ANNUAL REPORT 2015
accelerate.
deliver.
transform.
Our financial performance is differentiated
from our competitors
Normalized
Revenue
Normalized Adjusted
Operating Profit
1.4
1.2
1
0
10
8
6
4
2
0
2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15
2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15
Ciena Industry Average
Source: Companies’ financial reports *Industry Avg: ADTN, ADVA, ALU, CSCO, ERIC, INFN, and JNPR
Improved profitability as revenue growth is coupled
with strong gross margins and improved OpEx levels.
Increased Operating Leverage
and Sustainable Momentum
s
v
e
R
%
x
E
p
O
d
n
a
M
G
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
42.6%
42%
40.9%
39%
1%
1.9%
42.8%
42.1%
44.7%
37%
36%
34%
10.9%
5.6%
6.5%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
FY2011
FY2012
FY2013
FY2014
FY2015
adj. opex (% revenue) adj. gross margin adj. operating margin
A Letter from Gary B. Smith
President and Chief Executive Officer
We surpassed a milestone with our
financial performance in fiscal 2015, as
we exceeded the long-term financial
targets that we set for ourselves five
years ago. During this period, we
made significant progress in diversify-
ing and solidifying our business across
multiple dimensions, we strengthened
our foundation by delivering steadily
improving operating leverage and
financial performance, and we made
the necessary strategic decisions to
ensure our continued momentum and
success going forward.
Hitting Our Financial Targets
In 2010, following our acquisition of Nortel’s MEN
business, we established a clear set of longer-term
financial targets for the combined company. Specifically,
we stated our intent to: grow revenues faster than
the market; improve adjusted gross margin to the
mid-40s percentage range; and reduce adjusted
operating expense as a percentage of revenue to the
low to mid-30s percentage range. As a result, we set
a target to achieve adjusted operating margin in the
range of 7-10%. These goals were aggressive at the
time, particularly given that our adjusted operating
margin in fiscal 2010 was below break-even.
In fiscal 2015, we exceeded that longer-term target,
delivering 11% adjusted operating margin for the
year. As planned, we achieved this by improving our
performance on every key financial metric. During this
five year period:
• We grew our revenues at a 14% compound annual
growth rate, which was higher than market growth
by 50%.*
• We improved our adjusted gross margin from 42%
to 45%.
• We reduced our adjusted operating expense as a
percentage of revenue from 42% to 34%.
In short, we did what we said we were going to do.
* Source: Infonetics, Dell’Oro, Ovum, and Heavy Reading with Ciena analysis.
ANNUAL REPORT 2015
1
In addition, we’ve improved our balance sheet
significantly during this period. We’ve gone from
losing money in fiscal 2010 to generating more than
$250 million in cash from operations in fiscal 2015,
driven by higher profitability and solid balance sheet
management. As we exited fiscal 2015, we had more
than $1 billion in cash and investments.
We also have reason to be confident about our
financial performance as we head into fiscal 2016. We
had record order flow during fiscal 2015, enabling us
to exit the year with backlog of approximately $1 billion.
This is a particularly strong metric, given that we
significantly increased our in-quarter book-to-revenue
business in fiscal 2015, which we define as revenue on
orders that were received in the same quarter.
This financial momentum is a direct result of our strategy
to lead in the markets we serve as we diversify the
business and continue to position Ciena for the
emerging priorities of the industry.
Expanding Our Market Leadership
Leveraging our recognized strength in innovation, in
fiscal 2015 we continued to introduce products and
solutions that led the industry and expanded our
market leadership. We increased our packet networking
opportunity by entering the metro aggregation market
with the 8700 Packetwave platform, a multi-terabit
packet switching platform for high-density metro
networks and inter-data center wide area networks. We
had 25 customers for the 8700 at the end of 2015,
and we now have over 350 customers purchasing
products in our packet networking portfolio.
We also introduced Waveserver, a stackable data
center interconnect (DCI) platform that allows network
operators to scale bandwidth quickly and to support
high-speed data transfer, virtual machine migration
and disaster recovery between data centers. As a
purpose-built solution for the DCI market, the dominant
application of Web-scale providers, Waveserver
extended our leadership position in this critical
market vertical. We now serve four of the five largest
Web-scale providers in the world, and we are gaining
share in those accounts while winning new customers
as well.
As a result of these and other solution advancements,
we are #1 or #2 globally in every optical product
category in which we compete. This reflects the trust
that our customers place in our ability to address their
needs today and in the future. In a global survey of
networking equipment customers by Infonetics, a
global technology market research firm, Ciena was
named the “top leader” across several market
segments, including optical, P-OTS and data center
interconnect (DCI), and across other disciplines such
as technology innovation and product reliability. And,
in the emerging area of transport software-defined
networking (SDN) and control place, we were ranked
#2 globally. In fiscal 2015, we also took a significant
step forward in further strengthening our role in this
important latter market category.
Strengthening Our Role in
On-Demand Networking
As I’ve noted in the past, we have designed our
business over the past several years based on our
view of the industry’s evolution toward the Cloud and
on-demand networking. During fiscal 2015, it became
even more clear from both our customers and their
end-users that the network must become a software-
enabled platform that is more capable of driving
on-demand business models.
Consistent with this view and the principles of our
OPn network architecture approach, in August we
acquired Cyan, a leading provider of next-generation
SDN and network functions virtualization (NFV)
solutions that enable open, agile and scalable
networks. Cyan’s expertise in multi-vendor network
and service orchestration will help us accelerate the
availability of a complete on-demand solution for
virtualized networks and services in an open ecosystem.
This, in turn, will allow our customers to realize greater
monetization capabilities through more efficient
utilization of network assets and faster time-to-market
with differentiated and profitable services. In fact,
we added two new Tier 1 customers for Cyan’s
next-generation Blue Planet platform in the first
quarter following the acquisition.
The addition of Cyan represents a unique opportunity
for us to strengthen and advance our role in the
2
ANNUAL REPORT 2015
Initial long-term financial targets
vs FY’15 results
revenue
as-adjusted
gross margin
initial targets
FY15 results
grow faster
than market
$2.45B
grown ~50% faster than
market since 2010*
mid 40s%
44.7%
as-adjusted opex
low-mid 30s%
as-adjusted
operating margin
7–10%
34%
11%
* Source: Infonetics, Dell’Oro, Ovum, and Heavy Reading with Ciena analysis.
ANNUAL REPORT 2015
3
Ciena’s Differentiated Position
Strategically designed to address large, high value markets today and tomorrow
Recognized leadership for technology innovation
Sustainable competitive advantages
Focus, scale, strong innovation, customer validation, strong business model
Sustainable share gain strategy
Winning new accounts, expanding within existing accounts, diversifying by geography
and application, and expanding addressable markets
Differentiated financial performance
Revenue growth, gross margin expansion, OpEx discipline, operating leverage
As we enter fiscal 2016, we see additional opportunities
to continue to grow and drive improved operating
leverage and financial results from our business. And
we intend to leverage those opportunities this year
and beyond.
As always, we continue to be thankful to our customers,
partners, employees and shareholders—all of whom
are critical to our success. We look forward to the next
stage of our journey together.
Gary B. Smith
President and Chief Executive Officer
market. To ensure that we fully capitalize on this
longer-term opportunity, we unified all of our new
and existing software activities and solutions under a
single brand and set of resources known as our Blue
Planet division. This will enable us to focus on obtaining
architecture-type customer wins in orchestration and
virtualization to grow our software business with an
open, multi-vendor approach.
Looking Ahead
We performed extremely well in fiscal 2015, a
continuation of our efforts and strong results over
the past five years. We’ve developed into a diversified,
differentiated business, with a broad-based strategy
and set of strategic investments in next-generation
metro, packet and software. Our strategy and our
operating model are working and proving to be both
durable and sustainable. And our team is consistently
executing against both at a very high level. We’ve
delivered on exactly what we promised, and this
has directly resulted in strong value creation for
our shareholders.
4
ANNUAL REPORT 2015
10-K
Ciena Corporation
accelerate.
deliver.
transform.
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, 2015
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 001-36250
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
New York Stock Exchange
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 $2.5 billion based on the
closing price of the Common Stock on the New York Stock Exchange on May 1, 2015.
The number of shares of Registrant’s Common Stock outstanding as of December 11, 2015 was 135,790,185.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Form 10-K incorporates by reference certain portions of the Registrant’s definitive proxy statement for its 2016 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.
CIENA CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED OCTOBER 31, 2015
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
5
21
35
35
36
36
38
40
42
65
67
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107
107
107
107
107
108
109
110
3
PART I
This annual report contains statements that discuss future events or expectations, projections of results of operations or financial
condition, changes in the markets for our products and services, trends in our business, business prospects and strategies and other
“forward-looking” information. In some cases, you can identify “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. These statements may relate to, among other things, adoption of next-generation network technology and
software programmability and control of networks; our competitive landscape; factors impacting our industry; factors impacting the
businesses of network operators and their network architectures; our corporate strategy, including our research and development, supply
chain and go-to-market initiatives; efforts to increase application of our solutions in customer networks and to increase the reach of our
business into new or growing customer and geographic markets; our backlog and seasonality in our business; our acquisition of Cyan, Inc.
and its impact on our business and results of operations; expectations for our financial results, revenue, gross margin, operating expense and
key operating measures in future periods; the adequacy of our sources of liquidity to satisfy our working capital needs, capital expenditures,
and other liquidity requirements; business initiatives including real estate and IT transitions or initiatives; and market risks associated with
financial instruments and foreign currency exchange rates. These statements are subject to known and unknown risks, uncertainties and other
factors, and actual events or results may differ materially due to factors such as:
our ability to execute our business and growth strategies;
fluctuations in our revenue and operating results and our financial results generally;
the loss of any of our large customers, a significant reduction in their spending, or a material change in their networking or
procurement strategies;
the competitive environment in which we operate;
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
• market acceptance of products and services currently under development and delays in product or software development;
•
lengthy sales cycles and onerous contract terms with communications service providers, Web-scale providers and other large
customers;
product performance problems and undetected errors;
our ability to diversify our customer base beyond our traditional customers and broaden the application for our solutions in
communications networks;
the international scale of our operations and fluctuations in currency exchange rates;
our ability to accurately forecast demand for our products for purposes of inventory purchase practices;
our ability to enforce our intellectual property rights, and costs we may incur in response to intellectual property right
infringement claims made against us;
the continued availability on commercially reasonable terms of software and other technology under third party licenses;
failure to maintain the security of confidential, proprietary or otherwise sensitive business information or systems or to protect
against cyber security attacks;
the performance of our third party contract manufacturers;
changes or disruption in components or supplies provided by third parties, including sole and limited source suppliers;
our ability to effectively manage our relationships with third party service partners and distributors;
unanticipated risks and additional obligations in connection with our resale of complementary products or technology of other
companies;
•
our exposure to the credit risks of our customers and our ability to collect receivables;
• modification or disruption of our internal business processes and information systems;
•
•
•
•
•
the effect of our outstanding indebtedness on our liquidity and business;
fluctuations in our stock price and our ability to access the capital markets to raise capital;
unanticipated expenses or disruptions to our operations caused by facilities transitions or restructuring activities;
inability to attract and retain experienced and qualified personnel;
disruptions to our operations caused by strategic acquisitions and investments or the inability to achieve the expected benefits and
synergies of newly-acquired businesses;
our ability to integrate Cyan, Inc. into our operations and to use that acquisition to grow our software business;
changes in, and the impact of, government regulations, including with respect to: the communications industry generally; the
business of our customers; the use, import or export of products; and the environment, potential climate change and other social
initiatives;
impairment charges caused by the write-down of goodwill or long-lived assets;
our ability to maintain effective internal controls over financial reporting and liabilities that result from the inability to comply
with corporate governance requirements; and
•
•
•
•
•
adverse results in litigation matters.
4
These are only some of the factors that may affect the forward-looking statements contained in this annual report. For a discussion
identifying additional important factors that could cause actual results to vary materially from those anticipated in the forward-looking
statements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in this
annual report. You should review these risk factors for a more complete understanding of the risks associated with an investment in our
securities. However, we operate in a very competitive and rapidly changing environment and new risks and uncertainties emerge, are
identified or become apparent from time to time. It is not possible for us to predict all risks and uncertainties that could have an impact on
the forward-looking statements contained in this annual report. You should be aware that the forward-looking statements contained in this
annual report are based on our current views and assumptions. We undertake no obligation to revise or update any forward-looking
statements made in this annual report to reflect events or circumstances after the date hereof or to reflect new information or the occurrence
of unanticipated events, except as required by law. The forward-looking statements in this annual report are intended to be subject to
protection afforded by the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Item 1. Business
Overview
We are a network specialist focused on providing communications networking solutions that enable a wide range of network operators to
adopt next-generation architectures. We have optimized our business and solutions to enable network operators to create and deliver the broad
array of high-bandwidth services relied upon by enterprise and consumer end users. We provide equipment, software and services that
support the transport, switching, aggregation, service delivery and management of voice, video and data traffic on communications networks.
In addition to our high-capacity hardware platforms, we offer network management and control software platforms that help network
operators simplify and automate their networks and virtualize certain network functions. Our solutions are designed to enable network
operators to adopt open, multi-vendor, software-programmable network infrastructures that improve automation, reduce network complexity
and flexibly support changing service requirements. Our solutions yield business and operational value for our customers by enabling them to
introduce new, revenue-generating services and to reduce network complexity and expense.
Our Converged Packet Optical, Packet Networking and Optical Transport products are used, individually or as part of an integrated
solution, by communications service providers, cable and multiservice operators, Web-scale providers, submarine network operators,
governments, enterprises, research and education (R&E) institutions and other network operators across the globe. Our products, which
support applications from the network core to network access points, allow network operators to scale capacity, increase transmission speeds,
allocate traffic and adapt dynamically to changing end-user service demands. Our software solutions are oriented around our Blue Planet
software platform, a modular, network virtualization, service orchestration and network management software platform designed to simplify
the creation, automation and delivery of services across multi-vendor and multi-domain network environments. To complement our hardware
and software solutions, we offer a broad range of network transformation and related support services that help our customers design,
optimize, deploy, manage and maintain their networks.
The rapid proliferation of communications services and devices, together with increased mobility, growth in video, cloud-based services
and data center interconnection, have fundamentally affected the bandwidth and service demands placed upon communications networks. As
the capacity of their network infrastructures are pressured, many network operators also face a rapidly changing business environment and
shifting competitive landscape. Newer market entrants, such as cloud service and over-the-top content providers, are challenging certain
traditional business models. Our OPn Architecture, which enables increased network scalability, flexibility and programmability, is designed
to meet these challenges. It allows for network-level software applications to control and configure the network dynamically, while flexible
interfaces integrate computing, storage and other network resources. This approach enables highly configurable network infrastructures that
can meet the “on-demand” service requirements of both our customers and their end-users. By enhancing software-based management and
control, enabling network functions to be provided virtually, and reducing required network elements, our OP n approach optimizes network
infrastructures. At the same time, it increases network scale at reduced cost and simplifies the management, deployment and orchestration of
multi-vendor hardware and software elements. Our OPn Architecture, which underpins our solutions offering and guides our research and
development strategy, is described more fully in the “Strategy” section below.
Acquisition of Cyan, Inc.
On August 3, 2015, we acquired Cyan, Inc. (“Cyan”), a leading provider of software-defined networking (SDN), network functions
virtualization (NFV), and metro packet-optical solutions, in a cash and stock transaction. See Note 2 to the Consolidated Financial Statements
found in Item 8 of Part II of this annual report for information relating to the terms of this transaction.
We believe that Cyan's best-in-class Blue Planet software platform will significantly strengthen our software offering and accelerate the
strategy behind our OPn network approach. The Blue Planet software platform offers multi-vendor network and service orchestration and
5
next-generation network management software solutions designed to automate, orchestrate, and manage the lifecycle of virtualized services
across data centers and the wide area network (WAN). Further strengthening our leadership in packet-optical hardware solutions, Cyan also
brings a metro packet-optical business with a complementary base of key customers for its family of Z-Series high-capacity, multi-layer
switching and transport platforms. We believe that this strategic acquisition will accelerate our availability to offer a complete, on-demand
solution for virtualized networks and services in an open ecosystem, and will increase our opportunity to play a leading role in the
transformation of the network from the delivery of capacity to the creation of service capability on-demand.
Certain Financial Information and Segment Data
We generated revenue of $2.4 billion in fiscal 2015, as compared to $2.3 billion in fiscal 2014. Sales to AT&T were $423.5 million, or
18.5% of total revenue in fiscal 2014, and $487.8 million, or 19.9% of total revenue in fiscal 2015. We did not have any other customers
accounting for greater than 10% of our revenue in fiscal 2014 or fiscal 2015. 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. During
fiscal 2015, we continued to organize our operations into four separate operating segments: “Converged Packet Optical;” “Packet
Networking;” “Optical Transport;” and “Software and Services.” See Notes 21 and 24 to the Consolidated Financial Statements found in
Item 8 of Part II of this annual report for information related to our segment results for fiscal 2015 and our updated operating segments for
fiscal 2016, respectively.
The matters discussed in this “Business” section should be read in conjunction with the Consolidated Financial Statements found in
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 website
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 in the “Investors” section of our website as soon as reasonably practicable after we file
these reports with the Securities and Exchange Commission (the “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 website is not a part of this annual report.
Industry Background
The markets in which we sell our communications networking solutions have been subject to significant changes in recent years.
Network operators face rapid growth in network traffic, technology convergence and evolving cloud-based service offerings and end-user
demands. Increased connectivity and growing demand for bandwidth and expanded service requirements have created significant demands on
the network infrastructures of many network operators. While network operators seek to grow revenue and manage the costs of their network,
many face competitive pressures that challenge their business models. These pressures include new market entrants, such as Web-scale
providers, and competing business models. We believe that these dynamics, and the need to adapt to changing business conditions, are
creating an environment that will cause network operators to increasingly adopt infrastructures that are more open, programmable and
automated. We also believe that these conditions will require network operators and vendors alike to seek to utilize an open ecosystem of
physical and virtual network resources provided by a variety of third parties, driving increased openness and interoperability of network
infrastructures.
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. Increased network traffic is being driven by significant technology shifts including:
• Growth in Mobile Devices and Applications. Traffic from mobile applications, including Internet, video and data services, has
expanded with the proliferation of smartphones, tablets and other wireless devices.
• Adoption and Reliance upon Bandwidth-Intensive Applications. Business customers are increasingly dependent upon enterprise
services and data center connectivity that facilitate global operations, employee mobility and access to critical business applications
and data. At the same time, consumer-oriented applications and adoption of broadband technologies, including peer-to-peer Internet
applications, video services, and multimedia downloads, have added to network traffic demands.
6
• Growth in Cloud Computing and Content Delivery. Enterprises and consumers are continuing to adopt cloud-based technologies
and service offerings that host key applications, store data, enable the viewing and downloading of content, and utilize on-demand
computing resources.
We believe that this traffic growth will require network operators to adopt higher capacity networks with increased transmission speeds,
particularly in regional and metropolitan networks and switching applications.
Changes Impacting our Network Operator Customers
We believe the following are illustrative of the significant technology and service changes impacting the businesses of network operators
and their design and adoption of next-generation network infrastructures.
•
“Cloud” Services. Cloud services are characterized by the sharing of remotely hosted computing, storage and network resources
across a network to improve economics through higher utilization of networked elements. Prevalent cloud-based services include
Platform as a Service (PaaS), Software as a Service (SaaS) and Infrastructure as a Service (IaaS). Through cloud-based
arrangements, smaller enterprises and consumers can subscribe to an expanding range of services to replace locally-housed
computing and storage requirements. Larger enterprises and data center operators can use private clouds to consolidate their own
resources and public clouds to accommodate peak demand situations, sometimes in combination. Today, infrastructures exist to
dynamically allocate centralized storage and computing resources from the cloud to end users and network architectures must be
capable of being adapted in real time to changing capacity requirements and locations.
• Mobility. Smart mobile devices and tablets that deliver integrated voice, audio, photo, video, email and mobile Internet capabilities
are rapidly changing the services and data traffic carried by wireless networks. 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. As a result, network architectures must be able to adapt and scale capacity cost-effectively to address a changing mix of
end user services.
• Over-the-Top (OTT) Content. Providers of OTT content are challenging the business models of certain network operators. OTT
content refers to video, television and other services delivered directly from the content provider to the viewer or end user. These
services are delivered and the Internet connections are provided by a different network operator than the content provider. OTT
content is imposing significant demands upon the infrastructures of communications service providers and multi-service operators
as bandwidth-intensive traffic associated with this content continues to grow.
• On-Demand Services. The application-centric, cloud-driven world is changing user bandwidth consumption patterns. Network
service users want to be connected to content and bandwidth whenever they desire, leading to less predictable traffic patterns and
usage. To address this trend, many network operators are looking to adopt programmable network infrastructures that enable them
to dynamically shift and allocate resources, on demand.
•
Internet of Things. As the number of networked connections between devices and servers grows, machine-to-machine (M2M)-
related traffic is expected to represent an increasing portion of traffic in what some refer to as the “Internet of Things”. These
device-to-device connections can provide value-added services and allow users to share data that can be monitored and analyzed by
applications residing on various devices. We expect service traffic relating to the interconnection of machines or devices to grow as
Internet and cloud-based 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.
Network Transition to Open, Software Programmable Network Architectures
By leveraging software programmability, network operators can adapt more quickly to changing end-user demands, provide network
functions virtually on demand, and enable more efficient service delivery. We expect network operators increasingly to look to adopt
networking strategies, including one or more of the following, that rely upon software to enable more open and programmable network
infrastructures:
•
Software-Defined Networking (SDN). In traditional networking approaches, network resources are managed individually, focusing
on the needs of a particular network element instead of the needs of the applications that network element enables. SDN seeks to
separate or abstract that control from individual network elements, replacing it with a standard network control protocol. The result
provides end-to-end visibility of network flows, enabling the ability to optimize traffic paths and programmatically control data
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flows through a network. SDN seeks to simplify networks, creating more open environments that ease manageability, support
automation, and more quickly deliver customized services to end users.
• Network Function Virtualization (NFV). Virtualization is the decoupling of physical IT or communications assets from the services
or capabilities they can provide. These virtualization principles — previously applied to computing and storage resources — are
now being applied to communications networks, with certain hardware-based network functions now capable of being virtualized
and enabled via software. Through NFV, network operators can eliminate costly, single-function or dedicated network appliances,
such as firewalls and wide area network (WAN) accelerators, and obtain the same functionality provided by those appliances
virtually over centralized, generic servers. We believe that NFV can decrease power and space requirements, reduce cost, and
improve network flexibility.
We believe that network operator adoption of these approaches and similar efforts to increase network software programmability and control
of communications networks will require network operators and vendors alike to increasingly look to utilize an ecosystem of physical and
virtual network resources provided by multiple third parties. We expect that these network architectural approaches, in turn, will drive
increased openness and interoperability of multi-vendor, multi-domain network environments, requiring an increased degree of cooperation
among us and other solutions providers, including our competitors.
Strategy
Our corporate strategy to capitalize on the market dynamics above, promote operational efficiency and drive the profitable growth of our
business includes the following initiatives:
Promote our OPn Architecture. We intend to promote our OPn Architecture as the preferred approach for network operators to transition
to next-generation networks and address the industry dynamics described above. Our OPn Architecture enables a programmable infrastructure
that brings together the reliability and capacity of optical networking with the flexibility and economics of packet networking technologies.
Our OPn Architecture leverages this convergence to enable network operators to scale their networks efficiently and cost effectively, while
applying advanced software-based network management and control for enhanced programmability. The software-driven aspects of this
architecture become increasingly important as we expect network operators increasingly to seek to utilize an open ecosystem that enables
multi-vendor and multi-domain network management and virtualized resources required for next-generation network architectures. We see
opportunities to drive the evolution of network infrastructures by offering a portfolio of solutions, including our Blue Planet software
platform, that can accelerate the realization of our OPn Architecture.
Extend Technology Leaderships and Expand Application of Our Solutions. Our product development strategy is focused on maintaining
our technology leadership and expanding our role in customer networks to support service delivery and additional network applications. Our
research and development efforts seek to extend our existing technologies, including our WaveLogic coherent optical processor for 200G and
400G optical transport, and to introduce terabit per second and greater transmission speeds. We are also focused on expanding high-capacity
service delivery capabilities in our Packet Networking and Converged Packet Optical products for metro networks, data center
interconnectivity and WAN applications. Separately, we are increasing the scale, density and capability of our packet offerings, reducing
power and space requirements, and enabling NFV capabilities for applications in metro networks, user aggregation and data center
connectivity. We are also focused on increasing software programmability of networks and enabling network operators to automate and
accelerate the creation and delivery of new, cloud-based services. These efforts include investments in our Blue Planet software platform —
which is designed to automate, orchestrate, and manage physical network resources and virtualized services across data centers and the WAN
—and its integration across our portfolio and with additional third party network resources.
Expand our Role and Reach through Go-to-Market Model. To address the industry dynamics described above, we believe that it is
important to secure customer relationships with a diverse set of traditional communications service providers and Web-scale providers, as we
expect that their purchasing and network decisions will become increasingly interdependent. As such, our go-to-market model is focused on
driving sales growth by diversifying our business with existing customers and penetrating additional customer verticals and international
markets.
Our sales and marketing efforts seek to promote increased sales to existing customers, particularly through opportunities that expand our
role or the application of our solutions within their network and business. We are pursuing opportunities to increase adoption of our packet
access and aggregation solutions, and to secure market share of our Blue Planet software platform, including within our existing customers
base. We are also focused on opportunities to support metro aggregation, data center interconnectivity, managed services offerings, cloud-
based services, submarine networks, business Ethernet services and mobile backhaul. We intend to leverage our existing customer
relationships to increase sales and promote the adoption of our solutions as our customers scale and evolve their networks.
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We also intend to target important growth markets, including key customer market segments and geographies. Our go-to-market strategy
is focused on further penetrating Internet content providers, data center operators and other emerging network operators that form the “Web-
scale” marketplace. We intend to use our direct and indirect sales channels to target and expand our sales with several other market verticals,
including cable and multiservice operators, submarine network operators, enterprise customers and in the government, research and education
(R&E) markets. We are also focused on securing additional communications service provider customers in outside of North America,
including in high-growth geographies such as Brazil and India. We believe that this is an important part of our strategy and necessary for
continued revenue growth. To leverage the geographic reach of our direct sales resources and expand sales into key geographies, we have
pursued channel and distribution opportunities, including our strategic relationship with Ericsson, that enable sales through third parties,
including service providers, systems integrators and value-added resellers.
Optimize Business to Yield Operating Leverage. We are actively pursuing initiatives to improve our operating margin, constrain
operating expense and redesign certain business processes, systems, and resources. These initiatives include portfolio optimization and
engineering efforts to drive improved efficiencies in the design and development of our solutions and supply procurement initiatives to ensure
that our product cost model remains ahead of market-based price erosion. We are also focused on transforming our supply chain, including
efforts to reduce our material and overhead costs, reduce customer lead times and improve inventory management and logistics. Our
initiatives also include significant investments in the re-engineering of company-wide enterprise resource planning platforms, improved
automation of key business processes and systems, and the off-shoring of certain business functions. We seek to leverage these initiatives to
promote the profitable growth of our business and to drive additional operating leverage.
Customers and Markets
We sell our product and service solutions through direct and indirect sales channels to network operators in the following customer and
market segments.
Communications Service Providers
Our service provider customers include regional, national and international wireline and wireless carriers. 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 wireline 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, 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 United States and internationally. Our cable and multiservice
operator customers rely upon us for carrier-grade Ethernet transport and switching products and high-capacity coherent optical transport. 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.
Web-scale Providers
Our customers include a diverse range of Internet content providers focused on applications such as search, social media, video, real-
time communications and cloud-based offerings to consumers and enterprises. Customers within this segment also include data center
operators and other emerging network operators that are often focused on virtualized infrastructure and Ethernet exchanges. These customers
are sometimes collectively included in a customer segment referred to as “Web-scale” providers or "Web 2.0." These customers often require
massive scale, low latency, reliability and performance to interconnect critical data centers and connect end users to network resources and
content.
Enterprise
Our enterprise customers include large, multi-site commercial organizations, including participants in the financial, health care,
transportation, utilities, energy and retail industries. 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.
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Government, Research and Education (R&E)
Our government customers include federal and state agencies in the United States as well as international government entities. Our R&E
customers include research and education institutions in the United States and abroad, as well as communities or consortia including leaders
in research, academia, industry and government. Customers in this segment seek to take advantage of technology innovation, improve their
information infrastructure and facilitate increased collaboration. Our solutions feature ultra-high capacity required to meet the requirements
of supercomputing systems, as well as network assurance and security features required by customers in this space.
Submarine Network Operators
Our customers include service providers and consortia operators of submarine communications networks across the globe. Our
submarine line terminal equipment (SLTE) helps submarine network operators build new networks and upgrade submarine networks to
increase transmission speeds and capacity as they address rapid traffic growth, including from Web-scale providers. In recent years, we have
had market success in enabling operators to upgrade terrestrial equipment located at the end of submarine networks, extending the value and
life of their existing, submerged plant infrastructure. As traffic growth continues globally, we believe that the same trends impacting the
terrestrial market will impact the submarine market, requiring further investment and the adoption of network approaches that improve
economies of scale, cost per bit and end-to-end latency.
Products and Services
Our product portfolio consists of our Converged Packet Optical, Packet Networking and Optical Transport products. Our product
offering also includes a suite of software solutions that unify our product portfolio and provide enhanced network automation, software-
defined management and control features, and NFV to enable efficient service delivery. These products, together with our network
transformation and support services offerings, allow us to offer comprehensive solutions to customers that address their communications
network priorities.
Converged Packet Optical
Our Converged Packet Optical portfolio includes networking solutions optimized for the convergence of coherent optical transport, OTN
switching and packet switching.
Using our coherent optical transport technology, our 6500 Packet-Optical Platform provides a flexible and scalable dense wavelength
division multiplexing (DWDM) solution that adds capacity to core, regional and metro networks and enables efficient transport at high
transmission speeds. Our 6500 Packet-Optical Platform features our WaveLogic coherent optical processors. The third generation of our
custom silicon chipset is now in the market. WaveLogic facilitates deployment over existing fiber plant (terrestrial and submarine), scales
capacity to 40G, 100G and greater transmission speeds, and minimizes the need for certain network equipment, such as amplifiers,
regenerators and dispersion compensation devices. Our 6500 Packet-Optical Platform also includes certain integrated switching elements,
addressing market demand for converged network features, functions and layers to drive more robust and cost-effective network
infrastructures. This platform, which includes several chassis sizes and a comprehensive set of line cards optimized for individual services or
applications, can be used throughout the network, from customer premises to metropolitan networks, to the regional core, where the need for
high capacity and carrier-class performance is essential.
This portfolio also includes our 5400 Family of products that provide packet switching capability to allocate network capacity
efficiently and enable rapid service delivery. Our 5430 Reconfigurable Switching System includes 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. These platforms flexibly support a mix of Carrier Ethernet/MPLS, OTN,
WDM, and SONET/SDH switching to facilitate the transition to a service-enabling infrastructure. Our CoreDirector® Multiservice Optical
Switch and 5430 Reconfigurable Switching System offer 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.
In May 2015, we launched our Waveserver™ product. Waveserver is a stackable data center interconnect (DCI) platform that allows
network operators, including Web-scale providers and data center operators, to scale bandwidth quickly and to support high-speed data
transfer, virtual machine migration and disaster recovery/backup between data centers. Waveserver is a specialized platform, purpose-built for
connecting data centers within a single metro area. It is optimized for the capacity, speed, space and power requirements of data center
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environments. Waveserver is designed to leverage the data server user experience, with open application programming interfaces (APIs) and
server-like deployment, provisioning and programmability via smart devices. We believe this product expands our role and market
opportunity beyond our current Converged Packet Optical solutions offering and enables us to diversify further our business through sales to
additional customer verticals.
Our Converged Packet Optical solutions also include our family of Z-Series high-capacity, multi-layer switching and transport platforms
acquired from Cyan. Our Z-Series family is used in regional and metro networks and is designed to support a variety of use cases including
increasing capacity for optical transport, traffic aggregation at the network edge and switching optimized for handoff at the network core.
Packet Networking
Our Packet Networking products allow customers to deliver new, revenue-generating services to consumer and enterprise end users.
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 to deliver business data services. Our Packet Networking
products facilitate network simplicity and cost effectiveness, including reduced costs associated with power and space, as compared to
traditional IP routing network designs. These solutions also enable a flexible and open architecture that reduces the complexity of growing
networks and enables network infrastructures to adapt to new service demands of end users.
Our Packet Networking portfolio includes our 8700 Packetwave platform, a multi-terabit packet switching platform for high-density
metro networks and inter-data center wide area networks. The 8700 combines high-capacity Ethernet switching and optical transport
technologies for both data center networks and metro networks, to help network operators rapidly deliver cloud-based services, streaming
video, and Internet content distribution, efficiently aggregate users, and provide express connections to data centers. By increasing the traffic
density while reducing power and space requirements, the 8700 also enables network operators to reduce capital and operating expense
associated with their networks and to simplify service management and enablement.
To date, revenue from our Packet Networking segment has been primarily related to our 3000 family of service delivery switches and
service aggregation switches, and our 5000 family of service aggregation switches. Our 3000 and 5000 families support the access and
aggregation tiers of communications networks and have principally been deployed to support business data services and wireless backhaul
infrastructures. Employing sophisticated, carrier-grade 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 Service-
Aware Operating System (SAOS) software is employed in our Packet Networking and Converged Packet Optical platforms to provide a
common set of advanced Ethernet features and to incorporate key Operations, Administration, and Maintenance (OA&M) features to support
the network and service performance monitoring requirements of large-scale Ethernet deployments. We believe our SAOS is a key
differentiator in the market, enabling reduced cost and improving operational efficiency from the network edge to core with consistent system
and service attributes.
Optical Transport
Our Optical Transport products include stand-alone WDM and SONET/SDH-based optical transport 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. The
products in this segment principally include the 4200 Advanced Services Platform, Corestream® Agility Optical Transport System,
5100/5200 Advanced Services Platform, Common Photonic Layer (CPL) and 6100 Multiservice Optical Platform. Our Optical Transport
portfolio includes our traditional 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.
Software and Services
Historically, our software business has principally consisted of the development and licensing of element and network management
software and software-related services that support our hardware offerings. In connection with our acquisition of Cyan during the fourth
quarter of fiscal 2015, we unified the software resources and activities of both companies under a single brand and comprehensive set of
resources known as the "Blue Planet" division. This division, which includes Ciena's former Agility division, is focused on providing next-
generation, multi-vendor network virtualization, service orchestration and management solutions. During fiscal 2015, our software revenue
was principally related to licensing of our element and network management solutions. The market relating to our Blue Planet software
platform and the other applications of our Blue Planet division is in the early stages. As such, a number of features or functions associated
with our Blue Planet software platform are in development, not generally available, or have only recently been introduced, and revenue from
our Blue Planet software division and its solutions have been immaterial to date.
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Blue Planet Software Platform and Network Management and Planning Solutions
Our Blue Planet software platform is a modular, network virtualization, service orchestration and network management software
platform that simplifies the creation, automation and delivery of services across multi-vendor and multi-domain network environments. Blue
Planet is multi-functional in that it is designed to simplify the management, deployment and orchestration of hardware and software elements
and services, from Ciena or third-party vendors, based on the requirements of a network operator. Blue Planet utilizes a container-based,
micro-services software architecture that provides flexibility to support the following use cases from a unified software platform:
Management and Control Platform (MCP). Multi-layer WANs have historically operated using multiple layer- and vendor-specific
management systems, with limited awareness of adjacent layers or network resources, resulting in additional complexity and cost, and
challenging network management. Through its automation, management and control of multi-vendor and multi-layer network
infrastructures, Blue Planet eliminates this complexity. Our MCP solution enables network operators to visualize and control these
disparate network elements through a unified solution that incorporates open APIs and resource adapters to control a range of third-party
network elements. We believe our MCP solution can enable network operators to simplify their network environments and accelerate
end-to-end service delivery.
Multi-Domain Service Orchestration (MDSO). Network infrastructures are comprised of multiple technology layers and domains
— such as the data center, cloud, metro, access and core networks — and it is often complex for network operators to offer services end-
to-end in this environment. Blue Planet enables service orchestration across multiple network (physical and virtual) domains and
multiple hardware and software vendors. By using open APIs and model-driven templates, Blue Planet integrates with third-party SDN
controllers, element and network management systems, and orchestration platforms. We believe our MDSO solution can enable network
operators to minimize vendor-specific management silos, reduce network complexity and enhance service management.
NFV Orchestration (NFVO). To reduce their dependence upon single-purpose hardware platforms and accelerate the time to market
for new revenue-generating services, network operators are increasingly looking for solutions that enable these functions through
software that runs on industry-standard servers, network and storage platforms. Blue Planet provides network operators with carrier-
grade, NFV management and orchestration capabilities for instantiating and managing virtualized network functions and data center
resources. Blue Planet uses an open, vendor-agnostic approach that allows network operators to select and scale those virtual network
functions (VNFs) they wish to offer to their end customers. We believe that our NFVO solution can enable network operators to increase
network programmability, reduce complexity and cost, and reduce time-to-market with new, revenue-generating services.
Our software portfolio also includes our SDN multi-layer WAN controller that spans network layers, our Navigate path computation engine,
and network-level software applications that enable WAN services over an open network ecosystem. Our V-WAN application provides
service providers the tools to offer enterprise, content, and cloud services to end users in a more automated and self-service oriented manner.
We also offer network-level software applications, including Protect and Optimize, that enable network operators to improve reliability, to
allow for more rapid network restoration, and to better monetize cloud-based services.
Network Management Solutions and Software. Our software offerings include our element and network management solutions and
planning tools used by network operators. Our network management solutions currently include our OneControl Unified Management
System. This integrated network and service management solution supports our Converged Packet Optical, Packet Networking and Optical
Transport network elements from a single platform. It offers end to end service creation, activation, and assurance to enable rapid
deployment of next-generation services and technologies under a single system. It provides visualization of fault and performance
information for network health status, and enables proactive network management. Our OneControl system integrates easily into next-
generation back office solutions and features a flexible and scalable deployment model. The OneControl platform supports element and
equipment management functions for large scale networks including as network inventory, network element configuration backup, network
element software delivery and security administration. In addition to its network maintenance functions, OneControl also has a rich set of
service management applications for the provisioning and troubleshooting of wavelength, OTN and packet services.
Our element and network management software offering also includes a number of software solutions that support installed base of
network solution. These include:
• ON-Center® Network & Service Management Suite, which provides network and service management for our installed base of
4200 Advanced Services Platform and Corestream products;
• Optical Suite Release, which provides network and service management for our installed base of traditional SONET/SDH
transport Optical Transport products;
• Ethernet Services Manager which provides network and service management for our installed base of Packet Networking products;
and
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•
Planet Operate, which provides network and service management for our installed base of Z-Series products acquired from Cyan.
Our software suite also includes Ciena OnePlanner, a suite of planning tools advanced, multi-layer network design and optimization tool
that leverages Ciena’s extensive background in Layer 0 and Layer 1 control plane planning and simulation, photonic system design, advanced
algorithm research, and graphical user interface development into a comprehensive and easy-to-use platform for network engineering and
design. OnePlanner correlates data from different network layers, allowing the network planner to easily see the association between
services, facilities, and equipment. OnePlanner’s modular architecture enables use of design and engineering modules with the Ciena
portfolio.
Global Services
To complement our product portfolio, we offer a broad suite 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 services offerings enable us to work closely with our
customers in the assessment, planning, deployment, and transformation of their networks. We believe that our customers place significant
value on the strategic, consultative engagements afforded by our services offering and on our ability to partner with them through services-
oriented solutions that address their network and business needs on an individualized basis.
Our services and support portfolio includes the following offerings:
• Deployment services, including turn-key installation and turn-up and test services;
• Maintenance and support services, including:
•
•
•
•
helpdesk and technical support assistance;
spares and logistics management;
engineering dispatch and on-site professional services; and
equipment repair and replacement.
•
Software-related services, including software subscription services, consulting, network migration and integration, installation and
upgrade support services, and technical support;
• Network management and monitoring through network operations center (NOC) services; and
•
Project management services, including staging, site preparation and installation support activities.
We also provide training services to educate our customers and sales channels on the implementation, use, functionality and support of our
solutions. We provide the services above using a combination of Ciena technical support engineers and qualified and authorized third party
service partners.
Product Development
Our industry is subject to rapid technological developments, emerging service delivery requirements and shifts in customer and end-user
network demand. To remain competitive, we must continually enhance our product platforms and add new features and functionality to
ensure alignment with these changing dynamics. Our research and development strategy has been to enable scalable, software-configurable
network infrastructures that can dynamically enable service delivery and provide an on-demand end-user experience. 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. Our product development initiatives include design and development work intended to address growing opportunities for the
application of our solutions, such as metropolitan networks, data center interconnectivity, enterprise networking, and packet-based
infrastructure solutions for high-capacity cloud-based service delivery. To address these opportunities and promote our OPn network vision,
our current development efforts are focused upon:
• Developing products that enhance software-based network management, orchestration and function virtualization, including:
•
Investments in our Blue Planet software platform to integrate across our portfolio, enable management of additional third
party network resources, and enhance orchestration across multi-vendor and multi-domain network environments;
• Extension of the NFV capabilities of Blue Planet to enable virtualization of additional network features or functions
traditionally supported by hardware elements;
SDN multi-layer WAN controller; and
•
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• Network-level applications that automate various network functions, support new service introduction and monetize
network assets.
• Enhancing and extending our Packet-Optical and Packet Networking solutions, including:
• Extending our leadership in coherent transport platforms, at 100G, 200G and 400G;
• Continued development of our WaveLogic coherent optical processor to improve network capacity, transmission speed,
spectral efficiency and reach;
• Accelerating packet feature development and technology convergence upon our Converged Packet Optical platforms; and
• Expanding packet networking capabilities and features for our high-capacity Ethernet aggregation switches, for metro and
service aggregation applications, data center interconnection, cloud-service delivery, mobile backhaul and business
Ethernet services;
• Designing products that enable network operators to achieve improved cost and efficiency, including with respect to power, space
and cost per bit.
Our research and development efforts are also geared toward portfolio optimization and engineering changes intended to drive cost reductions
across our platforms.
We regularly review our existing solution offering and prospective development of new components, features or products, to determine
their fit within our portfolio and broader corporate strategy. We also 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. To ensure that our
product development investments and solutions offerings 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, where we seek to utilize
or gain access to complementary or emerging technologies or solutions, we may obtain such technology through an acquisition or,
alternatively, through initiatives with third parties pursuant to technology licenses, original equipment manufacturer (OEM) arrangements and
other strategic technology relationships or investments. In addition, we participate in industry and standards organizations and, where
appropriate, incorporate information from these affiliations throughout the product development process.
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, and embedded operating system and network management software. Our research and
development expense was $383.4 million, $401.2 million and $414.2 million, for fiscal 2013, 2014 and 2015, 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
Within our global field organization, we maintain a direct sales presence that is organized geographically around the following markets:
(i) United States and Canada; (ii) Caribbean and Latin America; (iii) Europe, Middle East and Africa; and (iv) Asia-Pacific. Within each
geographic area, we may maintain specific teams or personnel that focus on a particular region, country, customer or market vertical. These
teams include sales management, account salespersons, and systems engineers, as well as services professionals and commercial management
personnel, who ensure we operate closely with and provide a high level of support to our customers.
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 include the packet-optical resale element of our
strategic relationship with Ericsson. We intend to pursue and foster targeted 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 see opportunities to leverage our strategic channel relationships to address additional customer
market segments, additional applications for our solutions and growth geographies. We believe this strategy and our use of third party
channels afford us expanded market opportunities and reduce the financial and operational risk of entering these additional markets.
To support our sales efforts, we engage in marketing activities intended to promote our brand, increase customer awareness of our
product, software and service offerings and drive demand generation. Our marketing strategy is highly focused on building our brand,
promoting our OPn network architecture and increasing customer adoption of our solutions, particularly our Blue Planet software platform.
Our marketing team supports Ciena’s sales efforts through a variety of marketing vehicles, including direct customer interaction, industry
events, public relations, industry analysts, social media, trade shows, our website and other marketing channels for our customers and channel
partners.
Operations and Supply Chain Management
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Operations personnel within our global products group manage our relationships with our third party manufacturers and manage our
supply chain. In addition, elements of our global products group team also address component 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. We rely
upon third party contract manufacturers, with facilities in Canada, Mexico, Thailand and the United States, to manufacture, support and ship,
our products, and therefore are exposed to risks associated with their businesses, financial condition and the geographies in which they
operate. We also rely upon these contract manufacturers and other third parties to perform design and prototype development, component
procurement, full production, final assembly, testing and customer order fulfillment. Our manufacturers procure components necessary for
assembly and manufacture of our products based on our specifications, approved vendor lists, bills 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 may incur carrying charges or obsolete material charges for components purchased by our
manufacturers that are not ultimately used. 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.
We are currently using a direct order fulfillment model for the sale of several products, and we are engaged in initiatives to expand this
model to a broader set of products. This model allows us to rely on our third party contract 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.
Shortages or lack of availability of components that we rely upon have occurred and are possible. Our products include some
components that are proprietary in nature and only available from one or a small number of suppliers. Significant time would be required to
establish relationships with alternate suppliers or providers of such components. We generally do not have long-term contracts with suppliers
or contract manufacturers that guarantee supply of components or manufacturing services. If component supplies become limited, production
at a contract manufacturer is disrupted, or if we experience difficulty in our relationship with a key supplier or contract manufacturer, we may
encounter manufacturing delays that could adversely affect our business and result of operations.
As part of our effort to optimize our operations, we continue to focus on driving cost reductions through sourcing, design and
engineering efforts, rationalizing our supply chain, outsourcing or virtualizing certain activities, and consolidating distribution sites and
service logistics partners. These efforts also include process optimization and initiatives, such as vendor-managed inventory models, to drive
improved efficiencies in our sourcing, logistics and fulfillment.
Backlog
Generally, we make sales pursuant to purchase orders placed by customers 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. Moreover, we are periodically awarded business for new network opportunities or network upgrades
following a selection process. In calculating backlog, we only include (i) customer purchase orders for products that have not been shipped
and for services that have not yet been performed; and (ii) customer 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 our products and services, although both cancellation and
non-acceptance are infrequent. Backlog may be fulfilled several quarters following receipt of a purchase order, or in the case of certain
service obligations, may relate to multi-year support period. As a result, backlog should not necessarily be viewed as an accurate indicator of
future revenue for any particular period.
Our backlog increased from $824 million as of October 31, 2014 to $1 billion as of October 31, 2015. Backlog includes product and
service orders from commercial and government customers combined. Backlog at October 31, 2015 includes approximately $260 million
primarily related to orders for products and maintenance and support services that are not expected to be filled or performed within fiscal
2016. Backlog at October 31, 2014 included approximately $180 million primarily related to orders for products and maintenance and
support services, that were not expected to be filled within fiscal 2015. Because backlog can be defined in different ways by different
companies, our presentation of backlog may not be comparable with figures presented by other companies in our industry.
Seasonality
15
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 by service providers is curtailed. This period coincides with the first quarter of our fiscal year. This
seasonality in our order flows can result in somewhat weaker revenue results in the first quarter of our fiscal year. These seasonal effects may
not apply consistently in future periods and may not be 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 technologies, introduction of new networking solutions and aggressive selling efforts to displace incumbent vendors and
capture market share. Competition for sales of communications networking solutions is dominated by a small number of very large, multi-
national companies. Our competitors include Alcatel-Lucent, Cisco, Fujitsu, Huawei, Juniper Networks, and ZTE. In April 2015, Nokia
Corporation announced its intent to acquire Alcatel-Lucent. Many of these competitors have substantially greater financial, operational and
marketing resources than Ciena, significantly broader product offerings or more extensive customer bases. 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, Coriant, ECI,
Infinera, and RAD. 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.
The principal competitive factors applicable to our markets include:
product functionality, speed, capacity, scalability and performance;
price and total cost of ownership of our solutions;
incumbency and strength of existing business relationships;
ability to offer comprehensive networking solutions, consisting of equipment, software and network consulting services;
product development that satisfies customers' immediate and future network requirements;
flexibility and openness of platforms, including ease of integration, interoperability and integrated management;
•
•
•
•
•
•
• manufacturing and lead-time capability; and
•
services and support capabilities.
As a result of the intense and fragmented environment in which we compete, winning new opportunities can require that we agree to
unfavorable commercial terms or pricing, and certain other onerous contractual commitments. These terms can adversely affect our results of
operations. These terms can also lengthen our revenue recognition or cash collection cycles, add start-up costs to initial sales or deployment
of our solutions, require financial commitments or performance bonds, and place a disproportionate allocation of risk upon us.
We expect the competitive landscape in which we operate to continue to broaden and competition to increase as network technologies
and layers continue to converge, network hardware functions become virtualized, and networks come under unified software management,
orchestration and control. As these changes occur, we expect to compete with a broader group of vendors promoting their own network
architectural approaches and offering their own solutions. As we expand our solutions offerings, we expect that our business will overlap
more directly with additional networking solution suppliers, including IP router vendors, data center switch providers and other suppliers or
integrators of networking technology traditionally geared toward different network applications, layers or functions. In addition, as demands
for software programmability, management and control increase, we expect to increasingly compete with software vendors and other
information technology vendors or integrators. We may also face increased competition from companies, including those in our supply chain,
who develop networking products based on off-the-shelf or commoditized hardware technology, referred to as “white box” hardware,
particularly where our customer's network strategies seek to emphasize deployment of those product offerings.
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 the intellectual property protections afforded by patents, copyrights, trademarks, and trade secret laws to establish,
maintain and enforce rights in our proprietary technologies and product branding. We maintain an invention incentive program that seeks to
reward innovation and an internal invention review board that selects appropriate protection mechanisms for our technology. 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, 2015, we had 1,508 issued U.S. patents, 249 pending U.S. patent applications and 432 non-U.S. patents.
16
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 their 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 we cannot be certain that the steps that we are taking will detect or
prevent all unauthorized use. The industry in which we compete is characterized by rapidly changing technology, a large number of patents,
and frequent claims and related litigation regarding patent and other intellectual property rights. We have been subject to several claims
related to patent infringement, including by competitors and also by non-practicing patent assertion entities, and we 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 settlement costs and legal fees in the defense of related actions. If
we are not successful in defending these claims, our business could be adversely affected. For example, we may be required to enter into a
license agreement requiring us to make ongoing royalty payments, we may be required to redesign our products or we may be prohibited
from selling infringing technology in certain jurisdictions.
Our operating system, element management and network virtualization, management, and orchestration software and other solutions
incorporate software and components under licenses from third parties, including software subject to various open source software licenses.
As network operators seek to adopt network infrastructures with increased software control and programmability and utilize an open
ecosystem of physical and virtual network resources provided by multiple third parties, and as we invest in our Blue Planet software platform,
we expect to incorporate into our solutions additional elements of open source software or license additional software or technology from
third parties. We expect that these network architectural approaches will require increased openness and interoperability of multi-vendor,
multi-domain network environments, requiring an increased degree of cooperation among solutions providers. Failure to obtain or maintain
such licenses or other third party intellectual property rights could affect our development efforts and market opportunities, or could require
us to re-engineer our products or to obtain alternate technologies. Moreover, there is a risk that open source and other technology licenses
could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products.
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 are also subject to disclosure and related requirements that apply to the presence of
“conflict minerals” in our products or supply chain. 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, 2015, we had a global workforce consisting of 5,345 employees. We have not experienced any work stoppages, and
we consider the relationships with our employees to be good. While we have been able to recruit and retain key personnel with the
capabilities required by our business and markets, competition for 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.
17
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
James A. Frodsham
François Locoh-Donou
James E. Moylan, Jr.
Andrew C. Petrik
David M. Rothenstein
Marcus Starke
Harvey B. Cash (1)(3)
Bruce L. Claflin (1)(2)
Lawton W. Fitt (2)
Patrick T. Gallagher (1)(3)
T. Michael Nevens (2)
Judith M. O’Brien (1)(3)
Michael J. Rowny (2)
Age
Position
72 Executive Chairman of the Board of Directors
55 President, Chief Executive Officer and Director
56 Senior Vice President and Chief Technology Officer
49 Senior Vice President and Chief Strategy Officer
44 Senior Vice President and Chief Operating Officer
64 Senior Vice President, Finance and Chief Financial Officer
52 Vice President and Controller
47 Senior Vice President, General Counsel and Secretary
54 Senior Vice President and Chief Marketing Officer
77 Director
64 Director
62 Director
60 Director
66 Director
65 Director
65 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 2016; Ms. O’Brien and Messrs.
Cash and Smith in 2017; and Messrs. Claflin, Nevens and Gallagher in 2018.
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 of Directors 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 has previously
served on the board of directors of Apptrigger, Inc., formerly known as Carrius Technologies, Inc., and on the board of directors of Optiwind
Corp, a privately held company
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 boards of directors of 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 & Data Networking.
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. Mr. Frodsham has previously served as General Manager of
Ciena’s former Broadband Access Group and Metro and Enterprise Solutions Group. Prior to joining Ciena, from August 2000 to
January 2003, Mr. Frodsham served as chief operating officer of Innovance Networks, an optical networking company. 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. Mr. Frodsham serves on the board of directors of Innovance Networks.
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François Locoh-Donou has served as Ciena's Senior Vice President and Chief Operating Officer since November 2015. In this capacity,
Mr. Locoh-Donou leads Ciena’s Global Field Organization, including the global sales and services functions, as well as Ciena's engineering,
supply chain, product line management, quality/customer advocacy organizations on a global basis. Mr. Locoh-Donou previously served as
Ciena's Senior Vice President, Global Products Group from August 2011 to October 2015. 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.
James E. Moylan, Jr. has served as Senior Vice President, Finance and Chief Financial Officer since December 2007.
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.
Marcus Starke joined Ciena in February 2015, and currently serves as Senior Vice President and Chief Marketing Officer where he
oversees all global marketing and external communications activities. From May 2014 to January 2015, Mr. Starke served as Chief Marketing
Officer at MicroStrategy, a leading global provider of enterprise-ready platforms for business analytics and mobile analytics. From November
2009 to April 2014, Mr. Starke was Senior Vice President, Worldwide Marketing and Communications at SAP, the global market leader in
enterprise application software. Prior to that, he was President and CEO (Europe, Middle East and Africa) for Wunderman, as well as
Chairman and CEO of the German arm of Publicis Worldwide.
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 boards 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 serves on the boards of directors of Advanced Micro Devices (AMD), where he is currently
Chairman of the Board and Chairman of its Nominating and Governance Committee, and IDEXX Laboratories, Inc.
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 boards of directors of The Carlyle Group LP and The Progressive Corporation, and
she has previously served on the boards of directors of Thomson Reuters, Overture Acquisition Corporation and Frontier Communications
Company. She also serves as a director or trustee of several non-profit organizations.
Patrick T. Gallagher has served as a Director of Ciena since May 2009. Mr. Gallagher currently serves as Chairman of Harmonic Inc, a
global provider of high-performance video solutions to the broadcast, cable, telecommunications and managed service provider sectors. From
March 2008 until April 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 is also Chairman of Intercloud SAS, a Paris-headquartered provider of global private cloud connectivity services. Mr. Gallagher
also serves on the board of directors of Sollers JSC.
T. Michael Nevens has served as a Director of Ciena since February 2014. Since 2006, Mr. Nevens has served as senior adviser to
Permira Advisers, LLC, an international private equity fund. From 1980 to 2002, Mr. Nevens held various leadership positions at McKinsey
& Co., most recently as a director (senior partner) and as managing partner of the firm’s Global Technology Practice. He also served on the
board of the McKinsey Global Institute, which conducts research on economic and policy issues. Mr. Nevens is a member of the Advisory
Council of the Mendoza College of Business at the University of Notre Dame, where he has been an adjunct professor of Corporate
Governance and Strategy. Mr. Nevens serves on the boards of directors of NetApp, Inc. and Altera Corporation.
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. Ms. O’Brien served as Executive Vice President and General
Counsel of Obopay, Inc., a provider of mobile payment services, from November 2006 through December 2010. From February 2001 until
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October 2006, Ms. O’Brien served as a Managing Director at Incubic Venture Fund, a venture capital firm. From August 1980 until February
2001, 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 serves on the board of directors of
privately-held companies, Theatro Labs, Inc. and Inform, Inc., and has previously served on the board of directors of Adaptec, Inc.
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 serves on the board of directors of Neustar, Inc.
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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.
Risks Relating to Our Business
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
are based on our visibility into customer spending plans and our projections of future revenue and gross margin. Customer spending levels are
uncertain and subject to change and reductions in our expense levels to react to deviations from our projections can take significant time to
implement. Because the percentage of revenue that we generate from customer orders placed during that particular quarter has increased as
compared to our historical periods, this may increase the likelihood of fluctuations in our results. Our revenue for a particular quarter is
difficult to predict, and a shortfall in expected orders in a given quarter can materially adversely affect our revenue and results of operations for
that quarter or future quarterly periods. 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, that affect our customers;
changes in capital spending by large communications service providers;
order timing, volume and cancellations;
backlog levels;
the level of competition and pricing pressure in our industry;
the impact of commercial concessions or unfavorable commercial terms required to maintain incumbency or secure new
opportunities with key customers;
our level of success in achieving cost reductions and efficiencies in our supply chain;
our incurrence of start-up costs required to support initial deployments, gain new customers or enter new markets;
the timing of revenue recognition on sales, particularly relating to large orders;
the mix of revenue by product segment, geography and customer in any particular quarter;
installation service availability and readiness of customer sites;
adverse impact of foreign exchange; and
seasonal effects in our business.
Quarterly fluctuations from these and other factors may also cause our results of operations to fall short of or to exceed significantly the
expectations of securities analysts or investors, which may cause volatility in our stock price.
A small number of large communications service providers account for a significant portion of our revenue, and the loss of any of these
customers, a significant reduction in their spending, or a material change in their networking or procurement strategies could have a
material adverse effect on our business and results of operations.
While our customer base has diversified in recent years to include a number of network operators and new customer verticals, including
Web-scale providers and cable and multiservice operators, a significant portion of our revenue remains concentrated among a few, large global
communications service providers. By way of example, AT&T accounted for approximately 19.9% of fiscal 2015 revenue, and our largest ten
customers contributed 52.5% of fiscal 2015 revenue. Consequently, our financial results are closely correlated with the spending of a relatively
small number of customers and can be significantly affected by market, industry or competitive dynamics affecting their businesses. The loss
of a significant customer could have a material adverse effect on our business and results of operations. Our business and results of operations
can also be materially adversely impacted by reductions in spending or capital expenditure budgets by our largest service provider customers.
Because the terms of our framework contracts do not obligate customers to purchase any minimum or guaranteed order quantities, and
customers often have the right to modify or cancel orders, there can be no assurance as to spending levels, and spending levels can be
unpredictable.
Our reliance upon a relatively small number of customers also increases our exposure to changes in their spending levels, network
priorities and purchasing strategies. Our customers have previously undertaken, and may undertake in the future, procurement initiatives or
adopt network strategies adverse to our business. These initiatives may seek to achieve reductions in capital expenditure, require commercial
concessions from suppliers or reduce the number of direct suppliers of networking technology. During fiscal 2015, AT&T and other service
provider customers announced initiatives to reduce capital expenditures in future periods, including on network infrastructure, and there can be
no assurance that we will be able to maintain the sales levels we achieved during fiscal 2015. Moreover, AT&T and other customers, including
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service providers, are pursuing network strategies that seek to utilize enhanced software programmability, management and control of networks
and to deploy off-the-shelf or commoditized hardware technology, referred to as "white box" hardware, in lieu of existing solutions. These
strategies may present challenges and opportunities for our business, particularly where we are an incumbent equipment vendor. As a result, we
expect our competitive landscape to broaden and competition to increase in the markets in which we compete for sales to service provider
customers. The loss of a significant customer, a significant reduction in their spending, or a material change in their networking or procurement
strategies could have a material adverse effect on our business, financial condition and results of operations.
We face intense competition that could hurt our sales and results of operations, and we expect the competitive landscape in which we
operate to continue to broaden to include additional solutions providers.
We face a competitive market for sales of communications networking equipment, software and services, and this level of competition
could result in pricing pressure, reduced demand, commercial concessions, lower gross margins and loss of market share that could harm our
business and results of operations. Competition is intense on a global basis, as we and our competitors aggressively seek to displace incumbent
equipment vendors at large service providers and secure new customers. In an effort to maintain our incumbency and secure additional
customer opportunities, we have in the past, and may in the future, agree to aggressive pricing, commercial concessions and other unfavorable
terms that reduce our revenue and result in low or negative gross margins on a particular order or group of orders. These commercial
concessions can also place a disproportionate amount of risk on us.
We expect the competitive landscape in which we operate to broaden, as multinational equipment vendors seek to promote adoption of
competing architectural approaches for next-generation networks and retain incumbent positions with large customers globally. As we expand
our solutions offering, and, as network technologies, features and layers converge, we expect that our business will overlap more directly with
additional networking solution suppliers, including IP router vendors and data center switch providers. In addition, as demands for software
programmability, management and control increase, we expect to increasingly compete with software vendors and other information
technology vendors and system integrators. We may also face increased competition from companies, including our suppliers, who develop
networking products based on off-the-shelf or commoditized hardware technology, referred to as "white box" hardware, particularly where our
customer's network strategies seek to emphasize deployment of those product offerings. The expansion of our competitive landscape, and entry
of new competitors into our markets and customers, may adversely impact our business and results of operations.
Generally, competition in our markets is based on any one or a combination of the following factors:
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•
•
•
product functionality, speed, capacity, scalability and performance;
price and total cost of ownership of our solutions;
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 meet customers' immediate and future network requirements;
flexibility and openness of platforms, including ease of integration, interoperability and integrated software programmability and
management;
• manufacturing and lead-time capability; and
•
services and support capabilities.
A small number of very large companies have historically 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. 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 in a particular product niche. If competitive
pressures increase, or if we fail to compete successfully in our markets, our business and results of operations could suffer.
Our business and operating results could be adversely affected by unfavorable changes in macroeconomic and market conditions and
reductions in the level of spending by customers in response to these conditions.
Our business and operating results, which depend significantly on general economic conditions and demand for our products and services,
could be materially adversely affected by unfavorable or uncertain macroeconomic and market conditions, globally or with respect to a
particular region or country where we operate. Broad macroeconomic weakness and market volatility have previously resulted in sustained
periods of decreased demand for our products and services that have adversely affected our operating results. Macroeconomic and market
conditions could be adversely affected by a variety of political, economic or other factors in the United States and international markets that
22
could adversely affect spending levels of our customers and their end users, and create volatility or deteriorating conditions in the markets in
which we operate. Macroeconomic uncertainty or weakness could result in:
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•
reductions in customer spending and delay, deferral or cancellation of network infrastructure initiatives;
increased competition for fewer network projects and sales opportunities;
increased pricing pressure that may adversely affect revenue, gross margin and profitability;
difficulty forecasting operating results and making decisions about budgeting, planning and future investments;
increased overhead and production costs as a percentage of revenue;
tightening of credit markets needed to fund capital expenditures by Ciena or our customers;
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.
Reductions in customer spending in response to unfavorable or uncertain macroeconomic and market conditions, globally or with respect to a
particular region where we operate, would adversely affect our business, results of operations and financial condition.
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 support in our product design and development, and in the
sourcing of key product components and subsystems. Our products include 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 and results of
operations of our component providers that can affect their liquidity levels, ability to continue investing in their businesses, ability to meet
development commitments and manufacturing capability. These and other challenges affecting our suppliers could expose our business to
increased costs, loss or 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 guarantees of supply from these
third parties, and in certain cases are relying upon temporary commercial arrangements or standard purchase orders. 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, and 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, either of which could result in business interruption, increased 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 hardware and software solutions is characterized by rapidly evolving technologies, changes
in market demand and increasing adoption of software-based networking solutions. We continually invest in research and development to
sustain or enhance our existing hardware and software solutions and to develop or acquire new technologies including new software platforms.
There is often a lengthy period between commencing these development initiatives and bringing new or improved solutions to market. During
this time, technology preferences, customer demand and the markets for our solutions, or those introduced by our competitors, may move in
directions we had not anticipated. There is no guarantee that our new products, including our Blue Planet software platform, or enhancements
to other solutions 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 meet our expectations, 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. 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.
Network equipment sales to communications service providers, Web-scale providers and other large customers often involve lengthy
sales cycles and protracted contract negotiations and may require us to agree to commercial terms or conditions that negatively affect
pricing, risk allocation, payment and the timing of revenue recognition.
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Our sales initiatives, particularly with communications service providers, Web-scale providers and other large customers, often involve
lengthy sales cycles. These selling efforts often involve a significant commitment of time and resources by us and our customers that may
include extensive product testing, laboratory or network certification, network or region-specific product certification and homologation
requirements for deployment in networks. Even after a customer awards its business or decides to purchase our solutions, the length of
deployment time can vary depending upon the customer's schedule, site readiness, the size of the network deployment, the degree of custom
configuration required and other factors. Additionally, 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. To maintain incumbency with key customers for
existing and future business opportunities, we may be required to offer discounted pricing, make commercial concessions or offer less
favorable terms as compared to our historical business arrangements with these customers. We may also be requested to provide deferred
payment terms, vendor or third-party financing or other alternative purchase structures that extend the timing of payment and revenue
recognition. Alternatively, customers may insist upon terms and conditions that we deem too onerous or not in our best interest, and we may be
unable to reach a commercial agreement. 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.
We may experience delays in the development of our products that may negatively affect our competitive position and business.
Our hardware and software networking solutions are based on complex technology, and we can experience unanticipated delays in
developing, manufacturing and introducing these solutions to market. Delays in product development efforts by us or our supply chain may
affect our reputation with customers, affect our ability to seize market opportunities and impact the timing and level of demand for our
products. The development of new technologies may increase the complexity of supply chain management or require the acquisition, licensing
or interworking with the technology of third parties. As a result, each step in the development cycle of our products presents serious risks of
failure, rework or delay, any one of which could adversely affect the cost-effectiveness 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 could be harmed.
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 highly complex.
Some of our products can be fully tested only when deployed in communications networks or when carrying traffic with other equipment, and
software products may contain bugs that can interfere with expected performance. 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 have recently launched, and are in the process of launching, a number of new hardware and software platforms, including our Blue Planet
software platform, and other solutions targeting metro network applications or Web-scale operators or enterprise end users. Unanticipated
product performance problems can relate to the design, manufacturing, installation, operation and interoperability 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. From time to time we have had to replace certain components, provide
software remedies or other remediation in response to defects or bugs, and we may have to do so again in the future. There can be no assurance
that such remediation would not have a material impact on our business and results of operations. In addition, 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, could adversely affect our business and reputation. Product performance, reliability, security and quality
problems can negatively affect our business, and may result in some or all of the following effects:
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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.
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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.
Efforts by us or by our strategic third party channel partners to sell our solutions into targeted geographic markets and customer
segments may be unsuccessful.
In order to sell our products into new geographic markets, diversify our customer base beyond our traditional customers and broaden the
application for our solutions in communications networks, we continue to promote sales initiatives and foster strategic channel sales
relationships, including the packet-optical resale element of our strategic relationship with Ericsson. Specifically, we are targeting sales
opportunities with Web-scale providers, cloud infrastructure providers, communications service providers, enterprises, wireless operators,
cable and multiservice operators, submarine network operators, research and education institutions, and federal, state and local governments.
We also seek to expand our geographic reach and increase market share in international markets, including Brazil and India. To succeed in
some of these geographic markets and customer segments we often need to leverage strategic sales channels and distribution arrangements, and
we expect these relationships to be an important part of our business. There can be no assurance we will realize the expected benefits of these
third party sales partners. In some cases we compete in certain business areas with our third party channel partners or may have divergent
interests. Our efforts to manage and drive the intended benefits of such sales relationships may ultimately be unsuccessful, and difficulties
selling through our third party channels could limit our growth and could harm our results of operations.
The international scale of our sales and operations exposes us to additional risk and expense that could adversely affect our results of
operations.
We market, sell and service our products globally, maintain personnel in numerous countries and rely upon a global supply chain for
sourcing important components and manufacturing our products. Our international sales and operations are subject to inherent risks, including:
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the impact of economic conditions in countries outside the United States;
effects of adverse 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;
compliance with certain testing, homologation or customization of products to conform to local standards;
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.
Our international operations are also subject to complex foreign and U.S. laws and regulations, including anti-corruption laws, antitrust or
competition laws, environmental regulations, and data privacy laws, among others. Violations of these laws and regulations could result in
fines and penalties, criminal sanctions against us or our employees, prohibitions on the conduct of our business and on our ability to offer our
products and services in certain geographies, and significant harm to our business reputation. There can be no assurance that any individual
employee, contractor, agent or other business partner will not violate these legal requirements or our policies to mitigate these risks.
Additionally, the costs of complying with these laws (including the costs of investigations, auditing and monitoring) could also adversely affect
our current or future business.
The success of our international sales and operations will depend, in large part, on our ability to anticipate and manage effectively these
risks. Our failure to manage any of these risks could harm our international operations, reduce our international sales, and could give rise to
liabilities, costs or other business 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 on forecasts of customer demand. Our practice of buying inventory based on forecasted demand exposes us to the risk that our
customers ultimately may not order the products we have forecast or will purchase fewer products than forecast. As a result, we may purchase
inventory in anticipation of sales that ultimately do not occur. 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. Also, customers often have the right to modify, reduce or cancel purchase quantities, and spending levels
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can be uncertain and subject to significant fluctuation. As we introduce new products with overlapping feature sets or application, it is
increasingly possible that customers may forgo purchases of certain products we have inventoried in favor of next-generation products with
similar or increased functionality. 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. If we are required to write off or write down a significant amount of
inventory, our results of operations for the applicable 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 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 infringement assertions by
patent assertion entities is increasing, particularly in the United States. Generally, these patent owners neither manufacture nor use the
patented invention directly, and they seek solely to derive value from their ownership through royalties from patent licensing programs.
We could be adversely affected by litigation, other proceedings or claims against us, as well as claims against our manufacturers, suppliers
or customers, alleging infringement of third party proprietary rights by our products and technology, or components thereof. 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, could require us to:
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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 or other third parties pursuant to contractual obligations to hold them harmless or pay expenses 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 and the steps taken to safeguard against the risks of infringing the rights of third parties.
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 operating system, network management and control platforms and other
products. As networks adopt open software control and virtualized network functions, we believe that we will be increasingly required to work
with third party technology providers. As a result, we may be required to license certain software or technology from third parties, including
competitors. Licenses for software or other technology may not be available or may not 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. Our
failure to comply with the terms of any license may result in our inability to continue to use such license, which may result in significant costs,
harm our market opportunities and require us to obtain or develop a substitute technology.
Our solutions, including our Blue Planet software platform, utilize elements of open source or publicly available software. As networks
become more open and software programmable, we expect that we and other communications networking solutions vendors will increasingly
contribute to and use technology or open source software developed by standards settings bodies or other industry forums that seek to promote
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the integration of network layers and functions. The terms of such licenses could be construed in a manner that could impose unanticipated
conditions or restrictions on our ability to commercialize our products. This increases our risks associated with our use of such software and
may require us to seek licenses from third parties, to re-engineer our products or to discontinue the sale of such solutions. Difficulty obtaining
and maintaining technology licenses with third parties may disrupt development of our products, increase our costs and adversely affect our
business.
If our contract manufacturers do not perform as we expect, our business and results of operations may be adversely affected.
We rely on third party contract manufacturers to perform the manufacturing of our products, and our future success will depend on our
ability to manage these manufacturing resources and ensure sufficient volumes and quality of our products. There are a number of risks
associated with our dependence on contract manufacturers, including:
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reduced control over delivery schedules and planning;
reliance on the quality assurance procedures of third parties;
potential uncertainty regarding manufacturing yields and costs;
availability of manufacturing capability and capacity, particularly during periods of high demand;
risks and uncertainties relating to the locations and geographies of our international contract manufacturing sites;
limited warranties provided to us;
potential misappropriation of our intellectual property; and
potential manufacturing disruptions, including disruptions caused by geopolitical events or environmental factors affecting the
locations and geographies of our international contract manufacturing sites.
These and other risks could impair our ability to fulfill orders, harm our sales and impact our reputation with customers. If our contract
manufacturers are unable or unwilling to continue manufacturing our products or components of our products, or if our contract manufacturers
discontinue operations, we would be required to identify and qualify alternative manufacturers, which could cause us to be unable to meet our
supply requirements to our customers and result in the breach of our customer agreements. The process of qualifying a new contract
manufacturer and commencing volume production is expensive and time-consuming, and if we are required to change or qualify a new
contract manufacturer, we would likely lose sales revenue and damage our existing customer relationships.
Data security 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 on our network systems certain information that is confidential, proprietary or
otherwise sensitive in nature. This information includes intellectual property, financial information and confidential business information
relating to Ciena and our customers, suppliers and other business partners. We also produce networking equipment solutions and software used
by network operators to ensure security and reliability in their management and transmission of data. Our customers, particularly those in
regulated industries, are increasingly focused on the security features of our technology solutions, and maintaining the security of information
sensitive to Ciena and our business partners is critical to our business and reputation. 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 to networks or
sensitive information. Our network systems and storage applications, and the technology solutions that we offer to end customers, 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 to detect immediately such incidents and the damage caused thereby. If an actual or perceived breach of network
security occurs in our network or in the network of a business partner, the market perception of our products could be harmed. While we
continually work to safeguard our products and internal network systems to mitigate these potential risks, there is no assurance that such
actions will be sufficient to prevent cyber-attacks or security breaches. Security incidents involving access or improper use of our systems,
networks or products could compromise confidential or otherwise protected information, destroy or corrupt data, or otherwise disrupt our
operations. These security events could also negatively impact our reputation and our competitive position and could result in litigation with
third parties, regulatory action, loss of business, potential liability and increased remediation costs, any of which could have a material adverse
effect on our financial condition and results of operations.
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 addition, as network operators
increasingly seek to rely on vendors to perform additional services relating to the design, construction and operation of their networks, the
scope of work performed by our support partners is likely to increase and may include areas where we have less experience providing or
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managing such services. We must successfully identify, assess, train and certify qualified service partners in order to ensure the proper
installation, deployment and maintenance of our products, as well as the skillful performance of other services associated with expanded
solutions offerings, including site assessment and construction-related services. Vetting and certification of these partners can be costly and
time-consuming, and certain partners may not have the same operational history, financial resources and scale as Ciena. Moreover, certain
service partners may provide similar services for other companies, including our competitors. We may not be able to manage effectively our
relationships with our service partners, and we cannot be certain that they will be able to deliver services in the manner or time required or that
we will be able to maintain the continuity of their services. We may also be exposed to a number of risks or challenges relating to the
performance of our service partners, including:
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delays in recognizing revenue;
liability for injuries to persons, damage to property or other claims relating to the actions or omissions of our service partners;
our services revenue and gross margin may be adversely affected; and
our relationships with customers could suffer.
If we do not manage effectively our relationships with third party service partners, or if they fail to perform these services in the manner or
time required, our financial results and relationships with customers could be adversely affected.
We may be adversely affected by fluctuations in currency exchange rates.
As a company with global operations, we face exposure to adverse movements in foreign currency exchange rates. Due to our global
presence, a significant percentage of our revenue, operating expense and assets and liabilities are 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. An increase in the value of the U.S. dollar could increase the real
cost to our customers of our products in those markets outside the United States where we sell in dollars, and a weakened dollar could increase
the cost of local operating expenses and procurement of materials or service that we purchase in foreign currencies. From time to time, we may
hedge against currency exposure associated with anticipated foreign currency cash flows or assets and liabilities denominated in foreign
currency. Such attempts to offset the impact of currency fluctuations are costly, and no amount of hedging can be effective against all
circumstances. Losses associated with these hedging instruments and the adverse effect of foreign currency exchange rate fluctuation may
negatively affect our results of operations.
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. 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 could 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 customer payment capability and to
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 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 or external factors may disrupt our business, processes and internal controls.
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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 managing our business. Our business processes and information systems must 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 have commenced a significant upgrade of our company-wide enterprise resource planning platform that will impact multiple
locations, functions and processes. We are also currently pursuing initiatives to transform and optimize our business operations through the
reengineering of certain other processes, investment in automation, and engagement of strategic partners or resources to assist with certain
business functions. These changes will require a significant investment of capital and human resources and 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. There can be no assurance that our
business and operations will not experience disruption in connection with this transition. Even if we do not encounter these adverse effects or
disruption in our business, the design and implementation of these new systems may be more costly than anticipated.
Our information technology systems, and those of third party information technology providers or business partners, may also be
vulnerable to damage or disruption caused by circumstances beyond our control, including catastrophic events, power anomalies or outages,
natural disasters, viruses or malware, and computer system or network failures. We may also be exposed to cyber-security related incidents,
including unauthorized access of information systems and disclosure or diversion of intellectual property or confidential data. There can be no
assurance that our business systems or those of our third party business partners would not be subject to similar incidents, exposing us to
significant cost, reputational harm and disruption or damage to our business.
Outstanding indebtedness under our convertible notes and senior secured credit facilities may adversely affect our liquidity and results
of operations and could limit our business.
At October 31, 2015, indebtedness on our outstanding convertible notes totaled approximately $1.0 billion in aggregate principal. In the
event that some or all of these notes are converted into common stock, the ownership interests of our existing stockholders will be diluted, and
any sales of such shares in the public market following conversion may adversely affect the market price for our common stock. We are also a
party to credit agreements relating to a $200 million senior secured asset-based revolving credit facility and a $250 million senior secured term
loan. The agreements governing these credit facilities contain certain covenants that limit our ability, among other things, to incur additional
debt, create liens and encumbrances, pay cash dividends, redeem or repurchase stock, enter into certain acquisition transactions or transactions
with affiliates, repay certain indebtedness, make investments or dispose of assets. The agreements also include customary remedies, including
the right of the lenders to take action with respect to the collateral securing the loans, that would apply should we default or otherwise be
unable to satisfy our debt obligations.
Our indebtedness could have important negative consequences, including:
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increasing our vulnerability to adverse economic and industry conditions;
limiting our ability to obtain additional financing, particularly in unfavorable capital and credit market conditions;
debt service and repayment obligations that may adversely impact our results of operations and 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.
We may also enter into additional transactions or credit facilities, including equipment loans, working capital lines of credit and other long-
term debt, which may increase our indebtedness and result in additional restrictions upon our business. In addition, major debt rating agencies
regularly evaluate our debt based on a number of factors. There can be no assurance that we will be able to maintain our existing debt ratings,
and failure to do so could adversely affect our cost of funds, liquidity and access to capital markets.
Significant volatility and uncertainty in the capital markets may limit our access to funding on favorable terms or at all.
The operation of our business requires significant capital. We have accessed the capital markets in the past and have successfully raised
funds, including through the issuance of equity, convertible notes and other indebtedness, to increase our cash position, support our operations
and undertake strategic growth initiatives. We regularly evaluate our liquidity position, debt obligations, and anticipated cash needs to fund our
long-term operating plans, and we may consider it necessary or advisable to raise additional capital or incur additional indebtedness in the
future. If we raise additional funds through further issuance of equity or securities convertible into equity, or undertake certain transactions
intended to address our existing indebtedness, our existing stockholders could suffer dilution in their percentage ownership of our company or
our leverage and outstanding indebtedness could increase. Global capital markets have undergone periods of significant volatility and
uncertainty in recent years, and there can be no assurance that such financing alternatives would be available to us on favorable terms or at all,
should we determine it necessary or advisable to seek additional cash resources.
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Facilities transitions could be disruptive to our operations and may result in unanticipated expense and adverse effects to our cash
position and cash flows.
We have recently undertaken and expect to undertake in the future a number of significant facilities transitions affecting a large number of
our employee s. The lease term for our Lab 10 building on the Carling Campus in Ottawa, Canada will expire in fiscal 2018, and the lease term
for our development facility in Gurgaon, India will expire in fiscal 2017. Both locations house sophisticated research and development lab
equipment and significant headcount including key engineering personnel. We will be transitioning our operations in Ottawa to new facilities
in contemplation of the expiration of the Lab 10 lease. Relocating 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. Significant facilities
transitions could be disruptive to our operations and may result in unanticipated expense and adverse effects on our cash position and cash
flows.
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, including our research and development efforts, and could 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 and use of cash in those
periods in which we undertake such actions.
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. Competition is particularly intense in certain jurisdictions where we
have research and development centers, including the Silicon Valley area of northern California, and 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. In addition, none of our executive
officers is bound by an employment agreement for any specific term. 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. If we are unable to attract and retain qualified personnel, we may be unable to manage our business effectively, and our operations
and financial results could suffer.
Strategic acquisitions and investments could disrupt our operations and 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 could dilute our current stockholders, or incur debt or assume indebtedness. These transactions, including our recently completed
acquisition of Cyan, involve numerous risks, including:
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failure to achieve the anticipated transaction benefits or the projected financial results and operational synergies;
greater than expected acquisition and integration costs;
disruption due to the integration and rationalization of operations, products, technologies and personnel;
diversion of management attention;
difficulty completing projects of the acquired company and costs related to in-process projects;
difficulty managing customer transitions or entering into new markets;
loss of key employees;
ineffective internal controls over financial reporting;
dependence on unfamiliar suppliers or manufacturers;
assumption of or 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.
30
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, including service providers and multiservice
network operators, are subject to the rules and regulations of these agencies. On February 26, 2015, the FCC approved rules that would
regulate Internet service providers as telecommunications service carriers under Title II of the Telecommunications Act. The impact of these
rules are uncertain, and challenges to these rules are expected. These and similar changes in regulatory requirements covering access to,
management of, or carriage of traffic on the Internet in the United States or other internationally could serve as a disincentive to certain
wireline or wireless network operators, including certain of our customers, to invest in their network infrastructures or introduce new services.
Such changes could adversely affect the sale of our products and services. Similarly, 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.
Government regulations affecting the use, import or export of products could adversely affect our operations, 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. Government regulation of usage, import or export of our products, or our 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, penalties or
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 implemented security regulations applicable to network equipment vendors and has previously imposed significant tariffs on
certain communications equipment. These and other regulations could adversely affect the sale or use of our products, substantially increase
our cost of sales and adversely affect our business and revenue.
Government regulations related to the environment, potential climate change and other social initiatives 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. If we were to violate or become liable under these laws or regulations, we could incur fines, costs related to damage to property or
personal injury, and costs related to investigation or remediation activities. 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. The SEC has adopted disclosure requirements regarding the use of “conflict minerals”
mined from the Democratic Republic of Congo and adjoining countries (“DRC”) and procedures regarding a manufacturer's efforts to prevent
the sourcing of such minerals from the DRC. Certain of these minerals are present in our products. SEC rules implementing these requirements
may have the effect of reducing the pool of suppliers who can supply DRC “conflict free” components and parts, and we may not be able to
obtain conflict free products or supplies in sufficient quantities for our operations. Because our supply chain is complex, we may face
reputational challenges with our customers, stockholders and other stakeholders if we are unable to verify sufficiently the origins for the
"conflict minerals” used in our products and cannot assert that our products are "conflict free". Environmental or similar social initiatives may
also make it difficult to obtain supply of compliant components or may require us to write off non-compliant inventory, which could have an
adverse effect on our business and operating results.
We may be required to write down goodwill or long-lived assets, and these impairment charges would adversely affect our operating
results.
As of October 31, 2015, our balance sheet includes $256.4 million of goodwill on our balance sheet. This amount primarily represents the
remaining excess of the total purchase price of our acquisition of Cyan over the fair value of the net assets acquired. Ciena tests each reporting
unit for impairment of goodwill on an annual basis, and between annual tests if an event occurs or circumstances change that would, more
31
likely than not, reduce the fair value of the reporting unit below its carrying value. As of October 31, 2015, our balance sheet also includes
$449.9 million in long-lived assets, which includes $202.7 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 upon which our estimates are based. Periods of significant uncertainty or instability of macroeconomic conditions can make forecasting
future business difficult. If actual market conditions differ or our forecasts change, we may be required to reassess goodwill or long-lived
assets and could record an impairment charge. Any impairment charge relating to goodwill or 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
would 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. Certain ongoing initiatives, including a significant upgrade of our company-wide enterprise
resource planning platform that is underway, will necessitate modifications to our internal control systems, processes and related information
systems. Similarly, other efforts to transform business processes, including our supply chain operations, or to transition certain functions to
third party resources or providers, will require further changes to our control environment as we optimize our business and operations. Our
expansion into new regions could pose further 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 2015, our closing stock price ranged
from a high of $26.50 per share to a low of $14.69 per share. The stock market has experienced significant price and volume fluctuation that
has 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, or the expectations of the
market generally, can cause significant swings in our stock price. Our stock price can also be affected by market conditions in our industry as
well as announcements that we, our competitors, vendors or our customers may make. These may include announcements of financial results
or changes in estimated financial results, technological innovations, the gain or loss of customers or key opportunities. Our common stock is
also included in certain market indices, and any change in the composition of these indices to exclude our company would adversely affect our
stock price. These and other factors affecting macroeconomic conditions or financial markets may materially adversely affect the market price
of our common stock in the future.
Risks Relating to Our Acquisition of Cyan, Inc.
We may fail to realize the anticipated benefits of the merger.
The success of the merger will depend on, among other things, our ability to gain market adoption for our Blue Planet software platform
and derive long-term revenue growth based on Cyan’s software capabilities. If the SDN and NFV markets do not develop as we anticipate, or if
we are unable to increase market awareness and adoption of our Blue Planet solutions as the preferred solution within those markets, demand
for our Blue Planet solutions may not grow, and our future results would be adversely affected. As a result, the success of the merger and our
long-term success will depend to a significant extent on potential customers recognizing the benefits of our next-generation software solutions,
and the willingness of service providers and high-performance data center and other network operators to increase their use of SDN and NFV
solutions in their networks. The market for SDN and NFV solutions is at an early stage, and it is difficult to predict important trends, including
the potential growth, if any, of this market. If the market for SDN and NFV solutions does not evolve in the way we anticipate or if customers
do not adopt our solutions, we may not to be able to increase sales of our Blue Planet platform. If we are not able to successfully achieve these
objectives, the anticipated benefits of the merger may not be realized fully, or at all, or may take longer to realize than expected. There may
also be additional unanticipated liabilities or costs in connection with the merger. These costs and expenses could reduce the realization of
efficiencies, strategic benefits and growth that we expect to achieve from the merger.
32
The failure to integrate successfully the business and operations of Cyan in the expected time frame may adversely affect our future
results.
There can be no assurances that we will successfully integrate Cyan's business. It is possible that the integration process could result in the
loss of key Ciena or former Cyan employees, the loss of customers, the disruption of either company’s or both companies’ ongoing businesses,
or in unexpected integration issues, greater than expected integration costs and an overall post-completion integration process that takes longer
than originally anticipated. Specifically, the following issues, among others, must be addressed in integrating our operations with those of Cyan
in order to realize the anticipated benefits of the merger so the combined company performs as expected:
•
•
•
•
combining our business with Cyan’s business in a manner that permits us to achieve the cost savings or revenue synergies
anticipated to result from the merger;
integrating the companies’ technologies and unifying the hardware and software solutions offerings and services available to
customers;
identifying and eliminating redundant costs;
harmonizing the companies’ operating practices, employee-related policies and compensation programs, internal controls and
other policies, procedures and processes;
• maintaining existing agreements with customers, distributors and vendors and avoiding delays in entering into new agreements
with prospective customers, distributors and vendors;
addressing possible differences in business backgrounds, corporate cultures and management philosophies; and
coordinating distribution and marketing efforts.
•
•
In addition, at times, the attention of certain members of our management and resources may be focused on the integration of the
businesses of the two companies and diverted from day-to-day business operations, which may disrupt our ongoing business and the business
of the combined company.
Lawsuits have been filed against us and Cyan challenging the merger and an adverse ruling may adversely affect Ciena's operations
and liquidity.
From May 15 through June 3, 2015, five separate putative class action lawsuits in connection with Ciena’s acquisition of Cyan, Inc.
("Cyan") were filed in the Court of Chancery of the State of Delaware:
•
Luvishis v. Cyan, Inc., et al., C.A. No. 11027-CB, filed May 15, 2015
• Poll v. Cyan, Inc., et al., C.A. No. 11028-CB, filed May 15, 2015
• Canzano v. Floyd, et al., C.A. No. 11052-CB, filed May 20, 2015
• Kassis v. Cyan, Inc., et al., C.A. No. 11069-CB, filed May 27, 2015
• Fenske v. Cyan, Inc., et al., C.A. No. 11090-CB, filed June 3, 2015
Each of the complaints named Cyan (except for the Canzano complaint), Ciena, Neptune Acquisition Subsidiary, Inc., a Ciena subsidiary
created solely for the purpose of effecting the acquisition (“Merger Sub”), and the members of Cyan’s board of directors as defendants. On
June 23, 2015, each of these lawsuits was consolidated into a single case captioned In Re Cyan, Inc. Shareholder Litigation, Consol. C.A. No.
11027-CB. On July 9, 2015, the plaintiffs filed a verified amended class action complaint, which named as defendants Ciena, Merger Sub, and
the members of Cyan’s board of directors. On August 5, 2015, the defendants filed motions to dismiss the amended complaint. On October 1,
2015, the plaintiffs filed a second amended complaint which named as defendants the members of Cyan’s board of directors. Cyan, Ciena, and
Merger Sub were not named as defendants. The second amended complaint generally alleges that the Cyan board members breached their
fiduciary duties by engaging in a conflicted and unfair sales process, failing to maximize stockholder value in the acquisition, taking steps to
preclude competitive bidding, and failing to disclose material information necessary for stockholders to make an informed decision regarding
the acquisition. The second amended complaint seeks (i) a declaration that the plaintiffs are entitled to a quasi-appraisal remedy, (ii) rescissory
damages, (iii) recovery through an accounting of all damages caused as a result of the alleged breaches of fiduciary duties, (iv) compensatory
damages, and (v) costs including attorneys’ fees and experts’ fees. The actions also seek to recover costs, including attorneys’ fees and experts’
fees. On October 15, 2015, the defendants filed a renewed motion to dismiss. A briefing schedule for these motions has been set, with briefing
to be completed in March 2016. The outcome of the consolidated action described above or any other lawsuit that may be brought challenging
the merger is uncertain.
Third parties with whom Cyan had a business relationship may terminate or alter existing contracts or relationships with us.
As a result of the merger, Ciena assumed Cyan's contracts with customers, suppliers, vendors, landlords, licensors and other business
partners. Certain of these contracts require consent from these other parties in connection with the merger. If these consents cannot be obtained,
33
Ciena may suffer a loss of potential future revenue and may lose rights that are material to its business and the business of the combined
company. In addition, third parties with whom we have (or Cyan had) relationships may terminate or otherwise reduce the scope of their
relationship with us now that the merger is complete. Any such disruptions could limit our ability to achieve the anticipated benefits of the
merger.
We may be unable to retain Cyan personnel successfully now that the merger has been completed.
The success of the merger will significantly depend on our ability to retain the talents and dedication of key professionals formerly
employed by Cyan. It is possible that these employees may decide not to remain with the combined company. If key employees terminate their
employment, or if an insufficient number of employees is retained to maintain effective operations, the combined company’s business activities
may be adversely affected and management’s attention may be diverted from successfully integrating Cyan to hiring suitable replacements, all
of which may cause the combined company’s business to suffer. In addition, we and Cyan may not be able to locate suitable replacements for
any key employees that leave either company or offer employment to potential replacements on reasonable terms.
34
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Overview. As of October 31, 2015, 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.
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 and our planned future relocation from this facility. We
also have engineering and/or service facilities located in San Jose, California; Petaluma, 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 the Asia-Pacific region 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 an agreement dated November 3, 2011, with W2007 RDG Realty, L.L.C.
relating to a 15-year lease of office space for its corporate headquarters in Hanover, Maryland, consisting of an agreed-upon rentable area of
approximately 154,100 square feet.
Ottawa Lease and Planned Relocation. Ciena Canada, Inc., a subsidiary of Ciena, and Public Works and Government Services Canada
(PWGSC) are parties to a lease agreement relating to Ciena’s lease of the Lab 10 building on the former Nortel Carling Campus in Ottawa,
Canada. Our Lab 10 facility houses sophisticated research and development lab equipment and significant headcount including key
engineering personnel. This facility consists of a rentable area of 265,000 square feet. This lease will terminate on December 31, 2017.
In contemplation of the termination of the Lab 10 lease, on October 23, 2014, Ciena Canada, Inc. entered into an agreement to lease the
office building located at 5050 Innovation Drive, Ottawa, Canada, consisting of an agreed-upon rentable area of 170,582 square feet. Ciena
occupied approximately 102,000 square feet of this facility during fiscal 2015 and expects to occupy the remaining amount during fiscal
2016. In addition, on April 15, 2015, Ciena Canada, Inc. entered into a work letter and a lease agreement related to the construction and lease
of two new office buildings in Ottawa, Canada, consisting of a rentable area of approximately 254,318 square feet, that will be built adjacent
to the premises subject to the October 2014 lease. Ciena expects to occupy these buildings by September 2017. These three facilities are
expected to be part of a future campus that will replace the Lab 10 building. The October 2014 lease also provides Ciena a right of first offer
to lease additional space in the building adjacent to the premises located at 4000 Innovation Drive, for so long as landlord owns the building
and subject to any existing rights of the current tenant. The development of our new facilities and the transition of our operations in Ottawa
will require significant effort, time and cost in advance of the expiration of the Lab 10 lease.
For additional information regarding our lease obligations, see Note 23 to the Consolidated Financial Statements in Item 8 of Part II of
this annual report.
35
Item 3. Legal Proceedings
From May 15 through June 3, 2015, five separate putative class action lawsuits in connection with Ciena’s then-pending acquisition of
Cyan, Inc. (“Cyan”) were filed in the Court of Chancery of the State of Delaware:
• Luvishis v. Cyan, Inc., et al., C.A. No. 11027-CB, filed May 15, 2015
•
Poll v. Cyan, Inc., et al., C.A. No. 11028-CB, filed May 15, 2015
• Canzano v. Floyd, et al., C.A. No. 11052-CB, filed May 20, 2015
• Kassis v. Cyan, Inc., et al., C.A. No. 11069-CB, filed May 27, 2015
•
Fenske v. Cyan, Inc., et al., C.A. No. 11090-CB, filed June 3, 2015
Each of the complaints named Cyan (except for the Canzano complaint), Ciena, Neptune Acquisition Subsidiary, Inc., a Ciena subsidiary
created solely for the purpose of effecting the acquisition (“Merger Sub”), and the members of Cyan’s board of directors as defendants. On
June 23, 2015, each of these lawsuits was consolidated into a single case captioned In Re Cyan, Inc. Shareholder Litigation, Consol. C.A. No.
11027-CB. On July 9, 2015, the plaintiffs filed a verified amended class action complaint, which named as defendants Ciena, Merger Sub,
and the members of Cyan’s board of directors. On August 5, 2015, the defendants filed motions to dismiss the amended complaint. On
October 1, 2015, the plaintiffs filed a second amended complaint which named as defendants the members of Cyan’s board of directors.
Cyan, Ciena, and Merger Sub were not named as defendants. The second amended complaint generally alleges that the Cyan board members
breached their fiduciary duties by engaging in a conflicted and unfair sales process, failing to maximize stockholder value in the acquisition,
taking steps to preclude competitive bidding, and failing to disclose material information necessary for stockholders to make an informed
decision regarding the acquisition. The second amended complaint seeks (i) a declaration that the plaintiffs are entitled to a quasi-appraisal
remedy, (ii) rescissory damages, (iii) recovery through an accounting of all damages caused as a result of the alleged breaches of fiduciary
duties, (iv) compensatory damages, and (v) costs including attorneys’ fees and experts’ fees. On October 15, 2015, the defendants filed a
renewed motion to dismiss. A briefing schedule for these motions has been set, with briefing to be completed in March 2016.
As a result of our acquisition of Cyan in August 2015, we became a defendant in a securities class action lawsuit. On April 1, 2014, a
purported stockholder class action lawsuit was filed in the Superior Court of California, County of San Francisco, against Cyan, the members
of Cyan’s board of directors, Cyan’s former Chief Financial Officer, and the underwriters of Cyan’s initial public offering. On April 30, 2014,
a substantially similar lawsuit was filed in the same court against the same defendants. The two cases have been consolidated as Beaver
County Employees Retirement Fund, et al. v. Cyan, Inc. et al., Case No. CGC-14-538355. The consolidated complaint alleges violations of
federal securities laws on behalf of a purported class consisting of purchasers of Cyan’s common stock pursuant or traceable to the
registration statement and prospectus for Cyan’s initial public offering in April 2013, and seeks unspecified compensatory damages and other
relief. In July 2014, the defendants filed a demurrer to the consolidated complaint, which the court overruled in October 2014 and allowed the
case to proceed. On May 19, 2015, the proposed class was certified. On August 25, 2015, the defendants filed a motion for judgment on the
pleadings based on an alleged lack of subject matter jurisdiction over the case, which motion was denied on October 23, 2015. Ciena believes
that the consolidated lawsuit is without merit 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, which request was denied by the PTO on April 29, 2013. Thereafter, on May 28,
2013, the plaintiff filed an amendment with the PTO in which it canceled the claims of the '673 Patent on which Ciena is alleged to infringe.
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, Ciena is subject to various legal proceedings and claims arising in the ordinary course of
business, including claims against third parties that may involve contractual indemnification obligations 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.
Item 4. Mine Safety Disclosures
Not applicable.
36
PART II
37
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 New York Stock Exchange under the stock symbol “CIEN.”
The following table sets forth the high and low sales prices of our common stock, as reported on the New York Stock Exchange for the
fiscal periods indicated.
Fiscal Year 2014
First Quarter ended January 31
Second Quarter ended April 30
Third Quarter ended July 31
Fourth Quarter ended October 31
Fiscal Year 2015
First Quarter ended January 31
Second Quarter ended April 30
Third Quarter ended July 31
Fourth Quarter ended October 31
High
Low
$
$
$
$
$
$
$
$
24.37 $
27.16 $
22.94 $
20.98 $
20.32 $
22.50 $
26.50 $
25.49 $
20.93
18.88
18.00
13.77
14.69
17.86
20.67
17.97
As of December 11, 2015, there were approximately 775 holders of record of our common stock and 135,790,185 shares of common
stock outstanding. We have never paid cash dividends on our capital stock. We currently 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 S&P Telecom Select
Index and the S&P Global SmallCap Index from October 31, 2010 to October 31, 2015. The S&P Telecom Select Industry Index comprises
stocks in the S&P Total Market Index that are classified in the Global Industry Classification Standard as alternative carriers, communications
equipment, integrated telecom services, and wireless telecom services sub-industries. The S&P Global SmallCap Index comprises the stocks
representing the lowest 15% of float-adjusted market cap in each developed and emerging country. 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, as amended (the "Exchange Act"), 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, as
amended, or the Exchange Act.
Assumes $100 invested in Ciena Corporation, the S&P Telecom Select Index and the S&P Global SmallCap Index, respectively, on
October 31, 2010 with all dividends reinvested at month-end.
(b) Not applicable.
38
(c) Not applicable.
39
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” in Part II of this annual report. 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 2011, 2013, 2014 and 2015 consisted of 52 weeks, and fiscal 2012 consisted of 53 weeks.
Year Ended October 31,
(in thousands)
Cash and cash equivalents
Short-term investments
Long-term investments
Total assets
Short-term debt
Long-term debt
Total liabilities
Stockholders’ equity (deficit)
$
$
2011
541,896 $
— $
50,264 $
2013
346,487 $
124,979 $
15,031 $
2012
642,444 $
50,057 $
— $
2014
586,720 $
140,205 $
50,057 $
2015
790,971
135,107
95,105
$
$ 1,951,418 $ 1,881,143 $ 1,802,770 $ 2,072,632 $ 2,695,051
2,500
$
$ 1,442,364 $ 1,225,806 $ 1,212,019 $ 1,274,791 $ 1,271,639
$ 1,937,545 $ 1,970,115 $ 1,885,447 $ 2,142,247 $ 2,074,175
620,876
190,063 $
216,210 $
13,873 $
(69,615 ) $
(88,972 ) $
(82,677 ) $
— $
— $
$
40
Statement of Operations Data:
Revenue
Cost of goods sold
Gross profit
Operating expenses:
Research and development
Selling and marketing
General and administrative
Amortization of intangible assets
Acquisition and integration costs
Restructuring costs
Change in fair value of contingent consideration
Total operating expenses
Income (loss) from operations
Interest and other income (loss), net
Interest expense
Gain on cost method investments
Loss on extinguishment of debt
Income (loss) before income taxes
Provision for income taxes
Net income (loss)
Basic net income (loss) per common share
Diluted net income (loss) per potential common share
2011
Year Ended October 31,
(in thousands, except per share data)
2013
$ 1,741,970 $ 1,833,923 $ 2,082,546 $ 2,288,289 $ 2,445,669
1,370,106
1,075,563
1,339,937
948,352
1,032,824
709,146
1,217,371
865,175
1,109,699
724,224
2014
2012
2015
379,862
251,990
126,242
69,665
42,088
5,781
(3,289 )
872,339
(163,193 )
6,022
(37,926 )
7,249
—
(187,848 )
7,673
364,179
266,338
114,002
51,697
—
7,854
—
804,070
(79,846 )
(15,200 )
(39,653 )
—
—
(134,699 )
9,322
383,408
304,170
122,432
49,771
—
7,169
—
866,950
(1,775 )
(5,744 )
(44,042 )
—
(28,630 )
(80,191 )
5,240
401,180
328,325
126,824
45,970
—
349
—
902,648
45,704
(25,262 )
(47,115 )
—
—
(26,673 )
13,964
$
$
$
(195,521 ) $
(144,021 ) $
(85,431 ) $
(40,637 ) $
(2.04 ) $
(1.45 ) $
(0.83 ) $
(0.38 ) $
(2.04 ) $
(1.45 ) $
(0.83 ) $
(0.38 ) $
414,201
333,836
123,402
69,511
25,539
8,626
—
975,115
100,448
(25,505 )
(51,179 )
—
—
23,764
12,097
11,667
0.10
0.10
118,416
Weighted average basic common shares outstanding
95,854
99,341
102,350
105,783
Weighted average diluted potential common shares
outstanding
95,854
99,341
102,350
105,783
120,101
41
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 network specialist focused on providing communications networking solutions that enable a wide range of network operators to
adopt next-generation architectures. We have optimized our business and solutions to enable network operators to create and deliver the broad
array of high-bandwidth services relied upon by enterprise and consumer end users. We provide equipment, software and services that
support the transport, switching, aggregation, service delivery and management of voice, video and data traffic on communications networks.
In addition to our high-capacity hardware platforms, we offer network management and control software platforms that help network
operators simplify and automate their networks and virtualize certain network functions. Our solutions are designed to enable network
operators to adopt open, multi-vendor, software-programmable network infrastructures that improve automation, reduce network complexity
and flexibly support changing service requirements. Our solutions yield business and operational value for our customers by enabling them to
introduce new, revenue-generating services and to reduce network complexity and expense.
Our Converged Packet Optical, Packet Networking and Optical Transport products are used, individually or as part of an integrated
solution, by communications service providers, cable and multiservice operators, Web-scale providers, submarine network operators,
governments, enterprises, research and education (R&E) institutions and other network operators across the globe. Our products, which
support applications from the network core to network access points, allow network operators to scale capacity, increase transmission speeds,
allocate traffic and adapt dynamically to changing end-user service demands. Our software solutions are oriented around our Blue Planet
software platform, a modular, network virtualization, service orchestration and network management software platform designed to simplify
the creation, automation and delivery of services across multi-vendor and multi-domain network environments. To complement our hardware
and software solutions, we offer a broad range of network transformation and related support services that help our customers design,
optimize, deploy, manage and maintain their networks.
The rapid proliferation of communications services and devices, together with increased mobility, growth in video, cloud-based services
and data center interconnection, have fundamentally affected the bandwidth and service demands placed upon communications networks. As
the capacity of their network infrastructures are pressured, many network operators also face a rapidly changing business environment and
shifting competitive landscape. Newer market entrants, such as cloud service and over-the-top content providers, are challenging certain
traditional business models. Our OPn Architecture, which enables increased network scalability, flexibility and programmability, is designed
to meet these challenges. It allows for network-level software applications to control and configure the network dynamically, while flexible
interfaces integrate computing, storage and other network resources. This approach enables highly configurable network infrastructures that
can meet the “on-demand” service requirements of both our customers and their end-users. By enhancing software-based management and
control, enabling network functions to be provided virtually, and reducing required network elements, our OP n approach optimizes network
infrastructures. At the same time, it increases network scale at reduced cost and simplifies the management, deployment and orchestration of
multi-vendor hardware and software elements. Our OPn Architecture, which underpins our solutions offering and guides our research and
development strategy, is described more fully in the “Strategy” section of the description of our business in Item 1 of Part I of this report.
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 information about Ciena that is important to
investors in the "Investors" section of our website at www.ciena.com. Investors are encouraged to review the “Investors” section of our
website because, as with the other disclosure channels that we use, from time to time we may post material information on that site that is not
otherwise disseminated by us.
Acquisition of Cyan, Inc.
On August 3, 2015, we acquired Cyan, Inc. (“Cyan”), a leading provider of software-defined networking (SDN), network function
virtualization (NFV) and metro packet-optical solutions, in a cash and stock transaction. Subject to the terms and conditions of the merger
agreement, at closing each outstanding Cyan share was exchanged for 0.19936 shares of Ciena common stock and $0.63 in cash, resulting in
an exchange of all of the outstanding shares of Cyan common stock for approximately $33.6 million in cash and 10.6 million shares of Ciena
common stock. Ciena assumed all then-outstanding Cyan stock options and unvested restricted stock unit awards and substituted for them
approximately 1.0 million Ciena restricted stock unit awards and stock options exercisable for approximately 2.4 million shares of Ciena
42
common stock. See Note 2 to our Consolidated Financial Statements included in in Item 8 of Part II of this report for more information
relating to this transaction.
Our acquisition of Cyan is intended to advance a strategy that started with the introduction of our OPn Architecture and was extended
with the launch of our Agility software division in fiscal 2014. We believe that Cyan's best-in-class Blue Planet software solutions portfolio
will significantly strengthen our software offering. Complementing Ciena's network control and application software technologies, Cyan adds
multi-vendor network virtualization, service orchestration and next-generation network management software. The Blue Planet portfolio
offers a carrier-grade, multi-vendor SDN and NFV platform designed to automate, orchestrate, and manage the lifecycle of virtualized
services across data centers and the wide area network (WAN). Further strengthening our leadership in packet-optical hardware products,
Cyan brings a metro packet-optical business with a complementary base of key customers for its family of Z-Series high-capacity, multi-layer
switching and transport platforms. We believe that this strategic acquisition will accelerate our availability to offer a complete, on-demand
solution for virtualized networks and services in an open ecosystem, and will increase our opportunity to play a leading role in the
transformation of the network from the delivery of capacity to the creation of service capability on-demand.
In connection with our acquisition of Cyan, during the fourth quarter of fiscal 2015, we unified the software resources and activities of
both companies under a single brand and comprehensive set of resources known as the "Blue Planet" division. This division, which includes
Ciena's former Agility division, is focused on providing next-generation, multi-vendor network virtualization, service orchestration and
management solutions. For fiscal 2015, revenue from Cyan's packet-optical solutions is included in our Converged Packet Optical operating
segment and revenue from its Blue Planet software solutions is included in our Software and Services operating segment. See Note 24 to our
Consolidated Financial Statements included in Item 8 of Part II of this report for information relating to our operating segments for fiscal
2016.
During fiscal 2015, we incurred approximately $25.5 million of acquisition-related costs associated with this transaction. These costs
and expenses include fees associated with financial, legal and accounting advisors, facilities and systems consolidation costs, and severance
and other employment-related costs, including payments to certain former Cyan executives and approximately $7.6 million of non-cash
share-based compensation expense. We also expect our future financial results to be impacted, in a number of ways, as a result of the
purchase accounting for the Cyan transaction. We recorded finite-lived intangible assets such as developed technology, customer
relationships, trademarks, and trade names, the amortization of which will increase our expense during the useful life of these assets.
Market Opportunity
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, increased mobility, and evolving cloud-based service offerings and end-user service demands.
These conditions have placed significant demands on network infrastructures. They have also created market opportunities and challenged the
business models and competitive landscapes of network operators, and the vendors that support them. 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 the costs of their networks and to ensure a profitable business model. These dynamics are
driving technology convergence of network features, functions and layers, virtualization of certain network functions, and solutions that
leverage increased software-based network control and programmability. We believe that these dynamics, and the need to adapt to changing
business conditions, are creating an environment that will cause network operators to adopt infrastructures that are more open, programmable
and automated. We also believe that these conditions will require network operators and vendors alike to utilize an ecosystem of physical and
virtual network resources provided by a variety of third parties, driving increased openness and interoperability of network infrastructures.
During fiscal 2015, we saw certain of our service provider customers increase efforts to constrain capital expenditure budgets, which
adversely impacted certain segments of our market, including in the U.S. Notwithstanding these market dynamics, which together with
certain customer-specific factors affecting spending, impacted our markets, our revenue increased during fiscal 2015. Increased revenue
benefited from our efforts to diversify our customer base to include additional customer segments, such as Web-scale providers, cable and
multiservice operators, and additional service providers in geographies including Brazil and India, and our strategy of focusing on certain
higher growth segments of the network infrastructure market, including Webscale providers. Our fiscal 2015 revenue also benefited from the
addition of revenue from our acquisition of Cyan during the fourth quarter of fiscal 2015. Our corporate strategy to capitalize on these market
dynamics, promote operational efficiency and drive profitable growth of our business includes the initiatives set forth in the "Strategy"
section of the description of our business in Item 1 of Part 1 of this annual report.
Competitive Landscape
The markets in which we compete are characterized by rapidly advancing technologies, introduction of new networking solutions and
intense selling efforts to displace incumbent vendors and to capture market share. We continue to encounter a highly competitive and
fragmented marketplace for our solutions. Our sales of Converged Packet Optical solutions face an intense competitive environment as we
43
and our competitors introduce new, high-capacity, high-speed network solutions and seek adoption of these solutions and our network
architectural approach. We expect the competitive landscape in which we operate to continue to broaden and to remain challenging and
dynamic. As we expand our solutions offering, including our sales of Packet Networking solutions such as our 8700 Packetwave Platform,
and our Waveserver data center interconnect (DCI) platform, we expect that our business will overlap more directly with additional
networking solution suppliers, including IP router vendors, data center switch providers and other suppliers or integrators of networking
technology traditionally geared toward different network applications, layers or functions. In addition, as we seek adoption of our Blue Planet
software platform, and network operator demands for software programmability, management and control increase, we expect increasingly to
compete with software vendors, information technology vendors or integrators of these solutions to promote our network architectural
approach. We may also face increased competition from companies, including those in our supply chain, who develop networking products
based on off-the-shelf or commoditized hardware technology, referred to as “white box” hardware, particularly where our customer's network
strategies seek to emphasize deployment of those product offerings.
Against the backdrop of these competitive dynamics, maintaining incumbency with key customers around the globe, and securing new
opportunities with a diverse set of network operators, often requires that we agree to aggressive pricing, significant commercial concessions
or other unfavorable commercial terms. These terms have previously and may in the future adversely affect our quarterly results of operations
and contribute to fluctuations in our results. These terms can also lengthen our revenue recognition or cash collection cycles, add start-up
costs to initial sales or deployment of our solutions, require financial commitments or performance bonds, and include onerous contractual
commitments that place a disproportionate allocation of risk upon us.
Convertible Notes Indebtedness
Maturity of 4.0% Convertible Senior Notes due 2015. On March 15, 2015, our outstanding 4.0% Convertible Senior Notes due 2015 (the
“2015 Notes”) matured. As a result of conversion elections made by holders of a substantial majority of the outstanding 2015 Notes under the
terms of the indenture governing the 2015 Notes, together with certain private exchange transactions conducted by us prior to maturity,
approximately $180.6 million in aggregate principal amount of the 2015 Notes, representing 96.3% of the outstanding aggregate principal
amount of the 2015 Notes, was settled through the issuance of Ciena common stock at or prior to maturity. In total, we issued approximately
8.9 million shares of Ciena common stock as a result of the conversion elections and private exchange transactions in respect of the 2015
Notes. We repaid in cash approximately $6.9 million in aggregate principal amount of the 2015 Notes at maturity.
Assumption and Conversion of Cyan Convertible Notes. Upon the closing of our acquisition of Cyan, we assumed its $50.0 million in
outstanding principal amount of 8.0% Convertible Senior Secured Notes due 2019 (the "2019 Notes"). Under the terms of the indenture
governing the 2019 notes, following the closing of the acquisition, the note holders were given the right to convert the 2019 Notes at an
increased conversion rate of approximately 91.79 shares of Ciena common stock and $290.08 in cash for each $1,000 principal amount of the
2019 Notes. During the fourth quarter of fiscal 2015, holders representing all of the outstanding aggregate principal amount of the 2019 Notes
surrendered their notes for conversion and, accordingly, there are no remaining 2019 Notes outstanding. In satisfaction of such conversions,
during the fourth quarter of fiscal 2015, we issued approximately 4.6 million shares of Ciena common stock and paid $14.5 million in cash.
See Note 15 to our Consolidated Financial Statements included in in Item 8 of Part II of this report for more information relating to our
outstanding convertible notes.
Financial Results for Fourth Quarter of Fiscal 2015
Revenue for the fourth quarter of fiscal 2015 was $692.0 million, representing a sequential increase of 14.8% from $602.9 million in the
third quarter of fiscal 2015. Fourth quarter revenue includes $84.4 million from products and services relating to the Cyan business acquired
on August 3, 2015. Revenue-related details reflecting sequential changes from the third quarter of fiscal 2015 include the following:
•
Product revenue for the fourth quarter of fiscal 2015 increased by $80.4 million, primarily reflecting increases of $76.3 million in
Converged Packet Optical and $6.5 million in Packet Networking. These increases were partially offset by a decrease of $1.7
million in software. Increased Converged Packet Optical revenue reflects $81.0 million relating to the Z-Series Packet-Optical
Platform acquired from Cyan. Sales of this platform primarily benefited from significantly increased sales to Windstream
Corporation, which has been participating in certain U.S. government-supported funding programs at levels that we do not expect
to recur. Accordingly, we expect quarterly revenue for this product during fiscal 2016 to decrease considerably from the level
attained in the fourth quarter.
•
Service revenue for the fourth quarter of fiscal 2015 increased by $8.7 million, inclusive of $3.4 million from the acquired Cyan
business.
44
• Revenue from North America for the fourth quarter of fiscal 2015 was $480.0 million, an increase from $389.6 million in the third
quarter of fiscal 2015. This primarily reflects increases of $75.7 million in Converged Packet Optical, $7.6 million in Packet
Networking, and $6.8 million in Software and Services.
• Europe, Middle East and Africa ("EMEA") revenue for the fourth quarter of fiscal 2015 was $94.0 million, a slight increase from
$93.2 million in the third quarter of fiscal 2015. This primarily reflects an increase of $2.3 million in Converged Packet Optical,
partially offset by a decrease of $1.0 million in Software and Services.
• Caribbean and Latin America ("CALA") revenue for the fourth quarter of fiscal 2015 was $45.7 million, a decrease from $65.1
million in the third quarter of fiscal 2015. This primarily reflects a decrease of $21.4 million in Converged Packet Optical offset by
an increase of $2.5 million in Software and Services.
• Asia Pacific ("APAC") revenue for the fourth quarter of fiscal 2015 was $72.3 million, an increase from $55.0 million in the third
quarter of fiscal 2015. This primarily reflects an increase of $19.7 million in Converged Packet Optical, partially offset by a
decrease of $1.5 million in Software and Services.
•
For the fourth quarter of fiscal 2015, AT&T and Windstream Corporation accounted for 19.1% and 10.5%, respectively, of total
revenue. For the third quarter of fiscal 2015, AT&T accounted for 20.2% of total revenue and no other customer accounted for 10%
or more of revenue.
Gross margin for the fourth quarter of fiscal 2015 was 43.8%, a decrease from 44.8% in the third quarter of fiscal 2015. Gross margin
for the fourth quarter of fiscal 2015 was adversely affected by the strong sales volume of lower margin Z-Series Packet-Optical Platform and
the impact of certain items relating to the purchase accounting for the Cyan acquisition that increased costs of goods sold during the quarter.
These items included the revaluation of the acquired Cyan inventory and increased expense for amortization of acquired intangible assets.
Operating expense was $293.6 million for the fourth quarter of fiscal 2015, a $68.2 million increase from $225.4 million in the third
quarter of fiscal 2015. This increase principally reflects $60.2 million of operating expense resulting from the Cyan acquisition, including
$25.4 million related to amortization of acquired intangible assets, $19.6 million in acquisition and integration costs, $8.2 million in research
and development expense, and $7.0 million in selling and marketing expense. The remaining operating expense increase of $8.0 million
primarily reflects increases of $4.4 million in selling and marketing expense, due to incentive compensation, and $4.1 million in general and
administrative expense, primarily due to increased performance-based stock compensation expense.
Reflecting the increases in operating expense above, income from operations for the fourth quarter of fiscal 2015 was $9.4 million, as
compared to $44.5 million during the third quarter of fiscal 2015. Due primarily to the fluctuation in foreign currency exchange rates, net of
hedging, we incurred losses in interest and other income, net of $6.2 million and $5.5 million during the fourth quarter of fiscal 2015 and the
third quarter of fiscal 2015, respectively. Our net loss for the fourth quarter of fiscal 2015 was $13.8 million, or $0.10 per diluted common
share. This compares to a net income of $23.6 million or $0.19 per diluted common share, for the third quarter of fiscal 2015.
We generated $84.6 million of cash from operations during the fourth quarter of fiscal 2015. This compares with $117.5 million in cash
generated from operations during the third quarter of fiscal 2015. As of October 31, 2015, we had $791.0 million in cash and cash
equivalents, $135.1 million of short-term investments in U.S. treasury securities and commercial paper and $95.1 million of long-term
investments in U.S. treasury securities. This compares to $697.1 million in cash and cash equivalents, $160.1 million of short-term
investments in U.S. treasury securities and commercial paper, and $70.2 million of long-term investments in U.S. treasury securities at
July 31, 2015.
As of October 31, 2015, we had 5,345 employees, an increase from 5,196 as of July 31, 2015 and an increase from 5,161 and 4,754 at
October 31, 2014 and 2013, respectively.
45
Consolidated Results of Operations
Operating Segments
For the periods covered by this report, Ciena’s internal organizational structure and the management of its business were grouped into
the following operating segments, each of which is more fully described in the "Products and Services" section of the description of our
business in Item 1 of Part I of this annual report:
• Converged Packet Optical —includes the 6500 Packet-Optical Platform and the 5430 Reconfigurable Switching System, which
feature our WaveLogic coherent optical processors. Products also include Waveserver, the family of CoreDirector® Multiservice
Optical Switches and the OTN configuration for the 5410 Reconfigurable Switching System. Revenue from sales of the Z-Series
Packet-Optical Platform acquired from Cyan is included in our Converged Packet Optical segment. 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.
• Packet Networking — includes the 3000 family of service delivery switches and service aggregation switches and the 5000 family
of service aggregation switches. This segment also includes the 8700 Packetwave Platform and the Ethernet packet configuration
for the 5410 Service Aggregation Switch. 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.
• Optical Transport — includes the 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 includes sales
from 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.
•
Software and Services — includes the sale of network management solutions, including the OneControl Unified Management
System, ON-Center® Network & Service Management Suite, Ethernet Services Manager, Optical Suite Release and Planet
Operate. This segment includes sales of Ciena's Blue Planet software platform, a modular network virtualization, service
orchestration and network management software solution, and Ciena's SDN Multilayer WAN Controller and its related applications.
This segment includes a broad range of services for consulting and network design, installation and deployment, software
subscription, maintenance support 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 2014 compared to Fiscal 2015
Revenue
During fiscal 2015, the U.S. dollar strengthened against a number of foreign currencies, including the Canadian Dollar and the Euro, in
which we have our most significant foreign currency revenue exposure. Consequently, our total revenue reported in U.S. dollars during fiscal
2015 was adversely impacted by approximately $48.4 million, or 1.9%, as compared to fiscal 2014. The table below (in thousands, except
percentage data) sets forth the changes in our operating segment revenue for the periods indicated:
Revenue:
Converged Packet Optical
Packet Networking
Optical Transport
Software and Services
Consolidated revenue
_________________________________
Fiscal Year
2014
%*
2015
%*
Increase
(decrease)
%**
$ 1,455,501
244,116
127,215
461,457
$ 2,288,289
63.6 $ 1,661,702
229,223
10.7
73,004
5.6
20.1
481,740
100.0 $ 2,445,669
67.9 $
9.4
3.0
19.7
100.0 $
206,201
(14,893 )
(54,211 )
20,283
157,380
14.2
(6.1 )
(42.6 )
4.4
6.9
46
*
Denotes % of total revenue
** Denotes % change from 2014 to 2015
• Converged Packet Optical revenue increased, reflecting a $139.7 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,
and a $19.1 million increase in sales of the OTN configuration for the 5410 Reconfigurable Switching System. Increased revenue
also reflects the addition of $81.0 million relating to the Z-Series Packet-Optical Platform acquired from Cyan. These increases
were partially offset by decreases of $16.8 million in sales of our CoreDirector® Multiservice Optical Switches and $16.8 million
in sales of our 5430 Reconfigurable Switching System. The strong performance of this segment, particularly as compared to the
expected and continued revenue declines in Optical Transport segment revenue, reflects the preference of network operators to
adopt next-generation architectures that enable the convergence of high-capacity, coherent optical transport with integrated OTN
switching and control plane functionality.
• Packet Networking revenue decreased, reflecting decreases of $15.8 million in sales of our 3000 and 5000 families of service
delivery and aggregation switches and $2.6 million in sales of our legacy broadband products. These decreases were offset by a
$3.8 million increase in sales of our 8700 Packetwave Platform, which became available for sale in the fourth quarter of fiscal
2014.
• Optical Transport revenue decreased, reflecting decreases of $20.5 million in sales of our 4200 Advanced Services Platform,
$16.9 million in sales of our 5100/5200 Advanced Services Platform and $16.8 million in sales of our other stand-alone transport
products. Revenue for our Optical Transport segment, which currently consists principally of stand-alone WDM and
SONET/SDH-based transport platforms, has experienced meaningful declines in annual revenue in recent years. We expect this
trend to continue, reflecting network operators' transition toward next-generation network architectures as described above.
•
Software and Services revenue increased, reflecting increases of $18.8 million in maintenance and support services sales and
$3.1 million in installation and deployment services sales partially offset by a decrease of $1.1 million in network transformation
consulting sales.
Our operating segments each engage in business and operations across four geographic regions: North America; EMEA; CALA; and
APAC. Results for North America include only activities in the United States and Canada. Part of our business and growth strategy is to
secure additional communications service provider customers outside of North America, including in high-growth geographies such as Brazil
and India. We believe that this is an important part of our strategy and required for continued revenue growth. The following table reflects our
geographic distribution of revenue principally based on the relevant location for our delivery of products and performance of services. Our
revenue, particularly when considered by geographic distribution, can fluctuate significantly from quarter to quarter. Among other things, the
timing of revenue recognition for large network projects, particularly outside of North America, can result in large variations in geographic
revenue results in any particular quarter. The table below (in thousands, except percentage data) sets forth the changes in geographic
distribution of revenue for the periods indicated:
North America
EMEA
CALA
APAC
Total
Fiscal Year
2014
$ 1,477,329
417,399
212,018
181,543
$ 2,288,289
%*
2015
%*
Increase
(decrease)
%**
64.6 $ 1,598,328
400,294
18.2
201,499
9.3
245,548
7.9
100.0 $ 2,445,669
65.4 $
16.4
8.2
10.0
100.0 $
120,999
(17,105 )
(10,519 )
64,005
157,380
8.2
(4.1 )
(5.0 )
35.3
6.9
_________________________________
*
Denotes % of total revenue
** Denotes % change from 2014 to 2015
• North America revenue includes sales to AT&T for fiscal 2014 and fiscal 2015 of $423.5 million and $487.8 million, respectively.
Revenues reflect increases of $184.0 million in Converged Packet Optical sales and $6.2 million in Software and Services sales,
partially offset by decreases of $38.2 million in Optical Transport sales and $31.0 million in sales of Packet Networking. Converged
47
Packet Optical sales principally reflect a $106.8 million increase in sales of our 6500 Packet-Optical Platform on increased sales to
AT&T, cable and multiservice operators and Web-scale providers, and a $76.3 million increase due to sales of our Z-Series Packet-
Optical Platform acquired from Cyan during the fourth quarter.
• EMEA revenue reflects decreases of $13.2 million in Optical Transport sales and $6.5 million in Software and Services sales.
These decreases were partially offset by an increase of $2.2 million in sales of Converged Packet Optical sales.
• CALA revenue reflects a $20.6 million decrease in Converged Packet Optical sales. This decrease was partially offset by an
increase of $9.7 million in Software and Services sales. Converged Packet Optical sales reflect a $41.3 million decrease in sales of
our 5430 Reconfigurable Switching System, partially offset primarily by a $15.5 million increase in sales of our 6500 Packet-
Optical Platform primarily to certain communications service providers. Software and Services sales reflect increases of $5.7
million in installation and deployment services sales and $2.3 million of network transformation consulting sales.
• APAC revenue reflects increases of $40.6 million in Converged Packet Optical sales, $16.0 million in Packet Networking sales and
$10.8 million in Software and Services sales. These increases were partially offset by a decrease of $3.4 million in sales of Optical
Transport. Converged Packet Optical sales reflect increases of $18.7 million of sales of our 6500 Packet-Optical Platform, $18.6
million of sales of our 5430 Reconfigurable Switching System, principally to communication service providers and submarine
network operators, and $1.3 million of the Cyan acquired Z-Series Packet-Optical Platform. Sales of our 6500 Packet-Optical
Platform reflect increased sales to communication service providers, sales through our strategic relationship with Ericsson and sales
to submarine network providers.
While we have benefited from the diversification of our business and customer base, our largest ten customers contributed 56.4% of
fiscal 2014 revenue and 52.5% of fiscal 2015 revenue. A sizable portion of our revenue continues to be derived from sales to service provider
customers. Consequently, our financial results are closely correlated with the spending of a relatively small number of customers and can be
significantly affected by market, industry or competitive dynamics affecting their businesses. Our reliance upon a relatively small number of
customers also increases our exposure to changes in their spending levels, network priorities and purchasing strategies. The loss of a
significant customer could have a material adverse effect on our business and results of operations and our results of operations can fluctuate
quarterly depending upon sales volumes and purchasing priorities with these large customers.
Sales to AT&T were $423.5 million, or 18.5% of total revenue, in fiscal 2014 and $487.8 million, or 19.9% of total revenue, in fiscal
2015. During fiscal 2015, AT&T and other service provider customers announced initiatives to reduce capital expenditures in future periods,
including on network infrastructure, and there can be no assurance that we will be able to maintain the sales levels we achieved during fiscal
2015. Moreover, AT&T and other customers, including service providers, are pursuing network strategies that seek to utilize enhanced
software programmability, management and control of networks and to deploy off-the-shelf or commoditized hardware technology, referred
to as "white box" hardware, in lieu of existing solutions. These strategies may present challenges and opportunities for our business,
particularly where we are an incumbent equipment vendor. We did not have any other customers accounting for greater than 10% of our
revenue in fiscal 2014 or fiscal 2015.
As our business has diversified, we have taken a number of steps to increase the velocity of our business and improve our operating
efficiency, including through inventory management and lead time reduction. As a result, the percentage of product revenue that we generate
from customer orders placed during that particular quarter has increased meaningfully, as compared to our historical periods. Our increased
reliance upon orders placed during a particular quarter may make it harder to predict our revenue and results of operations, and may further
increase the likelihood of fluctuations in our results.
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 "common" equipment sales and
48
higher margin products including 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 regularly encounter market-based price
erosion, and we expect that our gross margins will be subject to fluctuation and significantly dependent upon on our level of success in
driving product cost reductions relative to the price reductions that we encounter. Accordingly, gross margin can 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. Gross margin can also be affected as a result of our degree of success in implementing certain
optimization initiatives focused on rationalizing our supply chain and consolidating third party contract manufacturers and distribution sites.
These factors and market dynamics may result in fluctuation in our results of operations and can adversely affect our gross margin 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
2014
$ 2,288,289
1,339,937
948,352
$
%*
2015
%*
Increase
(decrease)
%**
100.0 $ 2,445,669
58.6
1,370,106
41.4 $ 1,075,563
100.0 $
56.0
44.0 $
157,380
30,169
127,211
6.9
2.3
13.4
_________________________________
*
Denotes % of total revenue
** Denotes % change from 2014 to 2015
Product revenue
Product cost of goods sold
Product gross profit
Fiscal Year
2014
$ 1,865,826
1,083,022
782,804
$
%*
2015
%*
Increase
(decrease)
%**
100.0 $ 2,002,395
1,120,373
58.0
882,022
42.0 $
100.0 $
56.0
44.0 $
136,569
37,351
99,218
7.3
3.4
12.7
_________________________________
*
Denotes % of product revenue
** Denotes % change from 2014 to 2015
Service revenue
Service cost of goods sold
Service gross profit
Fiscal Year
2014
422,463
256,915
165,548
$
$
%*
100.0 $
60.8
39.2 $
2015
443,274
249,733
193,541
%*
Increase
(decrease)
%**
100.0 $
56.3
43.7 $
20,811
(7,182 )
27,993
4.9
(2.8 )
16.9
_________________________________
*
Denotes % of service revenue
** Denotes % change from 2014 to 2015
• Gross profit as a percentage of revenue increased as a result of the factors described below.
49
• Gross profit on products as a percentage of product revenue increased as a result of our relative success in driving product cost
reductions and realizing improved manufacturing efficiencies as compared to the market-based price erosion we encountered during
the period.
• Gross profit on services as a percentage of services revenue increased, primarily due to increased sales of higher margin
software subscription services and reduced repair costs to support maintenance service contracts.
Operating Expense
We expect operating expense to increase in fiscal 2016 from the level reported for fiscal 2015, in part relating to the acquisition of the
Cyan business during the fourth quarter of fiscal 2015 and the addition of its personnel and operations. We also expect operating expense to
increase in order to fund our research and development initiatives, to provide for investments in the re-engineering of company-wide
enterprise resource planning platforms, and to fund the transition of key facilities. In particular, the development of our new facilities and the
transition of our operations in Ottawa will require significant effort, time and cost in advance of the expiration of the lease for our Lab 10
facility. For additional information regarding this lease and the facility transition, see Item 2 of Part I of this annual report.
Operating expense consists of the component elements described below.
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.
Selling 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.
Acquisition and integration costs consist of expenses for financial, legal and accounting advisors, facilities and systems
consolidation costs, and severance and other employment-related costs related to our recent acquisition of Cyan.
Amortization of intangible assets primarily reflects the amortization of purchased technology and the value of customer
relationships derived from our acquisitions.
Restructuring costs primarily reflect actions Ciena has taken to better align its workforce, facilities and operating costs with
perceived market opportunities, business strategies and changes in market and business conditions.
The table below (in thousands, except percentage data) sets forth the changes in operating expense for the periods indicated:
Fiscal Year
%*
17.5 $
14.3
5.5
2.0
—
—
39.3 $
2015
414,201
333,836
123,402
69,511
25,539
8,626
975,115
2014
401,180
328,325
126,824
45,970
—
349
902,648
%*
Increase
(decrease)
16.9 $
13.7
5.0
2.8
1.0
0.4
39.8 $
13,021
5,511
(3,422 )
23,541
25,539
8,277
72,467
%**
3.2
1.7
(2.7 )
51.2
—
2,371.6
8.0
Research and development
$
Selling and marketing
General and administrative
Amortization of intangible assets
Acquisition and integration costs
Restructuring costs
Total operating expenses
$
_________________________________
*
Denotes % of total revenue
** Denotes % change from 2014 to 2015
• Research and development expense benefited by $28.0 million as a result of foreign exchange rates, net of hedging, primarily due
to a stronger U.S. dollar in relation to the Canadian dollar. Including the effect of foreign exchange rates, research and development
50
expenses increased by $13.0 million, primarily reflecting increases of $8.6 million in facilities and information systems expense,
$6.3 million in employee compensation and related costs, $1.2 million in technology and related expense and $1.1 million in
depreciation expense. These increases were partially offset by decreases of $7.0 million in professional services and $2.3 million in
prototype expense. Research and development expense also reflects a $4.5 million reduction in reimbursements from our strategic
jobs investment fund grant from the province of Ontario as the maximum funding limit under this grant was met in the second
quarter of fiscal 2015.
•
Selling and marketing expense benefited by $16.9 million as a result of foreign exchange rates, primarily due to a stronger U.S.
dollar in relation to the Euro and the Canadian Dollar. Including the effect of foreign exchange rates, selling and marketing
expenses increased by $5.5 million, primarily reflecting increases of $10.4 million in employee compensation and related costs and
$1.2 million in customer demonstration equipment. These increases were partially offset by decreases of $2.2 million in trade show
and related costs, $2.2 million in travel and related costs and $1.5 million in professional services.
• General and administrative expense benefited by $4.4 million as a result of foreign exchange rates, primarily due to a stronger
U.S. dollar in relation to the Euro and the Canadian Dollar. Including the effect of foreign exchange rates, general and
administrative expense decreased by $3.4 million, reflecting an $8.5 million decrease in legal fees, primarily due to certain patent
litigation costs incurred during fiscal 2014. This decrease was partially offset by increases of $4.5 million in employee
compensation and related costs and $1.0 million in facilities and information systems expense.
• Acquisition and integration costs increased, reflecting financial, legal and accounting advisors, facilities and systems
consolidation costs, and severance and other employment-related costs related to our acquisition of Cyan during fiscal 2015.
• Amortization of intangible assets increased due to expense related to acquired intangible assets from our acquisition of Cyan
during the fourth quarter of fiscal 2015.
• Restructuring costs primarily reflect certain severance and related expense associated with headcount reductions and initiatives to
improve efficiency. During fiscal 2015, we incurred approximately $8.6 million in restructuring costs, primarily reflecting a global
workforce reduction of approximately 125 employees in the first quarter of fiscal 2015 as part of our business optimization strategy
to improve our gross margin, constrain operating expense and redesign certain business processes, systems, and resources. As we
look to manage operating expense and drive further efficiency and leverage from our operations, we will continue to assess
allocation of headcount, facilities and other resources to ensure that they are optimized toward key growth opportunities.
Other items
The table below (in thousands, except percentage data) sets forth the changes in other items for the periods indicated:
Fiscal Year
2014
%*
2015
%*
Increase
(decrease)
%**
Interest and other income (loss), net
Interest expense
Provision for income taxes
$
$
$
(25,262 )
47,115
13,964
(1.1 ) $
2.1 $
0.6 $
(25,505 )
51,179
12,097
(1.0 ) $
2.1 $
0.5 $
(243 )
4,064
(1,867 )
(1.0 )
8.6
(13.4 )
_________________________________
*
Denotes % of total revenue
** Denotes % change from 2014 to 2015
•
Interest and other income (loss), net reflects a $2.9 million increase in losses related to foreign exchange rates on assets and
liabilities denominated in a currency other than the relevant functional currency, net of hedging activity, offset by a $2.7 million
non-cash gain related to the change in fair value of the embedded redemption feature associated with our 2015 Notes, which
matured during the second quarter of fiscal 2015.
•
Interest expense increased, primarily due to a higher level of outstanding debt in fiscal 2015 as compared to fiscal 2014. See Note
15 to our Consolidated Financial Statements included in in Item 8 of Part II of this report for more information.
• Provision for income taxes decreased primarily due to foreign and state taxes.
Fiscal 2013 compared to Fiscal 2014
Revenue
51
The table below (in thousands, except percentage data) sets forth the changes in our operating segment revenue for the periods indicated:
Revenue:
Converged Packet Optical
Packet Networking
Optical Transport
Software and Services
Consolidated revenue
Fiscal Year
2013
%*
2014
%*
Increase
(decrease)
%**
$ 1,187,231
222,898
233,821
438,596
$ 2,082,546
57.0 $ 1,455,501
244,116
10.7
127,215
11.2
461,457
21.1
100.0 $ 2,288,289
63.6 $
10.7
5.6
20.1
100.0 $
268,270
21,218
(106,606 )
22,861
205,743
22.6
9.5
(45.6 )
5.2
9.9
_________________________________
*
Denotes % of total revenue
** Denotes % change from 2013 to 2014
• Converged Packet Optical revenue increased significantly, reflecting a $258.2 million increase in sales of our 6500 Packet-
Optical Platform, largely driven by service provider and Web-scale provider demand for high-capacity, optical transport for
coherent 40G and 100G network infrastructures. In addition, sales of our 5430 reconfigurable switching system and the OTN
configuration for the 5410 Reconfigurable Switching System increased by $25.6 million and $6.0 million respectively. These
increases were partially offset by a $21.5 million decrease in sales of our CoreDirector® Multiservice Optical Switches. The strong
performance of this segment, particularly as compared to the expected declines in Optical Transport segment revenue, reflects the
preference of network operators to adopt next-generation architectures that enable the convergence of high-capacity, coherent
optical transport with integrated OTN switching and control plane functionality.
• Packet Networking revenue increased, reflecting a $30.4 million increase in sales of our 3000 and 5000 families of service
delivery and aggregation switches. This increase was largely driven by the expansion of Ethernet business services by AT&T, our
largest service provider customer. Segment revenue also benefited from $1.7 million in initial sales of our 8700 Packetwave
Platform. These increases were partially offset by decreases of $5.3 million in sales of our 5410 Service Aggregation Switch and
$5.1 million in sales of our older, stand-alone broadband products.
• Optical Transport revenue decreased, reflecting sales decreases of $46.6 million in other stand-alone transport products, $36.2
million of 5100/5200 Advanced Services Platform and $23.8 million in our 4200 Advanced Services Platform. Revenue for our
Optical Transport segment, which currently consists principally of stand-alone WDM and SONET/SDH-based transport platforms,
has experienced meaningful declines in annual revenue in recent years, reflecting network operators' transition toward next-
generation converged network architectures as described above.
•
Software and Services revenue increased, reflecting increases of $10.4 million in maintenance and support services revenue, $8.4
million in installation and deployment services revenue, $2.8 million in software sales and $1.2 million in networking
transformation consulting revenue.
The table below (in thousands, except percentage data) sets forth the changes in geographic distribution of revenue for the periods
indicated:
North America
EMEA
CALA
APAC
Total
Fiscal Year
2013
$ 1,360,169
376,405
174,360
171,612
$ 2,082,546
%*
2014
%*
Increase
(decrease)
%**
65.3 $ 1,477,329
417,399
18.1
212,018
8.4
181,543
8.2
100.0 $ 2,288,289
64.6 $
18.2
9.3
7.9
100.0 $
117,160
40,994
37,658
9,931
205,743
8.6
10.9
21.6
5.8
9.9
_________________________________
*
Denotes % of total revenue
** Denotes % change from 2013 to 2014
52
• North America revenue includes sales to AT&T for fiscal 2013 and fiscal 2014 of $373.6 million and $423.5 million, respectively.
Revenues reflect increases of $145.6 million in Converged Packet Optical sales, $21.4 million in Software and Services sales and
$20.2 million in sales of Packet Networking. These increases were partially offset by a decrease of $70.1 million in Optical
Transport sales.
• EMEA revenue reflects increases of $58.4 million in Converged Packet Optical sales, $5.4 million in Software and Services Sales
and $2.3 million in Packet Networking sales. These increases were partially offset by a decrease of $25.0 million in Optical
Transport sales.
• CALA revenue reflects increases of $41.3 million in Converged Packet Optical sales and $2.5 million in Software and Services
sales. These increases was partially offset by a decrease of $6.1 million in Optical Transport sales.
• APAC revenue reflects an increase of $23.0 million in Converged Packet Optical sales. This increase was partially offset by
decreases of $6.5 million in Software and Services sales, $5.3 million in Optical Transport sales and $1.3 million in Packet
Networking sales. Software and Services sales reflect decreases of $3.4 million in maintenance and support services sales, $1.2
million in installation and deployment services sales and $1.0 million in software sales. Maintenance and support services sales
reflect decreases in sales to certain service providers. Installation and deployment services sales reflect a decrease in sales to
submarine network operators.
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
2013
$ 2,082,546
1,217,371
865,175
$
%*
2014
%*
Increase
(decrease)
%**
100.0 $ 2,288,289
1,339,937
58.5
948,352
41.5 $
100.0 $
58.6
41.4 $
205,743
122,566
83,177
9.9
10.1
9.6
_________________________________
*
Denotes % of total revenue
** Denotes % change from 2013 to 2014
Product revenue
Product cost of goods sold
Product gross profit
Fiscal Year
2013
$ 1,680,125
967,510
712,615
$
%*
2014
%*
Increase
(decrease)
%**
100.0 $ 1,865,826
1,083,022
57.6
782,804
42.4 $
100.0 $
58.0
42.0 $
185,701
115,512
70,189
11.1
11.9
9.8
_________________________________
*
Denotes % of product revenue
** Denotes % change from 2013 to 2014
Service revenue
Service cost of goods sold
Service gross profit
_________________________________
Fiscal Year
2013
402,421
249,861
152,560
$
$
%*
100.0 $
62.1
37.9 $
2014
422,463
256,915
165,548
%*
Increase
(decrease)
%**
100.0 $
60.8
39.2 $
20,042
7,054
12,988
5.0
2.8
8.5
53
*
Denotes % of service revenue
** Denotes % change from 2013 to 2014
• Gross profit as a percentage of revenue remained relatively unchanged.
• Gross profit on products as a percentage of product revenue decreased slightly, due to lower margins on Packet Networking and
Optical Transport products. The decline was largely offset by improved mix of higher-margin packet platforms with software
content within our Converged Packet Optical segment, and greater leverage from efforts to streamline and optimize our supply
chain activities.
• Gross profit on services as a percentage of services revenue increased primarily due to increased maintenance and consulting
services revenues and increased margin due to improved efficiencies for managed spares projects.
Operating expense
The table below (in thousands, except percentage data) sets forth the changes in operating expense for the periods indicated:
Research and development
Selling and marketing
General and administrative
Amortization of intangible assets
Restructuring costs
Total operating expenses
2013
383,408
304,170
122,432
49,771
7,169
866,950
$
$
Fiscal Year
%*
18.4 $
14.6
5.9
2.4
0.3
41.6 $
2014
401,180
328,325
126,824
45,970
349
902,648
%*
Increase
(decrease)
%**
17.5 $
14.3
5.5
2.0
—
39.3 $
17,772
24,155
4,392
(3,801 )
(6,820 )
35,698
4.6
7.9
3.6
(7.6 )
(95.1 )
4.1
_________________________________
*
Denotes % of total revenue
** Denotes % change from 2013 to 2014
• Research and development expense benefited by $15.4 million as a result of foreign exchange rates, primarily due to
strengthening of the U.S. dollar in relation to the Canadian Dollar. The $17.8 million increase primarily reflects increases of $8.1
million in professional services expense, $6.9 million in employee compensation and related costs, $5.3 million in prototype
expense, partially offset by a decrease of $2.6 million in technology and related costs.
•
Selling and marketing expense benefited by $1.9 million as a result of foreign exchange rates, primarily due to strengthening of
the U.S. dollar in relation to the Canadian Dollar. The $24.2 million increase primarily reflects increases of $20.6 million in
employee compensation and related costs, $3.3 million of travel and related costs and $1.2 million in facilities and information
technology costs. These increases were partially offset by a decrease of $1.4 million in customer demonstration equipment.
• General and administrative expense increased by $4.4 million, primarily reflecting an increase in legal fees and settlements and
consulting services.
• Amortization of intangible assets decreased due to certain intangible assets having reached the end of their economic lives.
• Restructuring costs 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. Restructuring
costs for fiscal 2013 also include the consolidation of certain facilities located within Maryland associated with the transition of our
headquarters facility.
Other items
The table below (in thousands, except percentage data) sets forth the changes in other items for the periods indicated:
54
Fiscal Year
2013
%*
2014
%*
Increase
(decrease)
%**
Interest and other income (loss), net
Interest expense
Loss on extinguishment of debt
Provision for income taxes
$
$
$
$
(5,744 )
44,042
(28,630 )
5,240
(0.3 ) $
2.1 $
(1.4 ) $
0.3 $
(25,262 )
47,115
—
13,964
(1.1 ) $
2.1 $
— $
0.6 $
(19,518 )
3,073
28,630
8,724
(339.8 )
7.0
(100.0 )
166.5
_________________________________
*
Denotes % of total revenue
** Denotes % change from 2013 to 2014
•
•
Interest and other income (loss), net reflects a $5.7 million non-cash loss related to the change in fair value of the embedded
redemption feature associated with our 2015 Notes and a $13.5 million increase in losses related to foreign exchange rates on assets
and liabilities denominated in a currency other than the relevant functional currency, net of hedging activity.
Interest expense increased, primarily due to a higher level of outstanding debt in fiscal 2014 as compared to fiscal 2013. See Note
15 to our Consolidated Financial Statements included in in Item 8 of Part II of this report for more information.
• Loss on extinguishment of debt for fiscal 2013 reflects a non-cash loss of $28.6 million relating to the exchange transactions
during the first quarter of fiscal 2013. Upon issuance, the 4.0% convertible senior notes due December 15, 2020 (the "2020 Notes")
were recorded at a fair value of $213.6 million. The exchange transactions resulted in the retirement of outstanding 2015 Notes with
a carrying value of $187.9 million and the write-off of unamortized debt issuance costs of $2.3 million and $0.6 million relating to
the redemption feature on the 2015 Notes, which was accounted for as a separate embedded derivative.
• Provision for income taxes increased primarily due to foreign and state tax expenses.
Segment Profit
The table below (in thousands, except percentage data) sets forth the changes in our segment profit for the respective periods:
Segment profit:
Converged Packet Optical
Packet Networking
Optical Transport
Software and Services
_________________________________
*
Denotes % change from 2014 to 2015
Fiscal Year
2014
2015
Increase
(decrease)
%*
$
$
$
$
353,942 $
19,467 $
38,974 $
134,789 $
471,484 $
28,136 $
15,930 $
145,812 $
117,542
8,669
(23,044 )
11,023
33.2
44.5
(59.1 )
8.2
• Converged Packet Optical segment profit increased, primarily due to increased sales volume and improved gross margin,
partially offset by increased research and development expense. Increased sales volume is largely driven by service provider
demand for convergence of high-capacity, coherent 40G and 100G network infrastructures with integrated OTN switching and
control plane functionality.
• Packet Networking segment profit increased due to lower research and development costs and improved gross margin partially
offset by lower sales volume.
• Optical Transport segment profit decreased, primarily due to reduced sales volume and decreased gross margin. Revenue for our
Optical Transport segment, which currently consists principally of stand-alone WDM and SONET/SDH-based transport platforms,
has experienced meaningful declines in annual revenue in recent years, reflecting network operators' transition toward next-
generation network architectures as described above.
55
•
Software and Services segment profit increased, primarily due to increases in sales of maintenance and support services,
installation and deployment services, software subscription services and increased margin due to lower repair costs to support
maintenance service contracts. These increases were partially offset by increased software research and development costs.
The table below (in thousands, except percentage data) sets forth the changes in our segment profit for the respective periods:
Segment profit:
Converged Packet Optical
Packet Networking
Optical Transport
Software and Services
_________________________________
*
Denotes % change from 2013 to 2014
Fiscal Year
2013
2014
Increase
(decrease)
%*
$
$
$
$
242,335 $
22,740 $
89,754 $
126,938 $
353,942 $
19,467 $
38,974 $
134,789 $
111,607
(3,273 )
(50,780 )
7,851
46.1
(14.4 )
(56.6 )
6.2
• Converged Packet Optical segment profit increased, primarily due to increased sales volume and improved gross margin. The
increased sales volume is largely driven by service provider and Web-scale provider demand for high-capacity, coherent 40G and
100G network infrastructures with integrated OTN switching and control plane functionality. The improved gross margin is
primarily due to sales reflecting a greater mix of higher-margin packet platforms with software content within the segment. These
increases were partially offset by increased research and development expense.
• Packet Networking segment profit decreased due to lower margins on our 3000 and 5000 families of service delivery and
aggregation switches, reflecting increased pricing pressure and competitive dynamics, and increased research and development
expense. Decreased segment profit was partially offset by increased sales volume.
• Optical Transport segment profit decreased, primarily due to reduced sales volume and lower gross margin, partially offset by
lower research and development expense. The decrease in gross margin is primarily due to an increase in obsolete and excess
inventory expense for the discontinuance of certain parts and components used in the manufacture of our Optical Transport
products, including our Corestream® Agility Optical Transport platform. Revenue for our Optical Transport segment, which
currently consists principally of stand-alone WDM and SONET/SDH-based transport platforms, has experienced meaningful
declines in annual revenue in recent years, reflecting network operators' transition toward next-generation network architectures as
described above.
•
Software and Services segment profit increased slightly, due to higher sales for software and consulting services and improved
efficiencies for managed spares projects. These increases were partially offset by higher software research and development
expense.
Liquidity and Capital Resources
At October 31, 2015, our principal sources of liquidity were cash and cash equivalents and investments in marketable debt securities,
representing U.S. treasuries and commercial paper, and our ABL Credit Facility. The following table sets forth 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,
2014
2015
Increase
(decrease)
$
586,720 $
140,205
50,057
790,971 $
135,107
95,105
204,251
(5,098 )
45,048
Total cash and cash equivalents and investments in marketable debt securities
$
776,982
$
1,021,183
$
244,201
The change in total cash and cash equivalents and investments in marketable debt securities during fiscal 2015 was primarily related to
the following:
56
•
•
•
•
•
•
•
•
•
$262.1 million cash provided by operations, consisting of $274.9 million provided by net income adjusted for non-cash charges
offset by $12.8 million used in working capital;
$62.1 million used for purchases of equipment, furniture, fixtures and intellectual property;
$24.1 million provided by the settlement of foreign currency forward contracts, net;
$8.0 million used to pay capital lease obligations;
$2.0 million used for the purchase of a cost method investment;
$37.2 million from the acquisition of Cyan, net of cash acquired;
$29.9 million used for the repayment of long-term debt;
$30.3 million from proceeds of stock issuances under our employee stock purchase plan and the exercise of stock options; and
$6.7 million decrease due to the effect of exchange rate changes on cash and cash equivalents.
Ciena and certain of its subsidiaries are parties to a senior secured asset-based revolving credit facility (the “ABL Credit Facility”)
providing for a total commitment of $200.0 million with a maturity date of December 31, 2016. Ciena principally uses the ABL 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
required to collateralize these instruments. As of October 31, 2015, letters of credit totaling $63.4 million were collateralized by our ABL
Credit Facility. There were no borrowings outstanding under the ABL Credit Facility as of October 31, 2015. Ciena and certain of its
subsidiaries are also parties to a Credit Agreement providing for senior secured term loans in an aggregate principal amount of $250 million
(the “Term Loan”) with a maturity date of July 15, 2019. For additional information about our Term Loan and ABL Credit Facility, see Note
15 and Note 16, respectively, to our Consolidated Financial Statements included in in Item 8 of Part II of this report.
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, investments and other sources of liquidity, including our ABL Credit Facility, will satisfy the working capital
needs, capital expenditures, and other liquidity requirements associated with our operations through at least the next 12 months.
The following sections set forth the components of our $262.1 million of cash provided by operating activities for fiscal 2015:
Net income adjusted for non-cash charges
The following tables set forth (in thousands) our net income adjusted for non-cash charges during fiscal 2015:
Net income
Adjustments for non-cash charges:
Depreciation of equipment, building, 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 income adjusted for non-cash charges
Working Capital
Year ended
October 31, 2015
11,667
55,901
55,340
79,866
26,846
17,881
27,373
274,874
$
$
Our working capital used $12.8 million of cash during fiscal 2015. The following tables set forth (in thousands) the major components of
the reduction in working capital:
57
Cash used in accounts receivable
Cash provided by inventories
Cash used in prepaid expenses and other
Cash used in accounts payable, accruals and other obligations
Cash provided by deferred revenue
Cash provided by a reduction in working capital
Year ended
October 31, 2015
(37,297 )
46,898
(46,383 )
(10,505 )
34,525
(12,762 )
$
$
The $37.3 million of cash used in accounts receivable during fiscal 2015 reflects the higher sales volume in the fourth quarter of fiscal
2015 compared to the fourth quarter of fiscal 2014. Our days sales outstanding (DSOs) remained relatively flat from 82 days for fiscal 2014
to 81 days for fiscal 2015. The $46.9 million in cash generated from reductions in inventory during fiscal 2015 reflects, in part, certain supply
chain initiatives to improve manufacturing efficiencies and inventory management and the reduction of deferred costs of sales. The reduction
of the deferred costs of sales relates to the completion of certain submarine network projects. As a result, our inventory turns increased from
4.3 turns during fiscal 2014 to 5.9 turns during fiscal 2015. Cash used in prepaid expense and other during fiscal 2015 was $46.4 million,
primarily reflecting a $30.0 million financing receivable with an 18-month term. The $10.5 million of cash used in accounts payable, accruals
and other obligations during fiscal 2015 reflects shorter vendor payment cycles. The $34.5 million of cash provided by deferred revenue
represents either payments received in advance of shipment or payments received after shipment but before revenue recognition.
Cash paid for interest
The $274.9 million of cash provided by our net income adjusted for non-cash charges during fiscal 2015 reflects interest payments by
Ciena of $40.8 million. The following tables set forth (in thousands) our interest paid during fiscal 2015:
4.0% Convertible Senior Notes, due March 15, 2015 (1)
0.875% Convertible Senior Notes due June 15, 2017 (2)
3.75% Convertible Senior Notes, due October 15, 2018 (3)
4.0% Convertible Senior Notes, due December 15, 2020(4)
Term Loan Payable due July 15, 2019 (5)
Interest rate swap (6)
ABL Credit Facility (7)
Cash paid during the fiscal year for interest
Year ended
October 31, 2015
3,750
4,375
13,125
7,500
9,475
793
1,754
40,772
$
$
(1)
(2)
(3)
(4)
(5)
(6)
(7)
The final interest payment owing on our 4.0% convertible senior notes, due March 15, 2015, was paid during the second fiscal
quarter of 2015.
Interest on our outstanding 0.875% convertible senior notes, due June 15, 2017, is payable on June 15 and December 15 of each
year.
Interest on our outstanding 3.75% convertible senior notes, due October 15, 2018, is payable on April 15 and October 15 of each
year.
Interest on our outstanding 4.0% convertible senior notes, due December 15, 2020, is payable on June 15 and December 15 of each
year.
Interest on our outstanding Term Loan, due July 15, 2019, is payable periodically based on the underlying market index rate
selected for borrowing. The Term Loan bears interest at LIBOR plus a spread of 300 basis points subject to a minimum LIBOR rate
of 0.75%. During fiscal 2015, the interest rate on our Term Loan was 3.75%.
Payments on our interest rate swap arrangement are variable and effectively fix the total interest rate under the Term Loan at
5.004% from July 20, 2015 through July 19, 2018.
During fiscal 2015, we utilized the ABL Credit Facility to collateralize certain standby letters of credit and paid $1.8 million in
commitment fees, interest expense and other administrative charges relating to our ABL Credit Facility.
58
For additional information about our convertible notes,Term Loan, ABL Credit Facility and interest rate swap see Note 15 and 16 to our
Consolidated Financial Statements included in Item 8 of Part II of this report and Item 7A of Part II of this report.
Contractual Obligations
On October 23, 2014, Ciena Canada, Inc., a subsidiary of Ciena, entered into a lease agreement to lease an office building located at
5050 Innovation Drive, Ottawa, Canada. On April 15, 2015, Ciena Canada, Inc. entered into a work letter and a lease agreement related to the
construction and lease of two new office buildings consisting of a rentable area of approximately 254,318 square feet that will be built
adjacent to the premises subject to the October 2014 lease. These facilities are expected to be part of a future campus that will replace Ciena’s
largest facility and a key research and development center located in the Lab 10 building on the former Nortel Carling Campus in Ottawa,
Canada. With respect to the lease entered into in the second quarter of fiscal 2015, the future minimum rental commitments to be paid over
the 15-year lease term are approximately CAD$112.9 million. The following is a summary of our future minimum payments under
contractual obligations as of October 31, 2015 (in thousands):
Principal due at maturity on convertible notes (1)
Principal due on Term Loan
Interest due on convertible notes
Interest due on Term Loan (2)
Payments due under interest rate swap (2)
Operating leases (3)
Purchase obligations (4)
Capital leases - equipment
Capital leases - buildings (5)
Other obligations
Total (6)
_________________________________
Total
$ 1,061,291 $
246,875
89,375
34,619
8,525
149,754
204,075
5,101
127,826
3,184
$ 1,930,625 $
Less than one
year
One to three
years
844,164 $
5,000
45,625
18,474
5,389
48,840
—
337
10,396
240
978,465 $
Three to five
years
Thereafter
— $
239,375
15,000
6,791
—
21,985
—
—
14,909
—
298,060 $
217,127
—
3,750
—
—
46,449
—
—
100,583
—
367,909
— $
2,500
25,000
9,354
3,136
32,480
204,075
4,764
1,938
2,944
286,191 $
(1)
(2)
(3)
(4)
(5)
(6)
Includes the accretion of the principal amount on the 2020 Notes payable at maturity at a rate of 1.85% per year compounded semi-
annually, commencing December 27, 2012.
Interest on the Term Loan and payments under the interest rate swap are variable and were calculated using the rate in effect on the
balance sheet date. For additional information about our Term Loan and the interest rate swap, see Note 15 to our Consolidated
Financial Statements included in in Item 8 of Part II of this report and Item 7A of Part II of this report.
Does not include variable insurance, taxes, maintenance and other costs that may be 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.
This represents the total minimum lease payments due for all buildings that are subject to capital lease accounting, as well as
buildings that are expected to be recorded as capital leases upon the commencement of the lease term. Payment timing is based on
the excepted commencement of the lease term. Does not include variable insurance, taxes, maintenance and other costs required by
the applicable capital lease. These costs are not expected to have a material future impact.
As of October 31, 2015, we also had approximately $13.3 million of other long-term obligations on 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.
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 ABL 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. The following is a summary of our commercial commitments secured by standby letters of credit by commitment expiration date
as of October 31, 2015 (in thousands):
59
Standby letters of credit
$
65,886 $
31,606 $
15,299 $
6,008 $
12,973
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, goodwill, income taxes, warranty obligations,
restructuring, derivatives and hedging, and contingencies and litigation. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances. Among other things, these estimates form the basis for judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ 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 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.
We apply the percentage-of-completion method to long-term arrangements where we are required to undertake significant production,
customization 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. Unbilled percentage- of-completion revenues recognized are included in accounts receivable,
net. Billings in excess of revenues recognized on these contracts are recorded within deferred revenue. The percentage of total revenue
recognized using the percentage-of-completion method for the fiscal years ended October 31, 2013, October 31, 2014 and October 31, 2015
were 4.5%, 4.0% and 1.8%, respectively.
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 are specified by the customer, revenue
is deferred until there are no uncertainties regarding customer acceptance
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.
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 for each delivered element when the revenue recognition criteria are met. We determine the selling price for
each deliverable based upon the selling price hierarchy for multiple-deliverable arrangements. Under this hierarchy, we use vendor-specific
objective evidence ("VSOE") of selling price, if it exists, or third party evidence ("TPE") of selling price if VSOE does not exist. If neither
60
VSOE nor TPE of selling price exists for a deliverable, we use our best estimate of selling price ("BESP") for that deliverable. For multiple
element software arrangements where VSOE of undelivered maintenance does not exist, revenue for the entire arrangement is recognized
over the maintenance term.
VSOE, when determinable, is established based on our pricing and discounting practices for the specific product or service when sold
separately. In determining whether VSOE exists, 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.
Our total deferred revenue for products was $50.5 million and $66.5 million as of October 31, 2014 and October 31, 2015, 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 $95.2 million and $122.5 million as of October 31, 2014 and October 31, 2015, 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 2015, we completed the Cyan acquisition for a purchase price of $335.7 million. See Note 2 to the Consolidated Financial
Statements included in Item 8 of Part II of this 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 and the expense is adjusted accordingly. 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 these estimates, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. Changes in these estimates and assumptions can materially affect the measurement of estimated
fair value of our share-based compensation. See Note 20 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, 2015, total unrecognized compensation expense was $78.7 million: (i) $2.8
million, which relates to unvested stock options and is expected to be recognized over a weighted-average period of 1.6 years; and (ii) $75.9
million, which relates to unvested restricted stock units and is expected to be recognized over a weighted-average period of 1.5 years.
61
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 recorded. When assessing
whether a tax benefit relating to share-based compensation has been realized, we follow the “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 $32.3 million and
$26.8 million in fiscal 2014 and 2015, respectively. The charges in fiscal 2014 were primarily related to engineering design changes and the
discontinuance of certain parts and components used in the manufacture of our Optical Transport, including our Corestream® Agility Optical
Transport platform, and Converged Packet Optical products. The charges in fiscal 2015 were primarily related to the discontinuance of certain
parts and components used in the manufacture of our Converged Packet Optical products and a decrease in the forecasted demand for both
our legacy, stand-alone WDM and SONET/SDH-based transport platforms and our 5410 Service Aggregation Switch. Our inventory net of
allowance for excess and obsolescence was $254.7 million and $191.2 million as of October 31, 2014 and October 31, 2015, 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 $519.0 million and $550.8 million as of October 31, 2014 and
October 31, 2015, respectively. Our allowance for doubtful accounts was $2.1 million and $3.0 million as of October 31, 2014 and
October 31, 2015, respectively.
Goodwill
Goodwill is the excess of the purchase price over the fair values assigned to the net assets acquired in a business combination. We test
goodwill for impairment on an annual basis, which we have determined to be the last business day of fiscal September each year. We also test
goodwill for impairment between annual tests if an event occurs or circumstances change that would, more likely than not, reduce the fair
value of the reporting unit below its carrying value.
The first step in the process of assessing goodwill impairment is to compare the fair value of the reporting unit with the unit’s carrying
amount, including goodwill. If this test indicates that the fair value is less than the carrying value, then step two is required to compare the
implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. A non-cash goodwill impairment
charge 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 would be materially adversely affected in such period. As of the end of fiscal 2014, there was no
goodwill balance. At the end of fiscal 2015, the goodwill balance was $256.4 million as a result of our acquisition of Cyan. See Note 2 to the
Consolidated Financial Statements included in Item 8 of Part II of this report.
62
Long-lived Assets
Our long-lived assets include: equipment; building; furniture and fixtures; finite-lived intangible assets and maintenance spares. As of
October 31, 2014 and October 31, 2015 these assets totaled $309.4 million and $449.9 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 represent the lowest level for which we identify cash flows. We measure
impairment loss as the amount by which the carrying amount of the asset or asset group exceeds its fair value.
Deferred Tax Valuation Allowance
As of October 31, 2015, we have recorded a valuation allowance offsetting all our net deferred tax assets of $1.5 billion. 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, 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 $56.0 million and $56.7 million as of October 31, 2014 and
October 31, 2015, 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 $22.1 million and $17.9 million for fiscal 2014 and
2015, 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 our 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, 2015. 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.
63
Jan. 31,
Apr. 30,
Jul. 31,
Oct. 31,
Jan. 31,
Apr. 30,
Jul. 31,
Oct. 31,
2014
2014
2014
2014
2015
2015
2015
2015
$ 432,941 $ 460,821 $
100,762
533,703
99,240
560,061
495,889 $ 476,175 $ 422,315 $ 511,880 $ 493,919 $ 574,281
117,692
107,673
691,973
603,562
109,013
602,932
114,788
590,963
109,722
621,602
106,847
529,162
245,216
62,636
307,852
225,851
257,632
64,738
322,370
237,691
275,003
64,586
339,589
263,973
305,171
64,955
370,126
220,837
236,548
62,319
298,867
230,295
286,898
62,293
349,191
272,411
273,837
59,226
333,063
269,869
323,090
65,895
388,985
302,988
Revenue:
Products
Services
Total Revenue
Cost of goods sold:
Products
Services
Total costs of goods sold
Gross profit
Operating expenses:
Research and development
Selling and marketing
101,497
78,348
103,492
83,662
97,685
81,919
98,506
84,396
100,761
76,712
105,202
82,471
100,379
81,650
107,859
93,003
General and administrative
30,097
31,882
36,285
28,560
29,553
30,302
29,743
33,804
Amortization of intangible
assets
Acquisition and integration
costs
Restructuring costs
Total operating expenses
Income (loss) from
operations
Interest and other income
(loss), net
12,439
11,493
11,019
11,019
11,019
11,019
11,019
36,454
—
115
222,496
—
—
230,529
—
63
226,971
—
171
222,652
—
8,085
226,130
1,020
(17 )
229,997
2,435
192
225,418
22,084
366
293,570
3,355
7,162
37,002
(1,815 )
4,165
42,414
44,451
9,418
(5,998 )
(1,905 )
(6,328 )
(11,031 )
(8,233 )
(5,549 )
(5,491 )
(6,232 )
Interest expense
(11,028 )
(11,020 )
(11,508 )
(13,559 )
(13,661 )
(12,947 )
(11,883 )
(12,688 )
Income (loss) before income
taxes
(13,671 )
(5,763 )
19,166
(26,405 )
(17,729 )
23,918
27,077
(9,502 )
Provision for income tax
2,265
4,395
Net income (loss)
$
(15,936 ) $
(10,158 ) $
3,006
16,160 $
4,298
1,050
(30,703 ) $
(18,779 ) $
3,265
20,653 $
3,452
23,625 $
4,330
(13,832 )
Basic net income (loss) per
common share
$
(0.15 ) $
(0.10 ) $
0.15
$
(0.29 ) $
(0.17 ) $
0.18
$
0.20
$
(0.10 )
Diluted net income (loss) per
potential common share
$
Weighted average basic
common shares outstanding
Weighted average diluted
potential common shares
outstanding
(0.15 ) $
(0.10 ) $
0.15
$
(0.29 ) $
(0.17 ) $
0.17
$
0.19
$
(0.10 )
104,501
105,451
106,236
106,931
107,773
113,555
118,413
134,097
104,501
105,451
120,809
106,931
107,773
128,017
133,233
134,097
64
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our market risk disclosures includes forward-looking statements. Actual results could differ materially
from those projected in these 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 investments in U.S. Government obligations and commercial paper with varying maturities.
See Notes 5 and 6 to our Consolidated Financial Statements included in Item 8 of Part II of this report for information relating to investments
and fair value. These investments are sensitive to interest rate movements and their fair value will decline as interest rates rise and increase as
interest rates decline. The estimated impact on these investments 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 $2.2 million decline in value.
Our earnings and cash flows from operations may be exposed to changes in interest rates because of the floating rate of interest in our
Term Loan. See Note 15 to our Consolidated Financial Statements included in Item 8 of Part II of this report for information relating to the
Term Loan. The Term Loan bears interest at LIBOR plus a spread of 300 basis points subject to a minimum LIBOR rate of 0.75%. As of
October 31, 2015, the interest rate in effect on our Term Loan was 3.75%. During fiscal 2014, Ciena entered into interest rate cap
arrangements to limit the interest rate under the Term Loan to a maximum LIBOR rate of 0.75% plus a spread of 300 basis points through
July 2015. Also in fiscal 2014, Ciena entered into interest rate swap arrangements ("interest rate swap") that fix the total interest rate under
the Term Loan at 5.004%, for the period commencing on July 20, 2015 through July 19, 2018. As such, a 100 basis point increase in the
LIBOR rate as of our most recent LIBOR rate setting would have an immaterial impact in annualized interest expense on our Term Loan
as recognized in our Consolidated Financial Statements.
Foreign Currency Exchange Risk. As a global concern, our business and results of operations are exposed to and can be impacted by
movements in foreign currency exchange rates. Due to our global sales presence, some of our sales transactions and revenue are non-U.S.
dollar denominated, with the Canadian Dollar and Euro being our most significant foreign currency revenue exposures. If the U.S. dollar
strengthens against these currencies, our revenue for these transactions 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 costs of our products to customers in markets outside
the United States, which could impact our competitive position. During fiscal 2015, approximately 20.2% of revenue was non-U.S. dollar
denominated. During fiscal 2015 as compared to fiscal 2014, the U.S. dollar strengthened against a number of foreign currencies, including
the Canadian Dollar and Euro and, consequently, our revenue reported in U.S. dollars was adversely impacted by approximately $48.4
million or 1.9%. As it relates to costs of goods sold, employee-related and facilities costs associated with certain manufacturing-related
operations in Canada represent our primary exposure to foreign currency exchange risk.
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 2015, approximately 46.1% of our operating expense was non-U.S.
dollar denominated. If these currencies strengthen, costs reported in U.S. dollars will increase. During fiscal 2015, research and development
expense benefited by approximately $28.0 million, net of hedging losses of $5.5 million, primarily due to the strengthening of the U.S. dollar
in relation to the Canadian Dollar in comparison to fiscal 2014. Also in fiscal 2015, sales and marketing expense and general and
administrative expense benefited by approximately $16.9 million and $4.4 million, respectively, in each case, due to the strengthening of the
U.S. dollar in relation to the Euro and the Canadian Dollar in comparison to fiscal 2014.
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 12 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, 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.
Ciena Corporation, as the U.S. parent entity, uses the U.S. dollar as its functional currency, however some of Ciena's foreign branch
offices and subsidiaries use the local currency as their functional currency. During fiscal 2015, Ciena recorded $47.6 million in foreign
currency exchange losses, as a result of monetary assets and liabilities that were transacted in a currency other than the entity's functional
currency, and the re-measurement adjustments were recorded in interest and other income (loss), net on the Consolidated Statement of
Operations. From time to time, Ciena uses foreign currency forwards to hedge these balance sheet exposures. These forwards are not
designated as hedges for accounting purposes and any net gain or loss associated with these derivatives is reported in interest and other
income (loss), net. During fiscal 2015, Ciena recorded gains of $23.2 million from these derivatives. See Note 1, Note 4 and Note 13 to our
Consolidated Financial Statements included in Item 8 of Part II of this report.
65
Convertible Notes 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 our 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 15 to our
Consolidated Financial Statements included in Item 8 of Part II of this report.
66
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 Comprehensive Income (Loss)
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
Number
68
69
70
71
72
73
74
67
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Ciena Corporation:
In our opinion, the accompanying 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, 2015 and 2014, and the results of their
operations and their cash flows for each of the three years in the period ended October 31, 2015 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, 2015, based on criteria established in Internal Control - Integrated Framework (2013) 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 accompanying 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.
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, 2015
68
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, building, furniture and fixtures, net
Goodwill
Other intangible assets, net
Other long-term assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable
Accrued liabilities and other short-term obligations
Deferred revenue
Current portion of long-term debt
Total current liabilities
Long-term deferred revenue
Other long-term obligations
Long-term debt, net
Total liabilities
Commitments and contingencies (Note 23)
Stockholders’ equity (deficit):
$
$
$
October 31,
2014
2015
586,720 $
140,205
518,981
254,660
192,624
1,693,190
50,057
126,632
—
128,677
74,076
2,072,632 $
209,777 $
276,608
104,688
190,063
781,136
40,930
45,390
1,274,791
2,142,247
790,971
135,107
550,792
191,162
196,178
1,864,210
95,105
191,973
256,434
202,673
84,656
2,695,051
222,140
316,283
126,111
2,500
667,034
62,962
72,540
1,271,639
2,074,175
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; 106,979,960 and 135,612,217
shares issued and outstanding
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity (deficit)
Total liabilities and stockholders’ equity (deficit)
$
1,070
5,954,440
1,356
6,640,436
(14,668 )
(22,126 )
(6,010,457 )
(69,615 )
2,072,632 $
(5,998,790 )
620,876
2,695,051
The accompanying notes are an integral part of these consolidated financial statements.
69
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
Amortization of intangible assets
Acquisition and integration costs
Restructuring costs
Total operating expenses
Income (loss) from operations
Interest and other income (loss), net
Interest expense
Loss on extinguishment of debt
Income (loss) before income taxes
Provision for income taxes
Net income (loss)
Basic net income (loss) per common share
Diluted net income (loss) per potential common share
Weighted average basic common shares outstanding
Weighted average diluted potential common shares outstanding
Year Ended October 31,
2013
2014
2015
$
1,680,125 $
402,421
2,082,546
1,865,826 $
422,463
2,288,289
967,510
249,861
1,217,371
865,175
1,083,022
256,915
1,339,937
948,352
383,408
304,170
122,432
49,771
—
7,169
866,950
(1,775 )
(5,744 )
(44,042 )
(28,630 )
(80,191 )
5,240
401,180
328,325
126,824
45,970
—
349
902,648
45,704
(25,262 )
(47,115 )
—
(26,673 )
13,964
$
$
$
(85,431 ) $
(40,637 ) $
(0.83 ) $
(0.83 ) $
102,350
102,350
(0.38 ) $
(0.38 ) $
105,783
105,783
2,002,395
443,274
2,445,669
1,120,373
249,733
1,370,106
1,075,563
414,201
333,836
123,402
69,511
25,539
8,626
975,115
100,448
(25,505 )
(51,179 )
—
23,764
12,097
11,667
0.10
0.10
118,416
120,101
The accompanying notes are an integral part of these consolidated financial statements.
70
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Year ended October 31,
2013
2014
Net income (loss)
$
(85,431 ) $
Change in unrealized gain (loss) on available-for-sale securities, net of tax
Change in unrealized gain (loss) on foreign currency forward contracts, net of tax
Change in unrealized loss on forward starting interest rate swap, net of tax
Change in accumulated translation adjustments
Other comprehensive loss
Total comprehensive income (loss)
(14 )
(310 )
—
(4,096 )
(4,420 )
(40,637 ) $
41
114
(2,109 )
(4,940 )
(6,894 )
$
(89,851 ) $
(47,531 ) $
2015
11,667
(149 )
(95 )
(3,439 )
(3,775 )
(7,458 )
4,209
The accompanying notes are an integral part of these consolidated financial statements.
71
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7
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Loss on extinguishment of debt
Depreciation of equipment, building, 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:
Accounts receivable
Inventories
Prepaid expenses and other
Accounts payable, accruals and other obligations
Deferred revenue
Net cash provided by 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
Purchase of cost method investment
Settlement of foreign currency forward contracts, net
Acquisition of business, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net
Payment of long-term debt
Payment of debt and equity issuance costs
Payment of capital lease obligations
Proceeds from issuance of common stock
Net cash provided by (used in) 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 fiscal year
Cash and cash equivalents at end of fiscal year
Supplemental disclosure of cash flow information
Cash paid during the fiscal year for interest
Cash paid during the fiscal year for income taxes, net
Non-cash investing activities
Purchase of equipment in accounts payable
Equipment acquired under capital leases
Building subject to capital lease
Construction in progress subject to build-to-suit lease
Non-cash financing activities
Year Ended October 31,
2014
2015
2013
$ (85,431)
$ (40,637)
$ 11,667
28,630
55,699
37,720
71,308
19,938
24,558
9,023
(145,421)
(8,943)
(82,809)
115,312
5,094
44,678
(43,814)
2,338
(184,864)
95,000
—
479
—
(130,861)
—
(216,210)
(3,692)
(3,335)
15,898
(207,339)
(2,435)
(295,957)
642,444
$ 346,487
$ 32,397
$ 10,679
$ 6,191
$ 2,538
$ —
$ —
—
55,616
42,930
57,151
32,332
22,129
25,668
(33,164)
(37,889)
(7,931)
(59,837)
33,448
89,816
(48,216)
2,060
(245,196)
195,000
—
(10,041)
—
(106,393)
248,750
(625)
(4,227)
(3,034)
17,663
258,527
(1,717)
240,233
346,487
$ 586,720
$ 36,276
$ 11,396
$ 4,961
$ 10,424
$ —
$ —
—
55,901
55,340
79,866
26,846
17,881
27,373
(37,297)
46,898
(46,383)
(10,505)
34,525
262,112
(62,109)
(40)
(245,323)
205,000
(2,000)
24,133
37,212
(43,127)
—
(29,867)
(421)
(8,038)
30,275
(8,051)
(6,683)
204,251
586,720
$ 790,971
$ 40,772
$ 10,668
$ 20,922
$ 464
$ 14,939
$ 18,663
Conversion of 4.0% convertible senior notes, due March 15, 2015 into 8,898,387 shares of
common stock
Conversion of 8.0% convertible senior notes, due December 15, 2019, assumed from the
Cyan acquisition, into 4,589,626 shares of common stock
Fair value of shares issued related to acquisition of business
$ —
$ —
$ 180,645
$ —
$ —
$ —
$ —
$ 117,140
$ 302,114
The accompanying notes are an integral part of these consolidated financial statements.
73
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 network specialist focused on providing communications networking solutions that
enable a wide range of network operators to adopt next-generation architectures. Ciena has optimized its business and solutions to enable
network operators to create and deliver the broad array of high-bandwidth services relied upon by enterprise and consumer end users. Ciena
provides equipment, software and services that support the transport, switching, aggregation, service delivery and management of voice,
video and data traffic on communications networks. In addition to its high-capacity hardware platforms, Ciena offers network management
and control software platforms that help network operators simplify and automate their networks and virtualize certain network functions.
Ciena's solutions are designed to enable network operators to adopt open, multi-vendor, software-programmable network infrastructures that
improve automation, reduce network complexity and flexibly support changing service requirements. Ciena's solutions yield business and
operational value for its customers by enabling them to introduce new, revenue-generating services and to reduce network complexity and
expense.
Ciena's Converged Packet Optical, Packet Networking and Optical Transport products are used, individually or as part of an integrated
solution, by communications service providers, cable and multiservice operators, Web-scale providers, submarine network operators,
governments, enterprises, research and education (R&E) institutions and other network operators across the globe. Ciena's products, which
support applications from the network core to network access points, allow network operators to scale capacity, increase transmission speeds,
allocate traffic and adapt dynamically to changing end-user service demands. Ciena's software solutions are oriented around its Blue Planet
software platform, a modular, network virtualization, service orchestration and network management software platform designed to simplify
the creation, automation and delivery of services across multi-vendor and multi-domain network environments. To complement its hardware
and software solutions, Ciena offers a broad range of network transformation and related support services that help its customers design,
optimize, deploy, manage and maintain their networks. Ciena’s principal executive offices are located at 7035 Ridge Road, Hanover,
Maryland 21076.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Ciena and its wholly owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
Ciena has a 52 or 53 week fiscal year, which ends on the Saturday nearest to the last day of October in each year (November 2, 2013,
November 1, 2014 and October 31, 2015 for the periods reported). Fiscal 2013, fiscal 2014 and fiscal 2015 each consisted of a 52-week fiscal
year. For purposes of financial statement presentation, each fiscal year is described as having ended on October 31.
Ciena has identified prior period errors in the classification of foreign currency differences on changes in operating assets and liabilities
for each of the three quarters of fiscal 2015. The matters identified have no impact on any of the cash flow statement sub totals in any of the
quarters, and are limited to equal and offsetting errors within the subtotal of cash provided by operations. Ciena concluded that the errors
were not material to any of its previously issued financial statements. Ciena intends to revise the affected periods when they are presented in
fiscal 2016 on a comparable basis to reflect the correct accounting. The revisions will result in net reclassifications within the cash flows from
operating activities section of the cash flow from "Other" to “Changes in operating assets and liabilities” of $19.0 million, $10.0 million and
$0.1 million for the nine, six and three month periods ending July 31, 2015, April 30, 2015 and January 31, 2015, respectively.
Business Combinations
Ciena records 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. Ciena's 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.
Use of Estimates
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The preparation of the financial statements and related disclosures in conformity with Generally Accepted Accounting Principles
("GAAP") 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, convertible
notes payable valuations, bad debts, valuation of inventories and investments, recoverability of intangible assets, other long-lived assets and
goodwill, 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 three months or less to be cash equivalents. Any
restricted cash collateralizing letters of credit is included in other current assets and other long-term assets depending upon the duration of the
restriction.
Investments
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 (loss). Ciena recognizes losses in the income statement 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 Ciena's 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, with all others
considered to be long-term investments.
Ciena has a minority equity investment in a privately held technology company that is classified in other long-term assets. This
investment is carried at cost because Ciena owns less than 20% of the voting equity and does not have the ability to exercise significant
influence over the company. Ciena monitors this investment for impairment and makes appropriate reductions to the carrying value when
necessary. As of October 31, 2015, the carrying value of this investment was $2.0 million. With respect to this investment, Ciena has not
estimated the fair value of this cost method investment because determining the fair value is not practicable. Ciena has not evaluated this
investment for impairment as there have not been any events or changes in circumstances that Ciena believes would have had a significant
adverse effect on the fair value of this investment.
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 the company's performance and allocates resources based on
multiple factors, including measures of segment profit(loss). Operating segments are defined as components of an enterprise that engage in
business activities that 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 following to be its operating segments for reporting purposes: (i) Converged Packet Optical, (ii) Packet Networking, (iii)
Optical Transport, and (iv) Software and Services. See Note 21 below.
Goodwill
Goodwill is the excess of the purchase price over the fair values assigned to the net assets acquired in a business combination. Ciena
tests goodwill for impairment on an annual basis, which we have determined to be the last business day of fiscal September each year. Ciena
also tests goodwill for impairment between annual tests if an event occurs or circumstances change that would, more likely than not, reduce
the fair value of the reporting unit below its carrying value.
The first step in the process of assessing goodwill impairment is to compare the fair value of the reporting unit with the unit’s carrying
amount, including goodwill. If this test indicates that the fair value is less than the carrying value, then step two is required to compare the
implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. A non-cash goodwill impairment
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charge 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 would be materially adversely affected in such period.
Long-lived Assets
Long-lived assets include: equipment, building, 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 asset's 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 that represent the lowest level for which cash flows can be
identified.
Equipment, Building, Furniture and Fixtures and Internal Use Software
Equipment, building, 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. During the second quarter of fiscal 2015, Ciena gained partial access to an office building in Ottawa, Canada pursuant to a
lease arrangement accounted for as a capital lease, which is depreciated over the lease term. The lease building is part of Ciena's new campus
facility that will replace the Lab 10 research and development center on the former Nortel Carling campus. See Note 10 below.
Ciena establishes assets and liabilities for the estimated construction costs incurred under build-to-suit lease arrangements to the extent
that Ciena is involved in the construction of structural improvements or takes construction risk prior to commencement of a lease. See
Notes 10 and 12 below.
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 cash and cash equivalents are maintained at a small number of major U.S. financial institutions. The majority
of Ciena's cash equivalents consist of money market funds. Deposits held with banks may exceed the amount of insurance provided on such
deposits. Because these deposits generally may be redeemed upon demand, management believes that they bear minimal risk.
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 21 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 supply 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 or forecast future demand, or if these manufacturers fail to deliver products or components on time, Ciena's business and
results of operations may suffer.
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
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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 deferred and recognized ratably over the period during which the services
are 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 Ciena is required to undertake significant
production, customization 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. Unbilled percentage-of-completion revenues recognized are included in accounts
receivable, net. Billings in excess of revenues recognized on these contracts are recorded within deferred revenue. The percentage of total
revenue recognized using the percentage-of-completion method for the fiscal years ended October 31, 2013, October 31, 2014 and
October 31, 2015 were 4.5%, 4.0% and 1.8%, respectively.
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 are 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.
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 for each delivered element when the revenue recognition criteria are met. Ciena determines the selling price
for each deliverable based upon the selling price hierarchy for multiple-deliverable arrangements. Under this hierarchy, Ciena uses vendor-
specific objective evidence ("VSOE") of selling price, if it exists, or third party evidence ("TPE") of selling price if VSOE does not exist. If
neither VSOE nor TPE of selling price exists for a deliverable, Ciena uses its best estimate of selling price ("BESP") for that deliverable. For
multiple element software arrangements where VSOE of undelivered maintenance does not exist, revenue for the entire arrangement is
recognized over the maintenance term.
VSOE, when determinable, is established based on Ciena's pricing and discounting practices for the specific product or service when
sold separately. In determining whether VSOE exists, 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.
Warranty Accruals
Ciena provides for the estimated costs to fulfill customer warranty obligations upon recognition of the related revenue. Estimated
warranty costs include estimates for material costs, technical support labor costs and associated overhead. Warranty is included in cost of
goods sold and is 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 the 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
them. 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 the customer. If a customer's financial condition changes, Ciena may be required to record an allowance for doubtful
accounts for that customer, which could negatively affect its results of operations.
Research and Development
77
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
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 23 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 award based on
the fair value of the underlying common stock on the date of grant. In each case, Ciena only recognizes expense in its Consolidated Statement
of Operations for those stock options or restricted stock units 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 and the expense is adjusted accordingly. Ciena uses the straight-line method to record expense for shared-based
awards with only service-based vesting. See Note 20 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 2010 through 2013
and in Canada for 2010 through 2013. Management does not expect the outcome of these audits to have a material adverse effect on Ciena's
consolidated financial position, results of operations or cash flows. Ciena's major tax jurisdictions and the earliest open tax years are as
follows: United States (2012), United Kingdom (2013), Canada (2010) and India (2010). Limited adjustments can be made to Federal U.S.
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.
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
indefinitely 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
78
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 “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.
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 and
term loan, see Note 15 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; and
• 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's
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 recognizes a liability for the cost associated with an exit or disposal
activity in the period in which the liability is incurred, except for one-time employee termination benefits related to a service period, typically
more than 60 days, which are accrued over the service period. See Note 3 below.
Foreign Currency
Certain 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 interest and other income (loss), net on the Consolidated Statement of Operations. See Note 4 below.
Derivatives
79
Ciena's 4.0% convertible senior notes due March 15, 2015 (the "2015 Notes") matured during the second quarter of fiscal 2015. The
2015 Notes included a redemption feature accounted for as a separate embedded derivative that expired when the 2015 notes matured. Until
maturity of the 2015 Notes, the embedded redemption feature was recorded at fair value on a recurring basis, and these changes were
included in interest and other income (loss), net on the Consolidated Statement of Operations. See Note 4 below.
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 12 months or less. During fiscal 2014, Ciena also entered into interest rate hedge
arrangements to reduce variability in certain forecasted interest expense associated with its Term Loan. All of these derivatives are designated
as cash flow hedges. At the inception of the cash flow hedge, and on an ongoing basis, Ciena assesses whether the derivative 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 upon 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. To date,
no ineffectiveness has occurred.
From time to time, Ciena uses foreign currency forward contracts to hedge certain balance sheet exposures. These forward contracts are
not designated as hedges for accounting purposes, and any net gain or loss associated with these derivatives is reported in interest and other
income (loss), net on the Consolidated Statement of Operations.
Ciena records derivative instruments in the Consolidated Statements of Cash Flows within operating, investing, or financing activities
consistent with the cash flows of the hedged items.
See Notes 6 and 13 below.
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 17 below.
Software Development Costs
Ciena develops software for sale to its customers. GAAP requires 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 -Effective
In November 2015, Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2015-17 (Topic
740), Balance Sheet Classification of Deferred Taxes. ASU 2015-17 requires deferred tax liabilities and assets to be classified as noncurrent in
the Consolidated Balance Sheet. The standard will be effective for financial statements issued for annual periods beginning after December
15, 2016, and interim periods within those annual periods. Early adoption is permitted for financial statements that have not been previously
issued. The ASU may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. Ciena
adopted this ASU on a prospective basis in the fourth quarter of fiscal 2015.
Newly Issued Accounting Standards - Not Yet Effective
In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides guidance for
revenue recognition. This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into
contracts for the transfer of non-financial assets. This ASU will supersede the revenue recognition requirements in Topic 605, Revenue
Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue
80
Recognition-Construction-Type and Production-Type Contracts. In August 2015, the FASB issued an amendment to defer the effective date
by one year and allow entities to early adopt no earlier than the original effective date. Based on this amendment, the standard will be
effective for Ciena beginning in the first quarter of fiscal 2019. Ciena is currently evaluating the impact of the adoption of this ASU on its
Consolidated Financial Statements and disclosures.
In April 2015, FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires debt
issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying value of that
debt liability, consistent with debt discounts. The guidance is effective retrospectively for fiscal years, and interim periods within those years,
and will be effective for Ciena beginning in the first quarter of fiscal 2017. Early adoption is permitted for financial statements that have not
been previously issued. Ciena does not expect that the impact of adopting this guidance will be material to its Consolidated Financial
Statements or disclosures.
(2) BUSINESS COMBINATIONS
On August 3, 2015, Ciena acquired Cyan, Inc. (“Cyan”), a leading provider of SDN, NFV and metro packet-optical solutions, in a cash
and stock transaction. Subject to the terms and conditions of the merger agreement, at closing each outstanding Cyan share was exchanged
for 0.19936 shares of Ciena common stock and $0.63 in cash, resulting in an exchange of all of the outstanding shares of Cyan common stock
for approximately $33.6 million in cash and 10.6 million shares of Ciena common stock. Ciena assumed all the then-outstanding Cyan
unvested restricted stock unit awards and stock options and substituted for them approximately 1.0 million Ciena restricted stock unit awards
and stock options exercisable for approximately 2.4 million shares of Ciena common stock.
Upon the closing of the acquisition, Ciena assumed Cyan’s $50.0 million in outstanding principal amount of 8.0% Convertible Senior
Secured Notes due 2019 (the "2019 Notes"). Under the terms of the indenture governing the 2019 notes, following the closing of the
acquisition, the note holders were given the right to convert the 2019 Notes at an increased conversion rate of approximately 91.79 shares of
Ciena common stock and $290.08 in cash for each $1,000 principal amount of 2019 Notes surrendered for conversion. Subsequently, during
the fourth quarter of fiscal 2015, holders representing all of the outstanding aggregate principal amount of the 2019 Notes surrendered their
2019 notes for conversion and, accordingly, there are no remaining 2019 Notes outstanding. In satisfaction of such conversions, Ciena issued
approximately 4.6 million shares of Ciena common stock and paid $14.5 million in cash.
During fiscal 2015, Ciena incurred approximately $25.5 million of acquisition-related costs associated with this transaction. These costs
and expenses include fees associated with financial, legal and accounting advisors, facilities and systems consolidation costs, and severance
and other employment-related costs, including payments to certain former Cyan executives and approximately $7.6 million of non-cash
share-based compensation expense.
The following table summarizes the purchase price for the acquisition (in thousands):
Cash
Value of common stock issued
Fair value of vested stock awards
Total purchase price
Amount
33,621
270,113
32,001
335,735
$
$
The fair value of Ciena's common stock issued in the acquisition was based on Ciena's opening stock price on August 3, 2015. The fair
value of replacement vested stock options was determined using the Black-Scholes option-pricing model.
The following table summarizes the final allocation related to Cyan based on the estimated fair value of the acquired assets and assumed
liabilities (in thousands):
81
Amount
$
Cash and cash equivalents
Restricted cash
Accounts receivable
Inventory
Prepaid expenses and other
Equipment, furniture and fixtures
Goodwill
Customer relationships
Trademarks
Developed technology
Order backlog
Other long-term assets
Accounts payable
Accrued liabilities
Deferred revenue
Long-term debt
Additional paid-in capital related to equity component of long-term debt
Total purchase consideration
$
60,831
10,001
23,891
12,849
3,502
7,962
256,434
36,323
3,432
88,814
25,293
789
(30,856 )
(15,887 )
(16,643 )
(48,836 )
(82,164 )
335,735
Under purchase accounting rules, Ciena valued the acquired finished goods inventory to fair value, which is defined as the estimated
selling price less the sum of (a) costs of disposal, and (b) a reasonable profit allowance for Ciena’s selling effort. This valuation resulted in an
increase in inventory carrying value of approximately $3.1 million for marketable inventory.
Customer relationships and contracts represent agreements with existing Cyan customers and have estimated useful lives of 4 years to
7 years. The majority of the order backlog, which is amortized over the fulfillment period, was fulfilled during the fourth quarter of fiscal
2015.
Developed technology represents purchased technology that had reached technological feasibility and for which Cyan had substantially
completed development as of the date of acquisition. Fair value was determined using future discounted cash flows related to the projected
income stream of the developed technology for a discrete projection period. Cash flows were discounted to their present value as of the
closing date. Developed technology is amortized on a straight line basis over its estimated useful lives of 5 years to 7 years.
The goodwill generated from the acquisition of Cyan was primarily related to expected synergies. The amount of goodwill allocated to
the Converged Packet Optical segment and the Software and Services segment was $55.0 million and $201.4 million, respectively. The
goodwill is not deductible for income tax purposes.
The following unaudited pro forma financial information summarizes the results of operations for the periods indicated as if Ciena’s
acquisition of Cyan had been completed as of the beginning of the earliest period. Revenue attributable to Cyan since the August 3, 2015
acquisition date was $84.4 million. As Ciena has begun to integrate the combined operations, eliminating overlapping processes and expenses
and integrating its products and sales efforts with those of Cyan, it is impractical to determine the earnings specific to Cyan since the
acquisition date. These unaudited 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 periods presented, or that may be obtained in the future.
Pro forma revenue
Pro forma net income (loss)
Fiscal Year
2014
2,388,772
$
(168,041 ) $
2015
2,565,081
16,286
$
$
82
The pro forma earnings were adjusted to exclude $25.5 million in acquisition-related costs and $3.1 million of nonrecurring expense
related to the fair value adjustment to acquisition-date inventory incurred in fiscal 2015. Fiscal 2014 pro forma earnings were adjusted to
include these amounts.
Additionally, pro forma earnings were adjusted to (i) exclude the mark to market changes in the fair value of Cyan's warrants, as they
were automatically exercised on a cashless basis immediately prior to the effective time of the merger and (ii) exclude the fair value of
bifurcated conversion features in Cyan's convertible notes, as these features were no longer bifurcated upon the consummation of the merger.
The total amounts of these adjustments were $4.7 million and $60.6 million in fiscal 2014 and 2015, respectively.
(3) RESTRUCTURING COSTS
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 sets forth the restructuring activity and balance of the
restructuring liability accounts for the fiscal years indicated (in thousands):
Balance at October 31, 2012
Additional liability recorded
Non-cash disposal
Cash payments
Balance at October 31, 2013
Additional liability recorded
Adjustment to previous estimates
Cash payments
Balance at October 31, 2014
Additional liability recorded
Cash payments
Balance at October 31, 2015
Current restructuring liabilities
Non-current restructuring liabilities
_________________________________
Workforce
reduction
Consolidation
of excess
facilities
Total
$
1,449
5,041 (a)
—
(6,410 )
80
685 (b)
—
(584 )
181
8,631 (c)
(8,221 )
591
591
—
$
$
$
3,600
2,128 (a)
$
(747 )
(3,045 )
1,936
9
(345 )
(466 )
1,134
(5 )
(441 )
688
362
326
$
$
$
5,049
7,169
(747 )
(9,455 )
2,016
694
(345 )
(1,050 )
1,315
8,626
(8,662 )
1,279
953
326
$
$
$
$
(a)
(b)
(c)
During fiscal 2013, Ciena recorded a charge of $5.0 million of severance and other employee-related costs associated with a
workforce reduction of approximately 100 employees. Ciena also recorded charges of $2.1 million related to its consolidation of
several facilities primarily in the Linthicum, Maryland area.
During fiscal 2014, Ciena recorded a charge of $0.7 million of severance and other employee-related costs associated with a
workforce reduction of approximately 25 employees.
During fiscal 2015, Ciena recorded a charge of $8.6 million of severance and other employee-related costs associated with a global
workforce reduction of approximately 125 employees.
(4) INTEREST AND OTHER INCOME (LOSS), NET
The components of interest and other income (loss), net, were as follow (in thousands):
83
2013
October 31,
2014
2015
Interest income
Change in fair value of embedded derivative
$
Gain (loss) on non-hedge designated foreign currency forward contracts
Foreign currency exchange losses
Other
$
550
2,950
296
(8,168 )
(1,372 )
407
$
(2,740 )
(5,757 )
(15,663 )
(1,509 )
Interest and other income (loss), net
$
(5,744 ) $
(25,262 ) $
1,178
—
23,243
(47,607 )
(2,319 )
(25,505 )
Ciena Corporation, as the U.S. parent entity, uses the U.S. dollar as its functional currency; however, some of its foreign branch offices
and subsidiaries use the local currency as their functional currency. During fiscal 2013, fiscal 2014 and fiscal 2015, Ciena recorded $8.2
million, $15.7 million and $47.6 million in foreign currency exchange losses, respectively, as a result of monetary assets and liabilities that
were transacted in a currency other than the entity's functional currency, and the re-measurement adjustments were recorded in interest and
other income (loss), net on the Consolidated Statement of Operations. From time to time, Ciena uses foreign currency forwards to hedge these
balance sheet exposures. These forwards are not designated as hedges for accounting purposes and any net gain or loss associated with these
derivatives is reported in interest and other income (loss), net. During fiscal 2014 Ciena recorded losses of $5.8 million from non-hedge
designated foreign currency forward contracts. During fiscal 2015, Ciena recorded gains of $23.2 million from non-hedge designated foreign
currency forward contracts.
(5) SHORT-TERM AND LONG-TERM INVESTMENTS
As of October 31, 2014, investments are comprised of the following (in thousands):
U.S. government obligations:
Included in short-term investments
Included in long-term investments
Commercial paper:
Included in short-term investments
October 31, 2014
Amortized Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Estimated Fair
Value
$
$
$
$
110,182 $
50,016
160,198 $
29,994 $
29,994 $
29 $
41
70 $
— $
— $
— $
—
— $
— $
— $
110,211
50,057
160,268
29,994
29,994
As of October 31, 2015, investments are comprised of the following (in thousands):
U.S. government obligations:
Included in short-term investments
Included in long-term investments
Commercial paper:
Included in short-term investments
October 31, 2015
Amortized Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Estimated Fair
Value
$
$
$
$
110,108 $
95,171
205,279 $
24,989 $
24,989 $
10 $
—
10 $
— $
— $
— $
(66 )
(66 ) $
110,118
95,105
205,223
— $
— $
24,989
24,989
The following table summarizes the legal maturities of debt investments at October 31, 2015:
84
Less than one year
Due in 1-2 years
(6) FAIR VALUE MEASUREMENTS
October 31, 2015
Amortized Cost
Estimated Fair
Value
$
$
135,097 $
95,171
230,268 $
135,107
95,105
230,212
As of the dates indicated, the following tables summarizes the fair value of assets and liabilities that were recorded at fair value on a recurring
basis (in thousands):
Level 1
Level 2
Level 3
Total
October 31, 2014
Assets:
Money market funds
U.S. government obligations
Commercial paper
Foreign currency forward contracts
Total assets measured at fair value
Liabilities:
Foreign currency forward contracts
Forward starting interest rate swap
Total liabilities measured at fair value
Assets:
Money market funds
U.S. government obligations
Commercial paper
Foreign currency forward contracts
Total assets measured at fair value
Liabilities:
Foreign currency forward contracts
Forward starting interest rate swap
Total liabilities measured at fair value
$
440,013 $
—
—
—
440,013 $
— $
160,268
89,989
1,561
251,818 $
— $
—
— $
200 $
2,083
2,283 $
$
$
$
— $
—
—
—
— $
— $
—
— $
440,013
160,268
89,989
1,561
691,831
200
2,083
2,283
Level 1
Level 2
Level 3
Total
October 31, 2015
$
642,073 $
— $
—
—
—
205,223
74,983
89
642,073 $
280,295 $
— $
—
— $
512 $
5,522
6,034 $
$
$
$
— $
—
—
—
— $
— $
—
— $
642,073
205,223
74,983
89
922,368
512
5,522
6,034
As of the dates indicated, the assets and liabilities above were presented on Ciena’s Consolidated Balance Sheet as follows (in
thousands):
85
Assets:
Cash equivalents
Short-term investments
Prepaid expenses and other
Long-term investments
Total assets measured at fair value
Liabilities:
Accrued liabilities
Other long-term obligations
Total liabilities measured at fair value
Assets:
Cash equivalents
Short-term investments
Prepaid expenses and other
Long-term investments
Total assets measured at fair value
Liabilities:
Accrued liabilities
Other long-term obligations
Total liabilities measured at fair value
Level 1
Level 2
Level 3
Total
October 31, 2014
$
440,013 $
—
—
—
440,013 $
59,995 $
140,205
1,561
50,057
251,818 $
— $
—
— $
200 $
2,083
2,283 $
$
642,073 $
—
—
—
642,073 $
49,994 $
135,107
89
95,105
280,295 $
— $
—
— $
512 $
5,522
6,034 $
$
$
$
$
$
$
— $
—
—
—
— $
— $
—
— $
500,008
140,205
1,561
50,057
691,831
200
2,083
2,283
— $
—
—
—
— $
— $
—
— $
692,067
135,107
89
95,105
922,368
512
5,522
6,034
Level 1
Level 2
Level 3
Total
October 31, 2015
Ciena did not have any transfers between Level 1 and Level 2 fair value measurements during the periods presented.
(7) ACCOUNTS RECEIVABLE
As of October 31, 2014, there were no customers that accounted for greater than 10% of net accounts receivable. As of October 31,
2015, there was one customer that accounted for 10.4% of net accounts receivable. 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):
Year ended
October 31,
2013
2014
2015
$
$
$
Beginning
Balance
Provisions
Net
Deductions
Ending
Balance
1,500 $
1,955 $
2,083 $
2,339 $
2,761 $
1,576 $
1,884 $
2,633 $
696 $
1,955
2,083
2,963
(8) INVENTORIES
As of the dates indicated, inventories are comprised of the following (in thousands):
86
Raw materials
Work-in-process
Finished goods
Deferred cost of goods sold
Provision for excess and obsolescence
October 31,
2014
2015
64,853 $
8,371
165,799
75,763
314,786
(60,126 )
254,660 $
53,082
9,120
125,966
55,995
244,163
(53,001 )
191,162
$
$
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 net realizable value based on assumptions about future demand and market conditions. During fiscal 2013
and fiscal 2014, Ciena recorded a provision for inventory reserves that were primarily related to engineering design changes and the
discontinuance of certain parts and components used in the manufacture of our Optical Transport products, including our Corestream®
Agility Optical Transport platform and Converged Packet Optical products. During fiscal 2015, Ciena recorded a provision for excess and
obsolescence of $26.8 million, primarily related to the discontinuance of certain parts and components used in the manufacture of its
Converged Packet Optical products and a decrease in the forecasted demand for both its legacy, stand-alone WDM and SONET/SDH-based
transport platforms and its 5410 Service Aggregation Switch. 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):
Beginning
Balance
Year ended
October 31,
2013
2014
2015
$
$
$
Provisions
Disposals
40,010 $
41,563 $
60,126 $
19,938 $
32,332 $
26,846 $
18,385 $
13,769 $
33,971 $
Ending
Balance
41,563
60,126
53,001
(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
Product demonstration equipment, net
Deferred deployment expense
Prepaid expenses
Financing receivable
Other non-trade receivables
Derivative assets
October 31,
2014
2015
86,464 $
42,385
27,991
23,539
—
10,683
1,562
192,624 $
74,754
41,611
26,193
25,074
19,869
8,588
89
196,178
$
$
Depreciation of product demonstration equipment was $7.4 million, $9.0 million and $9.8 million for fiscal 2013, 2014 and 2015,
respectively.
(10) EQUIPMENT, BUILDING, FURNITURE AND FIXTURES
As of the dates indicated, equipment, building, furniture and fixtures are comprised of the following (in thousands):
87
Equipment, furniture and fixtures
Building subject to capital lease
Construction in progress, subject to build-to-suit lease
Leasehold improvements
Accumulated depreciation and amortization
October 31,
2014
2015
$
383,059 $
—
—
46,354
429,413
404,935
13,459
18,663
49,196
486,253
(302,781 )
126,632 $
(294,280 )
191,973
$
On October 23, 2014, Ciena entered into a lease agreement to lease an office building located in Ottawa, Canada. During fiscal 2015,
Ciena gained access to a portion of the building and recorded a capital lease asset and liability.
Ciena capitalizes construction in progress and records a corresponding long-term liability for build-to-suit lease agreements where Ciena
is considered the owner, for accounting purposes, during the construction period. On April 15, 2015, Ciena entered into a build-to-suit lease
arrangement pursuant to which the landlord will construct, and Ciena will subsequently lease, two new office buildings at its new Ottawa,
Canada campus. The landlord will construct the buildings and contribute up to a maximum of CAD$290.00 per rentable square foot in total
construction costs plus certain allowances for tenant improvements, and Ciena will be responsible for any additional construction costs. This
arrangement qualifies as a capital lease. As a result, the facilities will be depreciated over the lease term.
During fiscal 2013, fiscal 2014 and fiscal 2015, Ciena recorded depreciation of equipment, furniture and fixtures, and amortization of
leasehold improvements of $48.3 million, $46.6 million and $46.1 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,
2014
2015
Gross
Intangible
Accumulated
Amortization
Net
Intangible
Gross
Intangible
Accumulated
Amortization
Net
Intangible
417,833 $
46,538
(351,929 ) $
(45,908 )
65,904 $
630
506,647 $
46,538
(382,130 ) $
(46,072 )
124,517
466
323,573
787,944 $
(261,430 )
(659,267 ) $
62,143
128,677 $
388,621
941,806 $
(310,931 )
(739,133 ) $
77,690
202,673
The aggregate amortization expense of intangible assets was $71.3 million, $57.2 million and $79.9 million for fiscal 2013, fiscal 2014
and fiscal 2015, respectively. Expected future amortization of intangible assets for the fiscal years indicated is as follows (in thousands):
Year Ended October 31,
2016
2017
2018
2019
2020
Thereafter
(12) OTHER BALANCE SHEET DETAILS
88
$
$
75,627
41,773
19,092
18,545
17,518
30,118
202,673
As of the dates indicated, other long-term assets are comprised of the following (in thousands):
Maintenance spares inventory, net
Deferred debt issuance costs, net
Financing receivable
Other
October 31,
2014
2015
54,101 $
15,160
—
4,815
74,076 $
55,259
10,820
10,107
8,470
84,656
$
$
Deferred debt issuance costs relate to Ciena's convertible notes payable (described in Note 15 below), Term Loan (described in Note 15
below) and ABL Credit Facility (described in Note 16 below). 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. The amortization of deferred debt
issuance costs is included in interest expense, and was $5.4 million, $4.8 million and $4.7 million for fiscal 2013, fiscal 2014 and fiscal 2015,
respectively.
As of the dates indicated, accrued liabilities and other short-term obligations are comprised of the following (in thousands):
Compensation, payroll related tax and benefits
Warranty
Vacation
Capital lease obligations
Interest payable
Other
October 31,
2014
2015
82,207 $
55,997
35,126
7,788
6,409
89,081
276,608 $
109,466
56,654
34,189
4,923
5,389
105,662
316,283
$
$
The following table summarizes the activity in Ciena’s accrued warranty for the fiscal years indicated (in thousands):
Year ended
October 31,
2013
2014
2015
$
$
$
Beginning
Balance
Acquired
Provisions
Settlements
55,132 $
56,303 $
55,997 $
— $
— $
2,996 $
24,558 $
22,129 $
17,881 $
23,387 $
22,435 $
20,220 $
Ending
Balance
56,303
55,997
56,654
The decreases in fiscal 2013, fiscal 2014 and fiscal 2015 warranty provisions were primarily due to lower failure rates and reduced costs
due to efficiencies.
As of the dates indicated, deferred revenue is comprised of the following (in thousands):
Products
Services
Less current portion
Long-term deferred revenue
October 31,
2014
2015
$
50,457 $
95,161
145,618
(104,688 )
$
40,930 $
66,527
122,546
189,073
(126,111 )
62,962
As of the dates indicated, other long-term obligations are comprised of the following (in thousands):
89
Income tax liability
Deferred tenant allowance
Straight-line rent
Capital lease obligations
Construction liability
Forward starting interest rate swap
Other
October 31,
2014
2015
14,342
10,839
5,174
4,589
—
2,083
8,363
45,390
$
$
13,308
9,807
6,237
13,794
18,663
5,522
5,209
72,540
$
$
Ciena capitalizes construction in progress and records a corresponding long-term liability for build-to-suit lease agreements where Ciena
is considered the owner during the construction period for accounting purposes.
The following is a schedule by fiscal years of future minimum lease payments under capital leases and the present value of minimum
lease payments as of October 31, 2015 (in thousands):
Period ending October 31,
2016
2017
2018
2019
2020
Thereafter
Net minimum capital lease payments
Less: Amount representing interest
Present value of minimum lease payments
Less: Current portion of present value of minimum lease payments
Long-term portion of present value of minimum lease payments
(13) DERIVATIVE INSTRUMENTS
Foreign Currency Derivatives
Amount
6,057
1,630
1,292
1,292
1,390
18,445
30,106
(11,389 )
18,717
(4,923 )
13,794
$
$
As of October 31, 2015 and 2014, Ciena had forward contracts to reduce the variability in its Canadian Dollar and Indian Rupee
denominated expense, which principally relates to research and development activities. The notional amount of these contracts was
approximately $68.1 million and $51.5 million as of October 31, 2015 and October 31, 2014, respectively. These foreign exchange contracts
have maturities of 12 months or less and have been designated as cash flow hedges.
During fiscal 2015 and fiscal 2014, in order to hedge certain balance sheet exposures, Ciena entered into forward contracts to sell
Brazilian Real and buy an equivalent U.S. Dollar amount. During fiscal 2015 and fiscal 2014, in order to hedge certain balance sheet
exposures, Ciena entered into forward contracts to sell U.S. Dollars and buy an equivalent amount of Canadian Dollars. The notional
principal of these contracts was approximately $146.5 million and $194.5 million as of October 31, 2015 and October 31, 2014. These
foreign exchange contracts have maturities of 12 months or less. These derivative contracts have not been designated as hedges.
Interest Rate Derivatives
During fiscal 2014 Ciena entered into interest rate cap arrangements to limit interest paid under the Term Loan to a maximum of 0.75%
plus a spread of 300 basis points through July 2015. The interest rate caps expired in July 2015. Also in fiscal 2014, Ciena entered into
floating interest rate to fixed interest rate swap arrangements ("interest rate swap") that fix the interest rate under the Term Loan at 5.004%,
90
for the period commencing on July 20, 2015 through July 19, 2018. The total notional amount of these derivatives as of October 31, 2015 and
October 31, 2014 was $246.9 million and $247.5 million, respectively.
Ciena expects the variable rate payments to be received under the terms of the interest rate swap to exactly offset the forecasted variable
rate payments on the equivalent notional amounts of the Term Loan. These derivative contracts have been designated as cash flow hedges.
Other information regarding Ciena's derivatives is immaterial for separate financial statement presentation. See Note 4 and Note 6 above.
(14) ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table summarizes the changes in accumulated balances of other comprehensive income (AOCI):
Unrealized
Gain/(Loss) on
Marketable
Securities
Unrealized
Gain/(Loss) on
Foreign
Currency
Forward
Contracts
Unrealized
Gain/(Loss) on
Forward Starting
Interest Rate
Swap
Cumulative
Foreign
Currency
Translation
Adjustment
Total
Balance at October 31, 2012
$
44
$
49
$
—
$
(3,447 ) $
(3,354 )
Other comprehensive loss before
reclassifications
Amounts reclassified from AOCI
Balance at October 31, 2013
Other comprehensive loss before
reclassifications
Amounts reclassified from AOCI
Balance at October 31, 2014
Other comprehensive loss before
reclassifications
(14 )
(1,431 )
1,121
(261 )
—
—
—
(4,096 )
(5,541 )
—
1,121
(7,543 )
(7,774 )
(1,265 )
(2,083 )
(4,940 )
(8,247 )
1,353
—
—
1,353
(173 )
(2,083 )
(12,483 )
(14,668 )
—
30
41
—
71
(149 )
(5,547 )
(4,232 )
(3,775 )
(13,703 )
Amounts reclassified from AOCI
—
5,452
793
—
6,245
Balance at October 31, 2015
$
(78 ) $
(268 ) $
(5,522 ) $
(16,258 ) $
(22,126 )
All amounts reclassified from accumulated other comprehensive income related to settlement (gains) losses on foreign currency forward
contracts designated as cash flow hedges impacted "research and development" on the Consolidated Statements of Operations. All amounts
reclassified from accumulated other comprehensive income related to settlement (gains) losses on forward starting interest swaps designated
as cash flow hedges impacted "interest and other income (loss), net" on the Consolidated Statements of Operations.
(15) SHORT-TERM AND LONG-TERM DEBT
Term Loan
On July 15, 2014, Ciena entered into a Credit Agreement providing for a senior secured term loan in an aggregate principal amount of
$250 million (the “Term Loan”), which bears interest at a rate equal to LIBOR (subject to a floor of 0.75%) plus an applicable margin of
3.00%, and matures on July 15, 2019. The Term Loan Credit Agreement requires Ciena to make quarterly installment payments in aggregate
amounts equal to 0.25% of the original principal amount of the Term Loan, or approximately $0.6 million, with the balance of the Term Loan
payable at maturity. The Term Loan Credit Agreement requires mandatory prepayments on the occurrence of certain customary events and,
when the total secured net leverage ratio (as defined in the Term Loan Credit Agreement) is in excess of 2.50 to 1.00, the Term Loan Credit
Agreement requires a mandatory prepayment of 50% of excess annual cash flow (as defined in the Term Loan Credit Agreement).
The Term Loan Credit Agreement contains customary covenants that limit, absent lender approval, the ability of Ciena to, among other
things, incur additional debt, create liens and encumbrances, pay cash dividends, 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.
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The Term Loan 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, violation of affirmative and negative covenants, and breaches of representations and warranties set forth in the Term
Loan Credit Agreement. Upon an event of default, the administrative agent may, subject to various customary cure rights, require the
immediate payment of all amounts outstanding and foreclose on collateral.
In connection with Ciena entering into the Term Loan Credit Agreement, Ciena and certain of its subsidiaries entered into a guaranty, a
security agreement and a pledge agreement, each on customary terms. The Term Loan is secured by (i) second-priority security interests in
the ABL Priority Collateral (as defined in Note 16 below), and (ii) first-priority security interests in substantially all other tangible and
intangible assets including equipment, intercompany notes, intellectual property and material owned real property (the "Term Loan Priority
Collateral").
The principal balance, unamortized discount and net carrying amount of the Term Loan were as follows as of October 31, 2015 (in
thousands):
Term Loan Payable due July 15, 2019
Principal
Balance
Unamortized
Discount
Net Carrying
Amount
$
246,875
$
(1,076 ) $
245,799
The following table sets forth, in thousands, the carrying value and the estimated fair value of the Term Loan:
Term Loan Payable due July 15, 2019(1)
October 31, 2015
Carrying Value
245,799
$
$
Fair Value(2)
247,184
(1)
(2)
Includes unamortized bond discount.
The Term Loan was categorized as Level 2 in the fair value hierarchy. Ciena estimated the fair value of its Term Loan using a
market approach based upon observable inputs, such as current market transactions involving this security.
Outstanding Convertible Notes Payable
Ciena has three 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 Ciena will be required, in certain circumstances, 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.
4.0% Convertible Senior Notes, due March 15, 2015
On March 15, 2015, Ciena's outstanding 4.0% Convertible Senior Notes due 2015 (the “2015 Notes”) matured. As a result of conversion
elections made by holders of a substantial majority of the outstanding 2015 Notes under the terms of the indenture, together with certain
private exchange transactions conducted by Ciena prior to maturity, approximately $180.6 million in aggregate principal amount of 2015
Notes, representing 96.3% of the outstanding aggregate principal amount of 2015 Notes, was settled through the issuance of Ciena common
stock at or prior to maturity. In total, Ciena issued approximately 8.9 million shares of Ciena common stock as a result of the conversion
elections and private exchange transactions in respect of the 2015 Notes. Ciena repaid in cash approximately $6.9 million in aggregate
principal amount of 2015 Notes at maturity.
0.875% Convertible Senior Notes due June 15, 2017
92
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, the 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 18 below for a description of this call spread option.
During the fourth quarter of fiscal 2015, Ciena entered into certain private exchange transactions to repurchase $5.9 million of the notes
for cash slightly below par.
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, which
matured during fiscal 2013.
4.0% Convertible Senior Notes due December 15, 2020
On December 27, 2012, Ciena issued $187.5 million in aggregate principal amount of 4.0% Convertible Senior Notes due December 15,
2020 (the “2020 Notes”) in separate private offerings in exchange for $187.5 million in aggregate principal amount of 2015 Notes above.
The 2020 Notes are senior unsecured obligations and rank equally with all of Ciena's other existing and future senior unsecured debt. The
2020 Notes pay interest from the date of issuance at a rate of 4.0% per year. The interest is payable semi-annually on June 15 and December
15, commencing on June 15, 2013. 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 Ciena's common stock. The 2020 Notes will mature on December 15, 2020. Consequently, in the event the
2020 Notes are converted, the accreted liability will extinguish without payment.
The 2020 Notes may be converted prior to maturity, at the option of the holder, into shares of Ciena's common stock at an initial
conversion rate of 49.0557 shares of common stock per $1,000 in original principal amount, which is equal to an initial conversion price of
$20.39 per share. In addition, Ciena may elect to convert the 2020 Notes, in whole or in part, at any time on or prior to December 15, 2020, if
the daily volume weighted average price of the common stock equals or exceeds 130% of the conversion price then in effect for at least 20
trading days in any 30 consecutive trading day period. If Ciena elects to convert the 2020 Notes on or before maturity, the conversion rate
will be adjusted to include an amount of additional shares, determined by reference to a make-whole table, payable in Ciena common stock,
or its cash equivalent, at Ciena's election. An aggregate of 9,197,944 shares of Ciena common stock issuable upon conversion of the 2020
Notes has been reserved for issuance.
Upon certain fundamental changes, holders of the 2020 Notes have the option to require Ciena to purchase the 2020 Notes at a price
equal to the accreted principal amount of the notes delivered for repurchase plus any accrued and unpaid interest on the original principal
amount. Upon a holder's election to convert the 2020 Notes in connection with certain fundamental changes, the conversion rate will be
adjusted to include an amount of additional shares, determined by reference to a make-whole table, payable in Ciena common stock, or its
cash equivalent, at Ciena's election.
Accounting guidance issued by the FASB requires the issuer of convertible debt instruments with cash settlement features, including
partial cash settlement, to account separately for the liability and equity components of the instrument. Under this guidance, the debt is
recognized at the present value of its cash flows discounted using the issuer's nonconvertible debt borrowing rate at the time of issuance and
the equity component is recognized as the difference between the proceeds from the issuance of the note and the fair value of the liability. The
reduced carrying value on the convertible debt results in a debt discount that is accreted back to the convertible debt's principal amount
through the recognition of non-cash interest expense over the expected life of the debt, which results in recognizing the interest expense on
these borrowings at effective rates approximating what Ciena would have incurred had nonconvertible debt with otherwise similar terms been
issued.
Because the additional make-whole shares can be settled in cash or common stock at Ciena's option, the debt and equity components
were accounted for separately. Ciena measured the fair value of the debt component of the 2020 Notes using an effective interest rate of
7.0%. As a result, Ciena attributed $170.4 million of the fair value of the 2020 Notes to the debt component. The debt component was netted
93
against the face value of the 2020 Notes to determine the debt discount. The debt discount will be accreted over the period from the date of
issuance to the contractual maturity date, resulting in the recognition of non-cash interest expense. In addition, Ciena recorded $43.1 million
within additional paid-in capital representing the equity component of the 2020 Notes. There was no net tax expense recorded due to Ciena’s
full valuation allowance against its deferred tax assets.
The 2020 Notes were issued pursuant to an Indenture entered into as of December 27, 2012 (the “Indenture”) with The Bank of New
York Mellon Trust Company, N.A., as trustee. The Indenture provides for customary events of default which include (subject in certain cases
to customary grace and cure periods), among others, the following: nonpayment of principal (including accreted portion) or interest; breach
of covenants or other agreements in the Indenture; defaults in failure to pay certain other indebtedness; and certain events of bankruptcy or
insolvency. Generally, if an event of default occurs and is continuing under the Indenture, the trustee or the holders of at least 25% in
aggregate original principal amount of the 2020 Notes then outstanding may declare the principal (including accreted portion), premium, if
any, and accrued interest on all the 2020 Notes immediately due and payable.
The principal balance, unamortized discount and net carrying value of the liability and equity components of our 2020 notes were as
follows as of October 31, 2015
4.0% Convertible Senior Notes due December 15, 2020
$
197,582 $
(13,347 ) $
184,235 $
43,131
Liability Component
Principal
Balance
Unamortized
Discount
Net Carrying
Amount
Equity
Component
Net Carrying
Amount
The following table sets forth, in thousands, the carrying value and the estimated current fair value of Ciena’s outstanding convertible
notes:
October 31, 2015
Description
0.875% Convertible Senior Notes due June 15, 2017
3.75% Convertible Senior Notes, due October 15, 2018
4.0% Convertible Senior Notes, due December 15, 2020(2)
_________________________________
Carrying Value
$
494,105 $
350,000
184,235
1,028,340 $
Fair Value(1)
494,723
482,125
265,791
1,242,639
$
(1)
The convertible notes were categorized as Level 2 in the fair value hierarchy. Ciena estimates the fair value of its outstanding
convertible notes using a market approach based on observable inputs, such as current market transactions involving comparable
securities.
(2)
Includes unamortized discount and accretion of principal.
(16) ABL CREDIT FACILITY
Ciena Corporation and certain of its subsidiaries are parties to a senior secured asset-based revolving credit facility (the “ABL Credit
Facility”) providing for a total commitment of $200 million with a maturity date of December 31, 2016. Ciena principally uses the ABL
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
required to collateralize these instruments. As of October 31, 2015, letters of credit totaling $63.4 million were collateralized by the ABL
Credit Facility. There were no borrowings outstanding under the ABL Credit Facility as of October 31, 2015.
(17) 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”). Basic EPS is
computed using the weighted average number of common shares outstanding. Diluted EPS is computed using the weighted average number
of the following, in each case, to the extent the effect is not anti-dilutive: (i) common shares outstanding, (ii) shares issuable upon vesting of
restricted stock units, (iii) shares issuable under Ciena’s employee stock purchase plan and upon exercise of outstanding stock options, using
the treasury stock method, and (iv) shares underlying Ciena’s outstanding convertible notes.
94
Numerator
Net income (loss)
Denominator
Basic weighted average shares outstanding
Add: Shares underlying outstanding stock options, employee stock purchase plan
and restricted stock units
Diluted weighted average shares outstanding
EPS
Basic EPS
Diluted EPS
Year Ended October 31,
2013
2014
2015
$
(85,431 ) $
(40,637 ) $
11,667
Year Ended October 31,
2013
2014
2015
102,350
105,783
118,416
—
102,350
—
105,783
1,685
120,101
Year Ended October 31,
2013
2014
2015
$
$
(0.83 ) $
(0.83 ) $
(0.38 ) $
(0.38 ) $
0.10
0.10
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
4.0% 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
8.0% Cyan Convertible Senior Notes due 2019
4.0% Convertible Senior Notes due December 15, 2020
Total excluded due to anti-dilutive effect
(18) STOCKHOLDERS’ EQUITY
Call Spread Option
Year Ended October 31,
2013
2014
2015
3,890
2,682
10,541
13,108
17,355
—
7,855
55,431
3,176
—
9,198
13,108
17,355
—
9,198
52,035
1,562
—
3,386
13,080
17,355
187
9,198
44,768
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. The call spread option is designed to mitigate exposure to potential dilution from the conversion of the notes. The call
spread option was purchased at the time of the notes offering from an affiliate of the underwriter. The cost of the call spread option was
recorded as a reduction in paid-in capital.
The call spread option is exercisable, upon maturity of the relevant issue of convertible note, for such number of shares of Ciena common
stock issuable upon conversion of that series of notes in full. The 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 option 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, or approximately $76.1 million, 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
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
95
volatility of Ciena’s stock and the remaining term of the call spread option. The number of shares subject to the call spread option, and the
lower and higher strike prices, are subject to customary adjustments.
(19) INCOME TAXES
For the periods indicated, the provision for income taxes consists of the following (in thousands):
Provision for income taxes:
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
Provision for income taxes
October 31,
2013
2014
2015
$
$
— $
906
4,334
5,240
—
—
—
—
5,240 $
— $
1,831
12,133
13,964
—
—
—
—
13,964 $
—
1,435
10,662
12,097
—
—
—
—
12,097
For the periods indicated, income (loss) before provision for income taxes consists of the following (in thousands):
United States
Foreign
Total
October 31,
2013
2014
2015
$
$
(59,594 ) $
(20,597 )
(42,742 ) $
16,069
(80,191 ) $
(26,673 ) $
(1,029 )
24,793
23,764
Ciena's foreign income tax as a percentage of foreign income is dependent upon the mix of earnings in our foreign jurisdictions.
Depending upon the mix of earnings in these jurisdictions, including those jurisdictions which are loss making, the tax on total foreign
income may appear disproportionate compared to the expected tax based on the U.S. federal statutory rate. Ciena expects that this result may
continue until earnings from foreign operations mature and maintain a more consistent contribution.
For the periods indicated, the tax provision reconciles to the amount computed by multiplying income or loss before income taxes by the
U.S. federal statutory rate of 35% as follows:
Provision at statutory rate
State taxes
Foreign taxes
Research and development credit
Non-deductible loss on debt extinguishment
Non-deductible compensation and other
Valuation allowance
Effective income tax rate
96
October 31,
2013
2014
2015
35.00 %
(1.13 )%
(12.70 )%
17.39 %
(11.21 )%
(8.78 )%
(25.10 )%
(6.53 )%
35.00 %
(6.87 )%
(70.25 )%
32.07 %
— %
(29.59 )%
(12.71 )%
(52.35 )%
35.00 %
6.04 %
28.98 %
(25.55 )%
— %
30.16 %
(23.73 )%
50.90 %
As a result of prospective application of Accounting Standards Update No. 2015-17, Income Taxes (Topic 740): Balance Sheet
Classification of Deferred Taxes, Ciena offset all deferred tax liabilities and assets, as well as any related valuation allowance, and is
presenting them as a single non-current amount as of October 31, 2015. Ciena has not retrospectively adjusted prior periods.
The significant components of deferred tax assets and liabilities are as follows (in thousands):
Deferred tax assets:
Reserves and accrued liabilities
Depreciation and amortization
NOL and credit carry forward
Other
Gross deferred tax assets
Valuation allowance
Net deferred tax asset
October 31,
2014
2015
$
59,707 $
268,783
1,155,389
12,956
1,496,835
(1,496,835 )
$
— $
63,290
203,991
1,202,641
25,750
1,495,672
(1,495,672 )
—
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, 2012
Decrease 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, 2013
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, 2014
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, 2015
Amount
11,052
(3,925 )
2,146
(994 )
8,279
2,479
5,241
(899 )
15,100
3,658
9,138
(360 )
27,536
$
$
As of October 31, 2014 and 2015, Ciena had accrued $3.4 million and $4.3 million of interest and penalties, respectively, related to
unrecognized tax benefits within other long-term liabilities in the Consolidated Balance Sheets. Interest and penalties of $2.0 million and $0.9
million were recorded to the provision for income taxes during fiscal 2014 and fiscal 2015 respectively, and no such charges or benefits were
recorded for fiscal 2013. 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,
2013
2014
2015
Beginning
Balance
$
$
$
1,488,994 $
1,487,299 $
1,496,835 $
Additions
Deductions
— $
9,536 $
— $
97
Ending
Balance
1,487,299
1,496,835
1,495,672
1,695 $
— $
1,163 $
As of October 31, 2015, Ciena had a $2.9 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 2019, 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.
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, 2015 of approximately $83.0
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.
(20) SHARE-BASED COMPENSATION EXPENSE
Ciena has outstanding equity awards issued under its legacy equity plans and equity plans assumed as a result of previous acquisitions.
In connection with its acquisition of Cyan during the fourth quarter of fiscal 2015, Ciena also assumed the Cyan, Inc. 2006 and 2013 Stock
Incentive Plans and exchanged outstanding Cyan stock options and unvested restricted stock unit awards at closing for options to acquire
approximately 2.4 million shares of Ciena common stock and 1.0 million Ciena restricted stock units. Ciena grants equity awards under its
2008 Omnibus Incentive Plan and makes shares of its common stock available for purchase under its Amended and Restated Employee Stock
Purchase Plan (“ESPP”).
2008 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. As of
October 31, 2015, the total number of shares authorized for issuance under the 2008 Plan is 25.1 million and approximately 6.3 million shares
remained available for issuance thereunder.
Stock Options
Outstanding stock option awards to employees are generally subject to service-based vesting conditions 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, 2014
Granted
Granted in exchange for Cyan options
Exercised
Canceled
Balance as of October 31, 2015
Shares
Underlying
Options
Outstanding
Weighted
Average
Exercise Price
1,288 $
—
2,381
(1,165 )
(211 )
2,293 $
25.43
—
18.20
12.49
25.84
24.45
The total intrinsic value of options exercised during fiscal 2013, fiscal 2014 and fiscal 2015 was $2.0 million, $1.0 million and $11.8
million, respectively. There were no stock options granted by Ciena during fiscal 2013, fiscal 2014 or fiscal 2015. The weighted average fair
value of each stock option granted by Ciena in exchange for Cyan awards was $13.04.
The following table summarizes information with respect to stock options outstanding at October 31, 2015, based on Ciena’s closing
stock price on the last trading day of Ciena’s fiscal 2015 (shares and intrinsic value in thousands):
98
Options Outstanding at
October 31, 2015
Weighted
Average
Remaining
Weighted
Range of
Exercise
Price
0.05 — $
11.34 — $
17.43 — $
24.69 — $
28.61 — $
31.85 — $
33.00 — $
37.31 — $
0.05 — $
$
$
$
$
$
$
$
$
$
Number
of
Underlying
Shares
Contractual Average
Exercise
Life
Aggregate
Intrinsic
(Years)
Price
Value
Number
of
Underlying
Shares
11.16
17.24
24.50
28.28
31.08
32.55
37.10
55.63
55.63
418
599
81
268
89
56
398
384
2,293
3.65 $
5.74
4.92
1.45
1.83
4.87
2.36
4.00
3.78 $
6.58 $
13.52
19.52
27.37
29.82
32.04
35.95
45.69
24.45 $
7,337
6,366
372
—
—
—
—
—
14,075
414
488
52
265
89
46
378
311
2,043
Vested Options at
October 31, 2015
Weighted
Average
Remaining Weighted
Average
Contractual
Life
Exercise
Aggregate
Intrinsic
(Years)
Price
Value
3.59 $
5.41
2.91
1.39
1.83
4.41
2.10
3.15
3.32 $
6.55 $
13.36
20.28
27.39
29.82
32.03
35.90
45.65
24.20 $
7,277
5,267
200
—
—
—
—
—
12,744
Assumptions for Option-Based Awards
Ciena recognizes the fair value of stock options as share-based compensation expense on a straight-line basis over the requisite service
period. Ciena did not grant any option-based awards during fiscal 2013, fiscal 2014, or fiscal 2015. Ciena used the following assumptions for
option-based awards issued in exchange for Cyan options:
Expected volatility
Risk-free interest rate
Expected term (years)
Expected dividend yield
Restricted Stock Units
35.87 %
1.26 %
0.72-6.88
0.0 %
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):
99
Balance as of October 31, 2014
Granted
Granted in exchange for Cyan awards
Vested
Canceled or forfeited
Balance as of October 31, 2015
Restricted
Stock Units
Outstanding
4,012 $
2,666
1,030
(2,320 )
(502 )
4,886 $
Weighted
Average
Grant Date
Fair Value
Per Share
18.02 $
Aggregate Fair
Value
67,241
20.02 $
117,951
The total fair value of restricted stock units that vested and were converted into common stock during fiscal 2013, fiscal 2014 and fiscal
2015 was $37.3 million, $48.1 million and $50.5 million, respectively. The weighted average fair value of each restricted stock unit granted
by Ciena during fiscal 2013, fiscal 2014 and fiscal 2015 was $16.30, $21.82 and $19.41, respectively. The weighted average fair value of
each restricted stock unit granted by Ciena in exchange for Cyan awards was $25.39.
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, 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 expense is reversed.
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.
Amended and Restated Employee Stock Purchase Plan (ESPP)
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 Ciena common 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. 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. Unless earlier terminated, the ESPP will terminate on January 24, 2023.
During fiscal 2013, fiscal 2014 and fiscal 2015, Ciena issued 0.9 million, 0.9 million and 1.0 million shares under the ESPP, respectively.
At October 31, 2015, 6.4 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):
100
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
Total share-based compensation
Year Ended October 31,
2013
2014
2015
2,522 $
1,771
4,293
8,214
13,290
12,055
—
33,559
(132 )
37,720 $
2,531 $
2,216
4,747
9,682
14,958
13,568
—
38,208
(25 )
42,930 $
2,400
2,156
4,556
10,665
15,539
17,018
7,588
50,810
(26 )
55,340
$
$
As of October 31, 2015, total unrecognized share-based compensation expense was $78.7 million: (i) $2.8 million, which relates to
unvested stock options and is expected to be recognized over a weighted-average period of 1.6 years; and (ii) $75.9 million which relates to
unvested restricted stock units and is expected to be recognized over a weighted-average period of 1.5 years.
(21) SEGMENT AND ENTITY WIDE DISCLOSURES
Segment Reporting
Ciena’s internal organizational structure and the management of its business are grouped into the following operating segments:
• Converged Packet Optical —includes the 6500 Packet-Optical Platform and the 5430 Reconfigurable Switching System, which
feature Ciena's WaveLogic coherent optical processors. Products also include Waveserver, the family of CoreDirector®
Multiservice Optical Switches and the OTN configuration for the 5410 Reconfigurable Switching System. Revenue from sales of
the Z-Series Packet-Optical Platform acquired from Cyan is included in our Converged Packet Optical segment. 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.
• Packet Networking — includes the 3000 family of service delivery switches and service aggregation switches and the 5000 family
of service aggregation switches. This segment also includes the 8700 Packetwave Platform and the Ethernet packet configuration
for the 5410 Service Aggregation Switch. 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.
• Optical Transport — includes the 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 includes sales
from 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.
•
Software and Services — includes the sale of network management solutions, including the OneControl Unified Management
System, ON-Center® Network & Service Management Suite, Ethernet Services Manager, Optical Suite Release and Planet
Operate. This segment includes sales of Ciena's Blue Planet software platform, a modular network virtualization, service
orchestration and network management software solution, and Ciena's SDN Multilayer WAN Controller and its related applications.
This segment includes a broad range of services for consulting and network design, installation and deployment, software
subscription, maintenance support 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.
Ciena's long-lived assets, including equipment, building, furniture and fixtures, finite-lived intangible assets and maintenance spares, are
not reviewed by the chief operating decision maker for purposes of evaluating performance and allocating resources. As of October 31, 2015,
101
equipment, building, furniture and fixtures totaling $192.0 million primarily supports asset groups within Ciena's Converged Packet Optical
segment, Packet Networking segment, Software and Services segment and Ciena's unallocated selling and general and administrative
activities. As of October 31, 2015, $166.5 million of Ciena's intangible assets, including goodwill of $55.0 million from the acquisition of
Cyan, were assigned to asset groups within Ciena's Converged Packet Optical segment and $292.6 million of Ciena's intangible assets,
including goodwill of $201.4 million from the acquisition of Cyan, were assigned to asset groups within Ciena's Software and Services
segment. As of October 31, 2015, all of the maintenance spares totaling $55.3 million were assigned to asset groups within Ciena's Software
and Services segment.
Segment Revenue
The table below (in thousands, except percentage data) sets forth Ciena’s segment revenue for the respective periods indicated:
Fiscal Year
2013
2014
2015
Revenue:
Converged Packet Optical
Packet Networking
Optical Transport
Software and Services
Consolidated revenue
Segment Profit
$ 1,187,231 $ 1,455,501 $ 1,661,702
229,223
73,004
481,740
$ 2,082,546 $ 2,288,289 $ 2,445,669
244,116
127,215
461,457
222,898
233,821
438,596
Segment profit 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;
interest and other income (loss), net; interest expense; loss on extinguishment of debt and provisions for income taxes.
The table below (in thousands) sets forth Ciena’s segment profit and the reconciliation to consolidated net income (loss) during the
respective periods indicated:
Segment profit:
Converged Packet Optical
Packet Networking
Optical Transport
Software and Services
Total segment profit
Less: non-performance operating expenses
Selling and marketing
General and administrative
Amortization of intangible assets
Acquisition and integration costs
Restructuring costs
Add: other non-performance financial items
Interest expense and other income (loss), net
Loss on extinguishment of debt
Less: Provision for income taxes
Consolidated net income (loss)
2013
Fiscal Year
2014
2015
$
242,335 $
22,740
89,754
126,938
481,767
353,942 $
19,467
38,974
134,789
547,172
304,170
122,432
49,771
—
7,169
(49,786 )
(28,630 )
5,240
328,325
126,824
45,970
—
349
(72,377 )
—
13,964
$
(85,431 ) $
(40,637 ) $
471,484
28,136
15,930
145,812
661,362
333,836
123,402
69,511
25,539
8,626
(76,684 )
—
12,097
11,667
102
Entity Wide Reporting
Ciena's operating segments each engage in business across four geographic regions: North America; Europe, Middle East and Africa
(“EMEA”); Asia Pacific (“APAC”); and Caribbean and Latin America ("CALA"). North America includes only activities in the United States
and Canada. The following table reflects Ciena’s geographic distribution of revenue principally based on the relevant location for Ciena's
delivery of products and performance of services. For the periods below, Ciena’s geographic distribution of revenue was as follows (in
thousands):
Fiscal Year
North America
EMEA
CALA
APAC
Total
2013
2015
2014
$ 1,360,169 $ 1,477,329 $ 1,598,328
400,294
201,499
245,548
$ 2,082,546 $ 2,288,289 $ 2,445,669
417,399
212,018
181,543
376,405
174,360
171,612
North America includes $1,217.5 million, $1,318.0 million and $1,479.5 million of United States revenue for fiscal years ended
October 31, 2013, 2014 and 2015, respectively. No other country accounted for at least 10% of total revenue for the periods presented above.
The following table reflects Ciena's geographic distribution of equipment, building, furniture and fixtures, net, with any country
accounting for at least 10% of total equipment, building, furniture and fixtures, net, specifically identified. Equipment, building, furniture and
fixtures, net, 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, building, furniture and fixtures, net, was as follows (in thousands):
United States
Canada
Other International
Total
$
2013
64,132 $
43,772
11,825
$ 119,729 $
October 31,
2014
73,420 $
42,015
11,197
126,632 $
2015
96,292
84,318
11,363
191,973
AT&T accounted for greater than 10% of Ciena's revenue in Ciena's fiscal years ended October 31, 2013, 2014 and 2015, with total
revenue of $373.6 million, $423.5 million and $487.8 million, respectively. AT&T purchases products and services from each of Ciena's
operating segments.
(22) OTHER EMPLOYEE BENEFIT PLANS
Ciena has a Defined Contribution Pension Plan that covers a majority of its Canada-based employees. The plan covers all 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$25,370 for 2015). 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 2013,
2014 and 2015, Ciena made matching contributions of approximately CAD$3.9 million, CAD$4.1 million and CAD$4.3 million,
respectively.
Ciena has a 401(k) defined contribution profit sharing plan. 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 2013, 2014 and 2015, Ciena made matching contributions of approximately $4.0 million, $4.5 million and
$4.7 million, respectively.
(23) 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
was eligible to receive up to an aggregate of CAD$25.0 million in funding for eligible costs relating to certain next-generation, coherent
103
optical transport development initiatives over the period from November 1, 2010 to October 31, 2015. Amounts received under the grant are
subject to recoupment in the event that Ciena fails to achieve certain minimum investment, employment and project milestones. As of
October 31, 2015, Ciena has received payment for the full amount of the grant. Payments received were recorded as a reduction in research
and development expenses.
Foreign Tax Contingencies
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
From May 15 through June 3, 2015, five separate putative class action lawsuits in connection with Ciena’s then-pending acquisition of
Cyan, Inc. (“Cyan”) were filed in the Court of Chancery of the State of Delaware:
• Luvishis v. Cyan, Inc., et al., C.A. No. 11027-CB, filed May 15, 2015
•
Poll v. Cyan, Inc., et al., C.A. No. 11028-CB, filed May 15, 2015
• Canzano v. Floyd, et al., C.A. No. 11052-CB, filed May 20, 2015
• Kassis v. Cyan, Inc., et al., C.A. No. 11069-CB, filed May 27, 2015
•
Fenske v. Cyan, Inc., et al., C.A. No. 11090-CB, filed June 3, 2015
Each of the complaints named Cyan (except for the Canzano complaint), Ciena, Neptune Acquisition Subsidiary, Inc., a Ciena subsidiary
created solely for the purpose of effecting the acquisition (“Merger Sub”), and the members of Cyan’s board of directors as defendants. On
June 23, 2015, each of these lawsuits was consolidated into a single case captioned In Re Cyan, Inc. Shareholder Litigation, Consol. C.A. No.
11027-CB. On July 9, 2015, the plaintiffs filed a verified amended class action complaint, which named as defendants Ciena, Merger Sub,
and the members of Cyan’s board of directors. On August 5, 2015, the defendants filed motions to dismiss the amended complaint. On
October 1, 2015, the plaintiffs filed a second amended complaint which named as defendants the members of Cyan’s board of directors.
Cyan, Ciena, and Merger Sub were not named as defendants. The second amended complaint generally alleges that the Cyan board members
breached their fiduciary duties by engaging in a conflicted and unfair sales process, failing to maximize stockholder value in the acquisition,
taking steps to preclude competitive bidding, and failing to disclose material information necessary for stockholders to make an informed
decision regarding the acquisition. The second amended complaint seeks (i) a declaration that the plaintiffs are entitled to a quasi-appraisal
remedy, (ii) rescissory damages, (iii) recovery through an accounting of all damages caused as a result of the alleged breaches of fiduciary
duties, (iv) compensatory damages, and (v) costs including attorneys’ fees and experts’ fees. On October 15, 2015, the defendants filed a
renewed motion to dismiss. A briefing schedule for these motions has been set, with briefing to be completed in March 2016.
As a result of our acquisition of Cyan in August 2015, we became a defendant in a securities class action lawsuit. On April 1, 2014, a
purported stockholder class action lawsuit was filed in the Superior Court of California, County of San Francisco, against Cyan, the members
of Cyan’s board of directors, Cyan’s former Chief Financial Officer, and the underwriters of Cyan’s initial public offering. On April 30, 2014,
a substantially similar lawsuit was filed in the same court against the same defendants. The two cases have been consolidated as Beaver
County Employees Retirement Fund, et al. v. Cyan, Inc. et al., Case No. CGC-14-538355. The consolidated complaint alleges violations of
federal securities laws on behalf of a purported class consisting of purchasers of Cyan’s common stock pursuant or traceable to the
registration statement and prospectus for Cyan’s initial public offering in April 2013, and seeks unspecified compensatory damages and other
relief. In July 2014, the defendants filed a demurrer to the consolidated complaint, which the court overruled in October 2014 and allowed the
case to proceed. On May 19, 2015, the proposed class was certified. On August 25, 2015, the defendants filed a motion for judgment on the
pleadings based on an alleged lack of subject matter jurisdiction over the case, which motion was denied on October 23, 2015. Ciena believes
that the consolidated lawsuit is without merit 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, which request was denied by the PTO on April 29, 2013. Thereafter, on May 28,
104
2013, the plaintiff filed an amendment with the PTO in which it canceled the claims of the '673 Patent on which Ciena is alleged to infringe.
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, Ciena is subject to various legal proceedings and claims arising in the ordinary course of
business, including claims against third parties that may involve contractual indemnification obligations 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.
Lease Commitments
Ciena has certain minimum obligations under non-cancelable leases expiring on various dates through 2032 for equipment and facilities.
The following table summarizes our future annual minimum lease commitments under non-cancelable leases that are not recorded on the
balance as of October 31, 2015 (in thousands):
Operating leases
Other lease commitments (1)
Total
2016
32,480 $
646
33,126 $
2017
30,030 $
1,731
31,761 $
2018
18,823 $
6,081
24,904 $
2019
12,279 $
6,081
18,360 $
$
$
2020
Thereafter
9,693 $
6,146
15,839 $
46,449 $
82,139
128,588 $
Total
149,754
102,824
252,578
(1) Represents the expected timing and amounts of payments for rent associated with capital and build-to-suit lease arrangements that have
not yet been placed into service. For future payments related to capital leases that have been placed into service, see Note 12 above.
Rental expense for fiscal 2013, fiscal 2014 and fiscal 2015 was approximately $26.0 million, $22.9 million and $25.7 million,
respectively. In addition, Ciena paid approximately $1.6 million, $0.5 million and $0.8 million during fiscal 2013, fiscal 2014 and fiscal 2015,
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.
(24) SUBSEQUENT EVENT
During the first quarter of fiscal 2016, Ciena reorganized its internal organizational structure, management of its business and the
reporting of its operating segments. In connection with the creation of its new Chief Operating Officer organization, Ciena has reorganized
the management of its business resulting in three operating segments: Networking Platforms; Software and Software-Related Services; and
Global Services. As a result of this reorganization, the Converged Packet-Optical, Packet Networking and Optical Transport segments were
realigned to form a new Networking Platforms segment under a single operating segment manager. Ciena's existing Software and Service
operating segment was reorganized into two separate operating segments; Software and Software-Related Services and Global Services. The
Software and Software-Related Services segment will include sales of Ciena's network virtualization, management, control and orchestration
software solutions and software-related services, including subscription, installation, support and consulting services. The Global Services
segment will include sales of a broad range of services for consulting and network design, installation and deployment, maintenance support
and training activities.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
105
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 our 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, our 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,
2015. 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, 2015, 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, 2015, as stated in its report appearing in Item 8 of Part II of this annual report.
/s/ Gary B. Smith
Gary B. Smith
/s/ James E. Moylan, Jr.
James E. Moylan, Jr.
President and Chief Executive Officer
Senior Vice President and Chief Financial Officer
December 21, 2015
December 21, 2015
Item 9B. Other Information
None.
106
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 responsive to this item concerning our Audit Committee and regarding compliance with Section 16(a) of the
Exchange Act is incorporated herein by reference from Ciena’s definitive proxy statement with respect to our 2016 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 website 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 website at the address above.
Item 11. Executive Compensation
Information responsive to this item is incorporated herein by reference from Ciena’s definitive proxy statement with respect to our 2016
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 from Ciena’s definitive proxy statement with respect to our 2016
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 from Ciena’s definitive proxy statement with respect to our 2016
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 from Ciena’s definitive proxy statement with respect to our 2016
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.
107
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)
1. The information required by this item is included in Item 8 of Part II of this annual report.
2.
3.
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 herewith 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 herewith or incorporated by reference as part of this annual report.
(c)
Not applicable.
108
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 2015.
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, 2015
Patrick H. Nettles, Ph.D.
/s/ Gary B. Smith
President, Chief Executive Officer and Director
December 21, 2015
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, 2015
/s/ Andrew C. Petrik
Vice President, Controller
December 21, 2015
Andrew C. Petrik
(Principal Accounting Officer)
/s/ Harvey B. Cash
Harvey B. Cash
Director
/s/ Bruce L. Claflin
Director
Bruce L. Claflin
/s/ Lawton W. Fitt
Lawton W. Fitt
Director
/s/ Patrick T. Gallagher
Director
Patrick T. Gallagher
/s/ T. Michael Nevens
T. Michael Nevens
Director
/s/ Judith M. O’Brien
Director
Judith M. O’Brien
/s/ Michael J. Rowny
Director
Michael J. Rowny
109
December 21, 2015
December 21, 2015
December 21, 2015
December 21, 2015
December 21, 2015
December 21, 2015
December 21, 2015
INDEX TO EXHIBITS
Exhibit
Number
2.1
2.2
3.1
3.2
4.1
4.2
4.3
4.4
Exhibit Description
Agreement and Plan of Merger, dated as of May 3, 2015, among
Ciena Corporation, Neptune Acquisition Subsidiary, Inc. and Cyan,
Inc.
Amendment No. 1, dated as of June 2, 2015, to Agreement and
Plan of Merger, dated as of May 3, 2015, among Ciena
Corporation, Cyan, Inc. and Neptune Acquisition Subsidiary, Inc.
Amended and Restated Certificate of Incorporation of Ciena
Corporation
Amended and Restated Bylaws of Ciena Corporation
Specimen Stock Certificate
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
Indenture dated 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
Indenture dated December 27, 2012 between Ciena Corporation
and The Bank of New York Mellon Trust Company, N.A., as
trustee, for 4.0% Convertible Senior Notes due 2020, 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*
10.3
Catena Networks, Inc. 1998 Equity Incentive Plan, as amended*
10.4
10.5
10.6
10.7
10.8
10.9
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*
Form of Non-Statutory Stock Option Award Agreement for
directors under Ciena Corporation 2000 Equity Incentive Plan*
110
Incorporated by Reference
Form and
Registration or
Commission No. Exhibit
Filed
Here-
with (X)
Filing Date
8-K (000-
21969)
S-4 (333-
204732)
8-K (000-
21969)
8-K (000-
21969)
10-K (000-
21969)
8-K (000-
21969)
2.1
5/4/2015
Annex
A
3.1
3.1
6/4/2015
3/27/2008
8/28/2008
4.1
12/27/2007
4.7
6/12/2007
8-K (000-
21969)
4.1
10/21/2010
8-K (000-
21969)
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)
8-K (000-
21969)
4.1
12/31/2012
10.22
12/10/1999
10.25
12/13/2001
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
10.4
11/4/2005
11/4/2005
Amendment (No. 3) to Ciena Corporation 2008 Omnibus Incentive
Plan dated April 10, 2014*
10-Q
10.1
6/11/2014
(001-36250)
Exhibit
Number
10.10
Exhibit Description
Form of Restricted Stock Unit Award Agreement for directors
under Ciena Corporation 2000 Equity Incentive Plan*
10.11
Amended and Restated 2003 Employee Stock Purchase Plan*
10.12
Employee Stock Purchase Plan Enrollment Agreement*
10.13
1996 Outside Directors Stock Option Plan*
10.14
Forms of 1996 Outside Directors Stock Option Agreement*
10.15
Third Amended and Restated 1994 Stock Option Plan*
10.16
Amended and Restated 1994 Stock Option Plan Forms of
Employee Stock Option Agreement*
10.17
2008 Omnibus Incentive Plan*
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
Amendment (No. 1) to Ciena Corporation 2008 Omnibus Incentive
Plan dated April 14, 2010*
Amendment (No. 2) 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)*
Form of Indemnification Agreement with Directors and Executive
Officers*
Amended and Restated Change in Control Severance Agreement
dated November 1, 2013, between Ciena Corporation and Gary B.
Smith*
Form of Amended and Restated Change in Control Severance
Agreement between Ciena Corporation and Executive Officers*
10.27
Ciena Corporation Directors Restricted Stock Deferral Plan*
10.28
Ciena Corporation Amended and Restated Incentive Bonus Plan,
as amended December 15, 2011*
10.29
Ciena Corporation 2010 Inducement Equity Award Plan*
10.30
Form of 2010 Inducement Equity Award Plan Restricted Stock
Unit Agreement*
10.31
U.S. Executive Severance Benefit Plan*
10.32
10.33
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 Her Majesty the Queen in Right of Canada, as
Represented by the Minister of Public Works and Government
Services, and Ciena Canada, Inc.
111
Incorporated by Reference
Form and
Registration or
Commission No. Exhibit
Filed
Here-
with (X)
Filing Date
8-K (000-
21969)
8-K (000-
21969)
10-K (000-
21969)
S-1 (333-
17729)
S-1 (333-
17729)
S-1 (333-
17729)
S-1 (333-
17729)
8-K (000-
21969)
8-K (000-
21969)
8-K (000-
21969)
10.5
11/4/2005
10.2
3/23/2012
10.33
12/22/2011
10.4
12/12/1996
10.5
12/12/1996
10.2
12/12/1996
10.3
12/12/1996
10.1
3/27/2008
10.1
4/15/2010
10.1
3/23/2012
10-K (000-
21969)
10-Q (000-
21969)
10-Q (000-
21969)
10-Q (000-
21969)
8-K (000-
21969)
8-K (000-
21969)
10-Q (000-
21969)
10-K (000-
21969)
10-K (000-
21969)
8-K (000-
21969)
10-Q (000-
21969)
10-Q (000-
21969)
8-K (000-
21969)
10.18
12/22/2011
10.2
6/4/2009
10.3
6/4/2009
10.1
3/3/2006
10.1
11/01/2013
10.2
11/01/2013
10.1
8/31/2007
10.26
12/22/2011
10.35
12/22/2009
10.2
3/25/2010
10.1
6/9/2011
10.1
6/10/2010
1.1
2/15/2012
Exhibit
Number
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
Incorporated by Reference
Form and
Registration or
Commission No. Exhibit
8-K
(000-21969)
Filed
Here-
with (X)
Filing Date
8/3/2013
8-K (001-
36250)
8-K (000-
21969)
10.1
7/11/2014
1.1
2/15/2012
8-K
10.1
8/3/2013
(000-21969)
8-K (001-
36250)
10.1
7/11/2014
—
—
—
X
8-K (001-
36250)
10-Q (000-
21969)
10-K (000-
21969)
10-Q (000-
21969)
10.3
6/3/2015
10.3
6/10/2010
10.34
12/22/2011
10.1
9/5/2012
Exhibit Description
Second Lease Amending Agreement dated August 29, 2013 by and
between Her Majesty the Queen in Right of Canada, as
Represented by the Minister of Public Works and Government
Services, as landlord, and Ciena Canada, Inc., as tenant
Third Lease Amending Agreement dated July 11, 2014 by and
between Her Majesty the Queen in Right of Canada, as
Represented by the Minister of Public Works and Government
Services, as landlord, and Ciena Canada, Inc., as tenant
Lab 10 Lease Amending Agreement dated February 13, 2012
between Her Majesty the Queen in Right of Canada, as
Represented by the Minister of Public Works and Government
Services, and Ciena Canada, Inc.
Second Lease Amending Agreement dated August 29, 2013 by and
between Her Majesty the Queen in Right of Canada, as
Represented by the Minister of Public Works and Government
Services, as landlord, and Ciena Canada, Inc., as tenant
Third Lease Amending Agreement dated July 11, 2014 by and
between Her Majesty the Queen in Right of Canada, as
Represented by the Minister of Public Works and Government
Services, as landlord, and Ciena Canada, Inc., as tenant
Lease Agreement by and between Ciena Canada, Inc. and
Innovation Blvd. II Limited dated as of October 23, 2014+
Amendment No. 1 to the Lease Agreement dated October 23,
2014, between Innovations Blvd II Limited and Ciena Canada,
Inc., dated April 15, 2015.
Intellectual Property License Agreement dated as of March 19,
2010 between Ciena Luxembourg S.a.r.l. and Nortel Networks
Limited#
Lease Agreement dated November 3, 2011 between Ciena
Corporation and W2007 RDG Realty, L.L.C. ++
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 ++
Amendment to ABL Credit Agreement, dated August 24, 2012, by
and among Ciena Corporation, Ciena Communications, Inc. and
Ciena Canada, Inc., as the borrowers, and Deutsche Bank AG New
York Branch, as administrative agent ++
10-Q (000-
21969)
10.2
9/5/2012
Omnibus Second Amendment to ABL Credit Agreement and First
Amendment to U.S. Security Agreement, Canadian Security
Agreement, U.S. Pledge Agreement, U.S. Guaranty and Canadian
Guaranty, entered into as of March 5, 2013, by and among Ciena
Corporation, Ciena Communications, Inc., Ciena Canada, Inc., and
Deutsche Bank AG New York Branch
10-Q
10.2
3/13/2013
(000-21969)
112
Exhibit
Number
10.46
10.47
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57
Exhibit Description
Third Amendment to ABL Credit Agreement, dated July 15, 2014
by and among Ciena Corporation, Ciena Communications, Inc.,
Ciena Government Solutions, Inc. Ciena Canada, Inc., Deutsche
Bank AG New York Branch, as administrative agent and collateral
agent, and the lenders party thereto.
Incorporated by Reference
Form and
Registration or
Commission No. Exhibit
Filed
Here-
with (X)
Filing Date
10-Q (001-
36250)
10.1
9/9/2014
Omnibus Fourth Amendment to Credit Agreement and First
Amendment to U.S. Pledge Agreement and Canadian Pledge
Agreement, dated April 15, 2015.
8-K (001-
36250)
10.2
6/3/2015
Fifth Amendment to ABL Credit Agreement dated July 2, 2015, by
and among Ciena Corporation, Ciena Communications, Inc., Ciena
Government Solutions, Inc. Ciena Canada, Inc., Deutsche Bank
AG New York Branch, as administrative agent and collateral agent,
and the lenders party thereto.
Joinder Agreement under ABL Credit Agreement and Related
Agreements as of March 15, 2013 by and between Ciena
Government Solutions, Inc. and Deutsche Bank AG New York
Branch, as Administrative Agent and as Collateral Agent, for the
benefit of the Secured Creditors++
Amended and Restated Security Agreement, dated August 13,
2012, amended and restated as of July 15, 2014, by and among
Ciena Corporation, Ciena Communications, Inc., Ciena
Government Solutions, Inc., and Deutsche Bank AG New York
Branch, as Collateral Agent++
Amended and Restated Pledge Agreement, dated August 13, 2012,
amended and restated as of July 15, 2014, by and among Ciena
Corporation, Ciena Communications, Inc., Ciena Government
Solutions, Inc., and Deutsche Bank AG New York Branch, as
Pledgee++
10-Q
10.2
9/9/2015
(001-36250)
10-Q
10.2
6/12/2013
(000-21969)
10-Q
10.2
9/9/2014
(001-36250)
10-Q
10.3
9/9/2014
(001-36250)
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)
10.5
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
Amended and Restated Canadian Security Agreement, dated
August 13, 2012, amended and restated as of July 15, 2014, by and
among Ciena Canada, Inc., each other assignor from time to time
party thereto, and Deutsche Bank AG New York Branch, as
Collateral Agent.++
Credit Agreement, dated July 15, 2014, by and among Ciena
Corporation, the lenders party thereto, and Bank of America, N.A.,
as Administrative Agent++
First Amendment to Credit Agreement, dated July 15, 2014 and
First Amendment to Certain Pledge Agreements (U.S. Pledge
Agreement, dated July 15, 2014 and Canadian Pledge Agreement,
dated December 12, 2014), dated April 15, 2015.++
10-Q
10.4
9/9/2014
(001-36250)
10-Q
10.5
9/9/2014
(001-36250)
8-K (001-
36250)
10.1
6/3/2015
Second Amendment to Credit Agreement, dated July 2, 2015, by
and among Ciena Corporation, the lenders party thereto, and Bank
of America, N.A., as Administrative Agent. ++
10-Q
10.1
9/9/2015
(001-36250)
Incorporated by Reference
113
Exhibit
Number
10.58
10.59
10.60
Exhibit Description
Guaranty, dated July 15, 2014, by and among Ciena
Communications, Inc., Ciena Government Solutions, Inc. and
Bank of America, N.A., as Administrative Agent.++
Term Loan Security Agreement, dated July 15, 2014, by and
among Ciena Corporation, Ciena Communications, Inc., Ciena
Government Solutions, Inc., and Bank of America, N.A., as
Collateral Agent. ++
Term Loan Pledge Agreement, dated July 15, 2014, by and among
Ciena Corporation, Ciena Communications, Inc., Ciena
Government Solutions, Inc., and Bank of America, N.A., as
Pledgee.++
10.61
Cyan, Inc. 2006 Stock Plan
10.62
Cyan, Inc. 2013 Equity Incentive Plan
Lease Agreement between Ciena Canada, Inc. and Innovation
Blvd. II Limited, dated April 15, 2015
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
Form and
Registration or
Commission No. Exhibit
Filed
Here-
with (X)
Filing Date
10-Q
10.6
9/9/2014
(001-36250)
10-Q
10.7
9/9/2014
(001-36250)
10-Q
10.8
9/9/2014
(001-36250)
S-1 (333-
187732)
S-1 (333-
187732)
8-K (001-
36250)
10.2.1
4/4/2013
10.3.1
4/4/2013
10.4
6/3/2015
—
—
—
—
—
—
—
—
—
—
—
—
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
—
—
—
10.63
12.1
21.1
23.1
31.1
31.2
32.1
32.2
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
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
114
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
X
X
X
X
X
X
X
X
X
X
X
X
X
________________________________
*
+
++
#
Represents management contract or compensatory plan or arrangement
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.
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.
115
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Corporate information
Operating Executive Officers
Patrick H. Nettles, Ph.D.
Executive Chairman of the
Board of Directors
Outside Board Members
Harvey B. Cash
Retired General Partner
InterWest Partners
Gary B. Smith
President, Chief Executive Officer
and Director
Bruce L. Claflin
Chairman
AMD Corporation
Lawton W. Fitt
Retired Partner
Goldman Sachs
Patrick T. Gallagher
Chairman
Harmonic, Inc.
Judith M. O’Brien
Partner
King & Spalding LLP
Michael J. Rowny
Chairman
Rowny Capital
T. Michael Nevens
Senior Adviser
Permira Advisers, LLC
James E. Moylan, Jr.
Senior Vice President,
Chief Financial Officer
Stephen B. Alexander
Senior Vice President,
Chief Technology Officer
James Frodsham
Senior Vice President,
Chief Strategy Officer
François Locoh-Donou
Senior Vice President,
Chief Operating Officer
Andrew Petrik
Vice President and Controller
David M. Rothenstein
Senior Vice President,
General Counsel and Secretary
Marcus Starke
Senior Vice President,
Chief Marketing Officer
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
Thursday, March 24, 2016. Please visit
www.shareholdermeeting.com/ciena at
least 10 minutes prior to the start time.
Independent Registered
Public Accounting Firm
PricewaterhouseCoopers LLP
Outside Counsel
Hogan Lovells US LLP
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
NYSE: 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.
Notes to Investors This Annual Report contains certain forward-looking statements regarding future events or results that involve
risks and uncertainties. These statements are based on current expectations, estimates, forecasts, assumptions and other informa-
tion available to the Company as of the date hereof. Forward-looking statements include statements regarding Ciena’s projections,
expectations, beliefs, intentions or strategies and can be identified by words such as “anticipate,” “believe,” “could,” “estimate,”
“expect,” “intend,” “may,” “should,” “will,” and “would” or similar words. Ciena’s actual results or performance may differ materi-
ally from these forward-looking statements, including due to certain risks and uncertainties relating to Ciena’s business more fully
disclosed in Ciena’s Annual Report on Form 10-K contained herein. Ciena assumes no obligation to revise or update any forward-
looking information included in this Annual Report.
This document includes certain adjusted or non-GAAP measures of Ciena’s results of operations. Detailed reconciliations of these
non-GAAP measures to our GAAP results are included in the press release for the relevant period available on Ciena.com.
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7035 Ridge Road, Hanover, Maryland 21076 (410) 694-5700 (800) 921-1144 ciena.com