena.com
virtual annual meeting
Ciena’s annual meeting of shareholders
will be held at 3:00 PM (Eastern) on
Wednesday, March 20, 2013. Please
visit www.shareholdermeeting.com/
ciena at least 10 minutes prior to the
start time.
independent registered
public accounting firm
PricewaterhouseCoopers LLP
Baltimore, MD
outside counsel
Hogan Lovells US LLP
Baltimore, MD
transfer agent
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
Stockholder Inquiries: (781) 575-2879
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
7035 Ridge Road
Hanover, MD 21076
Telephone: (877) 243-6273
or (410) 694-5700
Additional information is available on
Ciena’s website at www.Ciena.com.
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Ciena is the network specialist. Ciena Corporation specializes in helping our customers transition
their networks so they can better serve their customers in a rapidly evolving industry landscape. We
offer leading network infrastructure solutions, intelligent software and a comprehensive services
practice to help our customers use their networks to fundamentally change the way they compete.
With a global presence, Ciena leverages its heritage of practical innovation to deliver maximum
performance and economic value in communications networks worldwide.
Ciena’s portfolio of software-centric optical and Ethernet platforms combine network element
programmability, network automation and comprehensive network management to create a next-
generation network on which new services and applications can be delivered. Our solutions form
the foundation of many of the largest, most reliable and sophisticated service provider, enterprise,
government, and research and education networks across the globe.
: the network specialist
7035 Ridge Road, Hanover, Maryland 21076 (410) 694-5700 (800) 921-1144 ciena.com
gaining
momentum
our 20th year
annual report 2012
: the network specialist